Logistics Industry in China - Opportunities and Challenges Peter Y. F. Lee September 10, 2008

Peter Y. F. Lee2 Your speaker: Peter Lee ( 李耀辉 ) In logistics industry since 1973 Worked in Hong Kong, Sydney, Rotterdam, Toronto, Shanghai Last positions: General Manager of TMT Multimodal Transportation Co. Ltd. Managing Director of P&O Nedlloyd (China) Ltd. Managing Director of P&O Nedlloyd Logistics (China) Ltd.

September 10, 2008Peter Y. F. Lee3 Agenda Logistics Industry in China Increasing Needs – Opportunities of Logistics Industry in China Challenges of Logistics Industry in China Logistics Companies in China Case Studies

Logistics Industry in China Short History and Fast Development

September 10, 2008Peter Y. F. Lee5

September 10, 2008Peter Y. F. Lee6 Increasing Needs – Opportunities of Logistics Services 1.High growth rate of International Trade Creating Huge Demand of International and Domestic Logistics Services 2.Supply Chain Management reduces TOTAL COSTS of Logistics 3.Increasing Demand of Logistics Services at Inland Cities 4.Improvement of Infrastructure: Highway, Railway, River Transport and Port Development

Increasing Needs – Opportunities of Logistics Services High growth rate of International Trade Creates Huge Demand of International and Domestic Logistics Services

September 10, 2008Peter Y. F. Lee8 China GDP Growth Rate Overview Data source: the National Bureau of Statistics of China, Jul 19, 2008

September 10, 2008Peter Y. F. Lee9 China ’ s International Trade Growth Overview Total exports and imports: % % % % %

September 10, 2008Peter Y. F. Lee10 GDP Growth / Int ’ l Trade Growth Relationship

Increasing Needs – Opportunities of Logistics Services Supply Chain Management reduces TOTAL COSTS of Logistics

September 10, 2008Peter Y. F. Lee12 Logistics & Supply Chain Concept “ Supply chain management can be defined as the management of upstream and downstream relationships with suppliers, distributors and customers to achieve greater customer value- added at less total cost. ” Source: Martin Christopher 1997.

September 10, 2008Peter Y. F. Lee13 Logistics Costs?? What does cost of logistics stand for the total cost of an international trade transaction?

September 10, 2008Peter Y. F. Lee14 Costs of Logistics What are the costs of Logistics? Transportation Warehousing Customs clearance Insurance Management/IT And? Work-in-process Finance cost of work-in-process Total Cost versus Unit Costs consideration The Case of Haier in 2003/2004

Increasing Needs – Opportunities of Logistics Services Increasing Demand of Logistics Services at Inland Cities

September 10, 2008Peter Y. F. Lee16 International Trades – Ratio between Coastal and Inland cities 2003 Coastal93% Inland7% 2007 Coastal90% Inland10% Why? How do we see this picture in coming years?

Opportunities of Logistics Services Improvement of Infrastructure: Highway, Railway, River Transport and Port Development

September 10, 2008Peter Y. F. Lee18 China Infrastructure To support the rapidly expanding logistics industry, China ’ s transport infrastructure will continue to see improvements in the coming years. This presentation shows the latest development and major development plans of the three major modes of transportation in China, namely roads, railways and waterways.

Road – Highway and Expressway Overview and development plans

September 10, 2008Peter Y. F. Lee20 Overview The road network is developed in the three major economic regions, namely the Pearl River Delta (PRD), Yangtze River Delta (YRD) and Bohai-rim region. At the end of 2006, the total length of highways in China climbed to km. Source: MOC Bohai- rim YRD PRD Total length of highways: million KM Road density 2005: 34.8 km/100 km sq 2006: 36.0 km/100 km sq

September 10, 2008Peter Y. F. Lee21 National Trunk Highway System ( 五纵七横 ) Source: MOC

September 10, 2008Peter Y. F. Lee22 Development plans (2) The 11th Five-Year Development Plan for Road and Water Transportation ( 公路水路交通 ” 十一五 ” 发展规划 ) In 2006, the MOC promulgated the 11th Five-Year Development Plan for Road and Water Transportation (the Plan). The Ministry aims to build km of highways including km of expressways during this period. Source: MOC

September 10, 2008Peter Y. F. Lee23 Expected routes of the ‘ 7918 ’ Network to be completed by 2010 Source: MOC

Railways Overview and development plans

September 10, 2008Peter Y. F. Lee25 Overview Railway is also another important mode of transportation carrying goods and people in China. At the end of 2006, the total length of railways in operation reached km, which ranked 3rd in the world and accounted for 6% of the world ’ s total. The volume of freight dispatched by the railways in China in 2006 was 2.9 billion tons, with a year-on-year (yoy) increase of 7.1%. The total freight ton-kilometers in 2006 were billion, with a yoy increase of 5.9%. The structure of the railway network has also improved a great deal. In 2006, 34.3% of the railways were double tracking; and 31.7% were electrified. Source: MOR

September 10, 2008Peter Y. F. Lee26 Priorities during Dedicated Passenger Lines 2.Inter-city railways in the PRD, YRD, Bohai-rim and other regions with dense cities 3.Container transportation system To build 18 container logistics centers, with the help of new and existing railways, and to construct double-deck container transportation railway in the big cities.

September 10, 2008Peter Y. F. Lee27 Railway Container Freight National railway has completed 3.6 million TEU during 2007 International containers by rail – around 2 million TEU About 1.5% of Total China Ports throughput Target to reach 10 million TEU by 2010 In general, the development of container freight railway lags behind

Water transportation Overview and development plans

September 10, 2008Peter Y. F. Lee29 Overview In general, China ’ s water transportation could roughly be divided into ports and inland waterways. Ports China has one of the world ’ s most extensive network of coastal ports, the largest ones are Shanghai and Ningbo in the Yangtze River Delta (YRD); Shenzhen and Guangzhou (incl Nansha) in the Pearl River Delta (PRD); Tianjin, Qingdao and Dalian in the Bohai-rim region; and Xiamen on the Fujian Coast. Source: MOC

September 10, 2008Peter Y. F. Lee30 Top 20 World Ports (2006) 1. Singapore 2. Hong Kong 3. Shanghai 4. Shenzhen 5. Busan 6. Kaohsiung 7. Rotterdam 8. Dubai 9. Hamburg 10. Los Angeles 11. Qingdao 12. Long Beach 13. Ningbo 14. Antwerp 15. Guangzhou 16. Port Kelang 17. Tianjin 18. New York 19. Tanjung Pelepas 20. Bremen

September 10, 2008Peter Y. F. Lee31 Top Ten Chinese Ports 2007 RankPorts2007 (TEU)Increase % 1 Shanghai26,150, % 2 Shenzhen20,813,000 13% 3 Qingdao9,462, % 4 Ningbo9,360, % 5 Guangzhou9,200, % 6 Tianjin7,102, % 7 Xiamen4,627, % 8 Dalian3,813, % 9 Lianyungang2,003, % 10 Zhongshan1,279, %

September 10, 2008Peter Y. F. Lee32 Overview Inland waterways China ’ s inland waterway system is dominated by the Yangtze River ( 长 江 ), which is the main transportation link for inland China. Yangtze River is one of the world ’ s most used inland waterways. Nanjing ( 南京 ), Wuhan ( 武汉 ) and Chongqing ( 重庆 ) are the main inland ports along the Yangtze River. While the navigable river stretches from Shanghai to Chongqing, most activities occur between Nanjing and Shanghai.

September 10, 2008Peter Y. F. Lee33 National Plan for Coastal Port Layout Bohai Sea Area port cluster Dalian, Yingkou, Qinhuangdao, Tianjin, Yantai, Qingdao YRD port cluster Shanghai, Ningbo- Zhoushan, Nantong, Nanjing, Zhenjiang, Lianyungang, Suzhou, Wenzhou Southeast coastal area port cluster Xiamen, Fuzhou PRD port cluster Shenzhen, Guangzhou, Zhuhai, Shantou Southwest coastal area port cluster Zhanjiang, Fangcheng, Haikou Source: MOC

September 10, 2008Peter Y. F. Lee34 Market Preferences: In order of preference in domestic transportation of containers River transport economical, efficient and a true multimodal transportation Railway (distance of longer than 800KM) economical, inefficient, unreliable Highway expensive, efficient, convenient

Challenges of Logistics Industry in China

September 10, 2008Peter Y. F. Lee36 Logistics Market in China (I) Strengthening the willingness of using logistics services Limited management and experience Limited willingness to outsource logistics services Focus on unit price Focus on single event operations cost Insufficient attention on adding value to customers

September 10, 2008Peter Y. F. Lee37 Logistics Market in China (II)  Major problems: Lack of proper administration organization Difference between existing demand and potential demand Lack of outsourcing concept Lack of sufficient public facilities, IT technology and middle managers

September 10, 2008Peter Y. F. Lee38 Logistics Market in China (III)  A few misunderstandings: logistics service development = modern facilities and equipment sales + logistics requirement = operate logistics service logistics service = a very profitable business

September 10, 2008Peter Y. F. Lee39 Logistics in China (I) No clear “ Business Scope ” of Logistics Industry Foreign operators face ownership restrictions, hampering trucking and forwarding activities

Logistics Companies in China Local and Foreign

September 10, 2008Peter Y. F. Lee41 Logistics Companies Freight Forwarding and Freight Management Sea Air Road/Rail Project Logistics Customers tailored program Hardware solutions + Supply chain management Standardized system and processes Lead Logistics Managing and integrating logistics service providers across geographies Customers tailored program Standardized system and processes Specialized industry related, e.g. chemical, etc …

September 10, 2008Peter Y. F. Lee42 Logistics Companies International companies Global connections Integrated global system Standardized processes Local companies Hardware providers Local knowledge and connections Upstream and downstream support companies

September 10, 2008Peter Y. F. Lee43 Top 10 Global International Logistics Companies (freight forwarding related) DHL Global 2.Kuehne & Nagel 3.Schenker 4.Panalpina 5.Expeditors 6. UPS SCS 7. SDV 8. EGL 9. Sinotrans 10. Nippon Express Source: Transport Intelligence

September 10, 2008Peter Y. F. Lee44 Top 10 Global International Logistics Companies (freight related) 2006 These 10 companies shared about 40% of the global market shares All of them have established rep. offices or branch offices, or JV ’ s in China

September 10, 2008Peter Y. F. Lee45 Industry Structure Foreign invested logistics providers Sub-contractor market will develop increased competition - shake out?

3 Case Studies 1.Buyers ’ Consolidation 2.Regional Distribution Center 3.Primary and Secondary Warehousing

September 10, 2008Peter Y. F. Lee47 Case 1 – Buyers ’ Consolidation Home Depot The issues A large number of stores in the USA A large number of suppliers in China, spread over mainly along coastal area A large number of commodities Central procurement Online update of stock record

September 10, 2008Peter Y. F. Lee48 Buyers Consolidation Services elements: Receive cargo from various suppliers Sorting, Inspection, warehousing Consolidation according to buyers instructions Booking of shipping space Transportation between warehouses and port Custom clearance Intercontinental shipping Update stock and shipment details

September 10, 2008Peter Y. F. Lee49 Case 2 - Regional Distribution Centre BASF The issues: Production Area: Germany and South America Customers: Eastern China, Northern China, Japan and Korea Commodities: Chemicals (in drums or bags), including some Dangerous Goods Distribution centre: Singapore

September 10, 2008Peter Y. F. Lee50 Regional Distribution Center (1) Service elements: A regional Distribution Center in Free Trade Zone in Shanghai First transportation (shipments) is done by Shipping companies Transportation to bonded warehouse in FTZ Customs registration at FTZ Unpacking and warehousing

September 10, 2008Peter Y. F. Lee51 Regional Distribution Center (2) Service elements: For local buyers: Release cargo to local receivers or buyers Customs clearance Deliver cargo in full containers or break-bulk to inland points For Northern Asia countries buyers: Booking of space with inter Asia shipping lines Transportation to port Customs registration and de-registration Delivery of cargo to Northern Asia countries

September 10, 2008Peter Y. F. Lee52 Case 3 - Primary and Secondary Warehousing - Heineken Single commodity: different packing Production Area: the Netherlands Loss of market share: 1%< Single entry port: Shenzhen Distribution through agents in China Distribution Channel: widespread everywhere in China, but mainly at coastal cities

September 10, 2008Peter Y. F. Lee53 Primary and Secondary Warehousing Heineken The Plan Shipment hubs: one N. China port (Qingdao or Tianjin), Shanghai and Shenzhen Setting up of Primary warehouses at ports, with bonded and non- bonded facilities Distribution of coastal markets via Primary warehouses Setting up of Secondary warehouses at major inland cities, e.g. Chengdu, Wuhan etc. Transportation of goods by river or rail from primary to secondary warehouses The Reality: Brew in Shanghai Local distribution via land and river transportation

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