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China Logistics Market

May 12

China logistics

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China logistics overview

+ Current status

– Ongoing urbanisation and industrialisation has supported the China logistics market, total logistics value expanded by a CAGR of 21.6% between 2007 -2010

– Large volume of international trade - 6 of the top 10 world ports are located in China

– Low outsourcing activities, 3PL only has 7% market share in China, much lower than the 10-14% levels in the developed world

– Logistics expenditure is disproportionally large at 17.8% of GDP, compare to less than 10% in the EU and US

– Warehouse stock per capita in China is only 7.9% of that in the United States

– Limited logistics land in urban locations limiting supply, resulting in strong rental growth over the last 12 months

+ Future demand drivers

– Ongoing process of urbanisation

– Acceleration in domestic consumption and demand for imported goods

– Improvement in operational efficiency and 3PL expansion

– Manufacturers shifting west

– Preferential government policies & improving infrastructure

– Strong uptick in e-commerce

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20

40

60

80

100

120

140

160

180

98 99 00 01 02 03 04 05 06 07 08 09 10 11

RMB trillion

China total logistics value

Source: China Federation of Logistics and Purchasing

29.1

28.4

23.7

22.5

14.2

13.1

12.6

12.0

11.6

11.1

Shanghai, China

Singapore, Singapore

Hong Kong, China

Shenzhen, China

Busan, South Korea

Ningbo-Zhoushan, China

Guangzhou Harbor, …

Qingdao, China

Dubai, United Arab …

Rotterdam, Netherlands

Top 10 world container ports 2010million TEUs

Source: World Shipping Council

1. Urbanisation & domestic consumption

+ China continues to urbanise at an accelerating pace, adding approximately 205 million people to the urban population between 2000 and 2010.

+ According to the 12th FYP, China aims to increase the urbanisation ratio to 55% by 2015, from 51% in 2010.

+ Large disparity between the development of coastal areas and inland cities. Urbanisation rate in Eastern China is 57%, compared with only 39% and 45% in Central and Western China. Growth is therefore expected to accelerate in the inland cities.

+ With China shifting from export-lead growth to more domestic demand focus during the 12th FYP period, rising wage and urbanisation will promote domestic consumption, creating demand for logistics and warehouse services.

+ Inventory accounted for about 34% of logistics cost in China or 6% of GDP, compared with 14% of GDP in the US. As China’s matures from a manufacturing powerhouse to domestic demand focus, inventory levels will rise and will increase the demand for warehousing facilities.

400

600

800

1,000

1,200

1,400

1970 1980 1990 2000 2010

Rural Urban

China urban and rural population 1970 - 2010

M illio n peo ple

Source: N at ional B ureau o f St at ist ics

4

Source: CEIC

Source: CASS, Morgan Stanley Research

2. Improvement in operational efficiency

+ China logistics service industry is still at infant stage, dominated by 1PL/2PL players and suffered from low operational efficiency. China’s logistics costs is now at 18% of GDP, versus only 8% in the US.

+ Fragmented logistics service market and high logistics costs providing opportunity for 3PL to expand and reduce the costs of inventories and depreciation.

+ China’s 3PL penetration rate is expected to expand from the current underdeveloped 7% to 11% by 2016, similar to other developedAsian countries’ level. This will drive the 3PL to achieve an 16% CAGR in revenues, reaching US$182 billion in the next 4 years, making China’s 3PL market significantly larger than either the 2010 US market, at US$127 billion, or the 2010 European market, at US$146 billion.

+ With the China logistics industry moving from in-house management to outsourcing, the demand of warehouse is expected to thieve with the expansion of 3PL.

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Source: Armstrong Associates, Morgan Stanley Research Source: CEIC, Armstrong & Associates, Morgan Stanley Research

e = Morgan Stanley Research estimates

3 year average growth between 2007-2009

Langfang

Beijing

Qingdao

Tianjin

Shenzhen DongguanGuangzhou

Ningbo

Hangzhou Nanjing

Shanghai

Wuhan

Chengdu

Jinan

Chongqing

Xi'an

Zhengzhou

0%

10%

20%

30%

40%

15% 16% 17% 18% 19% 20% 21% 22%Retail sales (3 yr avg growth)

To

tal tr

ad

e (

3 y

r avg

gro

wth

) Cities in Bohai Rim

Cities in PRD

Cities in YRD

Inland cities

3. Manufacturing shifting west

+ Government have provided preferential policies and invested in infrastructures to develop inland cities since early 2000s. Manufacturers have since then gradually relocates from coastal cities towards the west, although increasingly driven by economic reasons.

– With much lower rates of urbanisation, inland cities have a larger reserve of cheaper workers

– Beyond cheap labour, manufacturers also benefits from the large number of college graduates from the inland educational institutes

– Inland cities are all strategically located to serve as distribution hubs, connecting mature coastal area with emerging inland manufacturing hubs

+ The inland cities have outperformed mature coastal cities in recent years and the trend is expected to continue as the inlandeconomies gain momentum

Source: Local statistics bureaus

Inland cities post the highest growth potential

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+ Growing economic momentum in western china drove

manufacturers to move their operations to inland cities,

motivated by:

– Improved infrastructure

– Lower wage and more stable workforce

– Abundance of skilled labour

– To strengthen development of domestic sales

network

+ Growing investment by MNCs

– Chongqing: Changan-Ford-Mazda factory will boast a capacity of 400,000 cars a year by 2013

– Wuhan: PSA Peugeot Citroën, Nissan and Honda

– Xi’an: Meguiars has invested USD250 mil; Applied

Materials has invested US$ 255 mil

– Zhengzhou: Foxconn invested US$32 mil in

Zhengzhou in 2010

3. Manufacturing shifting west

ChongqingChongqing WuhanWuhan

ZhengzhouZhengzhou

Xi’anXi’an

ChengduChengdu

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4. Government policies

+ In order to sustain the country’s long-term economic growth, China’s State Council has developed plans to build a national modern logistics network and system with the aim to reduce the high logistics costs.

+ The development of modern logistics system and infrastructure across the country is expected to stimulate inland cities economy and facilitate further urbanisation.

+ Government will sponsor infrastructure projects to facilitate transmodal connections between the hubs and targeted cities.

+ Tax reform is underway to reduce the logistics costs for industry players, including toll road tariff cuts, business tax cuts and VAT reform

8Source: NDRC, CEIC, Morgan Stanley Research

5. E-commerce and online shopping

+ China’s online shopping has enjoyed a period of strong growth, with transaction volumes increased by a 3 year CAGR of 107% to US$ 77 billion in 2010.

+ China currently has c. 150 million online shoppers spending on average US$200-250/year, this compares with 170 million users spending average US$1,000 /year in the US.¹

– Estimates suggest China’s online shoppers will double in the next 4 to 5 years, with average spending reaching US$1,000/year

+ Online retail market is still in its infancy, B2C transactions is only 0.4% of total retail sales, versus 3.2% in Japan, 4.0% in the US, and 7.7% in the UK.

+ Strong growth in the e-commerce sector is expected to further support China’s logistics demand.

9Note: 1 Source: Transport Intelligence

Source: i Research, Morgan Stanley Research

e = Morgan Stanley Research estimates

Source: i Research

China logisticsproperty market

Thank + you