Developing and Deploying Outsourced Logistics in China The Market, The Opportunities, The Challenges

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Developing and Deploying Outsourced Logistics in
ChinaThe Market, The Opportunities, The
Challenges
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Efficiency of Goods Distribution Infrastructure
1Very Inefficient 10Very
Efficient
Survey on distribution infrastructure of goods
and service efficiency (The World Competitiveness
Yearbook 1999)
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Cross-Country Logistics Cost Comparison
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Composition of Outsourcing Providers in China
Foreign Logistics Companies
Emerging Logistics Companies

• APL
• Maersk
• Menlo Worldwide
• Panalpina
• Exel
• Danzas

• TNT
• Schenker
• FedEx
• UPS
• DHL

• EAS
• ST-Anda
• PGL
• China Overseas Logistics
• DTW

Internal Logistics Departments Of Chinese
Companies
Traditional Chinese Transportation Companies

• Haier Logistics
• Attend Logistics
• Ding Xing Logistics
• TCL
• Bright Diary
• Legend Computers

• Costco
• Sinotrans
• China Shipping
• China Resources
• China Post
• China Merchants

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The Push by Global Providers

• Sinotrans IPO
• Biggest Investors
• Exel US10 Million
• (Already has a JV with 1200 employees in 15
  cities)
• Deutsche Post US52 Million
• Danzas Investing US35million in IT Infrastucture
  in Asia
• UPS to invest US100 million to gain control of
  its China network, purchased MWF to add a
  heavyweight air freight component
• TNT to invest US303 million in China
• APL Logistics Investing US6.5 million in JV with
  Legend Holdings to attack IT logistics market
• Schenker Investing US4 million in JV in China

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High Level Summary of the Market

• The Market is large, fast-growing, highly
  fragmented and in a very early stage of
  development
• The market for outsourced logistics is estimated
  at roughly RMB 40 billion (US4.8 billion)
• While many logistics providers have experienced
  growth rates at or near 30 over the last three
  years, 85 of services offered are basic
  transportation or warehousing.
• Many providers believe clients are not yet ready
  for outsourcing, and shippers cite many
  obstacles, mainly 3PL service quality
• The Market is fragmented with no market share
  greater than 2. 80 of revenues come from the
  Yangtse and Pearl River Delta regions
• The demands of multinationals and Chinese
  shippers are very different, suggesting two
  distinct market development paths.
• Many providers are seeking partners for growth
• Govt. initiatives are stimulating the 3PL market
  in China, but often to the benefit of local
  players.

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Growth Rates and Service Breakdown
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Primary Industry Sectors

• Industry sector
• Electronic Products, Computer and
  Telecommunication
• Household Appliance
• Automotive and Parts
• Fast Moving Consumer Products
• Food and Beverage
• Industrial Machinery and Equipment
• Textile and Apparel
• Furniture
• Pharmaceutical
• Other

• Average Revenue Contribution ()
• 15.92
• 15.35
• 9.65
• 9.65
• 9.40
• 6.00
• 4.58
• 4.06
• 5.85
• 16.69

Source 2002 China Logistics Provider Survey
(Georgia Tech)
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Global vs. Local Capailities

• Chinese providers focus more on domestic
  opportunities due to lack of overseas networks.
  Foreign providers draw most of their revenue from
  import and export-related logistics as they focus
  on servicing their global accounts

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Cost Tracking Between MNCs and Local Shippers
The tracking of direct and indirect costs by
MNCs and local companies is a strong indicator
of internal incentives for outsourcing. While
low tracking of admin and inventory costs by
local companies could be seen as an opportunity
for foreign providers, at the same time, it
suggests a significant challenge if the lack of
cost tracking also suggests a lack of perceived
need for value-added logistics outsourcing.
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Outsourcing by Service/Shipper
Not surprisingly, given the attention to direct
and indirect costs in the supply chain between
local companies and MNCs, outsourcings value
is apparently still seen as primarily related to
direct transportation as opposed to value-added
logistics services. The ratio of outsourcing
between MNCs and local companies Would suggest
a considerable learning curve to be overcome in
this area.
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MNCs Are a Powerful Growth Factor for the
Outsourcing Market
Indications would suggest that the largest users
of outsourcing in China remain to be
multinational corporations. While this would
suggest that MNCs act the same in China as they
do elsewhere, the biggest challenge for
both Chinese and foreign providers is the meet
the expectations of both corporate and local
management of these companies.
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Foreign vs. Chinese Providers
The suggested polarization of the market between
foreign and local providers and their customers
suggests that a defined segmentation of target
markets and customers will be necessary to
facilitate profitable, cross enterprise growth.
The data would suggest that a broader approach to
the market would necessitate the acquisition,
through partnership, JV or other form, of those
advantages perceived to be held by Chinese
providers.
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Challenges for Growth
There are many similarities between Chinese and
Foreign providers in the way that they perceive
growth challenges. The biggest exception is the
identification of Government restrictions as the
leading obstacle for growth on the part of
foreign providers.
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Conclusions

• Observations of the China Market would suggest
  that any perceived opportunity is accompanied by
  significant challenges
• Regulatory issues remain high on the list of
  those challenges. Although the WTO reforms
  suggest significant opportunities, history has
  shown that proposed reforms rarely occur as
  expected and often tend to favor local
  industries.
• The suggested polarization of the market between
  local and foreign providers, as well as the
  requirements of local companies and MNCs, will
  require careful thought regarding target
  industries and customers.
• Cost competitiveness will continue to be a major
  competitive issue, regardless of whether a
  provider is local or foreign. The extent to
  which the concept of added value can be
  effectively conveyed in solution development will
  be a key competitive advantage on top of
  competitive transactional pricing.
• Apart from customer demand, overcoming the
  obstacles for growth will be a major area of
  competition between both Local and foreign
  providers.