The Asia-Pacific region is filled with logistics challenges, including infrastructure, regulatory framework, licensing issues and disparate customs rules. But it also has more than 40 percent of the world’s population, more than half of global economic output, almost half of world trade, and in some months it seems to have all of the world’s shipping growth.
That’s why third-party logistics companies that didn’t get in on the initial wave into China over the past 10 years are flocking to the Asia-Pacific region now, while 3PLs already there are expanding. Demand for logistics services of all kinds is growing as manufacturers, facing increased supply chain complexity and rising land and labor costs, are looking to outsource to focus more on their core businesses.
The demand is growing as shipping patterns have shifted after the global economic downturn, with intra-Asia trade increasingly disentangled from the European and U.S. demand that has set Asia’s destiny for more than a decade — and built China into a world manufacturing powerhouse.
China’s trade with Southeast Asian nations, boosted by a new free trade agreement, grew 47.2 percent in the first eight months of 2010 from the same period last year. Intra-Asia maritime trade grew 16.9 percent in the first half of 2010, according to Drewry Shipping Consultants, far exceeding the 12.3 percent expansion in eastbound container shipping that defines the trans-Pacific market and the 11.5 percent growth in Asia’s containerized exports to Europe.
Side Bar Doubling Up on Service Logistics.
That puts a premium on logistics operators rooted in Asia business, and those companies appear to be seeing the benefits of the trade growth.
“Our business is up 30 percent this year,” said Jackson Zeng of Trade-Link, a Shenzhen-based supply chain management specialist.
China’s policy to push more manufacturing from the Pacific coastal cities inland, and to foster greater domestic consumption, also offers greater opportunity to logistics operators, increasing the complexity of supply chains. But the question is whether that business will go to regional operators or the global multinationals with greater experience on the world stage.
“The top 10 logistics companies still have only 30 percent of the market,” Hu Jianhua, managing director of the port handling business at China Merchants, told the recent China International Logistics Forum in Shenzhen. “The traditional all-encompassing services will be eliminated. In order to meet the demands of supply chain management, companies will separate out the outsourced contract logistics function, and some companies will then focus on logistics and distribution.”
The logistics market in China, he said, “will have higher and higher concentration. Some companies will be eliminated.”
Western operators are positioning themselves to do the consolidating by building up China operations that tie into broader supply chains.
Global companies with operations in India, China and other countries in the region tend to favor longer-term strategic relationships with their 3PLs because they understand growth is at risk if their supply chains don’t run smoothly, said Paul Graham, CEO for DHL Supply Chain in the Asia-Pacific. With more supply chain risk and less of a margin for error, they outsource a broader range of logistics and transportation services to focus on their core competencies.
“They seem to be saying that we will market and sell our products, but we will outsource everything in between to a trusted provider,” Graham said.
Side Bar Growing By Degrees.
Customer expectations are rising as consumer demand for everything from branded foods to electronics soars throughout the region, spurring 3PLs to operate with greater efficiency and velocity.
Chief executives of 3PLs that operate in the Asia-Pacific are bullish about growth. According to the 2010 3PL CEO Survey, sponsored by Penske Logistics and prepared by Robert Lieb, professor of supply chain management at Northeastern University in Boston, average three-year growth projections for 3PLs operating in Asia-Pacific are currently 19.5 percent, far more than in Europe (7.2 percent) and North America (10.4 percent).
3PL revenue in Asia-Pacific totaled $136.7 billion in 2009, less than in Europe ($162 billion), but more than in North America ($128 billion), according to supply chain consultants Armstrong & Associates. The cost of logistics is higher in the Asia-Pacific, especially China, where logistics costs as a percentage of GDP are 18.1 percent, more than any other country in Asia-Pacific and double the U.S. rate of 9.4 percent.
In the Asia-Pacific region, the most commonly outsourced logistics services are domestic transportation (89 percent), international transportation (86 percent), warehousing (77 percent), forwarding (70 percent) and customs brokerage (68 percent). More companies use 3PL supply chain consulting services (25 percent) than in North America (20 percent) and Europe (11 percent), according to the 2010 edition of the State of Logistics Outsourcing report released by Capgemini Consulting and the Georgia Institute of Technology.
Logistics operators are on the move throughout the region.
Damco, the logistics arm of A.P. Moller-Maersk Group, is investing more than $4 million in a 280,000-square-foot integrated logistics center at Binh Duong, 15 miles from Ho Chi Minh City. The company has nine existing sites in fast-growing Vietnam totaling nearly 400,000 square feet.
“Vietnam is a key market for Damco, and we will continue to invest in infrastructure, technology and people to support the increasing demands from our customers here,” said Tony Hotine, CEO of Damco in the Asia-Pacific.
Singapore-based APL Logistics, a wholly owned subsidiary of $8.2 billion NOL Group, operates 14 stations in China and 13 in India, and has offices throughout the Asis-Pacific region. Minneapolis-based C.H. Robinson, the dominant player in U.S. trucking brokerage, is actively seeking opportunities in China not only in international freight forwarding but also in basic truck brokerage. DHL Supply Chain recently announced a $70 million expansion of its service logistics business in the Asia-Pacific as regional consumer electronics and high tech markets soar. (Story, page 24.)
“By our estimates, the (Asia-Pacific) market is growing at about 25 percent per annum,” Graham said. “Of that, logistics services, especially technical services and repairs, account for up to 60 percent of the overall spend.”
Key trends identified by the CEOs in the Penske survey, whose companies represent more than $37 billion in combined revenue, include price compression as providers pare costs; overall market growth; and the growing role of procurement in the 3PL selection process. The companies are expecting ongoing industry restructuring because of consolidation and business failures, the continued growth of intra-Asian trade as the main driver of business and the growing sophistication of 3PL customers.
The average 2009 revenue for 3PLs was $298 million for the Asia-Pacific, $1.3 billion in North America and $1.7 billion in Europe. All of the Asia-Pacific-based 3PLs believe an economic recovery is under way, and they are rebuilding their work forces.
But not every investment in the region and in China has gone according to plan.
Schneider Logistics, a subsidiary of truckload giant Schneider National, began operating in China about six years ago. In 2007, the company won authority to operate as a domestic carrier and logistics services provider, making it the first North American truckload provider to establish a domestic business in China.
In 2007, the company acquired operating assets of Bayoun Logistics, one of the top 30 private logistics companies in China, part of an effort to provide end-to-end intra-China freight services, said David Bennett, vice president of global logistics sales and Asia trade development for Schneider Logistics.
But when the recession hit, Schneider scaled back its global expansion plans. In October, the company sold its forwarding and customs brokerage business in the U.S. and China to France’s Norbert Dentressangle. The sale includes seven locations in the U.S. and two in China, in Tianjin and Shanghai.
Now operating under the name Schneider Logistics (Tianjin) Co., the company works with a network of nearly 10,000 owner-operators and operates 20 trucks bearing the Schneider brand, with a goal of 200 branded trucks. The government is pressing for the regulatory changes it believes are necessary to replicate the scale of the truckload service it has in the United States.
Companies such as Schneider face big infrastructure challenges as well as the regulatory hurdles, however. “There are no interstates and no domestic intermodal system,” Bennett said. “There is a significant challenge in getting materials in and exports back out.”
That’s why some 3PLs are breaking from the non-asset model to provide more of their own dedicated distribution networks with a mix of in-house and outsourced assets.
CEVA Logistics, for instance, runs a sprawling trucking network from Beijing in the north, Shanghai in the East, Chengdu in the West and Guangzho in the South, major depots in 28 other cities and domestic delivery in 204 cities total. The company offers bonded truckload service and non-bonded truckload and less-than-truckload service with a combination of its own trucks and owner-operators.
China’s westward expansion and inland development present even more opportunities for 3PLs to bring flexibility and efficiency to the supply chain.
One large U.S. shipper, speaking on condition of anonymity, said some suppliers in southern China near Shenzhen and Guangzho had closed factories there and moved deeper into the interior. This retailer said he had maintained his business with the suppliers after developing trusted relationships with them over several years.
Some U.S. importers tend to bypass distribution programs, pre-loading goods at factories for shipment to store locations in the U.S., thereby bypassing import distribution centers. The trend also should spur development of bonded warehouses, which enable companies to claim their value-added tax rebates much sooner, a growing concern in the face of longer lead times.
Another developing trend involves retailers looking to take possession of goods delivered from factories to ports rather than leaving that last-mile service to manufacturers. This enables them to reduce duty and handling costs, and improve visibility.
“We will continue to see retailers finding creative ways to move products into stores faster,” Bennett said.
The trend to last-mile control is driven by North American retailers wanting to reduce ocean lead times and react more quickly to changes through greater supply chain control, said Fabrizio Brasca, vice president of global logistics for JDA, a supply chain software services provider.
With route planning in the hands of tiny trucking firms, many with one or two trucks, large retailers have been more focused on other supply chain practices such as container loading. Overstuffed containers are common in Asia-Pacific countries, which can lead to safety problems.
Software solutions must be flexible to accommodate different regional logistics priorities. “Routing isn’t as important because of a lack of scale, infrastructure and control,” Brasca said. “The concern is more about visibility and having an intelligent way to load equipment.”
A growing percentage of JDA’s business, currently about 15 percent, is in Asia-Pacific, either through direct sales to regional providers or through North American customers operating there, Brasca said.
Contact David Biederman at email@example.com.