Asia competition barometer transport and logistics

Asia Competition Barometer Transport and logistics An Economist Intelligence Unit report Supported by Asia Competition Barometer Transport and logistics Contents Preface Executive summary Asia’s growing importance for corporate performance and global competitiveness Competition and profitability at Asian firms Competition: Rising Case study: APL Logistics Profitability: On the decline overall, but pockets of growth exist World trade 8 13 10 12 Positioning for success in Asia Resilient demand: Industry growth will come from Asia Profiting from Asia’s evolving manufacturing footprints Case study: DHL Express 14 14 15 16 Outlook 17 Barometer methodology 19 © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer Transport and logistics Preface Supported by Singapore’s Economic Development Board (EDB), the Economist Intelligence Unit has developed the Asia Competition Barometer with the aim of understanding the changing market dynamics in key sectors and assessing the intensity of competition in them Drawing upon company-level data on profitability and other indicators, the Barometer quantifies the changing dynamics of competitiveness in Asia for select industries between 2004 and 2009 This report focuses on the Barometer findings for the transport and logistics (T&L) sector Assessing a universe of over 275 T&L companies that are publicly listed in eight countries—China, India, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam—the Barometer examines changing profitability and the competition landscape for the T&L sector Other reports in this series look at the information technology services, precision engineering, petrochemicals and chemicals, and pharmaceuticals sectors in Asia January 2012 © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer Transport and logistics Executive summary W hat does the emergence of Asia as a major engine of global economic growth mean for companies operating in the region? Asia’s robust economic outlook—coupled with diminished growth prospects in many other parts of the world—has attracted new investment into the market both from regional players and Western multinationals As a result, competition in the region is expected to intensify Given the darkening global economic outlook, and the expected impact on some economies and sectors in the region, growth and profitability look uncertain in the near term But over the medium to longer term, Asia’s strong economic fundamentals will ensure consistent growth across a range of industries How are companies positioning themselves to capitalise on Asia’s growth opportunities over the next few years? The Asia Competition Barometer assesses the intensity of competition and changing market dynamics in several key sectors This report examines the transport and logistics (T&L) sector, which includes the following sub-segments: land transport and transport via pipelines, water transport, air transport, warehousing and support activities for transportation and postal and courier services Among the key findings of this report are the following: • Asia’s T&L sector has been expanding rapidly, in line with the region’s stellar economic growth Several broad macroeconomic trends, including Asia’s widening manufacturing base, deeper intraAsian trade integration, rising household incomes, high urbanisation rates and widespread government efforts to improve infrastructure have boosted demand for T&L services in Asia By 2009, nine out of the ten biggest container ports in the world were in Asia, up from just five in 2000 This growth looks set to continue, given Asia’s relatively robust economic outlook • The number of players in Asia’s T&L sector, homegrown and global, is rising The number and size of publicly-listed firms in the T&L sector in Asia has increased dramatically, from 199 firms in 2004 to 275 in 2009 Total combined revenues more than doubled from US$66.1bn to US$140.8bn during the period © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer Transport and logistics Meanwhile, in recognition of Asia’s increasing importance to the global T&L sector, foreign MNCs have been building up their presence in the region • Competition in Asia’s T&L sector is intensifying, as firms get leaner The influx of new players into the region’s T&L sector has led to a more competitive operating environment The industry’s largest publiclylisted Asian players saw their market shares decline between 2004 and 2009, as new players, including many low-cost competitors, entered the business Current trends in the industry suggest that fierce price competition will continue In such an environment, sources of competitive advantage will emerge both in big firms that can reap cost efficiencies and small firms that can serve niche segments • Profitability in Asia’s T&L sector has been declining, but pockets of growth exist The average gross margin of publicly-listed Asian firms declined from 49.8% in 2004 to 39.8% in 2009 Competition is only one factor pushing down profits A number of others—including the global economic downturn, higher fuel costs and rising wages—have put pressure on margins To maintain profitability, many firms will have to focus on specific growth niches, such as low-cost air travel or express and freight forwarding services, particularly in China and India • Rising domestic demand in Asia will change the nature of trade in the region, creating new growth opportunities As the global balance of economic power shifts from the West to the East, and as private consumption in Asia picks up, the nature of trade flows in the region will change dramatically Though component trade is still huge, and growing, this trend indicates a shift towards more final demand This will push logistics providers to improve their importing and intra-regional capabilities This also suggests that shorter-haul freight companies concentrating on the region will grow faster than those focussed on longhaul routes, for instance between Asia and Europe In addition, small T&L firms able to serve remote parts of Asia where incomes are rising—such as commodity-rich parts of Indonesia—stand to boost revenues • Asia’s evolving manufacturing footprints will affect the region’s T&L industry by shifting demand to newer markets Several broad trends are causing a rethink of Asian manufacturing, including rising wages in China, which are leading to the flight of low-cost manufacturing away from the south and coastal areas of that country to inland provinces and neighbouring countries such as Vietnam T&L firms will need to adapt to these changing dynamics in order to maintain profitability © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer Transport and logistics Asia’s growing importance for corporate performance and global competitiveness O ver the past decade, Asia has rapidly grown in importance to the global economy Its share of global GDP, measured in purchasing-power parity terms, increased from 26.8% in 2001 to 33.8% in 2010.1 By 2016, the Economist Intelligence Unit (EIU) expects this proportion to rise to 38.9% There are several broad trends associated with Asia’s rapid growth and development that have been driving its transport and logistics (T&L) sector.2 First, intra-Asian trade has boomed as manufacturing supply chains have spread and deepened across the region According to the World Trade Organisation (WTO), the share of intra-Asian exports as a proportion of total Asian exports has risen from 42.1% in 1990 to 52.6% in 2010.3 These intricate supply chains have become fundamental to global manufacturing output, as shown by the trade disruptions following natural disasters in Japan and Thailand in 2011 Increasingly integrated networks have boosted demand for, among other things, contract logistics, express and freight forwarding services, as well as unified services to smoothen customs clearance Second, rising incomes in the region as a result of broader economic growth have led to greater private consumption, sparking growth in imports For instance, the composition of China’s imports is shifting from raw materials and intermediate components for export-oriented manufacturing to an increasing amount of consumer goods.4 Asia’s logistics market will surpass North America’s by 2013, says Procurement Intelligence Unit, a business intelligence provider.5 It expects Asia’s transport and warehousing sector’s share of the global market to rise from 18% in 2010 to 21% by 2013 Today, some 70% of global container throughput is handled by ports in Asia.6 By 2009, nine out of the ten biggest container ports in the world were in Asia, up from just five in 2000 Indeed, Asia is increasingly important for corporate performance in the T&L sector globally “Asia without any doubt is the most active region in the world It is flowering The world tends to focus on China, but the reality is that there are several economies here that are growing very fast,” Nils Andersen, CEO of Maersk, a Danish conglomerate with big transportation and energy businesses, was quoted as saying in May 2011.7 “So if we look at trade, we see our intra-Asia business being the most dynamic We see trade between Asia and Latin America growing fast, the same with Africa.” From 2004 to 2008, the proportion of Maersk’s total allocated assets in Asia rose from 6.1% to 16.5%.8 Meanwhile, Maersk’s Asia revenues almost doubled from 2005 to 2010, with Asia’s share of global revenues rising from 11% to 13% over that same period © The Economist Intelligence Unit Limited 2012 Asia here includes Bangladesh, China, Hong Kong, Indonesia, India, Japan, South Korea, Malaysia, Myanmar, Philippines, Pakistan, Singapore, Sri Lanka, Thailand, Taiwan, and Vietnam The transport and logistics (T&L) sector includes the following sub-segments: land transport and transport via pipelines, water transport, air transport, warehousing and support activities for transportation and postal and courier services International Trade Statistics World Trade Organisation 2001 and 2011 “Intra-Asia traffic grows as carriers add services”, Cargonews Asia, Sep 12th 2011 “Asian logistic sector to become driver for global growth”, Procurement Intelligence Unit, Sep 2nd 2011 “Container shipping: Successful turnaround”, Deutsche Bank Research, Mar 28th 2011 “The View From The Bridge”, Forbes Asia Magazine, Jun 6th 2011 This figure does not include Maersk’s assets that are not allocated to a specific region Asia Competition Barometer Transport and logistics The International Air Transport Association, Feb 14th 2011 10 “China air passenger growth to lead global market”, China Daily, Feb 16th 2011 11 CAPA Centre for Aviation 12 This includes Greenfield investments as well as additions to existing projects Rising incomes have also caused a strong surge in domestic travel The International Air Transport Association (IATA) forecasts that the air industry will have to handle 800m more passengers and 12.5m extra tonnes of international cargo by 2014.9 Much of that growth will come from Asia “Asia is the most profitable region in the world,” Giovanni Bisignani, IATA’s director general, said in early 2011.10 “Of the 800m new passengers who will fly by 2014, 360m will be in Asia-Pacific and 214m of those in China.” In addition to boosting revenues at traditional, premium travel service providers, this growth in disposable incomes has sparked the development of a huge low-cost carrier (LCC) market The LCC’s share of the intra-Asian travel market, in terms of passenger seats, increased from 1.1% in 2001 to 17.7% in 2010.11 In the passenger airlines sector, for example, Jetstar, a newer LCC, has grown to account for more than 25% of the operating profit at Qantas, its parent company, in under a decade These new entrants to the T&L sector can disrupt traditional business models, putting pressure on margins at the established firms The success of low-cost carriers, for instance, has forced incumbent legacy carriers to offer better and more competitive products To maintain profitability, they may have to trim their cost base, as Philippine Airlines did in 2010 by retrenching 3,000 of its employees The third trend driving Asia’s T&L sector is the high urbanisation rate in the region, which has created numerous opportunities for T&L firms The Asian Development Bank believes that Asia’s urban population is growing by about 44m people a year—or 120,000 people a day This is boosting demand for interregional transit services—as migrants travel back and forth from their rural provinces—as well as intracity commuter services These new urban residents will also keep pushing up demand for a range of goods and services, which will in turn ensure consistent growth for the warehousing, supply chain management, and logistics sectors Fourth, many governments in the region, from India to Indonesia, are making concerted efforts to plug infrastructure deficits in their countries Asia’s generally poor infrastructure networks have long been a drag on growth in the T&L sector As public and private sector investments help construct new airports, renovate old sea ports, and build better highways, they will boost productivity in the T&L sector Foreign T&L MNCs have been operating in Asia for several decades Recently, in recognition of Asia’s growing importance, they have been investing heavily in the region Between January 2003 and August 2011, fDi Markets, a research house, recorded a total of 670 T&L investment projects in Asia from 217 companies 12 Many of those investments originated from the US (18% of the investment projects), Germany (18%) and Japan (9%) Meanwhile, the top three investment destination markets were China (35% of the investment projects), India (19%) and Vietnam (8%) While there are numerous opportunities, T&L firms in Asia will also continue to face several challenges In China, for instance, firms have to contend with non-uniform tax rates at various links of the supply chain, and repeated taxation In addition, high road and bridge tolls account for as much as one-third of the costs of logistics enterprises in China Meanwhile, even though governments are prioritising infrastructure investments, they will find it hard just to keep pace with the region’s torrid demand growth McKinsey, a consultancy, believes that India’s network of roads, rail, and waterways will act as a possible brake on the country’s growth, as it will be unable to accommodate the expected threefold increase in freight movement over the coming decade Recent free trade agreements such as those signed between the Association of Southeast Asian Nations © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer Transport and logistics (ASEAN) and Australia and New Zealand, China, and India, are hastening integration of Asian countries Between 2000 and 2011, the number of bilateral FTAs recorded by the WTO that involved an Asian country increased from to 74 However, the region’s web of complex non-tariff barriers will continue to pose challenges to T&L firms Other operational challenges include bureaucracy, cross-border tariffs, corruption and talent shortages These challenges can vary considerably from one Asian country to the next; hence firms face a heterogeneous operating environment in Asia Environmental regulations may also eventually have an impact on the industry © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer Transport and logistics Competition and profitability at Asian firms R eflecting the booming growth in Asia’s T&L sector, the number and size of publicly-listed firms in Asia has increased dramatically The total number of listed companies in the industry increased by 40%, from 199 firms in 2004 to 275 in 2009, while their total combined revenue more than doubled from US$66.1bn to US$140.8bn The influx of new players, both Asian and non-Asian, into the region’s T&L sector has led to a more competitive operating environment Competition: Rising With many companies raising their expectations of Asia to deliver growth and profits, it is reasonable to expect competition intensity in the region to increase To capture this intensity we have used the Herfindahl–Hirschman Index (HHI), which measures the market concentration of an industry’s largest firms HHI values can range from (extremely fragmented market) to 1.0 (monopoly) Here we have multiplied the values by 100 to achieve a scale consistent with profitability indicators (see below) The Figure 1: Herfindahl–Hirschman Index 6.0 5.5 5.0 4.5 4.0 2004 2005 2006 2007 2008 2009 Source: Economist Intelligence Unit Herfindahl—Hirschman Index (HHI) 2004 2005 2006 2007 2008 2009 5.77 5.66 5.08 5.78 5.44 4.34 © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer Transport and logistics HHI for Asia’s T&L industry decreased from 5.77 in 2004 to 4.34 in 2009 (see Figure 1), signifying that the 50 biggest firms in the Barometer decreased their market concentration over that period.13 The three largest companies (by 2009 turnover) (see Figure 2)—China Cosco Holdings, Singapore Airlines and China Southern Airlines—saw their combined revenue share drop from 27.4% in 2004 to 20.7% in 2009 These numbers partly reflect the growing penetration into the industry of small, nimble, low-cost entrants, which are winning market share from the larger incumbents and in the process disrupting traditional business models Figure 2: Top ten companies by turnover Company Country of origin 2004 turnover (US$bn) 2009 turnover (US$bn) China Cosco Holdings China 4.94 10.50 Singapore Airlines Singapore 9.52 10.11 China Southern Airlines China 3.63 8.58 Air China China 5.13 8.18 China Eastern Airlines China 3.24 6.65 Neptune Orient Lines Singapore 6.64 6.53 Thai Airways Thailand 5.09 5.42 MISC Malaysia 3.58 4.61 Sinotrans China 3.31 4.25 Malaysian Airlines Malaysia 3.64 4.10 13 A measure of the size of companies in relation to the industry, and an indicator of the amount of competition among them, the HHI is defined as the sum of the squares of the market shares of the 50 largest firms from the universe of 275 listed companies assessed For more information on the Barometer methodology, please refer to the last section in this report Note: These are the ten biggest companies by turnover that were analysed in the Barometer, which considered only publicly listed firms in eight countries: China, India, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam Taken together, the declining market concentration and higher number of companies paint a clear picture of fragmentation, adding to the already high competition levels in the T&L sector in Asia Current trends in the industry suggest that firms will continue to compete fiercely on price In such an environment, both big and small firms can develop unique competitive advantages Small firms may be able to innovate and provide low-cost offerings, particularly in segments where traditional incumbents are saddled with huge cost bases Large, integrated transportation firms, meanwhile, can reap scale efficiencies, particularly when providing a service over a wider geographic area Over the next few years, consolidation in the T&L sector in Asia is likely, as these larger firms seek to grow their market share through strategic acquisitions Jim McAdam, president of APL Logistics, a supply chain service provider, believes that the growth in intra-Asian trade will force logistics service providers to invest in infrastructure and to acquire key assets in the region Firms will compete in terms of their cross-border logistics infrastructure and incountry warehousing and transportation capabilities “Vertical-focused capabilities will also mushroom, particularly in major consumer growth sectors like retailing, FMCG, apparel, automotive, electronic goods, automotive and pharmaceutical,” he says © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer Transport and logistics case study APL Logistics APL Logistics: Investments in assets, technology and talent APL Logistics, a supply-chain service provider, has enjoyed doubledigit annual revenue growth in Asia over the past five years, except in 2009 when the global economy was in recession In 2010, its Asia revenues grew 37% year on year, compared with 26% growth in nonAsia revenues “Today, Asia accounts for 26% of APL Logistics’ global revenue, up from 17% in 2005,” says Jim McAdam, the firm’s president Mr McAdam identifies several factors that have driven profitability at APL These include economies of scale, close cost control (particularly for operational and personnel costs), smarter procurement practices, streamlined processes (including, where possible, centralising back-room operations in affordable regional or global centers), and flexibility with external infrastructure and assets He also cites selective investment in productivity-boosting technology Mr McAdam also recognises the importance of service innovations that can boost both top- and bottom-line growth He cites the example of APL Logistics’ day-definite ocean services that allow customers to deliver their time-sensitive cargoes predictably, without having to pay expensive airfreight rates 10 Mr McAdam contends that in order to ensure future profitability, players in the T&L industry will “need to look at putting in place costefficiency strategies that will allow them to reap benefits over the longer term,” rather than looking at short-term, isolated cost savings “Among other things, this will involve investing in critical ground infrastructure and assets, including transport routes.” Since 2007, APL has been providing rail services in India, while in Indonesia and Vietnam it has invested in warehousing, equipment and technology “Many of these emerging countries don’t have adequate infrastructure for state-of-the-art domestic supply chains,” he told The Journal of Commerce, a trade publication, in a separate interview in September 2011 “As operators we can either wait for governments or private enterprise to move first, or we can put our own money in to help develop it faster We are doing the latter.” In particular, he believes that T&L firms in Asia are going to compete in terms of technology and talent Advanced planning and supplychain optimisation technologies will be crucial, he says Meanwhile, as demand grows for knowledge-based consultancy services, he says that “hiring the right skill sets at the right prices is a key too In the same vein, it is important to invest in training and people development.” “APL Logistics Chief Says Asset-Based Model Key”, The Journal of Commerce, Sep 9th 2011 © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer Transport and logistics Profitability: On the decline overall, but pockets of growth exist To measure the profitability of the T&L sector, we developed a composite index of five ratios which measure different aspects of a company’s margins (for more details, see the note on methodology at the end of this report) All profit margins for the T&L industry in 2009 have fallen relative to 2004 (see Figure 3) Profitability has not fallen consistently, but has fluctuated broadly in tandem with global economic growth (see Figure 4) From 2006 to 2007, profitability rose slightly, before a steep decline between 2007 and 2008.14 This was a direct reflection of the gathering financial storm at the end of 2007 that depressed global demand and led to a collapse in global trade As much of the developed world entered a recession, export volumes worldwide contracted sharply Nevertheless, given that regional economic growth and trade began to recover in mid 2009, the Profitability Index shows a small uptick that year Thus, while intense competition in the region has meant a long-term secular decline in profitability in the T&L industry, economic growth cycles have influenced short-term margin fluctuations 14 The composite Profitability Index is made up of five ratios that each represent a different aspect of a company’s profitability For more information on the Barometer methodology, please refer to the last section in this report Figure 3: Profitability Index 120 100 80 60 2004 2005 2006 2007 2008 2009 Source: Economist Intelligence Unit 2004 2005 2006 2007 2008 2009 Profitability index 115.3 100.0 93.2 100.4 75.2 83.3 EBITDA margin (%) 24.0 21.1 19.9 23.3 16.4 17.4 Gross margin (%) 49.8 43.0 39.7 39.4 33.7 39.8 Return on capital employed (%) 14.1 12.5 11.8 14.5 8.0 5.8 Return on equity (%) 16.0 13.5 12.8 16.3 6.7 5.4 Return on assets (%) Herfindahl—Hirschman Index (HHI) 7.2 6.0 5.9 7.4 2.8 2.2 5.77 5.66 5.08 5.78 5.44 4.34 Profitability has also been hurt by several broader industry trends, including the liberalisation of transportation markets, which has opened up many segments to increased competition Rising fuel costs and wages in many parts of Asia have also eaten into profits Margins are likely to remain under pressure, particularly given the entrance of new competitors into the industry, and the increasing sophistication of low-cost competitors To maintain profitability, many firms will have to focus on specific growth niches, such as low-cost air travel or express and freight forwarding services, particularly in China and India © The Economist Intelligence Unit Limited 2012 11 Asia Competition Barometer Transport and logistics Figure 4: Global GDP (% real change p.a.) -1 -2 -3 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Economist Intelligence Unit, Dec 14th 2011 15 Global Forecasting Service, The Economist Intelligence Unit, Dec 14th 2011 12 Over the next few years, overall profitability in Asia’s T&L sector will inevitably be affected by broader global macroeconomic developments The Economist Intelligence Unit (EIU) has downgraded its global GDP growth forecasts for 2011-2016 (see Figure 4), largely due to the sovereign debt problems facing the euro zone We now expect the global economy to grow by 2% in 2012 As part of that rerate, we have reduced our growth forecasts for most emerging markets; countries with significant trade exposure to the large Western economies will feel the greatest impact For instance, we have lowered our 2012 GDP forecast for China to 8.2%.15 Furthermore, we estimate there is a greater than 40% chance that the global economy will fall into recession sometime in the next two years Diminished global demand will have a direct impact on trade and therefore profitability at most firms in Asia’s T&L sector (See Box: World Trade) T&L firms dependent on commodity markets—such as dry bulk shippers and offshore service providers—will also eventually be affected by this slowdown in global demand Over the medium to long term, the imminent global economic slowdown, with its roots in the developed Western economies, will hasten the ongoing rebalancing of global economic power from the West to Asia Therefore, many firms in Asia’s T&L sector will be positioning themselves to capitalise on changing global trade and growth patterns “There is clearly a shift in trade towards Asia,” says Christopher Ong, vice president, business development at DHL Express Asia Pacific “If there is a slowdown, maybe the best thing we can is invest, because we will effectively be lowering our capital expenditure It is all about buying the assets at the right time.” © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer Transport and logistics World trade Following a rebound in 2010, world trade growth has slowed in 2011, with momentum stalling particularly since the third quarter In Germany, after a strong first half-year, annual export earnings growth slowed to 10% in September, while in China exports grew at an annual rate of 15.9% in October, down from 17.1% a month earlier In the US, where indicators of economic health are not yet pointing uniformly downwards, export earnings grew by 18.1% in September, compared with an average rate of 21% in 2010 Japan’s economy is still recovering from the tsunami and nuclear disaster in March, with exports in September growing more slowly than imports on an annualised basis In the light of the slowdown evident in recent data, notably in Europe and Asia, the Economist Intelligence Unit has revised down its world trade growth estimate for 2011 to 6.6% Meanwhile, in response to the downgrade of our euro zone growth forecast and the deteriorating global macroeconomic picture, we have cut our world trade growth forecast for 2012 to 4.2% We expect growth to recover to close to 6% in 2013 and to strengthen over from 2014-2016 Figure 5: World trade (% change; goods) 15 12 -3 -6 -9 -12 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Economist Intelligence Unit, Dec 14th 2011 © The Economist Intelligence Unit Limited 2012 13 Asia Competition Barometer Transport and logistics Positioning for success in Asia Resilient demand: Industry growth will come from Asia G 16 “Asia Pacific Transport and Logistics 2011”, Transport Intelligence, Sep 2011 14 iven the long-term structural problems in many Western markets and emerging Asia’s largely bullish economic fundamentals, the shift in trade and investment from the West to Asia will continue The EIU estimates that by 2016 the eight Asian countries in this study alone will account for 28.9% of global GDP (measured in purchasing-power parity terms), up from 23.2% in 2010 The strong growth of Asia’s emerging economies will boost the intra-regional movement of goods and people Many industry analysts therefore believe Asia offers better prospects for T&L firms Transport Intelligence, an industry research firm, projects double-digit increases through 2014 in contract logistics and express and freight forwarding services in the region, led by China and India.16 Meanwhile, China replaced the US this year as the largest air cargo market for Singapore, an example of how China’s growth is driving the Asian logistics industry Many other Asian countries are also keen to boost private consumption, partly in a bid to reduce their reliance on exports and investment “We have huge contracts with a lot of brand owners, including Apple,” says Mr Ong at DHL Express “There is a lot of growth in demand in Asia for these end products.” Though component trade is still huge, and growing, this trend suggests that the nature of trade flows in the region is shifting towards more final demand This is forcing logistics providers to improve their importing and intra-regional capabilities This suggests that shorter-haul freight companies concentrating on the region will grow faster than those focussed on long-haul routes, for instance between Asia and Europe In addition, small T&L firms able to serve remote parts of Asia where incomes are rising—such as commodity-rich parts of Indonesia— stand to boost revenues In line with this, companies are aggressively growing their presence and operations in Asia For example, Singapore-based REIT Global Logistic Properties, Asia’s largest provider of modern logistics facilities, will develop 14m square feet of new space in China in 2011, and 16-17m square feet in 2012 A © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer Transport and logistics number of established companies, such as logistics services company FedEx, express services firm TNT, marine terminal operator and developer DP World, and logistics and transportation solutions provider Toll Group, are using acquisitions of Indian companies to gain a presence in India The development of China and India will also drive the commodities trade within Asia Frost & Sullivan, a research house, believes that Indonesia’s robust oil and gas sector and its status as the largest coal exporter in the world will contribute to an 8.3% expansion in the country’s logistics sector in 2011.17 Though intra-Asian trade will continue to drive growth in container shipping, the industry’s profitability outlook is slightly more cautious due to high oil prices, over-capacity and depressed freight rates In this environment, shipping firms will want to adopt more fuel-saving initiatives, minimise idling capacity and redraft routes to strengthen their bottom lines 17 “Indonesia’s Logistics Industry Set to Grow 8.3% in 2011”, Knight Ridder/Tribune Business News, Jan 27th 2011 Profiting from Asia’s evolving manufacturing footprints Just three years ago, supply chains in Asia were still following a predictable pattern, with many components from around the region being shipped to China for final assembly, before being sent to other markets for sale Today, several broad trends are causing a rethink of Asian manufacturing First and foremost is rising wages in China, which are leading to the flight of low-cost manufacturing away from the south and coastal areas to inland provinces and neighbouring countries such as Vietnam Another is the continued rapid growth of Asian economies, coupled with sluggish recoveries in the West, which has prompted more firms to focus on serving Asia’s consumers Finally, the recent natural disasters in Japan and Thailand, and their impact on the production of certain components, have highlighted the importance of having alternative suppliers Within China, economic development has been shifting westwards “Instead of Shenzhen and Guangdong, we are seeing a lot of growth in Chengdu,” says Mr Ong China’s T&L industry, therefore, will expand strongly into the central and western regions, and boost development of rural logistics services China’s broad geographical spread and the presence of production bases across the country offer opportunities for small and large logistics services providers Meanwhile, Transport Intelligence sees long-term growth potential in Vietnam, as low-cost manufacturing work shifts there from China 18 Vietnam’s rapidly growing air and seaport industries have facilitated a higher volume of trade, and its vast network of inland waterways serves as an efficient mode of goods transportation Vietnam’s T&L sector is still in its infancy, with a fragmented industry makeup Early entrants have an opportunity to establish a first-mover advantage For instance, Maersk has constructed the Cai Mep International Terminal in Vietnam, which began operations in mid-2011, through a joint venture Sources of competitive advantage will include being able to leverage transportation network efficiencies with China and navigating the government bureaucracy in Vietnam Manufacturing footprints elsewhere in Asia are also changing Indonesia’s manufacturing sector has been growing rapidly, focussed both on exports as well as its huge, burgeoning domestic market Malaysia and Thailand will continue to push up the manufacturing value chain, producing, for instance, automotive products and solar panels India, meanwhile, is eager to increase its export-oriented manufacturing, partly to serve markets in the Middle East and Africa This shift will lead to the growth of many new trade links within the region, says Mr Ong He believes © The Economist Intelligence Unit Limited 2012 18 “Vietnam Logistics 2009”, Transport Intelligence, Jan 2009 15 Asia Competition Barometer Transport and logistics this will benefit large firms such as DHL, because “for a multinational that wants to work with a single source, we are there.” But these developments will also create opportunities for new regional T&L players, who can grow and develop as trade blossoms in their immediate neighbourhood case study DHL Express DHL Express: Growth in Asia Asia is the most important contributor to growth for major express delivery firms, according to Christopher Ong, vice president, business development at DHL Express Asia Pacific “Even though the 2008-09 recession hurt profitability for some companies, last year (2010) was a very good year for many global express services firms, and Asia was driving much of that growth,” he says Nevertheless, Mr Ong agrees that competition has intensified dramatically over the past few years, and not just from the large, integrated firms “In the Japan-Korea-China growth triangle, for instance, we are starting to see a lot of competition from regional players,” he says “There are Chinese players who are offering extremely low freight rates into Korea and Japan.” These emerging T&L SMEs and “national champions” compete on price in localised geographies, says Mr Ong, targeting small companies who trade only along a few routes In that segment, they present tough competition to bigger firms such as DHL In July 2011 DHL exited the domestic delivery business in China, when its loss-making joint venture with Sinotrans, a Chinese firm, was sold to Uni-top, another Chinese player Sinotrans cited “overly fierce competition in the domestic courier services sector” for its poor performance Given the multitude of small local players in Asia, Mr Ong expects there to be some consolidation in the region over the next few years, particularly in China, with a few national champions growing bigger “Some of these markets are so fragmented, it’s impossible to reap any economies of scale,” he says Mr Ong is confident that consolidation will improve service standards in these markets, as firms move away from pure price competition These firms will also broaden their footprint Mr Ong cites Shunfeng, one of China’s largest domestic express services, which “has started to move out to Singapore, Hong Kong and Taiwan.” 16 Faced with these emerging challengers, DHL’s competitive positioning is based on its global reach as well as its reputation for quality and security Over the past few years, the industry has had to contend with rising wages as well as fuel costs To curb operational costs, DHL has been relentlessly striving to improve the efficiency of its processes, says Mr Ong, who used to run the firm’s Six Sigma programme This efficiency drive has also helped the firm reduce its energy usage, improving its environmental performance Meanwhile, it has been able to pass on most of its fuel cost rises to its customers Though Mr Ong expects both wages and fuel costs to continue to rise over the next few years, he does not expect them to significantly crimp profitability Over the near term, T&L firms in Asia will need to closely monitor manufacturers’ production plans with respect to just-in-time production and delivery (JIT), as this will impact the nature of transportation and logistics services required Given the global economy’s rapid growth from 2004 to 2007, many manufacturing firms switched from air to ocean freight during that time, Mr Ong says, in order to cut costs But when the 2008-09 recession hit, they suddenly found themselves with a huge inventory build-up This prompted many manufacturing firms to increase their use of JIT “I think they figured it’s better to pay a little more for transport than to have obsolete inventory,” he says There was then a shift back to air freight This could partly explain the supply disruptions many firms faced following the natural disasters in Japan and Thailand in 2011, as they had relatively smaller inventories on hand Thus, on the one hand, many manufacturers are again questioning the wisdom of JIT following those two disasters On the other hand, the darkening global economic outlook is again threatening to dampen demand for goods, suggesting that huge inventories may turn out to be a liability To stay ahead of the competition, T&L firms in Asia will need to be able to handle any shifts in traffic, as manufacturers react to changing market conditions © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer Transport and logistics Outlook A lthough the T&L market in Asia has been growing rapidly, profitability has been on a downward trend over the past five years, largely due to increased competition in the sector Though profitability has risen since the 2008-09 recession, the darkening economic outlook portends further declines in the near term Companies in Asia will therefore have to manage near-term uncertainty while anticipating and preparing for the longer-term secular shift in trade and growth, as economic momentum shifts from sluggish Western countries to dynamic emerging markets The T&L sector will continue to adapt to changes in the global environment by competing on price Cost-cutting will therefore be a key theme Additional challenges to T&L companies will come in the form of energy costs, climate change, and terrorism Companies will need strong risk management programmes in order to mitigate these threats Amongst more developed T&L markets, and in the more sophisticated links of the supply chain, there is a greater call for increased cost efficiency through the adoption of new technology For instance, technologies such as radio frequency identification (RFID) help to narrow margins of error and thereby reduce the costs of correcting errors Environmentally friendly products and services will also become increasingly important, accelerating the shift to “Green Logistics” Asia is likely to produce many global T&L leaders Two broader industry trends suggest that many of the global T&L leaders of the future will come from Asia First is the long-term shift in trade and investment from the West to the East, which will provide ever more opportunities for growth in the region across all segments There will be further consolidation in the sector, as firms grow to reap scale efficiencies and improve their cross-border capabilities Second is Asia’s early advantage in low-cost competition and “frugal engineering” (a product design approach that emphasises using the bare minimum of resources to create basic, no-frills products) © The Economist Intelligence Unit Limited 2012 17 Asia Competition Barometer Transport and logistics This indicates that Asian T&L firms will innovate to produce low-cost services that will appeal not only to emerging-market consumers, but to increasingly cost-conscious consumers in Western developed markets An example of this is LCC AirAsia’s increasing penetration in global air travel markets, as it expands geographically, while also pushing up to serve higher-value segments on certain routes (for instance, on some routes it offers premium seats, such as flat-beds, at much lower prices than regular airlines) Similarly, other T&L firms that can compete and win market share in Asia will be well positioned for global expansion As Asia progressively accounts for a bigger share of global trade and transportation, it is likely that the region will produce many of the world’s most competitive and innovative T&L firms of the future 18 © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer Transport and logistics Barometer methodology T o assess the intensity of competition and understand the changing market dynamics in key sectors, the Economist Intelligence Unit (EIU) has developed the Asia Competition Barometer Drawing upon company-level data on profitability and other indicators, the Barometer quantifies the changing dynamics of competitiveness in Asia for select industries between 2004 and 2009 Assessing a universe of over 275 publicly listed transport and logistics (T&L) companies across eight countries—China, India, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam—the Barometer examines changing profitability and the competition landscape for the T&L sector How we define the transport and logistics sector? Given the increasingly integrated nature of global and regional logistics supply chains the T&L sector encompasses both passenger and freight services In addition, activity for both types of services is driven by similar macroeconomic factors, particularly related to global trade The T&L sector includes the following sub-segments: land transport and transport via pipelines, water transport, air transport, warehousing and support activities for transportation and postal and courier services Methodology The Barometer has two dimensions: profitability and market concentration Profitability Index To assess the aggregate profitability of the T&L sector in Asia, the EIU developed a composite index of five ratios that each represent a different aspect of a company’s profitability: • EBITDA margin (%): A measure of a company’s operating profitability It is equal to earnings before interest, tax, depreciation and amortisation (EBITDA) divided by total revenue Because EBITDA excludes depreciation and amortisation, EBITDA margin provides a clearer view of a company’s core profitability An increase in competition may put pressure on an industry’s profit margins © The Economist Intelligence Unit Limited 2012 19 Asia Competition Barometer Transport and logistics • Gross margin (%): When used as a market measure of competition, gross margin measures the profitability considering only the costs of goods sold The higher the percentage, the more the company retains on each dollar of sales to service its other costs and obligations An increase in competition tends to reduce firms’ ability to increase prices and thereby increase its gross margin • Return on capital employed (%): A measure of the efficiency and profitability of a company’s capital investments Return on capital employed also indicates whether the company is earning sufficient revenues and profits in order to make the best use of its capital assets An increase in competition may require firms to employ additional capital to maintain profitability • Return on equity (%): A measure of the rate of return on the shareholders’ equity It measures a firm’s efficiency at generating profits from every unit of shareholders’ equity Return on equity shows how well a company uses shareholder funds to generate earnings growth A rise in competition tends to put pressure on returns on shareholder funds • Return on assets (%): A measure of how profitable a company’s assets are in generating revenue, or how profitable a company is relative to its assets Return on assets determines a company’s ability to utilise its assets efficiently and effectively Higher competition tends to put pressure on firms’ ability to maintain return on assets We aggregated company-level data for 275 publicly-quoted T&L companies and examined their profitability ratios To enable observation of trends over time, a composite Profitability Index was developed (where year 2005 = 100) EBITDA and gross margin are given a higher weighting in the index as they speak directly to bottom line profitability, while the return on capital employed, return on equity and return on assets ratios speak to how a company make use of its various resources to drive return (i.e efficiency/ productivity) Profitability indicator Weight in Profitability Index EBITDA margin (%) 35% Gross margin (%) 35% Return on capital employed (%) 10% Return on equity (%) 10% Return on assets (%) 10% Market concentration 19 Or summed for all the firms in the case that there are fewer than 50 20 To assess market concentration, the EIU calculated the Herfindahl-Hirschmann Index (HHI) for the T&L sector in Asia from 2004 to 2009 A measure of the size of companies in relation to the industry, and an indicator of the amount of competition among them, the HHI is defined as the sum of the squares of the market shares of the 50 largest firms19 from the universe of over 275 listed companies assessed HHI values can range from to 1.0, moving from an extremely fragmented market (0) to a monopoly (1) HHI values have been multiplied by 100 to achieve a scale consistent with profitability indicators A rising HHI index generally indicates falling market competition, while a fall in the HHI suggests that competition is increasing © The Economist Intelligence Unit Limited 2012 [...]... accounts for a bigger share of global trade and transportation, it is likely that the region will produce many of the world’s most competitive and innovative T&L firms of the future 18 © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer Transport and logistics Barometer methodology T o assess the intensity of competition and understand the changing market dynamics in key sectors,... includes the following sub-segments: land transport and transport via pipelines, water transport, air transport, warehousing and support activities for transportation and postal and courier services Methodology The Barometer has two dimensions: profitability and market concentration Profitability Index To assess the aggregate profitability of the T&L sector in Asia, the EIU developed a composite index... Asia Competition Barometer Drawing upon company-level data on profitability and other indicators, the Barometer quantifies the changing dynamics of competitiveness in Asia for select industries between 2004 and 2009 Assessing a universe of over 275 publicly listed transport and logistics (T&L) companies across eight countries—China, India, Indonesia, Malaysia, the Philippines, Singapore, Thailand and. . .Asia Competition Barometer Transport and logistics case study APL Logistics APL Logistics: Investments in assets, technology and talent APL Logistics, a supply-chain service provider, has enjoyed doubledigit annual revenue growth in Asia over the past five years, except in 2009 when the global economy was in recession In 2010, its Asia revenues grew 37% year on year,... scale efficiencies and improve their cross-border capabilities Second is Asia s early advantage in low-cost competition and “frugal engineering” (a product design approach that emphasises using the bare minimum of resources to create basic, no-frills products) © The Economist Intelligence Unit Limited 2012 17 Asia Competition Barometer Transport and logistics This indicates that Asian T&L firms will... 2013 and to strengthen over from 2014-2016 Figure 5: World trade (% change; goods) 15 12 9 6 3 0 -3 -6 -9 -12 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Economist Intelligence Unit, Dec 14th 2011 © The Economist Intelligence Unit Limited 2012 13 Asia Competition Barometer Transport and logistics Positioning for success in Asia Resilient demand: Industry growth will come from Asia G 16 Asia. .. stand to boost revenues In line with this, companies are aggressively growing their presence and operations in Asia For example, Singapore-based REIT Global Logistic Properties, Asia s largest provider of modern logistics facilities, will develop 14m square feet of new space in China in 2011, and 16-17m square feet in 2012 A © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer Transport. .. Transport and logistics number of established companies, such as logistics services company FedEx, express services firm TNT, marine terminal operator and developer DP World, and logistics and transportation solutions provider Toll Group, are using acquisitions of Indian companies to gain a presence in India The development of China and India will also drive the commodities trade within Asia Frost... and solar panels India, meanwhile, is eager to increase its export-oriented manufacturing, partly to serve markets in the Middle East and Africa This shift will lead to the growth of many new trade links within the region, says Mr Ong He believes © The Economist Intelligence Unit Limited 2012 18 “Vietnam Logistics 2009”, Transport Intelligence, Jan 2009 15 Asia Competition Barometer Transport and logistics. .. Malaysia, the Philippines, Singapore, Thailand and Vietnam—the Barometer examines changing profitability and the competition landscape for the T&L sector How do we define the transport and logistics sector? Given the increasingly integrated nature of global and regional logistics supply chains the T&L sector encompasses both passenger and freight services In addition, activity for both types of services ... 13 Asia Competition Barometer Transport and logistics Positioning for success in Asia Resilient demand: Industry growth will come from Asia G 16 Asia Pacific Transport and Logistics 2011”, Transport. .. Association of Southeast Asian Nations © The Economist Intelligence Unit Limited 2012 Asia Competition Barometer Transport and logistics (ASEAN) and Australia and New Zealand, China, and India, are hastening... Unit Limited 2012 Asia Competition Barometer Transport and logistics Competition and profitability at Asian firms R eflecting the booming growth in Asia s T&L sector, the number and size of publicly-listed