Inc. Langdon Seah | Hyder Consulting | EC Harris

“Logistics in a world of

slowing globalization –

scale, scope & investment”

10th Express, Logistics & Supply Chain Conclave

Dr Jonathan Beard

22nd September Mumbai

Source: Vesseltracker.com

© Arcadis 2015

Outline Global trade remains subdued – prospects

for a recovery?

The promise of new technologies…and technology disruption

Container shipping responses – economies of scale and “better together”

Economies of scale or gigantic follies –aviation and maritime compared

Funding future investment – money is there, but project preparation is critical

23 September 2016 2

© Arcadis 2015

Global Trade Remains Subdued World trade volume growth to remain

sluggish: 2016 at 2.8% (same as

2015), rising to 3.6% in 2017 (WTO

Over medium term world trade growth

& “container trade multiplier” has

fallen.1990-99, container volumes

grew 3.5x rate of global GDP growth;

2000-09 only 2.7x GDP growth;

average GDP-to-trade multiplier of

~1.2 since 2010)..

….and despite low fuel prices

Source: Institute for Shipping Economic and Logistics; CPB Netherlands Bureau for Economic

Policy Analysis; US Energy Information Administration

Container shipping trend throughput index, January 2007 – January 2016

Seasonally adjusted trend index, 2010=100

World Merchandise Trade GrowthLast 3 months on Preceding 3 months

Brent Crude Oil Spot Price FOB

© Arcadis 2015

Global air traffic growth has been surprisingly resilient…

Note: RPK (revenue passenger kilometers) equals the number of passengers multiplied by the journey length (km). It is a measure of demand

Source: ICF; ICAO; IATA forecast as of December 2014; International Monetary Fund (“IMF”), World Economic Outlook, October 2014

Historical Traffic vs. GDP and GDP Growth

© Arcadis 2015

…although Air Cargo has struggledmajor fluctuations, but growth trend has been slowing

23 September 2016 5Source: Arcadis based on AAHK

-15%

-10%

-5%

0%

5%

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15%

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25%

1998 2003 2008 2013

Y-o-Y 5yr CAGR 10yr CAGR

Hong Kong International Airport as a proxy – growth rates for cargo Throughput (tonnes) 1998-2015

Major challenge for capacity planning – uplift and terminal capacity

© Arcadis 2015

Structural and Cyclical Factors at Play

Economic uncertainty in Europe,

US recovery relatively strong

Slowing pace of trade

liberalization…

China (fastest growing & 2nd

largest economy) slowing down:

Q1 yoy 6.3%, quarter over quarter

1.1%...

…and restructuring away from

dependence on export

growth….possible “hard landing”

China producing more semi-

manufactured products – share of

imported components in exports

60% 1990s vs 35% 2010s

India liberalization would help, but

cannot “fill the gap”

Source: WTO; National Bureau of Statistics China; ADB; ICF

© Arcadis 2015

Whither Globalisation and Trade Liberalisation?

Source: World Bank; WSJ; WTO; Christianpost.com

Percent of imported products subject to trade barriers in G20 countries

© Arcadis 2015

Population and Wage Trends

Source: Global Demographics; ICF based on Population Division of the

Department of Economic and Social Affairs of the United Nations

Secretariat, World Population Prospects (2008 Edition) and the

Department of Statistics, Ministry of Interior, Republic of China.

China’s employed workforce

(million)

Population Age

Composition

China’s aging population

and shrinking labour force =

slower economic growth,

unless productivity increases

© Arcadis 2015

Rising labour costs provide supply chain

opportunities in rest of emerging Asia

Source: ILO; The GailFosler Group LLC

Mean Real Monthly Earnings of Employees, Average Annual Growth Rate, 2006-13

But scale, stability and logistics infrastructure of China cannot be easily

replicated…

…and China productivity improvements including major investments in

automation / industrial robots

© Arcadis 2015

Economic slowdown + asset bubble + technology

disruptorsImplications for retail and related supply chains

One-third of China’s

shopping malls will

close in 5 years

The rest must

transform to survive

Driven by:

− Rise of online

shopping & relate

fulfillment networks

(massive growth of

Taobao, SF Express,

etc.)

− Oversupply of malls:

4,000 (3x US)

− Too homogenous

23 September 2016 10Source: Chinese Academy of Social Sciences

© Arcadis 2015

How have key supply chain actors weathered the storm?Terminal operators continue to outperform lines

0%

10%

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40%

50%

60%

70%

APMT HHLA Eurogate DP World ICTSI HPH HPH Trust CMHI PSA

EBITDA Margin - CT Operators2009 2010 2011 20122013 2014 2015

-40%

-30%

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30%

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EBITDA Margin - Liners 2009 2010 2011 20122013 2014 2015

Source: Annual Reports; ICF Analysis

Notes: EBITDA / Revenue; recent PSA performance to be confirmed

© Arcadis 2015

Airlines

Better EBITDA margin

than shipping lines, but

still struggling to generate

adequate returns on

capital invested

Source:Companies’ Annual Reports, SEC Filings, ICF Analysis

Notes: EBITDA / Revenue; * Cathay Pacific does not separate out operating lease expenses from depreciation and amortization; Japan Airlines filed for

bankruptcy and delisted on 2010 – no financial data was available for FY2010

-20%

-10%

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EB

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CathayPacific*

SingaporeAirlines

JapanAirlines*

Air China AirAsia Delta AirLine

Lufthansa

EB

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arg

in

2010 2011 2012 2013 2014

Shipping

How have key supply chain actors weathered the storm?Airlines have also generally outperformed shipping lines

© Arcadis 2015

Global Spot Freight Rates

Average vessel load factor

FE-US route

FE-Europe route

Source: Shanghai Shipping Exchange; Shanghai

Containerised Freight Index; Alphaliner; Arcadis

Growth of Container Ship Capacity and Demand, 2000-16

$/FEU

Weak demand growth and

declining unit revenues….

Therefore must cut unit costs,

including via mega-vessels, but

this has exacerbated the

supply-demand gap and

depressed utilisation

levels…and hence revenues

Situation will continue for the

medium term and profitability

and sustainability will rely on

further cost reductions and

possible M&A activities

Lines will be ever more focused

on mainline network costs

Ports and Terminals will

continue to face downward

pressure on their charges and

demands for higher service

levels (faster turnaround)

Decreasing unit revenue for shipping lines places huge

pressure on cost reductionWhich cannot be passed on to customers, if lines are to recover

© Arcadis 2015

Note: data as of Jan 2016

Source: Alphaliner

Average Vessel Size by Trade Lane

Economies of Scale to Reduce Unit CostsBut ordering of mega-vessels has generated further surplus capacity

‘Herd’ mentality – where Maersk leads (18,000 TEU),

others quickly follow

OOCL order for 6 x 21,100 TEU, for delivery 2017

One EEE is already laid-up

0

2,000

4,000

6,000

8,000

10,000

12,000

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2011 2012 2013 2014 2015

Eur-N. Am FE-N.Am FE-Eur ME/ISC related Africa relatedLat Am Related Oceania Related Intra-FE Intra-Europe Global

Current Fleet at May 16

Order-book at May 16

© Arcadis 2015

Safer Together - Filling up the mega-vesselsEconomies of scale via larger alliances

New alliances to defray risk of introducing larger vessels

in subdued demand conditions…

…and secure enough numbers of vessels that are of same

magnitude of size to offer fixed or weekly schedule

Following P3 rejection, four major alliances created / remain:

– 2M

– Ocean Three (O3)

– G6

– CKYHE Alliance

Recent M&A (CMA CGM – NOL; COSCO – CSCL; Hapag-Lloyd -

UASC) is causing restructuring of alliances:

– Ocean Alliance

– The Alliance

– 2M

Account for significant portions of capacity on major trade lanes

Fully accommodating an alliance in key transhipment markets (e.g.

SE Asia) may require 8-9 million TEU capacity…

...or mitigate risk with dual hubs (at additional cost)Source: Alphaliner

© Arcadis 2015

16

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Market Share (by Capacity), LH Axis HHI (cumulative), RH Axis

Container Shipping Industry Remains Fragmented…….but consolidation is underway

Top 5 operators account for only ~47% of capacity; 86% for top 20 operators.

Notes: Herfindahl-Hirschman index (HHI) measure for market concentration widely used by EU Directorate General for Competition, U.S. Federal Maritime Commission (FMC) and U.S. Department of Justice. Calculated by squaring market share of each firm competing in a market, and then summing the resulting numbers. E.g. if only one firm in an industry, that firm would have 100 per cent market share, and HHI would equal 10,000 (100^2), indicating a monopoly. Or, if there hundreds of firms competing, each would have nearly zero market share, and HHI would be close to zero, indicating nearly perfect competition.U.S. DoJ considers a market with HHI <1,000 to be a competitive; 1,000-1,800 to be a moderately concentrated marketplace; and > 1,800 to be a highly concentrated marketplace. Mergers that increase the HHI by more than 100 points in concentrated markets generally raise antitrust concerns

Herfindahl-

Hirschman index

(HHI) for industry

of 767, well below

the trigger point of

1,000

Much higher for

certain routes,

where cabotage

restrictions limit

competition

Market Analysis top 20 Carriers

Source: Alphaliner; Arcadis; ICF

© Arcadis 2015

Major shipping lines want high performance

- > 35 moves per crane per hour, 230-250 moves/ship hr @ berth for larger vessels

- Reliable berth windows and turnaround time

- Maersk EEE seeking 6,000 moves within 24hrs from terminals….but this requires adequate cargo

Major hub ports (& some gateway ports, e.g. Rotterdam) must efficiently accommodate variety of

vessels sizes (e.g. from feeder / barges to mother vessels) - flexibility in operations

Risk/reward: investment requirements are higher but in the absence of base-load

import/export (IE) cargo, incentives for largest vessels to call may be insufficient – challenge for

smaller transhipment hubs, less so for the major gateway terminals…and major TS hubs?

Possible scenario? Winners “lock in” volume (e.g. Colombo? Singapore?) and establish a

virtuous circle, become mega transhipment (& gateway) hubs; losers, even some smaller gateways

see IE volume routed via a third port, increasing cost of import/export

Infrastructure and services:

- 18m water depth;

- long straight / contiguous quays (1,000m or longer) to provide

maximum flexibility

- adequate number of super post panama cranes: outreach

for ≥23 TEUs across

- land: adequate yard to support quay face operations & large box

exchanges (ideally 600-650m average yard depth / m quay)

- inland connectivity: gate, road, rail, barge, etc. (for gateway ports)

- capacity to accommodate all alliances partners Source: World Maritime News

Port Planning & Performance in an Era of Mega-vessels & Alliances

© Arcadis 2015

Ports of the Future – New Technology, New

Ways of thinking?

More of the same but a bit better (e.g. VICT,

Melbourne; Maasvlakte 2, Rotterdam)

Or a step change in design & operations

But what is the return on investment

and are customers

willing to pay for

superior productivity?

Source: APMT; GRID Logistics Inc;

Hyperloop One

© Arcadis 2015

Limits to Size – Diseconomies of Scale?

“We continue to build ships that are bigger and bigger

and if we can’t get the containers off faster the whole

thing will come to a grinding halt.”

Søren Skou, Maersk CEO, TPM 26 Feb 2015

Citing the example of the Airbus A380 double-

decker jet….“They have the same problem, how do

they get the passengers on and off this double-

decker plane? They solved it by making a double-

decker jetway. What I am asking is, what is the

container terminal industry’s version of the double-

decker jetway? I ask that question to terminal

operators and I never get any good answers.”

Source: GRID Logistics Inc.

© Arcadis 2015

Lessons from the Aviation Sector? Airbus worked closely with aviation authorities and airports to define A380 parameters

and minimize impact on existing infrastructure, BEFORE construction began

80 ft

Initial aircraft design was done with compatibility in

mind, e.g.

“Fit in a 80m x 80m x 80ft box (24.4 m)” – not

significantly larger than a Boeing 747

Use similar ground equipment as for other

widebody aircraft

Main impacts:

Larger plane separation

Double decker air-bridges

Higher reach loaders for upper deck galleys, etc.

Larger luggage carousels

Worked closely with groups of aviation authorities,

airlines, and airport operators to facilitate A380

operations at existing airports with minimum

infrastructure change

Supported International Civil Aviation Organisation

in drafting guidelines for New Large Aircraft

operations

© Arcadis 2015

Lessons from the Aviation Sector? Similar but also very different industries

Supply side in wide-body planes is constrained – only two

major manufacturers

No continual introduction of ever larger aircraft, with

different handling requirements…as there has been with

shipping lines and mega-vessels

Airline approach to alliances driven primarily by regulatory

restrictions – home base / national carriers, rather than

over-capacity or a shortage of passengers to fill planes

A380 has not been a hugely successful aircraft – limited to a few carriers and key routes. Far less

common than mega-vessels for shipping lines… perhaps it is a valid comparison with mega-vessels?

1970 2007

Operators A380 FleetCumulative as % of

Total Fleet

Emirates Airline 59 37.8%

Singapore Airlines 19 50.0%

Lufthansa 13 58.3%

Qantas 12 66.0%

Air France 10 72.4%

Korean Air 10 78.8%

British Airways 9 84.6%

Malaysia Airlines 6 88.5%

Thai Airways International 6 92.3%

China Southern Airlines 5 95.5%

Qatar Airways 4 98.1%

Asiana Airlines 2 99.4%

Etihad Airways 1 100.0%

Grand Total 156

Emirates has the largest A380 fleet; together with Singapore Airlines, they hold 50% of the world A380s

Source: ACAS March 2015, ICF Analysis

© Arcadis 2015

Airline approach to alliances driven primarily by regulatory restrictions – home base /

national carriers, rather than over-capacity or a shortage of passengers to fill planes

Source: ACAS March 2015,

ICF AnalysisMalaysia Airlines puts its entire Airbus A380 fleet up for sale

© Arcadis 2015

So who would want to invest in supply chain infrastructure?

“Developing Asia needs to spend

US$40 trillion on infrastructure

between now and 2030.”

Danny Alexander, AIIB

A major portion of this must go to

transport & logistics infrastructure

Where will the money come from?

Asia is a major exporter of capital. Better question

might be: where are the bankable projects?

Too many “Hambantota airports” (Sri Lanka),

”YuanMo expressways” (Yunnan) & Cai Mep Ports

(Vietnam)

Of 95 PRC road & rail projects with ADB & WB

financing, only a third were economically productive

(traffic volumes on two thirds were below forecast,

cost over-runs, etc)*

Focus on better project preparation….especially

under conditions of slower demand

23 September 2016 23Source: *A Ansar (2016) Oxford University

Thank you

Any questions?

23-9-2016 24

T +852 2263 7300

M +852 6095 8434

E jonathan.beard@arcadis.com

Arcadis 38/F AIA Kowloon TowerLandmark East100 How Ming StreetKwun Tong, KowloonHong Kong

DR JONATHAN BEARDHead of Transportation & Logistics, Asia

IVAN KEOGHCountry Director IndiaArcadis 2nd Floor, Esquire CenterNo.9 M.G RoadBangalore560 001, IndiaT +91 80 4123 9141 F +91 80 4123 8922 M +91 77 6045 2763M ivan.keogh@arcadis.com

© Arcadis 2015 23-9-2016 25

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