Overview of the development of China's logistic infrastructure and industry; identifying potential obstacles and opportunities for investment

1. CONFIDENTIAL
State of China’s Logistics and
Potential Business Opportunities
BY: KC YOON
GLOBAL CHINA CAPITAL
Mobile: 18675573803 1
Email: kcyoon07@gmail.com

2. Section One-
State of China’s Logistics - Challenges & Future
Growth
State of China’s Logistic Market
Market Characteristics
Understanding the Costs and Challenges
Industry Trends and Drivers
Future Market Potential
Laying China’s Logistic Infrastructure
Current and Future Transportation Infrastructure
Logistic Hub, City and Passage Development
Chinese Government’s Support for Industry
Leading Logistic Players in the Market
Leading Domestic & Foreign Players
Recent Business & M&A
2

3. China Market Becoming Attractive
Market Size at Record Manufacturing Bias
Market size of Logistics industry in China set Industrial products has a 90% share of the
a new record high in 2010, at US$15.75 goods transported.
billion, with growth of almost 30% Y-o-Y.
2009 Value Yoy Mkt
(bn RMB) Growth Share
Agricultural 2,236 43% 18%
products
Industrial 113,103 14.6% 90%
Products
Imported 9,431 22.1% 7.5%
Products
Recycled 446 39.5% 0.4%
products
Comm & Pers 198 14.7% 0.2%
Source: KPMG
Products
Total 125,413 15%
Source: National Development & Reform Commission Source: KPMG
Logistic market growing and in-transition- offers new business opportunities

4. Market Demand on Increase
Market Demand Recovering Expansion of Value-Added
Measures logistics value to GDP ratio, Logistic value-added showing market
increasing since 2006;recovered from the expansion since 2006- value-added increasing
financial crisis from 2.9 to 3.2 in 2010 at rate of tiertary (service) sector
Logistic Demand Coefficient
Source: CFLP Source: CFLP
Market for logistic services on the increase with broad-based demand

5. Logistic Cost High vs Global Peers
Logistic Cost as % GDP High Transport is Major Cost
Chinese total logistics cost is high (at Transport and labor costs account for
Rmb7100Bil in 2010) with low logistics typically 60% of Chinese distribution center
efficiency (China ratio is 17.8% vs USA 7.7%). cost structure vs 8-10% for US/Japan
Breakdown of China’s Total Logistics Cost
(2009)
Other
Storage
25%
Transportati
on
Warehouse 55%
8%
Management
12%
Source: National Development & Reform Commission Source: ATKearney Report Chinese Logistics 2015
Chinese logistics has significant room for cost & efficiency gains..
5

6. Challenges faced …
China’s 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 Poor penetration by 3PLs; Poor use of logistics i.e. lack
facilities and sufficient spend on 3PL only 2.7% in of cold-chain logistics; poor
warehouses space 2009 vs 30% for EU planning tools
2009 China Other
% Coldchain 10% US/JPN: 80%
3PL Number.
refrigerated
60,000
ME: 50%
US: 250,000
JP: 150.000
trucks
Source: GZ Cold-chain Logistics Assoc.
Business Development Needs to Consider -Infrastructure to Planning
6

7. 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
7

8. Industry Trends (2)..
China’s 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
De-regulated environment
allows foreign participation
Asia Retail Forecast 2014 In China retail
Expansion in Online
Shopping similarly adds
to demand
Modern Logistic a pillar in
“China’s 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 8
offers new business opportunities

9. 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
9
Market Leader

10. 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: China’s Future Transport Infrastructure , Tsinghua University
Rail Network brings significant new efficiencies in land transportation;
New hubs will be created
10

11. 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
11

12. 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.
China’s Contract Logistics Market Contract Logistics Market Forecast
(2009-2013)
RMB billion
200
Geographies CAGR
180
Asia 12.8%
160
140 Western Europe 6.5%
120 North America 9.8%
100
Global 9.5%
80
China 20.6%
60
40 Inter Asia Trade Forecast (2010-2015)
20 2010 30.1 million TEU’s
0
2015 44.1 million TEU’s
2003 2004 2005 2006 2007 2008 2009 2013F
Source: Transport Intelligence, Colliers International Source: Transport Intelligence, Colliers International
Potential to build 3PL market hub leader leveraging global skills
12

13. Case Study: Outsourcing Trends
Outsourcing Rate Increasing Outsourcing Characteristics
Survey of Chinese enterprises shows Enterprises outsourcing more of internal
outsourcing volume increasing to 61% in logistics especially transportation &
2009 from 35% in 2005 (does not reflect distribution functions; future needs are
whole market only sample) 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..
13

14. 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 China’s 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

15. Section Two-
State of China’s Logistics - Challenges & Future
Growth
State of China’s Logistic Market
Market Characteristics
Understanding the Costs and Challenges
Industry Trends and Drivers
Future Market Potential
Laying China’s Logistic Infrastructure
Current and Future Transportation Infrastructure
Logistic Hub, City and Passage Development
Chinese Government’s Support for Industry
Leading Logistic Players in the Market
Leading Domestic & Foreign Players
Recent Business & M&A
15

16. 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
Priority on transportation reflects Govt priority on improving logistics
16

17. 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
Current capacity relies on road transportation which is still restrictive
17

18. 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
Recognising this focus- identify rail/coastal ports for early partnerships
18

19. Roads and Expressways Network 2020
Multiple Highways & Trucking Hubs (42)
Source: Research Centre for Modern Logistics Tsinghua University
19

20. Rail Network and Hubs 2020
Railway Container Hubs (18)
Hub
Source: Research Centre for Modern Logistics Tsinghua University
20

21. 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
• Major passenger carrier
Energy Saving • 2007: 1.4bn pax;3.2bn tons goods
Competition
Most energy efficient Intense competition from
3 transport mode cpr to
• 2007-2012: US$300bn invested
other transport modes esp. 3
Japan’s rail system road with heavy investment
Growth of China Rail
Social Demand Poor Financing
5
Already high load density
but demand outstrip supply.
High construction capex
funded through domestic
3
Need further expansion bonds; limited flexibility
Container Transport Limited Profitability
4
Development crucial for
inland economy; increase
Profit margin 1-2%; Low
pricing esp passenger as
4
share of land transport Driving Force Restraining Force viewed as public service
Govt Support 17 VS 13 Strict Control
Financial & policy support Viewed as strategic asset
5 plus independent Ministry with semi-military control; 4
of Railway lacks market flexibility
21 Source: Research by Zheng Wan , University of California
Xiang Liu, University of Illinois Urbana-Campaign

22. Coastal and Large-Scale Ports
Vibrant World-class Port Network
World Ranking of Container Ports
Source: Research Centre for Modern Logistics Tsinghua University
22

23. 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
23

24. 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
24
A Crowded market.. Need to offer unique proposition
to stand out against Competition

25. 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
Source: Research Centre for Modern Logistics Tsinghua University
25

26. Examples of Primary Hubs
Primary Hubs are formed from the Early Economic Zones
A significant number of logistic parks and warehouse facilities have already co-
located within these hubs
Harbor City Tianjin-Bohai Bay
Shanghai Hub
PRD Hub
Source: Research Centre for Modern Logistics Tsinghua University
26

27. 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
27 Need for in-depth study to study opportunities offered by cities

28. Recent Chinese Policies Supporting
Logistics Market
Under 12th Five Year Plan by NDRC- Logistics Key Focus
Eight key preferential terms for logistic market
1. To reduce tax burden for all logistics companies effectively
2. To increase support for Logistics Land Policy
3. To promote and facilitate convenient passages for transportation vehicles
4. To improve management of logistics enterprises
5. To encourage integration of logistics facilities and resources
6. To promote innovation and application of logistics technology
7. To increase investment in logistics industry
8. To promote development of agricultural logistics.
Targets set by NDRC • Total Logistics value grow at CAGR 14%
& CFLP by 2015 • Logistics Value-added increase at CAGR 15%
Leverage on Chinese Govt Support to Drive Growth of Logistic Hub
28

29. High-Level Co-ordination Still Weak..
Constraints at Provincial
Re-Org of Govt. Dept
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
29

30. Section Two-
State of China’s Logistics - Challenges & Future
Growth
State of China’s Logistic Market
Market Characteristics
Understanding the Costs and Challenges
Industry Trends and Drivers
Future Market Potential
Laying China’s Logistic Infrastructure
Current and Future Transportation Infrastructure
Logistic Hub, City and Passage Development
Chinese Government’s Support for Industry
Leading Logistic Players in the Market
Leading Domestic & Foreign Players
Recent Business & M&A
30

31. 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
31

32. 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. Fedex Asia-Pacific delivery center in Guangzhou Baiyun Airport
commenced operations in 2009- largest outside the US.
2. UPS relocated its intra-Asia hub from Clarke in Philippines to Shenzhen in
2010
3. DHL entered agreement with China Merchants Maritime Logistics in June
2010 to establish a global distribution center in Qinghai, Shenzhen
4. TNT established and invest EUR 170M in a wholly-owned road
transportation subsidiary in Hangzhou
5. In 2010 Japan’s 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
32

33. 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 Int’l, 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
300,000 850,000
- 96,000
40,000 82,000
- 220,000
60,000 170,000
1000,000 2,800,000
300,000 500,000
1,850,000 5,100,000
33

34. 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

35. Recent Market M&A..
M&A Driven by Foreign Logistic companies….
World Class centres needed to support world class players’ logistics needs
35

36. Section Two-
Identifying Business Opportunities in China
Scoping of Opportunities
Screening Attractive Market Segments
Case Examples
36

37. Scoping of Opportunities…
Identify Possible Market Segment Opportunity
Screen Potential of Market Landscape & Competitiveness; Analyse
Opportunity Transportation Mode vs Industry Segment
Road/ Air Air Intl Remark
Rail Freight Express Freight
Freight
Non-Food Vol + Margins
Retail (Luxury gds –
strong Margins
Large Mkt Logistics
Import
Pharma Domestic Market Domestic Market Gd. Margins
only only
Logistics
Hi-tech/Auto Efficient SCM
Med. Mkt Logistics required; Export
Food + Agro Domestic Market Domestic Market Niche Cold Chain
only only logistics – Gd
Logistics
Margins
Small. Mkt Source: Various, Internal Analysis
Retail & Hi-Tech/Auto Logistics Looks like good opportunities

38. Scoping of Opportunities…
Identify Possible Market Segment Opportunity
Screen Potential of Market Landscape & Competitiveness; Analyse
Opportunity Transportation Mode vs Logistic Segment
Non-Food Pharma Hi-tech/Auto Agro-Food Remark
Retail Logistics Logistics Logistics Logistics
Outsourcing
Transportation trend
Outsourcing
Large Mkt trend
Distribution
Outsourcing
Warehousing trend
Packaging &
Med. Mkt
Processing
Logistic IT & Future demand
Mgt Systems
Small. Mkt
Source: Various, Internal Analysis
Transportation, distribution & warehousing current hot Sectors

39. Scoping of Opportunities..
Identify Possible Market Segment Opportunity
Screen Potential of Market Landscape & Competitiveness; Screening
Opportunity by Transportation Mode vs Location
Road/Rail River Air Intl Remark
Freight Freight Freight/Exp
Western
Chengdu
Chongqing
Mega-hub
Central
Wuhan
Eastern
Shanghai
Northeast
Bohai-Tianjin
Southern
GZ-SZ
Larger Opportunities in emerging logistic hubs

40. 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 • Foreign investments concentrated inBeijing,
• Only 5% have good IT systems Shanghai and Guangzhou hubs
• Existing warehouse in populated areas • Warehousing focus for retail, apparel, auto,
which restricts trucking pharma, electronics and tobacco sectors
Source: Tomkins International Survey 2009
Recent continued investments continue into warehousing sector
40

41. 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 Italian fashion retail
Retail Invests to open
Invests U$1.2bn Asia Distribution Retail + warehouse
Logistics
in logistics Center in TJ
Pharma Zhejiang Nhwa Pharma
Logistics International invests invests US$18M in
US$15M in Pharma Xuzhou Logistic
logistic center Center
Hi-Tech/Auto
Logistics
Invests U$200M RMB680M
Food + Agro In Suzhou to cater Distribution Centre Metro Hypermart JV with
Logistics for manufacturing in Chongqing Shuanghui for delivery of all
& supermart retail frozen products
Source: Various, Internal Analysis
Substantial Investments seen into Auto/Consumer/Retail Segments
41

42. 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. GDP Transport Economic Competitive
Nodes Drivers Edge
Wuhan 8.9M RMB • 4th Aviation • Hi-tech • Large pool U grads
(Central) 456bn Hub • Biotech • Strong IT foundation
• Road/Rail hub • Auto- Honda, PSA • Rel. low land/labour costs
• Largest inland • Logistic – TNT, • Strategic centre of China’s
River port DHL transport network
Wuhan’s 1+8 Cluster of surrounding
cities offers multiple re-development
opportunities
Source: Chinese Govt. Sources
42

43. Case Examples – Location Investments
New Inland Hubs away from the Coast
Chengdu will become China’s Southwest logistic hubs to drive economic
development further inland
Pop. GDP Transport Economic Competitive
Nodes Drivers Edge
Chengdu 11.4M RMB • Aviation Hub • Hi-tech and IT • Large pool U grads
(Southwest) 450bn • Asia’’s largest • BPO hub • Strong IT foundation
rail container • Biotech • Rel. low land/labour costs
hub • Food processing • Strategic centre of China’s
• Largest rail • Logistic – TNT, transport network
network DHL
Source: Chinese Govt Sources
Emerging Hubs appear to offer broader investment opportunities
43