State of Chinas Logistics and Potential Business Opportunities

Section OneState of Chinas Logistics - Challenges & Future Growth State of Chinas Logistic Market
Market Characteristics Understanding the Costs and Challenges Industry Trends and Drivers Future Market Potential

Laying Chinas Logistic Infrastructure

Current and Future Transportation Infrastructure Logistic Hub, City and Passage Development Chinese Governments Support for Industry

Leading Logistic Players in the Market

Leading Domestic & Foreign Players Recent Business & M&A

China Market Becoming Attractive

Market Size at Record
Market size of Logistics industry in China set a new record high in 2010, at US$15.75 billion, with growth of almost 30% Y-o-Y.

Manufacturing Bias
Industrial products has a 90% share of the goods transported.

2009
Agricultural products Industrial Products Imported Products Recycled products Comm & Pers Source: KPMG Products

Value (bn RMB)

2,236 113,103 9,431 446 198

Yoy Growth
43% 14.6% 22.1% 39.5% 14.7%

Mkt Share
18% 90% 7.5% 0.4% 0.2%

Total
Source: National Development & Reform Commission Source: KPMG

125,413

15%

Logistic market growing and in-transition- offers new business opportunities

Market Demand on Increase

Market Demand Recovering
Measures logistics value to GDP ratio, increasing since 2006;recovered from the financial crisis from 2.9 to 3.2 in 2010 Logistic Demand Coefficient

Expansion of Value-Added
Logistic value-added showing market expansion since 2006- value-added increasing at rate of tiertary (service) sector

Source: CFLP

Source: CFLP

Market for logistic services on the increase with broad-based demand

Logistic Cost High vs Global Peers

Logistic Cost as % GDP High
Chinese total logistics cost is high (at Rmb7100Bil in 2010) with low logistics efficiency (China ratio is 17.8% vs USA 7.7%).

Transport is Major Cost

Transport and labor costs account for typically 60% of Chinese distribution center cost structure vs 8-10% for US/Japan
Breakdown of Chinas Total Logistics Cost (2009)
Other Storage 25%

Warehouse 8%

Transportati on 55%

Management 12%

Source: National Development & Reform Commission

Source: ATKearney Report Chinese Logistics 2015

Chinese logistics has significant room for cost & efficiency gains..
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Challenges faced
Chinas Logistic Industry Large but Undeveloped..
Logistic practices not upto global standdards..Foreign companies only allowed into sector in 2005 and still not fully plugged-into the market

Lack of modern logistic facilities and sufficient warehouses space

Poor penetration by 3PLs; spend on 3PL only 2.7% in 2009 vs 30% for EU

Poor use of logistics i.e. lack of cold-chain logistics; poor planning tools 2009 China
10% 60,000

Other
US/JPN: 80% ME: 50% US: 250,000 JP: 150.000

3PL

% Coldchain Number. refrigerated trucks

Source: GZ Cold-chain Logistics Assoc.

Business Development Needs to Consider -Infrastructure to Planning

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Industry Trends (1)..

Economic Shift Movement of Manufacturing Locations to the West
Increasing Land and Labour cost of coastal cities driving manufacturing factories to move into the hinterlands- for both YRD and PRD benefiting new logistic hubs like Wuhan, Chengdu, etc

Source: CB Ellis

Coming Demand & Growth in Logistics due to shift in Manufacturing to Western China
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Industry Trends (2)..

Chinas Strategic Shift towards Consumption Drive Demand
Demand for sophisticated retail logistics management & warehouse space from the expansion of global retailers Walmart, carrefour plus other retail/consumer brands from coastal into rural and inner cities creates demand

Asia Retail Forecast 2014

De-regulated environment allows foreign participation In China retail Expansion in Online Shopping similarly adds to demand Modern Logistic a pillar in Chinas 11th Year Plan

IMF estimates that by 2025, retail will dominate 75% of domestic logistics
Source: PWC Report on Asia Retail 2010

Major consumption centres are building up inland i.e. Strong retail sales for past 3 years in Chongqing, Changsha, Chengdu, Xian where logistics will be required to transport consumer goods to these cities.

Coming Demand & Growth in Consumption-Driven Retail Logistics offers new business opportunities

Industry Trend (3)

Market in Growth Stage with Increasing Competition
Market is fragmented (Top 20 operators with 6% of total revenues); Dominated by companies with limited scale/limited service scope. M&A Trend as Govt push to nuture domestic giants; interest from foreign players looking for an entry into the Chinese market

Source: ATKearney Report on Chinese Logistics by 2015

Fragmented & Growing market Opportunity for Consolidation to become Market Leader

Industry Trend (4)

Continued Investment in Transportation Network Build-up of Nationwide Transportation Infrastructure
Currently China suffers one of the heaviest freight density in the world- driving up transportation cost. In 2009-2010: RMB 1.4 trillion invested in rail network. By 2020- 120,000km highspeed railway network to be completed- dramatically improve speed of delivery and nationwide access

Rail Network 2020

Hubs

Source: Chinas Future Transport Infrastructure , Tsinghua University

Rail Network brings significant new efficiencies in land transportation; New hubs will be created
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Industry Trends (6)

Market Demands Improvements in Efficiency
With increasing market competitiveness, efficiency gains from improved logistic management critical to firms remaining competitive; Domestic firms investing in advanced SCM IT system and online logistics

Advanced SCM Platform

eLogistics

Source: Fraunhofer IML

Opportunity to bring world-class SCM capabilities as Value-added

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Industry Trends (7)

Development of Domestic 3PL +Rise of Outsourcing
Currently only in China 2.7% outsource vs 15.7% global norm but market segment growing at 25% annually vs overall logistics- By 2013 China expected to be largest contract logistic market in Asia-Pacific reaching RMB183.5 billion market value.
Chinas Contract Logistics Market
RMB billion
200 180 160 140 120 100 80 60 40 20 0 2003 2004 2005 2006 2007 2008 2009 2013F

Contract Logistics Market Forecast (2009-2013)

Geographies
Asia Western Europe North America Global China

CAGR
12.8% 6.5% 9.8% 9.5% 20.6%

Inter Asia Trade Forecast (2010-2015)

2010 2015 30.1 million TEUs 44.1 million TEUs

Source: Transport Intelligence, Colliers International

Source: Transport Intelligence, Colliers International

Potential to build 3PL market hub leader leveraging global skills

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Case Study: Outsourcing Trends

Outsourcing Rate Increasing
Survey of Chinese enterprises shows outsourcing volume increasing to 61% in 2009 from 35% in 2005 (does not reflect whole market only sample)

Outsourcing Characteristics
Enterprises outsourcing more of internal logistics especially transportation & distribution functions; future needs are advanced logistic functions Types of Functions Outsourced

Outsourcing Vol. Domestic Enterprises

Future Planned Functions Outsourced

70% enterprises surveyed outsourced more than 50% of logistic functions; while 40% outsourced more than 80%

Source: NDRC and Nankai University

Source: Extracts from NDRC and Nankai Survey

Market for more sophisticated 3PLs on the increase..

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Future Growth for Logistics Market

China Market to Reach US$ 450 billion
Market demand, the development of transportation infrastructure plus availability of world-class logistic facilities and systems will support the overall upgrading of Chinas logistic market Express Road freight Air freight Intl freight fwding 3PL outsource

Consumption-related Spend will drive 5 key logistic segments!

Source: ATKearney Report on Chinese Logistics by 2015

Broad growth in market segments and various transport modes

Section TwoState of Chinas Logistics - Challenges & Future Growth State of Chinas Logistic Market
Market Characteristics Understanding the Costs and Challenges Industry Trends and Drivers Future Market Potential

Laying Chinas Logistic Infrastructure

Current and Future Transportation Infrastructure Logistic Hub, City and Passage Development Chinese Governments Support for Industry

Leading Logistic Players in the Market

Leading Domestic & Foreign Players Recent Business & M&A

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Transportation Network Long Term Goals

Transportation Infrastructure Build-up Plan (I)
Transportation accounted for 75% of the RMB 3 trillion investments in logistics in 2010. Early phase of transportation network build-up focused on road and deepwater ports in support of the manufacturing and export demand. Chinese ports rapidly led in world container traffic

Early Phase Focus

Source: Research Centre for Modern Logistics Tsinghua University, National Bureau Statistics

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Priority on transportation reflects Govt priority on improving logistics

Transportation Capacity
Traffic Capacity by Transportation Modes
Road Transportation remained the primary mode for passenger and freight traffic while air transportation mode saw the strongest rise. While road traffic capacity has increased MILEAGE PER CAPITA CHINA VS US ONLY 10%

Source: National Bureau Statistics

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Current capacity relies on road transportation which is still restrictive

Transportation Network Long-term Goals

Transportation Infrastructure Build-up Plan (II)
Primary goal from 2010 to 2020 is to ramp up the domestic transportation network to support the growing, broadening and deepening of the domestic consumption-focused economy

2010 to 2020

Source: Research Centre for Modern Logistics Tsinghua University

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Recognising this focus- identify rail/coastal ports for early partnerships

Roads and Expressways Network 2020

Multiple Highways & Trucking Hubs (42)

Source: Research Centre for Modern Logistics Tsinghua University

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Rail Network and Hubs 2020

Railway Container Hubs (18)

Hub

Source: Research Centre for Modern Logistics Tsinghua University

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Case Study: China Rail

Opportunity and Challenge
Using Force Field Analysis as decision-tool - Insights into future development of the Chinese rail transport system appears to be positive

Energy Saving

Most energy efficient transport mode cpr to Japans rail system

Major passenger carrier 2007: 1.4bn pax;3.2bn tons goods 2007-2012: US$300bn invested

Competition
Intense competition from other transport modes esp. road with heavy investment

Growth of China Rail

Social Demand

Poor Financing
High construction capex funded through domestic bonds; limited flexibility

Already high load density but demand outstrip supply. Need further expansion

Container Transport

Limited Profitability
Driving Force Restraining Force
Profit margin 1-2%; Low pricing esp passenger as viewed as public service

Development crucial for inland economy; increase share of land transport

Govt Support

5
21

Financial & policy support plus independent Ministry of Railway

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VS

13

Strict Control
Viewed as strategic asset with semi-military control; lacks market flexibility

Source: Research by Zheng Wan , University of California Xiang Liu, University of Illinois Urbana-Campaign

Coastal and Large-Scale Ports

Vibrant World-class Port Network
World Ranking of Container Ports

Source: Research Centre for Modern Logistics Tsinghua University

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Civil Airport Network in 2020

Core Hub Formed by BJ, SH, GZ Airports
Northern Hub North-West Hub

Sub-hubs in each Geographical area with International, Regional and Trunk Airports

South east Hub

China Eastern Hub

China Southern Hub

Source: Research Centre for Modern Logistics Tsinghua University

Source: Research Centre for Modern Logistics Tsinghua University

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Current Developments -Logistic Hub/Pks

Total of 1300 + Logistic Parks have been Developed
85% supported by local govt Govt build infrastructure Special tax incentives for tenants Cluster development Value of land increase primary motivation for investment Overcapacity- only 40% utilization. Corruption contract allocation Design not meet business needs Lack multimodal transport

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A Crowded market.. Need to offer unique proposition to stand out against Competition

Logistics Hubs Bloom Across China

5 Major Logistic Hubs Across China
Broadly classified into 3 categories (1) Primary hubs are the leading coastal cities of Shenzhen/Guangzhou; Shanghai and Beijing/Tianjin (2)Secondary hubs are extensions from the primary (3) Emerging hubs are in the inland and have risen priomarily due to strong retail/consumption story

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Source: Research Centre for Modern Logistics Tsinghua University

Examples of Primary Hubs

Primary Hubs are formed from the Early Economic Zones
A significant number of logistic parks and warehouse facilities have already colocated within these hubs

Harbor City Tianjin-Bohai Bay Shanghai Hub

PRD Hub

Source: Research Centre for Modern Logistics Tsinghua University

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Logistic Cities
City Locations with Logistic Potential
State Council designated Cities due to being part of air, land or sea transportation nodes; State Council also identified 10 logistic passages with key traffic volume

21 Nationwide Junction cities 17 Regional Junction cities

Source: LiFung Research

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Need for in-depth study to study opportunities offered by cities

Recent Chinese Policies Supporting Logistics Market

Under 12th Five Year Plan by NDRC- Logistics Key Focus
Eight key preferential terms for logistic market

1. 2. 3. 4. 5. 6. 7. 8.

To reduce tax burden for all logistics companies effectively To increase support for Logistics Land Policy To promote and facilitate convenient passages for transportation vehicles To improve management of logistics enterprises To encourage integration of logistics facilities and resources To promote innovation and application of logistics technology To increase investment in logistics industry To promote development of agricultural logistics.

Targets set by NDRC & CFLP by 2015

Total Logistics value grow at CAGR 14% Logistics Value-added increase at CAGR 15%

Leverage on Chinese Govt Support to Drive Growth of Logistic Hub

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High-Level Co-ordination Still Weak..

Re-Org of Govt. Dept Constraints at Provincial Level

Lack of co-ordination among Govt Dept leads to multiple jurisdictions and limits development of logistic industry; provincial level authority still exerts influence and impacts industry Functions of government departments regulating civil aviation, postal services, communications and urban public transportation consolidated under establishment of Ministry of Transport in 2008 Other dept still responsible for monitoring different aspects of logistics industry

G to G efforts would be required to ensure nation-wide co-ordination

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Section TwoState of Chinas Logistics - Challenges & Future Growth State of Chinas Logistic Market
Market Characteristics Understanding the Costs and Challenges Industry Trends and Drivers Future Market Potential

Laying Chinas Logistic Infrastructure

Current and Future Transportation Infrastructure Logistic Hub, City and Passage Development Chinese Governments Support for Industry

Leading Logistic Players in the Market

Leading Domestic & Foreign Players Recent Business & M&A

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Leading Logistics Enterprises..

Performance of Domestic Logistic Business for 2009
Revenues of Domestic Enterprises Profitability in 2009
Average profit margins of domestic enterprises was 6% in 2010 down by 7.1% yoy

Source: NDRC and Nankai University

Low profitability opens partnership and profit improvement opportunities

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Leading Logistics Enterprises..

Foreign Logistic Enterprises Continue to Expand
Market share of foreign logistic players still small but growing especially in the land freight and air express freight segments

1. 2. 3. 4. 5.

Fedex Asia-Pacific delivery center in Guangzhou Baiyun Airport commenced operations in 2009- largest outside the US. UPS relocated its intra-Asia hub from Clarke in Philippines to Shenzhen in 2010 DHL entered agreement with China Merchants Maritime Logistics in June 2010 to establish a global distribution center in Qinghai, Shenzhen TNT established and invest EUR 170M in a wholly-owned road transportation subsidiary in Hangzhou In 2010 Japans largest logistic co. Yamato Holdings will setup cold-chain land transport company in YRD with aim to reach 30 bn yen in 5 years

Foreign enterprises seek to enter China also opens partnership opportunities

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Leading Logistic RE Players..

Gaining Interest from Foreign RE Developers and Funds
Logistics Real Estate Developers: - Government Ind/Log Parks, Local and Central SOEs.
- Private Co.: GLP (Prologis), AMB, Goodman, Ascendas, Mapletree Log. etc. - Funds: A-Reit, ING Real Estate, Cache (ARA-CWT), PingAn, Equity Intl, China Inv Corp, Canadian Pension Fund etc.
Portfolios of Key Private Developers: (sqm by 2009)
(Lease rates)
2010/11 New Devt. On hand & under construction
44000

150,000

270,000

300,000 40,000 -

850,000 96,000 82,000 220,000

60,000 1000,000 300,000 1,850,000

170,000 2,800,000 500,000 5,100,000

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Recent New Business Starts..

Market Developments focused on Specialist Sectors
Retail and consumer brand enterprises have been aggressively expanding and building logistic capabilities- in-house and through 3PL partnerships; Automotive logistic has also been a sector targeted by foreign enterprises

Large sports retailers: eg. Nike & Adidas. E-commerce: eg Alibaba, DangDang, Amazon. Retailers: eg. Carrefour, Tesco, Watson etc. Automobile & Car components: eg. Benz, BMW; GiTi, Faurecia. Food Industry: eg. Havi LC (McDonald) vs YLC (Yum! KFC) Cold chain logistics: eg. Americold, China Merchant Log, PFS. Others: Medical Pharma, Chemical logistics. eg. CWT, Kerry Log. SERVICE PROVIDERS: 3PLs: moving from freights (DHL, Fedex, UPS) to Contract Logistics: eg. APL- Hanes, Legend; YCH- Dell; Schenker- BMW. 3PLs-Shippers: eg. CEVA, Maersk, K+N, Samudera. SCM / BPO: eg. Banks- CitiBank, DEM/OEM- Hi-P, Eternal Asia.

Knowing the Market Needs and Trends..to identify opportunities

Recent Market M&A..

M&A Driven by Foreign Logistic companies.

World Class centres needed to support world class players logistics needs
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Section TwoIdentifying Business Opportunities in China Scoping of Opportunities

Screening Attractive Market Segments Case Examples

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Scoping of Opportunities
Identify Possible Market Segment Opportunity
Screen Potential of Market Landscape & Competitiveness; Analyse Opportunity Transportation Mode vs Industry Segment

Road/ Rail Freight

Non-Food Retail Logistics Pharma Logistics
Med. Mkt

Air Freight

Air Express

Intl Freight

Remark

Large Mkt

Vol + Margins (Luxury gds strong Margins Import

Domestic Market only Domestic Market only

Gd. Margins

Hi-tech/Auto Logistics Food + Agro Logistics

Domestic Market only Domestic Market only

Efficient SCM required; Export Niche Cold Chain logistics Gd Margins

Small. Mkt

Source: Various, Internal Analysis

Retail & Hi-Tech/Auto Logistics Looks like good opportunities

Scoping of Opportunities
Identify Possible Market Segment Opportunity
Screen Potential of Market Landscape & Competitiveness; Analyse Opportunity Transportation Mode vs Logistic Segment

Non-Food Retail Logistics

Transportation
Large Mkt

Pharma Logistics

Hi-tech/Auto Logistics

Agro-Food Logistics

Remark
Outsourcing trend Outsourcing trend Outsourcing trend

Distribution Warehousing

Med. Mkt

Packaging & Processing Logistic IT & Mgt Systems

Future demand

Small. Mkt

Source: Various, Internal Analysis

Transportation, distribution & warehousing current hot Sectors

Scoping of Opportunities..
Identify Possible Market Segment Opportunity
Screen Potential of Market Landscape & Competitiveness; Screening Opportunity by Transportation Mode vs Location

Road/Rail Freight
Western Chengdu Chongqing Mega-hub Central Wuhan Eastern Shanghai Northeast Bohai-Tianjin Southern GZ-SZ

River Freight

Air Freight/Exp

Intl

Remark

Larger Opportunities in emerging logistic hubs

Case Examples- Logistic Function

Overview of Warehousing Investments
As land &labor costs increase in the coastal cities, warehousing expansion continues in 2nd / 3rd tier cities with need for better, quicker and more accurate deliveries demanded by customers- hence opportunity for foreign investments

State of Chinese Warehouses

Foreign Investments

Current automation levels low Only 5% have good IT systems Existing warehouse in populated areas which restricts trucking
Source: Tomkins International Survey 2009

Foreign investments concentrated inBeijing, Shanghai and Guangzhou hubs Warehousing focus for retail, apparel, auto, pharma, electronics and tobacco sectors

Recent continued investments continue into warehousing sector

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Case Examples- Segment Investment

Recent New Business/Investments by Segments
Active investments into building logistic infrastructure evident especially from foreign logistic-focused RE players..

Non-Food Retail Logistics Pharma Logistics

Invests U$1.2bn in logistics Zhejiang International invests US$15M in Pharma logistic center

Asia Distribution Center

Nhwa Pharma invests US$18M in Xuzhou Logistic Center

Italian fashion retail Invests to open Retail + warehouse in TJ

Hi-Tech/Auto Logistics
Invests U$200M In Suzhou to cater for manufacturing & supermart retail RMB680M Distribution Centre in Chongqing

Food + Agro Logistics

Metro Hypermart JV with Shuanghui for delivery of all frozen products

Source: Various, Internal Analysis

Substantial Investments seen into Auto/Consumer/Retail Segments

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Case Examples Location Investments

New Inland Hubs away from the Coast
Wuhan is identified as the Central Logistic and Transportation hub and provincial capital of Hubei province Pop. Wuhan (Central)
8.9M

GDP
RMB 456bn

Transport Nodes
4th Aviation Hub Road/Rail hub Largest inland River port

Economic Drivers
Hi-tech Biotech Auto- Honda, PSA Logistic TNT, DHL

Competitive Edge
Large pool U grads Strong IT foundation Rel. low land/labour costs Strategic centre of Chinas transport network

Wuhans 1+8 Cluster of surrounding cities offers multiple re-development opportunities

Source: Chinese Govt. Sources

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Case Examples Location Investments

New Inland Hubs away from the Coast
Chengdu will become Chinas Southwest logistic hubs to drive economic development further inland Pop. Chengdu (Southwest)
11.4M

GDP
RMB 450bn

Transport Nodes
Aviation Hub Asias largest rail container hub Largest rail network

Economic Drivers
Hi-tech and IT BPO hub Biotech Food processing Logistic TNT, DHL

Competitive Edge
Large pool U grads Strong IT foundation Rel. low land/labour costs Strategic centre of Chinas transport network

Source: Chinese Govt Sources

Emerging Hubs appear to offer broader investment opportunities

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