Winning bit by bit

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With annual growth estimated at around 30 per cent on average, China is by far, the strongest developing market in the global supply chain management and logistics sector.

Tremendous growth in foreign trade and direct investments, strong domestic economic development and state support for massive infrastructure investments means that China will continue to offer huge opportunities for SCM and logistics services.

And, as the country becomes ever more integrated into worldwide manufacturing processes, time-sensitive logistics for global supply chains will grow in importance.

Global integrators such as UPS, TNT, DHL, and FedEx have been in China for two decades, and have over this time, captured a large share of China’s international time-sensitive SCM and logistics market.

A developing regulatory framework, heavy fragmentation, weak transport network and congestion however, still present huge challenges in doing business domestically.

Any further market development will depend on how these global winners operate within China and how they manage to build and fortify their domestic delivery networks.

Today, DHL remains the only international operator in a joint venture relationship with a local partner, Sinotrans. Such joint ventures should help open up the right routes to greater market penetration through local connections.

Other global integrators have opted to stay independent to maintain efficiencies in decision making, gain more control over their operations and avoid internal cultural conflicts.

It would seem that there are enough challenges in the external environment to deal with. The geographical and regulatory landscape of local Chinese logistics operations is highly fragmented. Among the players are thousands of SMEs, the vast majority of whom are local truckers who operate at low prices and varying service levels.

The strong protectionism of local authorities, especially with regards to road transport, has put up significant barriers to large expansion strategies. Local operators are very active in the domestic market and have been snapping up opportunities in an effort to stay ahead of the intense competition.

While some have expanded profitably, no-one captured more than ten per cent of the market. Most providers offer comprehensive service levels, competitive prices and competencies in serving markets in Europe and North America. Yet no-one seems to have a major competitive advantage, which is critical in taking on more than just a regional role.

To buy or not to buy? In late 2005, China announced that it would open up the ground transport market to wholly-owned foreign enterprises (WOFEs). This seems to offer global players new strategic opportunities, even if WOFEs will still face challenges such as limited network coverage and cut-throat prices from local operators.

Certainly, foreign international integrators with their global reach and scale could turn the race in their favour through local acquisitions to quickly gain market share.

Unfortunately, there is very little history of mergers and acquisitions (M&A) in China and the typical evaluation criteria may not apply.

Typical M&A evaluation criteria

1) Potential to acquire fully the target or at least obtain a majority stake.

2) Brand reputation and awareness in China.

3) Geographic attractiveness (domestic vs. international).

4) Financial attractiveness, soundness of operations and customer base.

5) Product/service mix, vertical industry coverage.

6) Target relationship with local government officials. Firstly, Chinese culture values “guan xi” relationships in business. Those with successful M&A ventures already had strong local presence and relationships, as well as domestic management in China for long periods.

What’s more, high market fragmentation results in few known targets and limited data available, making it challenging to conduct detailed due diligence.

Rolling up and integrating regional time-sensitive SCM and logistics players into an existing network and organisation will be very difficult.

Despite these hurdles, the simplest choice for global operators may be to buy a smaller partner instead of co-operating to deliver time-sensitive SCM and logistics capabilities.

While some of the acquisitions may not add significant operational assets and capabilities, they can help build the customer base and add volume into the acquisitions network. Local infrastructure providers can hopefully offer the “last mile” component.

Looking ahead into 2010, we are likely to see more small acquisitions by service or by geography in China’s time-sensitive domestic SCM and logistics market. This will result in incremental (and slower) growth for industry players, instead of a “great leap forward”.

Indeed, gaining a foothold in China’s domestic time-sensitive logistics market will require much patience and local know-how.

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