运输物流企业如何应对经济危机

The Party is Over
How Logistics Companies in China Should Respond in the Global Economic Meltdown
Authors1：Mui-Fong Goh
Chee Wee Gan
T ina Wang
Jian Li
Ang Jin
A.T. Kearney (Shanghai)
Management Consulting Co., Ltd
February 2009
Copyright © 2009 by A.T. Kearney
This document was prepared by A.T. Kearney for use
by a joint Client and A.T. Kearney team and may not be used
for other purposes, or disclosed to other parties without the
written permission of A.T. Kearney
For many years, scientists have worried about the possibility of a volcanic eruption in America’s Yellowstone National Park, believing that the devastating effects of the super volcano would reach as far as Russia and Japan and plunge the world into a volcanic winter. In September 2008, many people suddenly realized that the destructive power of homeowners in the US not being able to pay their debts could bring similar devastation, plunging the world into a bitter economic winter.
Against the backdrop of increasing globalization l eading to the world’s economies becoming inextricably tied, what will be the impact of the global economic meltdown on China, and more specifically, on China’s logisti cs industry? How should logistics companies in China weather this financial storm? In this paper, we will summarize the causes of the global economic crisis and its effect on China’s macro-economy and logistics industry, as well as discuss the issues and implications logistics companies face in this challenging time.
How Did the Economic Meltdown Occur? What is the Impact on the Global Economy?
As the world’s largest economy and biggest importer, fluctuations in the US economy are guaranteed to have a significant spillover effect on the rest of the world. However, the extent of damage that Wall Street’s subprime crisis brought to the world within a few short months still shocked the world.
Subprime lending is the practice of lending money, mainly in the form of mortgages, to low income borrowers with troubled credit histories to purchase real estate with little or no down payment. As the price of a typical American house increased 124% between 1997 and 2006, lenders started issuing more and more subprime loans to make housing more affordable for the American consumer. Subprime mortgages quickly rose from 5% of the total mortgage market in 2001 to 30% in 2005. Moreover, 63% of the US$3.12 trillion subprime loan market was securitized and traded in capital markets. When the housing bubble burst in 2007, delinquencies and foreclosures of subprime mortgages forced financial firms around the globe to write down their holdings of subprime related securities i.
The devastating effects of the financial crisis became prominently visible in September 2008 when Lehman Brothers declared bankruptcy and Bank of America acquired Merrill Lynch, saving the investment bank from collapse. The meltdown of the American financial market soon had a domino effect on the rest of the world, forcing countries like the UK, Japan and Australia to inject hundreds of billions of dollars in hopes of invigorating the financial markets. Despite many governments’ efforts to stimulate the market, stock prices continue to fall globally. More than US$20 trillion of equity value was wiped out the moment the real economy was impacted by shrinking demand, sending the developed world into recession (See figure 1)ii.
2009 Expert Growth Expectations and Official Forecasts
Notes: Estimates based on purchasing-power parity.
Source: Global Business Policy Council Faculty; IMF January 2009 World Economic Outlook Update; National Statistics Bureau
What is the Extent of the Economic Crisis’s Impact on China?
Since joining the WTO, China, now ranked as the third largest country in terms of GDP, has become more integrated into the global economy. With exports making up 40% of the country’s GDP, China is heavily dependent on exports for economic growth. Despite the export rate showing signs of slowing down since 2007, the year-on-year export growth rate for the first half of 2008 remained above 20%. However, the export growth rate started to decline dramatically in the second half of 2008. In November, the export growth rate was negative for the first time in seven years, with a year-on-year growth rate of -2.2%iii, dragging 2008 Q4 GDP growth down to 6.7%iv.
Alongside the decline in exports is a simultaneous drop in industrial output. The economic crisis will likely lead to social problems, unemployment being perhaps the most dangerous. The number of registered unemployed persons soared over 8.9 million by the end of 2008. To make matters worse, this unemployment statistic does not include the “informal work force,” which is made up of migrant workers who are not qualified to register for unemployment and are usually the first to be laid off. According to recent estimates from the government, around 20 million migrant workers, or 15.3% of total migrant workers in China, have lost their jobs due to the financial crisis v. The Chinese government is under pressure to maintain sufficiently high GDP growth in order to create jobs, thus ensuring stability and preventing social unrest.
Given the gloomy forecasts for international trade, which predict that exports will not contribute substantially to 2009 GDP growth, the Chinese government has focused its attention on generating increased domestic demand. Since October, the government has announced a series of stimulus plans calling for increasing investment, mainly in fixed assets, stimulating exports and boosting consumption.
In an effort to increase investments, the government put forth 4 trillion RMB for investments in areas like transportation and power grid infrastructure construction, post-earthquake reconstruction, rural infrastructure and industrial revitalization planning. In an effort to stimulate exports and boost consumption, the government has launched a series of initiatives to increase demand in rural markets, as well as implemented import tariff and export tax rebate adjustment programs (see figure 2). Figure 2
A Series of Stimulus Plans to Revitalize the Economy
Source: China Economic Weekly; A.T. Kearney analysis
Additionally, as most Chinese households prefer to save rather than to spend, the Chinese government has lowered interest rates and reduced tax rates in hopes of spurring consumer spending. In 2007, bank deposits were 27% of China’s household assets in 2007, while stocks and real estate were 66%vi. The savings deposits growth rate decreased during 2007 due to the stock market boom, but picked up again in 2008 after the burst of the stock market bubble and continued to soar as consumer confidence was hurt by the economic downturn. It is vital in this time of economic uncertainty for the government to free up bank deposits and encourage consumer spending.
Overall, the future of China’s economy will be determined by the timing of the recovery of the global market and the impact of the current government measures (see figure 3).
China’s Macro-economy in 2015
Source: A.T. Kearney analysis
What is the Impact on the Logistics Industry in China?
The devastating effects of the financial tsunami have severely impacted China’s logistics industry. In this turmoil, there are three major trends that are shaping the industry, both current and post-recession, and how companies compete: •Continued downward pressure on demand coupled with shifting mix creates need to re-think service offerings
•Cost restructuring necessary as profits decline and become more volatile •Renewed investment interest and further consolidation expected
As these forces reshape the industry and alter the competing paradigm, players need to think ahead and be proactive about tackling these forces not just to weather the storm, but to seize the opportunity to leapfrog competition and position for long-term success (see figure 4).
Logistics Companies in Industry Evolution
Source: A.T. Kearney analysis
Continued Downward Pressure on Demand Coupled with Shifting Mix Creates Need to Re-think Service Offerings
The economic crisis has forced consumers to re-evaluate their spending habits and subsequently cut back as they prepare for the worst economic downturn since the Great Depression. This decrease in consumption has led to a significant decline in trade, severely affecting the logistics industry. The Q4 2008 year-on-year growth rate for total logistics expenses, which includes spending on transportation, inventory and other logistics services, dropped to 1% from a 19% Q3 year-on-year growth rate, highlighting the negative impact of the economic crisis on the industry vii.
Declining international and domestic trade in the second half of 2008 has created a downward pressure on demand for logistics services. Consumers in countries impacted by the global economic slowdown began to cut spending and as a result, demand dropped significantly with international sea and air trade volume decreasing by 7% and 14% respectively in November (see figure 5).
International Cargo Volume YoY Growth Rate, 2008(1)
Notes: (1) December data not yet available at time of print.
(2) Snowstorms limited logistics efficiency to ports, decreasing sea cargo throughput.
Decline is also attributed to the economic slowdown, high February 2007 volume skewing year-on-year calculation, timing of Spring Festival and the RMB’s appreciation since January.
(3) Only seaports with throughput capacity above 1 million tons and river ports with
throughput capacity above 2 million tons are included.
(4) Includes throughput between China and HK & Macau.
Source: National Statistics Bureau; A.T. Kearney Analysis
Along with decreasing international trade, domestic cargo volume growth across the different modes of transportation, including rail, waterway, road and air, also started declining since September 2008 (see figure 6).
Figure 6
Domestic Cargo Volume YoY Growth Rate, 2008(1)
international cargo volume might be included in by rail and by road data
(2) Only seaports with throughput capacity above 1 Mn tons and river ports with
throughput capacity above 2 Mn tons are included
Source: National Statistics Bureau; A.T. Kearney analysis
Despite the dismal picture painted by declining trade, there are still prospects for hope, as export growth opportunities still exist in select top 25 lanes where trade has
been less impacted by the crisis. Despite a significant drop in growth rates from September to December, exports to major markets, including the United Arab Emirates, Canada, Italy and Australia, are still growing at double-digit rates in December in the face of deteriorating economic conditions. Such lanes represent opportunities for China as the nation’s top exporting lanes, such as the United States, Hong Kong and South Korea, exhibited negative year-on-year export growth in December. Likewise, although imports from the largest markets have declined, certain top 25 lanes, such as Oman and South Africa, grew at double-digit year-on-year rates in December, and still present trade opportunities. Leading logistics companies have begun to and should continue to adjust services in order to better capture demand from those countries less impacted by the crisis.
Domestically, the combined push-and-pull effects of government policy and manufacturing companies becoming more cost-sensitive is driving the inland shift of manufacturing bases and consequently, accelerating inland demand for logistics. Favorable local government policy in West and North is pulling manufacturing companies to move inland from coastal cities. Additionally, a large portion of the eco nomic stimulus plan is dedicated to invigorating West China’s economy with trillions earmarked for infrastructure investment in the region, which will further draw companies to establish bases in this region. Manufacturing companies are simultaneously pushed to move inland in efforts to reduce costs during the economic meltdown and have recently accelerated their execution. For example, the leading chipmaker Intel has announced plans to close one of its factories in Shanghai in 2009 and move its operations to existing facilities in southwest Chengdu. To capitalize on the opportunities by this shift in demand, logistics companies are well-served to quickly develop local capabilities and expand their networks to cover West and North China.
Concurrently, the logistics industry has witnessed an increased need for more high value-add and specialized logistics services as a result of industry upgrades in coastal areas calling for the production of more high value goods. Key focus sectors include specialty chemicals, high-end electronics, high-end fashion and agriculture, with upgrades expected to largely change logistics requirements in these sectors. Take the textile industry for example, high value-add manufacturing companies will place more emphasis on safety, zero defect rate, expedited shipment, special handling of luxury fabrics and reverse logistics. The agricultural industry will also be impacted; as it shifts towards producing more “green” and “high hygiene” products, the industry will demand specialized cold chain expertise as well as end-to-end control to avoid contamination risks. Logistics companies would need to quickly develop capabilities to meet these changing requirements resulting from industry upgrading.
Additionally, in efforts to improve efficiency and trim costs, both MNCs and local companies are restructuring their supply chains, directly impacting their requirements for logistics services. Customers are looking for flexibility and scalability on top of cost and are eager to shed their logistics assets. Logistics companies need to be attuned to these changing priorities to offer customized and potentially higher margin offerings accordingly (see figure 7).
Figure 7
Supply Chain Restructuring Initiatives Lead to Changing Customer Requirements
Source: Customer interviews; secondary research; A.T. Kearney analysis Cost Restructuring Necessary as Profits Decline and Become More Volatile
Since Q4 2008, prices have continued to drop across almost all sub-sectors of the logistics industry due to overcapacity
resulting from the economic downturn. In the ocean freight sector, more than 210 container ships cut service globally due to decreased trade volume in January 2009,
creating excess capacity of ~0.55 million
TEU viii . Overcapacity led to a 7% drop in
the China Containerized Freight Index
from October to November 2008ix . In the
road sector, China’s average market
price for LTL Heavy Freight decreased by
10%x . However, attention needs to be
paid to the possible severe results of
price weakness. For example, the margin
of a typical road transportation player is 3
– 5%, making it impossible to afford a 10%
price discount unless some effective countermeasures are taken xi (see figure 8).
The recently launched “Fuel Price Reform Policy” calls for the retail fuel price in China to be tied more closely to the global market. Although the price of crude oil currently remains at a comparatively low level, uncertainty and volatility will certainly result from supply cuts in the midst of the current economic meltdown. If the crude oil price increases by 20%, the margin of a typical road transportation player will be reduced from 3% to 0%xii , as it becomes more difficult to pass fuel cost increases to customers in this over capacity market. The margin in the logistics industry is
Figure 8
Potential Countermeasures to Cut Cost by Type
Source: A.T. Kearney analysis
extremely sensitive to fuel volatility and managing supply volatility is becoming increasingly critical. (To view more information on this topic, please refer to A. T. Kearney’s article Managing Supply Volatility)
The current economic situation compounded with increasing operational complexity and a changing competitive paradigm necessitates a strategic re-examination of overall cost drivers and structures. If bold and sweeping actions are not taken at this time, it could jeopardize a company’s short-term survival and longer term competitiveness.
Renewed Investment Interest and Further Consolidation Expected
Despite the effect current market conditions have on China’s short-term growth, China is expected to rebound and continue as one of the major global manufacturing bases. China’s trade growth is expected to recover and turn positive in 2010xiii and by 2025, become the top manufacturing country in the world, surpassing the United States xiv. Considering these favorable prospects for growth, logistics companies will need to form long-term strategies to expand presence, strengthen positioning and offer more compelling and differentiated solutions.
Logistics companies with relatively strong financial positions have already begun to expand their capabilities and realize their long-term growth strategies by pursuing M&A, taking full advantage of the current economic environment that is conducive to consolidation. Three forces are accelerating M&A activity. Firstly, changing market demand and customer requirements are compelling logistics players to build up a strong domestic network with sufficient geographic and mode coverage, and/or a seamless domestic and international network and/or integrated logistics solutions capabilities to capture high margin value-added service requirements. As the logistics market in China still remains highly fragmented, it is still an open game to all players to carve out a dominating position. A quick way to do so is through M&A. Secondly, targets with attractive brands, networks and/or infrastructure in line with logistics companies’ long-term growth strategies are becoming available as pressure to cope during the economic crisis mounts. Significant downward movement of valuation (for example, a le ading domestic player’s market cap decreased by 40% in 2008) presents attractive pricing. Thirdly, the government has already begun to support consolidation in the logistics industry. Aid is being provided to SOEs to ensure companies have enough capital to pursue growth opportunities and logistics M&A committees have been formed by regional governments to promote M&A deals between foreign players and domestic companies.
Although the logistics industry is currently in the early stage of development, the above three factors will ramp up consolidation activity significantly, thereby changing the competitive landscape. (To view more information on the stages of mergers and acquisitions, please refer to A.T. Kearney’s article Winning the Merger Endgame)
What Does it Mean for the Logistics Industry?
This is a time when strategic review of long-term growth strategy, competitive positioning and cost re-structuring is urgently needed, together with short-term reactive actions to cope with the crisis. Unclear or wrong decisions and priorities could lead to the risk of being marginalized. There are several strategic options for logistics companies depending on their desire for growth, financial positioning and risk appetite (see figure 9):
•Defend Option –Defensively cope with crisis situation by employing quick-win solutions
•Rebuild Option– Establish solid market presence by strengthening capabilities •Attack Option–Expand business to prepare for next stage of growth by employing structural improvement solutions
In choosing one of the above strategic options, logistics companies can determine the degree of change enacted along three distinct strategies. Levers within each strategy will be determined by the option pursued:
•Cost and Operations Strategy –Optimize cost to counter price and volume weakness
•Business and Market Strategy –Protect top line through effective portfolio, customer and pricing strategies
•Investment Strategy –Capitalize on investment opportunities in current market conditions
Figure 9
Options for Logistics Companies Facing Challenges and Opportunities in Economic Crisis
Industry Trends and Potential Options for Logistics Company
Source: A.T. Kearney analysis
A. Cost and Operations Strategy to Counter Volume and Price Weakness Logistics companies seeking to pursue a cost and operations strategy can implement various cost optimization levers to counter price and volume weakness. Depending on the logistics company’s financial position and readiness for change, the company can decide which levers, ranging from quick wins to deep structural improvements, to employ (see figure 10). From experience, it is possible to achieve a 15 –25% reduction in costs by applying these levers while injecting flexibility and scalability in preparation for post-crisis growth.
Figure 10
Suggested Levers to Optimize the Costs of a Logistics Company
Source: A.T. Kearney analysis
B. Business and Market Strategy to Counter Continued Pressure on Demand
and Shifting Mix
As the economic crisis worsens, logistics companies need to take quick actions to protect their top line through effective portfolio, customer and pricing levers. Again, a company’s financial position, readiness for change and risk profile dictates the levers to be undertaken. Levers ranging from price adjustments, customer retention, new product development and expansion in mode, lanes, industry sector and geography can be considered (see figure 11).
Suggested Levers to Generate Revenue for a Logistics Company
Notes: (1) Step 1: Analytically and rigorously identify and eliminate sources of value erosion.
Step 2: Creatively identify innovative opportunities for price increases by deliberately breaking the classical rules of pricing.
Source: A.T. Kearney analysis
C. Investment Strategy to Cope with Industry Consolidation Trend
A company with a relatively strong financial position or one that has improved its financial position after successful deployment of the Defend and Rebuild options should take full advantage of the fact that attractive targets are becoming available. M&A is a high stakes game – a crystal clear strategy, scrupulous due diligence, well-structured planning and controlled execution are key to achieving M&A success (see figure 12).
Figure 12
Source: A.T. Kearney analysis
Examples of To-Dos
•Define M&A
strategy based on corporate growth strategy and goals given current financial position and post-recession objectives •Determine
corresponding criteria based on M&A objectives (strategic –M&A for customer vs. financial –M&A for acquisition price vs. operative –M&A for management skills)
•Identify high potential targets in line with M&A criteria
•Closely and continuously monitor market for competitors and companies impacted by crisis that may need
consolidation to survive
•Execute external due diligence and
coordinate
advisors to
evaluate if
target’s market, competition and customer base
generate high
level business
case and
expected
acquisition
rationale
•Coordinate valuation with business planning and due diligence •Determine potential
synergies and
performance
improvements
•Integrate and
analyze data to
further refine
valuation, craft
negotiation
strategy and define potential scenarios
•Close the gap between seller and buyer prices •Balance
alternatives with creativity to
generate mutual gain
•Navigate lending
requirements to finance deal •Create
implementation plan
•Establish
transition team
•Develop PMI program structure, timeline and work plan to transform target and guarantee future combined success
•Conduct PMI through network
optimization, routing
improvement, BPR, HR / IT / branding integration, etc.
Today’s economic conditions call for companies seeking short-term survival and long-term growth to quickly respond to the challenges in a world of continuous, disruptive change. Rather than sit by passively waiting to recover along with the rest of the economy, logistics companies must alter the competing paradigm by deciding whether to defend aggressively, take the opportunity to solidify position and/or expand the business. The combination of new strategic foresight and operational rigor will define who wins and who loses in today’s challenging environment. The smart, bold and quick actors will emerge from this downturn stronger and more competitive than ever.
i. Wall Street Journal; Bloomberg; Citigroup; S&P; Dow Jones
ii. To learn more about the impact of the financial crisis on the global economy, please see the interviews from December 2008 between A.T. Kearney Global Business Policy Advisory Committee Chairman Norbert Jorek and World Bank Director Uri Dadush
(2009 World Economic Outlook)
iii. China Statistics Bureau
iv. IMF January 2009 World Economic Outlook Update
v. Central Government Finance and Economics Leading Group
vi. Morgan Stanley
vii. China’s Logistics Statistical Yearbook
viii. AXS-ALPHALINER
ix. Shanghai Shipping Exchange
x. China Federation of Logistics and Purchasing
xi. Internal expert interview; A.T. Kearney analysis
xii. A.T. Kearney analysis
xiii. Economic Intelligence Unit
xiv.Global Insight via Financial Times
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EAST 1 Authors：
Mui-Fong Goh
Partner
Based in Beijing
E-mail：
Mui-fong.goh@ Chee Wee Gan
Principal
Based in Shanghai
E-mail：
Cheewee.gan@ Tina Wang
Principal
Based in Beijing
E-mail：
Tina.wang@ Jian Li
Manager
Based in Shanghai
E-mail: Jian.li@ Ang Jin
Associate
Based in Shanghai
E-mail: Ang.jin@
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