asia competition barometer: transport and logistics
DESCRIPTION
Supported by Singapore’s Economic Development Board (EDB), the Economist Intelligence Unit has developed the Asia Competition Barometer with the aim of understanding the changing market dynamics in key sectors and assessing the intensity of competition in them. Drawing upon company-level data on profitability and other indicators, the Barometer quantifies the changing dynamics of competitiveness in Asia for select industries between 2004 and 2009. This report focuses on the Barometer findings for the transport and logistics (T&L) sector. Assessing a universe of over 275 T&L companies that are publicly listed in eight countries—China, India, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam—the Barometer examines changing profitability and the competition landscape for the T&L sector. The Barometer has two dimensions: profitability and market concentration. To assess the aggregate profitability of the T&L sector in Asia, the EIU developed a composite index of five ratios that each represents a different aspect of a company’s profitability. To assess market concentration, the EIU calculated the Herfindahl-Hirschmann Index (HHI) for the T&L sector in Asia from 2004 to 2009. A measure of the size of companies in relation to the industry, and an indicator of the amount of competition among them, the HHI is defined as the sum of the squares of the market shares of the 50 largest firms from the universe of over 275 listed companies assessed. Other reports in this series look at the information technology services, precision engineering, petrochemicals and chemicals, and pharmaceuticals sectors in Asia.TRANSCRIPT
Asia Competition Barometer Transport and logisticsAn Economist Intelligence Unit report
Supported by
© The Economist Intelligence Unit Limited 2012 1
Asia Competition BarometerTransport and logistics
Contents
Preface 2
Executive summary 3
Asia’s growing importance for corporate performance and global competitiveness 5
Competition and profitability at Asian firms 8 Competition: Rising 8
Case study: APL Logistics 13
Profitability:Onthedeclineoverall,butpocketsofgrowthexist 10
World trade 12
Positioning for success in Asia 14 Resilientdemand:IndustrygrowthwillcomefromAsia 14
ProfitingfromAsia’sevolvingmanufacturingfootprints 15
Case study: DHL Express 16
Outlook 17
Barometer methodology 19
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SupportedbySingapore’sEconomicDevelopmentBoard(EDB),theEconomistIntelligenceUnithasdevelopedtheAsiaCompetitionBarometerwiththeaimofunderstandingthechangingmarketdynamicsinkeysectorsandassessingtheintensityofcompetitioninthem.Drawinguponcompany-leveldataonprofitabilityandotherindicators,theBarometerquantifiesthechangingdynamicsofcompetitivenessinAsiaforselectindustriesbetween2004and2009.
ThisreportfocusesontheBarometerfindingsforthetransportandlogistics(T&L)sector.Assessingauniverseofover275T&Lcompaniesthatarepubliclylistedineightcountries—China,India,Indonesia,Malaysia,thePhilippines,Singapore,ThailandandVietnam—theBarometerexamineschangingprofitabilityandthecompetitionlandscapefortheT&Lsector.
Otherreportsinthisserieslookattheinformationtechnologyservices,precisionengineering,petrochemicalsandchemicals,andpharmaceuticalssectorsinAsia.
January2012
Preface
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Executive summary
WhatdoestheemergenceofAsiaasamajorengineofglobaleconomicgrowthmeanforcompaniesoperatingintheregion?Asia’srobusteconomicoutlook—coupledwithdiminishedgrowth
prospectsinmanyotherpartsoftheworld—hasattractednewinvestmentintothemarketbothfromregionalplayersandWesternmultinationals.Asaresult,competitionintheregionisexpectedtointensify.Giventhedarkeningglobaleconomicoutlook,andtheexpectedimpactonsomeeconomiesandsectorsintheregion,growthandprofitabilitylookuncertaininthenearterm.Butoverthemediumtolongerterm,Asia’sstrongeconomicfundamentalswillensureconsistentgrowthacrossarangeofindustries.HowarecompaniespositioningthemselvestocapitaliseonAsia’sgrowthopportunitiesoverthenextfewyears?
TheAsiaCompetitionBarometerassessestheintensityofcompetitionandchangingmarketdynamicsinseveralkeysectors.Thisreportexaminesthetransportandlogistics(T&L)sector,whichincludesthefollowingsub-segments:landtransportandtransportviapipelines,watertransport,airtransport,warehousingandsupportactivitiesfortransportationandpostalandcourierservices.
Amongthekeyfindingsofthisreportarethefollowing:
• Asia’s T&L sector has been expanding rapidly, in line with the region’s stellar economic growth. Severalbroadmacroeconomictrends,includingAsia’swideningmanufacturingbase,deeperintra-Asiantradeintegration,risinghouseholdincomes,highurbanisationratesandwidespreadgovernmenteffortstoimproveinfrastructurehaveboosteddemandforT&LservicesinAsia.By2009,nineoutofthetenbiggestcontainerportsintheworldwereinAsia,upfromjustfivein2000.Thisgrowthlookssettocontinue,givenAsia’srelativelyrobusteconomicoutlook.
• The number of players in Asia’s T&L sector, homegrown and global, is rising.Thenumberandsizeofpublicly-listedfirmsintheT&LsectorinAsiahasincreaseddramatically,from199firmsin2004to275in2009.TotalcombinedrevenuesmorethandoubledfromUS$66.1bntoUS$140.8bnduringtheperiod.
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Meanwhile,inrecognitionofAsia’sincreasingimportancetotheglobalT&Lsector,foreignMNCshavebeenbuildinguptheirpresenceintheregion.
• Competition in Asia’s T&L sector is intensifying, as firms get leaner.Theinfluxofnewplayersintotheregion’sT&Lsectorhasledtoamorecompetitiveoperatingenvironment.Theindustry’slargestpublicly-listedAsianplayerssawtheirmarketsharesdeclinebetween2004and2009,asnewplayers,includingmanylow-costcompetitors,enteredthebusiness.Currenttrendsintheindustrysuggestthatfiercepricecompetitionwillcontinue.Insuchanenvironment,sourcesofcompetitiveadvantagewillemergebothinbigfirmsthatcanreapcostefficienciesandsmallfirmsthatcanservenichesegments.
• Profitability in Asia’s T&L sector has been declining, but pockets of growth exist.Theaveragegrossmarginofpublicly-listedAsianfirmsdeclinedfrom49.8%in2004to39.8%in2009.Competitionisonlyonefactorpushingdownprofits.Anumberofothers—includingtheglobaleconomicdownturn,higherfuelcostsandrisingwages—haveputpressureonmargins.Tomaintainprofitability,manyfirmswillhavetofocusonspecificgrowthniches,suchaslow-costairtravelorexpressandfreightforwardingservices,particularlyinChinaandIndia.
• Rising domestic demand in Asia will change the nature of trade in the region, creating new growth opportunities.AstheglobalbalanceofeconomicpowershiftsfromtheWesttotheEast,andasprivateconsumptioninAsiapicksup,thenatureoftradeflowsintheregionwillchangedramatically.Thoughcomponenttradeisstillhuge,andgrowing,thistrendindicatesashifttowardsmorefinaldemand.Thiswillpushlogisticsproviderstoimprovetheirimportingandintra-regionalcapabilities.Thisalsosuggeststhatshorter-haulfreightcompaniesconcentratingontheregionwillgrowfasterthanthosefocussedonlong-haulroutes,forinstancebetweenAsiaandEurope.Inaddition,smallT&LfirmsabletoserveremotepartsofAsiawhereincomesarerising—suchascommodity-richpartsofIndonesia—standtoboostrevenues.
• Asia’s evolving manufacturing footprints will affect the region’s T&L industry by shifting demand to newer markets.SeveralbroadtrendsarecausingarethinkofAsianmanufacturing,includingrisingwagesinChina,whichareleadingtotheflightoflow-costmanufacturingawayfromthesouthandcoastalareasofthatcountrytoinlandprovincesandneighbouringcountriessuchasVietnam.T&Lfirmswillneedtoadapttothesechangingdynamicsinordertomaintainprofitability.
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Asia’s growing importance for corporate performance and global competitiveness
Overthepastdecade,Asiahasrapidlygrowninimportancetotheglobaleconomy.ItsshareofglobalGDP,measuredinpurchasing-powerparityterms,increasedfrom26.8%in2001to33.8%in2010.1
By2016,theEconomistIntelligenceUnit(EIU)expectsthisproportiontoriseto38.9%.ThereareseveralbroadtrendsassociatedwithAsia’srapidgrowthanddevelopmentthathavebeen
drivingitstransportandlogistics(T&L)sector.2First,intra-Asiantradehasboomedasmanufacturingsupplychainshavespreadanddeepenedacrosstheregion.AccordingtotheWorldTradeOrganisation(WTO),theshareofintra-AsianexportsasaproportionoftotalAsianexportshasrisenfrom42.1%in1990to52.6%in2010.3Theseintricatesupplychainshavebecomefundamentaltoglobalmanufacturingoutput,asshownbythetradedisruptionsfollowingnaturaldisastersinJapanandThailandin2011.Increasinglyintegratednetworkshaveboosteddemandfor,amongotherthings,contractlogistics,expressandfreightforwardingservices,aswellasunifiedservicestosmoothencustomsclearance.
Second,risingincomesintheregionasaresultofbroadereconomicgrowthhaveledtogreaterprivateconsumption,sparkinggrowthinimports.Forinstance,thecompositionofChina’simportsisshiftingfromrawmaterialsandintermediatecomponentsforexport-orientedmanufacturingtoanincreasingamountofconsumergoods.4Asia’slogisticsmarketwillsurpassNorthAmerica’sby2013,saysProcurementIntelligenceUnit,abusinessintelligenceprovider.5ItexpectsAsia’stransportandwarehousingsector’sshareoftheglobalmarkettorisefrom18%in2010to21%by2013.
Today,some70%ofglobalcontainerthroughputishandledbyportsinAsia.6By2009,nineoutofthetenbiggestcontainerportsintheworldwereinAsia,upfromjustfivein2000.Indeed,AsiaisincreasinglyimportantforcorporateperformanceintheT&Lsectorglobally.“Asiawithoutanydoubtisthemostactiveregionintheworld.Itisflowering.TheworldtendstofocusonChina,buttherealityisthatthereareseveraleconomiesherethataregrowingveryfast,”NilsAndersen,CEOofMaersk,aDanishconglomeratewithbigtransportationandenergybusinesses,wasquotedassayinginMay2011.7“Soifwelookattrade,weseeourintra-Asiabusinessbeingthemostdynamic.WeseetradebetweenAsiaandLatinAmericagrowingfast,thesamewithAfrica.”
From2004to2008,theproportionofMaersk’stotalallocatedassetsinAsiarosefrom6.1%to16.5%.8 Meanwhile,Maersk’sAsiarevenuesalmostdoubledfrom2005to2010,withAsia’sshareofglobalrevenuesrisingfrom11%to13%overthatsameperiod.
1AsiahereincludesBangladesh,China,HongKong,Indonesia,India,Japan,SouthKorea,Malaysia,Myanmar,Philippines,Pakistan,Singapore,SriLanka,Thailand,Taiwan,andVietnam.
2 The transport and logistics (T&L)sectorincludesthefollowingsub-segments:landtransportandtransportviapipelines,watertransport,airtransport,warehousingandsupportactivitiesfortransportation and postal and courierservices.
3 International Trade Statistics.WorldTradeOrganisation.2001and2011.
4“Intra-Asiatrafficgrowsascarriersaddservices”,Cargonews Asia,Sep12th2011
5“Asianlogisticsectortobecomedriverforglobalgrowth”,ProcurementIntelligenceUnit,Sep2nd2011
6“Containershipping:Successfulturnaround”,DeutscheBankResearch,Mar28th 2011
7“TheViewFromTheBridge”,Forbes Asia Magazine,Jun6th 2011
8ThisfiguredoesnotincludeMaersk’sassetsthatarenotallocatedtoaspecificregion.
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Risingincomeshavealsocausedastrongsurgeindomestictravel.TheInternationalAirTransportAssociation(IATA)forecaststhattheairindustrywillhavetohandle800mmorepassengersand12.5mextratonnesofinternationalcargoby2014.9MuchofthatgrowthwillcomefromAsia.“Asiaisthemostprofitableregionintheworld,”GiovanniBisignani,IATA’sdirectorgeneral,saidinearly2011.10“Ofthe800mnewpassengerswhowillflyby2014,360mwillbeinAsia-Pacificand214mofthoseinChina.”
Inadditiontoboostingrevenuesattraditional,premiumtravelserviceproviders,thisgrowthindisposableincomeshassparkedthedevelopmentofahugelow-costcarrier(LCC)market.TheLCC’sshareoftheintra-Asiantravelmarket,intermsofpassengerseats,increasedfrom1.1%in2001to17.7%in2010.11Inthepassengerairlinessector,forexample,Jetstar,anewerLCC,hasgrowntoaccountformorethan25%oftheoperatingprofitatQantas,itsparentcompany,inunderadecade.ThesenewentrantstotheT&Lsectorcandisrupttraditionalbusinessmodels,puttingpressureonmarginsattheestablishedfirms.Thesuccessoflow-costcarriers,forinstance,hasforcedincumbentlegacycarrierstoofferbetterandmorecompetitiveproducts.Tomaintainprofitability,theymayhavetotrimtheircostbase,asPhilippineAirlinesdidin2010byretrenching3,000ofitsemployees.
ThethirdtrenddrivingAsia’sT&Lsectoristhehighurbanisationrateintheregion,whichhascreatednumerousopportunitiesforT&Lfirms.TheAsianDevelopmentBankbelievesthatAsia’surbanpopulationisgrowingbyabout44mpeopleayear—or120,000peopleaday.Thisisboostingdemandforinter-regionaltransitservices—asmigrantstravelbackandforthfromtheirruralprovinces—aswellasintra-citycommuterservices.Thesenewurbanresidentswillalsokeeppushingupdemandforarangeofgoodsandservices,whichwillinturnensureconsistentgrowthforthewarehousing,supplychainmanagement,andlogisticssectors.
Fourth,manygovernmentsintheregion,fromIndiatoIndonesia,aremakingconcertedeffortstopluginfrastructuredeficitsintheircountries.Asia’sgenerallypoorinfrastructurenetworkshavelongbeenadragongrowthintheT&Lsector.Aspublicandprivatesectorinvestmentshelpconstructnewairports,renovateoldseaports,andbuildbetterhighways,theywillboostproductivityintheT&Lsector.
ForeignT&LMNCshavebeenoperatinginAsiaforseveraldecades.Recently,inrecognitionofAsia’sgrowingimportance,theyhavebeeninvestingheavilyintheregion.BetweenJanuary2003andAugust2011,fDiMarkets,aresearchhouse,recordedatotalof670T&LinvestmentprojectsinAsiafrom217companies.12ManyofthoseinvestmentsoriginatedfromtheUS(18%oftheinvestmentprojects),Germany(18%)andJapan(9%).Meanwhile,thetopthreeinvestmentdestinationmarketswereChina(35%oftheinvestmentprojects),India(19%)andVietnam(8%).
Whiletherearenumerousopportunities,T&LfirmsinAsiawillalsocontinuetofaceseveralchallenges.InChina,forinstance,firmshavetocontendwithnon-uniformtaxratesatvariouslinksofthesupplychain,andrepeatedtaxation.Inaddition,highroadandbridgetollsaccountforasmuchasone-thirdofthecostsoflogisticsenterprisesinChina.
Meanwhile,eventhoughgovernmentsareprioritisinginfrastructureinvestments,theywillfindithardjusttokeeppacewiththeregion’storriddemandgrowth.McKinsey,aconsultancy,believesthatIndia’snetworkofroads,rail,andwaterwayswillactasapossiblebrakeonthecountry’sgrowth,asitwillbeunabletoaccommodatetheexpectedthreefoldincreaseinfreightmovementoverthecomingdecade.
RecentfreetradeagreementssuchasthosesignedbetweentheAssociationofSoutheastAsianNations
9TheInternationalAirTransportAssociation,Feb14th2011
10“Chinaairpassengergrowthtoleadglobalmarket”,China Daily,Feb16th2011
11CAPACentreforAviation
12ThisincludesGreenfieldinvestmentsaswellasadditionstoexistingprojects.
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(ASEAN)andAustraliaandNewZealand,China,andIndia,arehasteningintegrationofAsiancountries.Between2000and2011,thenumberofbilateralFTAsrecordedbytheWTOthatinvolvedanAsiancountryincreasedfrom8to74.However,theregion’swebofcomplexnon-tariffbarrierswillcontinuetoposechallengestoT&Lfirms.Otheroperationalchallengesincludebureaucracy,cross-bordertariffs,corruptionandtalentshortages.ThesechallengescanvaryconsiderablyfromoneAsiancountrytothenext;hencefirmsfaceaheterogeneousoperatingenvironmentinAsia.Environmentalregulationsmayalsoeventuallyhaveanimpactontheindustry.
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Competition and profitability at Asian firms
ReflectingtheboominggrowthinAsia’sT&Lsector,thenumberandsizeofpublicly-listedfirmsinAsiahasincreaseddramatically.Thetotalnumberoflistedcompaniesintheindustryincreasedby
40%,from199firmsin2004to275in2009,whiletheirtotalcombinedrevenuemorethandoubledfromUS$66.1bntoUS$140.8bn.Theinfluxofnewplayers,bothAsianandnon-Asian,intotheregion’sT&Lsectorhasledtoamorecompetitiveoperatingenvironment.
Competition: RisingWithmanycompaniesraisingtheirexpectationsofAsiatodelivergrowthandprofits,itisreasonabletoexpectcompetitionintensityintheregiontoincrease.TocapturethisintensitywehaveusedtheHerfindahl–HirschmanIndex(HHI),whichmeasuresthemarketconcentrationofanindustry’slargestfirms.HHIvaluescanrangefrom0(extremelyfragmentedmarket)to1.0(monopoly).Herewehavemultipliedthevaluesby100toachieveascaleconsistentwithprofitabilityindicators(seebelow).The
Figure 1: Herfindahl–Hirschman Index
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4.5
5.0
5.5
6.0
200920082007200620052004Source: Economist Intelligence Unit
2004 2005 2006 2007 2008 2009
Herfindahl—Hirschman Index (HHI) 5.77 5.66 5.08 5.78 5.44 4.34
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13Ameasureofthesizeofcompanies in relation to the industry,andanindicatoroftheamountofcompetitionamongthem,theHHIisdefinedasthesumofthesquaresofthemarketsharesofthe50largestfirmsfromtheuniverseof275listedcompaniesassessed.FormoreinformationontheBarometermethodology,pleaserefertothelastsectioninthisreport.
HHIforAsia’sT&Lindustrydecreasedfrom5.77in2004to4.34in2009(seeFigure1),signifyingthatthe50biggestfirmsintheBarometerdecreasedtheirmarketconcentrationoverthatperiod.13
Thethreelargestcompanies(by2009turnover)(seeFigure2)—ChinaCoscoHoldings,SingaporeAirlinesandChinaSouthernAirlines—sawtheircombinedrevenuesharedropfrom27.4%in2004to20.7%in2009.
Thesenumberspartlyreflectthegrowingpenetrationintotheindustryofsmall,nimble,low-costentrants,whicharewinningmarketsharefromthelargerincumbentsandintheprocessdisruptingtraditionalbusinessmodels.
Figure 2: Top ten companies by turnover
Company Country of origin 2004 turnover (US$bn) 2009 turnover (US$bn)
ChinaCoscoHoldings China 4.94 10.50
SingaporeAirlines Singapore 9.52 10.11
ChinaSouthernAirlines China 3.63 8.58
AirChina China 5.13 8.18
ChinaEasternAirlines China 3.24 6.65
NeptuneOrientLines Singapore 6.64 6.53
ThaiAirways Thailand 5.09 5.42
MISC Malaysia 3.58 4.61
Sinotrans China 3.31 4.25
MalaysianAirlines Malaysia 3.64 4.10
Note:ThesearethetenbiggestcompaniesbyturnoverthatwereanalysedintheBarometer,whichconsideredonlypubliclylistedfirmsineightcountries:China,India,Indonesia,Malaysia,thePhilippines,Singapore,ThailandandVietnam
Takentogether,thedecliningmarketconcentrationandhighernumberofcompaniespaintaclearpictureoffragmentation,addingtothealreadyhighcompetitionlevelsintheT&LsectorinAsia.Currenttrendsintheindustrysuggestthatfirmswillcontinuetocompetefiercelyonprice.Insuchanenvironment,bothbigandsmallfirmscandevelopuniquecompetitiveadvantages.Smallfirmsmaybeabletoinnovateandprovidelow-costofferings,particularlyinsegmentswheretraditionalincumbentsaresaddledwithhugecostbases.Large,integratedtransportationfirms,meanwhile,canreapscaleefficiencies,particularlywhenprovidingaserviceoverawidergeographicarea.Overthenextfewyears,consolidationintheT&LsectorinAsiaislikely,astheselargerfirmsseektogrowtheirmarketsharethroughstrategicacquisitions.
JimMcAdam,presidentofAPLLogistics,asupplychainserviceprovider,believesthatthegrowthinintra-Asiantradewillforcelogisticsserviceproviderstoinvestininfrastructureandtoacquirekeyassetsintheregion.Firmswillcompeteintermsoftheircross-borderlogisticsinfrastructureandin-countrywarehousingandtransportationcapabilities.“Vertical-focusedcapabilitieswillalsomushroom,particularlyinmajorconsumergrowthsectorslikeretailing,FMCG,apparel,automotive,electronicgoods,automotiveandpharmaceutical,”hesays.
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case study APL Logistics
APL Logistics: Investments in assets, technology and talentAPLLogistics,asupply-chainserviceprovider,hasenjoyeddouble-
digitannualrevenuegrowthinAsiaoverthepastfiveyears,exceptin2009whentheglobaleconomywasinrecession.In2010,itsAsiarevenuesgrew37%yearonyear,comparedwith26%growthinnon-Asiarevenues.
“Today,Asiaaccountsfor26%ofAPLLogistics’globalrevenue,upfrom17%in2005,”saysJimMcAdam,thefirm’spresident.
MrMcAdamidentifiesseveralfactorsthathavedrivenprofitabilityatAPL.Theseincludeeconomiesofscale,closecostcontrol(particularlyforoperationalandpersonnelcosts),smarterprocurementpractices,streamlinedprocesses(including,wherepossible,centralisingback-roomoperationsinaffordableregionalorglobalcenters),andflexibilitywithexternalinfrastructureandassets.Healsocitesselectiveinvestmentinproductivity-boostingtechnology.
MrMcAdamalsorecognisestheimportanceofserviceinnovationsthatcanboostbothtop-andbottom-linegrowth.HecitestheexampleofAPLLogistics’day-definiteoceanservicesthatallowcustomerstodelivertheirtime-sensitivecargoespredictably,withouthavingtopayexpensiveairfreightrates.
MrMcAdamcontendsthatinordertoensurefutureprofitability,playersintheT&Lindustrywill“needtolookatputtinginplacecost-efficiencystrategiesthatwillallowthemtoreapbenefitsoverthelongerterm,”ratherthanlookingatshort-term,isolatedcostsavings.“Amongotherthings,thiswillinvolveinvestingincriticalgroundinfrastructureandassets,includingtransportroutes.”
Since2007,APLhasbeenprovidingrailservicesinIndia,whileinIndonesiaandVietnamithasinvestedinwarehousing,equipmentandtechnology.
“Manyoftheseemergingcountriesdon’thaveadequateinfrastructureforstate-of-the-artdomesticsupplychains,”hetoldThe Journal of Commerce,atradepublication,inaseparateinterviewinSeptember2011.1“Asoperatorswecaneitherwaitforgovernmentsorprivateenterprisetomovefirst,orwecanputourownmoneyintohelpdevelopitfaster.Wearedoingthelatter.”
Inparticular,hebelievesthatT&LfirmsinAsiaaregoingtocompeteintermsoftechnologyandtalent.Advancedplanningandsupply-chainoptimisationtechnologieswillbecrucial,hesays.Meanwhile,asdemandgrowsforknowledge-basedconsultancyservices,hesaysthat“hiringtherightskillsetsattherightpricesisakeytoo.Inthesamevein,itisimportanttoinvestintrainingandpeopledevelopment.”
1“APLLogisticsChiefSaysAsset-BasedModelKey”,The Journal of Commerce,Sep9th2011
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Profitability: On the decline overall, but pockets of growth existTomeasuretheprofitabilityoftheT&Lsector,wedevelopedacompositeindexoffiveratioswhichmeasuredifferentaspectsofacompany’smargins(formoredetails,seethenoteonmethodologyattheendofthisreport).AllprofitmarginsfortheT&Lindustryin2009havefallenrelativeto2004(seeFigure3).Profitabilityhasnotfallenconsistently,buthasfluctuatedbroadlyintandemwithglobaleconomicgrowth(seeFigure4).
From2006to2007,profitabilityroseslightly,beforeasteepdeclinebetween2007and2008.14 This wasadirectreflectionofthegatheringfinancialstormattheendof2007thatdepressedglobaldemandandledtoacollapseinglobaltrade.Asmuchofthedevelopedworldenteredarecession,exportvolumesworldwidecontractedsharply.Nevertheless,giventhatregionaleconomicgrowthandtradebegantorecoverinmid2009,theProfitabilityIndexshowsasmalluptickthatyear.
Thus,whileintensecompetitionintheregionhasmeantalong-termseculardeclineinprofitabilityintheT&Lindustry,economicgrowthcycleshaveinfluencedshort-termmarginfluctuations.
Figure 3: Profitability Index
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80
100
120
200920082007200620052004Source: Economist Intelligence Unit
2004 2005 2006 2007 2008 2009
Profitability index 115.3 100.0 93.2 100.4 75.2 83.3
EBITDAmargin(%) 24.0 21.1 19.9 23.3 16.4 17.4
Grossmargin(%) 49.8 43.0 39.7 39.4 33.7 39.8
Returnoncapitalemployed(%) 14.1 12.5 11.8 14.5 8.0 5.8
Returnonequity(%) 16.0 13.5 12.8 16.3 6.7 5.4
Returnonassets(%) 7.2 6.0 5.9 7.4 2.8 2.2
Herfindahl—Hirschman Index (HHI) 5.77 5.66 5.08 5.78 5.44 4.34
14ThecompositeProfitabilityIndexismadeupoffiveratios that each represent adifferentaspectofacompany’sprofitability.FormoreinformationontheBarometermethodology,pleaserefertothelastsectioninthisreport.
Profitabilityhasalsobeenhurtbyseveralbroaderindustrytrends,includingtheliberalisationoftransportationmarkets,whichhasopenedupmanysegmentstoincreasedcompetition.RisingfuelcostsandwagesinmanypartsofAsiahavealsoeatenintoprofits.Marginsarelikelytoremainunderpressure,particularlygiventheentranceofnewcompetitorsintotheindustry,andtheincreasingsophisticationoflow-costcompetitors.Tomaintainprofitability,manyfirmswillhavetofocusonspecificgrowthniches,suchaslow-costairtravelorexpressandfreightforwardingservices,particularlyinChinaandIndia.
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Overthenextfewyears,overallprofitabilityinAsia’sT&Lsectorwillinevitablybeaffectedbybroaderglobalmacroeconomicdevelopments.TheEconomistIntelligenceUnit(EIU)hasdowngradeditsglobalGDPgrowthforecastsfor2011-2016(seeFigure4),largelyduetothesovereigndebtproblemsfacingtheeurozone.Wenowexpecttheglobaleconomytogrowby2%in2012.Aspartofthatrerate,wehavereducedourgrowthforecastsformostemergingmarkets;countrieswithsignificanttradeexposuretothelargeWesterneconomieswillfeelthegreatestimpact.Forinstance,wehaveloweredour2012GDPforecastforChinato8.2%.15Furthermore,weestimatethereisagreaterthan40%chancethattheglobaleconomywillfallintorecessionsometimeinthenexttwoyears.
DiminishedglobaldemandwillhaveadirectimpactontradeandthereforeprofitabilityatmostfirmsinAsia’sT&Lsector(SeeBox:WorldTrade).T&Lfirmsdependentoncommoditymarkets—suchasdrybulkshippersandoffshoreserviceproviders—willalsoeventuallybeaffectedbythisslowdowninglobaldemand.
Overthemediumtolongterm,theimminentglobaleconomicslowdown,withitsrootsinthedevelopedWesterneconomies,willhastentheongoingrebalancingofglobaleconomicpowerfromtheWesttoAsia.Therefore,manyfirmsinAsia’sT&Lsectorwillbepositioningthemselvestocapitaliseonchangingglobaltradeandgrowthpatterns.
“ThereisclearlyashiftintradetowardsAsia,”saysChristopherOng,vicepresident,businessdevelopmentatDHLExpressAsiaPacific.“Ifthereisaslowdown,maybethebestthingwecandoisinvest,becausewewilleffectivelybeloweringourcapitalexpenditure.Itisallaboutbuyingtheassetsattherighttime.”
Figure 4: Global GDP(% real change p.a.)
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2016201520142013201220112010200920082007200620052004
Source: Economist Intelligence Unit, Dec 14th 2011
15GlobalForecastingService,The Economist Intelligence Unit,Dec14th2011
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World trade
Followingareboundin2010,worldtradegrowthhasslowedin2011,withmomentumstallingparticularlysincethethirdquarter.InGermany,afterastrongfirsthalf-year,annualexportearningsgrowthslowedto10%inSeptember,whileinChinaexportsgrewatanannualrateof15.9%inOctober,downfrom17.1%amonthearlier.IntheUS,whereindicatorsofeconomichealtharenotyetpointinguniformlydownwards,exportearningsgrewby18.1%inSeptember,comparedwithanaveragerateof21%in2010.Japan’s
economyisstillrecoveringfromthetsunamiandnucleardisasterinMarch,withexportsinSeptembergrowingmoreslowlythanimportsonanannualisedbasis.Inthelightoftheslowdownevidentinrecentdata,notablyinEuropeandAsia,theEconomistIntelligenceUnithasreviseddownitsworldtradegrowthestimatefor2011to6.6%.Meanwhile,inresponsetothedowngradeofoureurozonegrowthforecastandthedeterioratingglobalmacroeconomicpicture,wehavecutourworldtradegrowthforecastfor2012to4.2%.Weexpectgrowthtorecovertocloseto6%in2013andtostrengthenoverfrom2014-2016.
Figure 5: World trade(% change; goods)
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2016201520142013201220112010200920082007
Source: Economist Intelligence Unit, Dec 14th 2011
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Positioning for success in Asia
Resilient demand: Industry growth will come from Asia
Giventhelong-termstructuralproblemsinmanyWesternmarketsandemergingAsia’slargelybullisheconomicfundamentals,theshiftintradeandinvestmentfromtheWesttoAsiawillcontinue.The
EIUestimatesthatby2016theeightAsiancountriesinthisstudyalonewillaccountfor28.9%ofglobalGDP(measuredinpurchasing-powerparityterms),upfrom23.2%in2010.
ThestronggrowthofAsia’semergingeconomieswillboosttheintra-regionalmovementofgoodsandpeople.ManyindustryanalyststhereforebelieveAsiaoffersbetterprospectsforT&Lfirms.TransportIntelligence,anindustryresearchfirm,projectsdouble-digitincreasesthrough2014incontractlogisticsandexpressandfreightforwardingservicesintheregion,ledbyChinaandIndia.16Meanwhile,ChinareplacedtheUSthisyearasthelargestaircargomarketforSingapore,anexampleofhowChina’sgrowthisdrivingtheAsianlogisticsindustry.
ManyotherAsiancountriesarealsokeentoboostprivateconsumption,partlyinabidtoreducetheirrelianceonexportsandinvestment.“Wehavehugecontractswithalotofbrandowners,includingApple,”saysMrOngatDHLExpress.“ThereisalotofgrowthindemandinAsiafortheseendproducts.”Thoughcomponenttradeisstillhuge,andgrowing,thistrendsuggeststhatthenatureoftradeflowsintheregionisshiftingtowardsmorefinaldemand.Thisisforcinglogisticsproviderstoimprovetheirimportingandintra-regionalcapabilities.
Thissuggeststhatshorter-haulfreightcompaniesconcentratingontheregionwillgrowfasterthanthosefocussedonlong-haulroutes,forinstancebetweenAsiaandEurope.Inaddition,smallT&LfirmsabletoserveremotepartsofAsiawhereincomesarerising—suchascommodity-richpartsofIndonesia—standtoboostrevenues.
Inlinewiththis,companiesareaggressivelygrowingtheirpresenceandoperationsinAsia.Forexample,Singapore-basedREITGlobalLogisticProperties,Asia’slargestproviderofmodernlogisticsfacilities,willdevelop14msquarefeetofnewspaceinChinain2011,and16-17msquarefeetin2012.A
16“AsiaPacificTransportandLogistics2011”,TransportIntelligence,Sep2011
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numberofestablishedcompanies,suchaslogisticsservicescompanyFedEx,expressservicesfirmTNT,marineterminaloperatoranddeveloperDPWorld,andlogisticsandtransportationsolutionsproviderTollGroup,areusingacquisitionsofIndiancompaniestogainapresenceinIndia.
ThedevelopmentofChinaandIndiawillalsodrivethecommoditiestradewithinAsia.Frost&Sullivan,aresearchhouse,believesthatIndonesia’srobustoilandgassectoranditsstatusasthelargestcoalexporterintheworldwillcontributetoan8.3%expansioninthecountry’slogisticssectorin2011.17
Thoughintra-Asiantradewillcontinuetodrivegrowthincontainershipping,theindustry’sprofitabilityoutlookisslightlymorecautiousduetohighoilprices,over-capacityanddepressedfreightrates.Inthisenvironment,shippingfirmswillwanttoadoptmorefuel-savinginitiatives,minimiseidlingcapacityandredraftroutestostrengthentheirbottomlines.
Profiting from Asia’s evolving manufacturing footprintsJustthreeyearsago,supplychainsinAsiawerestillfollowingapredictablepattern,withmanycomponentsfromaroundtheregionbeingshippedtoChinaforfinalassembly,beforebeingsenttoothermarketsforsale.Today,severalbroadtrendsarecausingarethinkofAsianmanufacturing.FirstandforemostisrisingwagesinChina,whichareleadingtotheflightoflow-costmanufacturingawayfromthesouthandcoastalareastoinlandprovincesandneighbouringcountriessuchasVietnam.
AnotheristhecontinuedrapidgrowthofAsianeconomies,coupledwithsluggishrecoveriesintheWest,whichhaspromptedmorefirmstofocusonservingAsia’sconsumers.Finally,therecentnaturaldisastersinJapanandThailand,andtheirimpactontheproductionofcertaincomponents,havehighlightedtheimportanceofhavingalternativesuppliers.
WithinChina,economicdevelopmenthasbeenshiftingwestwards.“InsteadofShenzhenandGuangdong,weareseeingalotofgrowthinChengdu,”saysMrOng.China’sT&Lindustry,therefore,willexpandstronglyintothecentralandwesternregions,andboostdevelopmentofrurallogisticsservices.China’sbroadgeographicalspreadandthepresenceofproductionbasesacrossthecountryofferopportunitiesforsmallandlargelogisticsservicesproviders.
Meanwhile,TransportIntelligenceseeslong-termgrowthpotentialinVietnam,aslow-costmanufacturingworkshiftstherefromChina.18Vietnam’srapidlygrowingairandseaportindustrieshavefacilitatedahighervolumeoftrade,anditsvastnetworkofinlandwaterwaysservesasanefficientmodeofgoodstransportation.Vietnam’sT&Lsectorisstillinitsinfancy,withafragmentedindustrymakeup.Earlyentrantshaveanopportunitytoestablishafirst-moveradvantage.Forinstance,MaerskhasconstructedtheCaiMepInternationalTerminalinVietnam,whichbeganoperationsinmid-2011,throughajointventure.SourcesofcompetitiveadvantagewillincludebeingabletoleveragetransportationnetworkefficiencieswithChinaandnavigatingthegovernmentbureaucracyinVietnam.
ManufacturingfootprintselsewhereinAsiaarealsochanging.Indonesia’smanufacturingsectorhasbeengrowingrapidly,focussedbothonexportsaswellasitshuge,burgeoningdomesticmarket.MalaysiaandThailandwillcontinuetopushupthemanufacturingvaluechain,producing,forinstance,automotiveproductsandsolarpanels.India,meanwhile,iseagertoincreaseitsexport-orientedmanufacturing,partlytoservemarketsintheMiddleEastandAfrica.
Thisshiftwillleadtothegrowthofmanynewtradelinkswithintheregion,saysMrOng.Hebelieves
17“Indonesia’sLogisticsIndustrySettoGrow8.3%in2011”,Knight Ridder/Tribune Business News,Jan27th2011.
18“VietnamLogistics2009”,TransportIntelligence,Jan2009.
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thiswillbenefitlargefirmssuchasDHL,because“foramultinationalthatwantstoworkwithasinglesource,wearethere.”ButthesedevelopmentswillalsocreateopportunitiesfornewregionalT&Lplayers,whocangrowanddevelopastradeblossomsintheirimmediateneighbourhood.
case study DHL Express
DHL Express: Growth in AsiaAsiaisthemostimportantcontributortogrowthformajorexpress
deliveryfirms,accordingtoChristopherOng,vicepresident,businessdevelopmentatDHLExpressAsiaPacific.“Eventhoughthe2008-09recessionhurtprofitabilityforsomecompanies,lastyear(2010)wasaverygoodyearformanyglobalexpressservicesfirms,andAsiawasdrivingmuchofthatgrowth,”hesays.
Nevertheless,MrOngagreesthatcompetitionhasintensifieddramaticallyoverthepastfewyears,andnotjustfromthelarge,integratedfirms.“IntheJapan-Korea-Chinagrowthtriangle,forinstance,wearestartingtoseealotofcompetitionfromregionalplayers,”hesays.“ThereareChineseplayerswhoareofferingextremelylowfreightratesintoKoreaandJapan.”
TheseemergingT&LSMEsand“nationalchampions”competeonpriceinlocalisedgeographies,saysMrOng,targetingsmallcompanieswhotradeonlyalongafewroutes.Inthatsegment,theypresenttoughcompetitiontobiggerfirmssuchasDHL.InJuly2011DHLexitedthedomesticdeliverybusinessinChina,whenitsloss-makingjointventurewithSinotrans,aChinesefirm,wassoldtoUni-top,anotherChineseplayer.Sinotranscited“overlyfiercecompetitioninthedomesticcourierservicessector”foritspoorperformance.
GiventhemultitudeofsmalllocalplayersinAsia,MrOngexpectstheretobesomeconsolidationintheregionoverthenextfewyears,particularlyinChina,withafewnationalchampionsgrowingbigger.“Someofthesemarketsaresofragmented,it’simpossibletoreapanyeconomiesofscale,”hesays.MrOngisconfidentthatconsolidationwillimproveservicestandardsinthesemarkets,asfirmsmoveawayfrompurepricecompetition.Thesefirmswillalsobroadentheirfootprint.MrOngcitesShunfeng,oneofChina’slargestdomesticexpressservices,which“hasstartedtomoveouttoSingapore,HongKongandTaiwan.”
Facedwiththeseemergingchallengers,DHL’scompetitivepositioningisbasedonitsglobalreachaswellasitsreputationforqualityandsecurity.
Overthepastfewyears,theindustryhashadtocontendwithrisingwagesaswellasfuelcosts.Tocurboperationalcosts,DHLhasbeenrelentlesslystrivingtoimprovetheefficiencyofitsprocesses,saysMrOng,whousedtorunthefirm’sSixSigmaprogramme.Thisefficiencydrivehasalsohelpedthefirmreduceitsenergyusage,improvingitsenvironmentalperformance.Meanwhile,ithasbeenabletopassonmostofitsfuelcostrisestoitscustomers.ThoughMrOngexpectsbothwagesandfuelcoststocontinuetoriseoverthenextfewyears,hedoesnotexpectthemtosignificantlycrimpprofitability.
Overthenearterm,T&LfirmsinAsiawillneedtocloselymonitormanufacturers’productionplanswithrespecttojust-in-timeproductionanddelivery(JIT),asthiswillimpactthenatureoftransportationandlogisticsservicesrequired.
Giventheglobaleconomy’srapidgrowthfrom2004to2007,manymanufacturingfirmsswitchedfromairtooceanfreightduringthattime,MrOngsays,inordertocutcosts.Butwhenthe2008-09recessionhit,theysuddenlyfoundthemselveswithahugeinventorybuild-up.
ThispromptedmanymanufacturingfirmstoincreasetheiruseofJIT.“Ithinktheyfiguredit’sbettertopayalittlemorefortransportthantohaveobsoleteinventory,”hesays.Therewasthenashiftbacktoairfreight.ThiscouldpartlyexplainthesupplydisruptionsmanyfirmsfacedfollowingthenaturaldisastersinJapanandThailandin2011,astheyhadrelativelysmallerinventoriesonhand.
Thus,ontheonehand,manymanufacturersareagainquestioningthewisdomofJITfollowingthosetwodisasters.Ontheotherhand,thedarkeningglobaleconomicoutlookisagainthreateningtodampendemandforgoods,suggestingthathugeinventoriesmayturnouttobealiability.Tostayaheadofthecompetition,T&LfirmsinAsiawillneedtobeabletohandleanyshiftsintraffic,asmanufacturersreacttochangingmarketconditions.
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Outlook
AlthoughtheT&LmarketinAsiahasbeengrowingrapidly,profitabilityhasbeenonadownwardtrendoverthepastfiveyears,largelyduetoincreasedcompetitioninthesector.Thoughprofitabilityhas
risensincethe2008-09recession,thedarkeningeconomicoutlookportendsfurtherdeclinesinthenearterm.
CompaniesinAsiawillthereforehavetomanagenear-termuncertaintywhileanticipatingandpreparingforthelonger-termsecularshiftintradeandgrowth,aseconomicmomentumshiftsfromsluggishWesterncountriestodynamicemergingmarkets.
TheT&Lsectorwillcontinuetoadapttochangesintheglobalenvironmentbycompetingonprice.Cost-cuttingwillthereforebeakeytheme.AdditionalchallengestoT&Lcompanieswillcomeintheformofenergycosts,climatechange,andterrorism.Companieswillneedstrongriskmanagementprogrammesinordertomitigatethesethreats.
AmongstmoredevelopedT&Lmarkets,andinthemoresophisticatedlinksofthesupplychain,thereisagreatercallforincreasedcostefficiencythroughtheadoptionofnewtechnology.Forinstance,technologiessuchasradiofrequencyidentification(RFID)helptonarrowmarginsoferrorandtherebyreducethecostsofcorrectingerrors.Environmentallyfriendlyproductsandserviceswillalsobecomeincreasinglyimportant,acceleratingtheshiftto“GreenLogistics”.
Asia is likely to produce many global T&L leaders TwobroaderindustrytrendssuggestthatmanyoftheglobalT&LleadersofthefuturewillcomefromAsia.Firstisthelong-termshiftintradeandinvestmentfromtheWesttotheEast,whichwillprovideevermoreopportunitiesforgrowthintheregionacrossallsegments.Therewillbefurtherconsolidationinthesector,asfirmsgrowtoreapscaleefficienciesandimprovetheircross-bordercapabilities.
SecondisAsia’searlyadvantageinlow-costcompetitionand“frugalengineering”(aproductdesignapproachthatemphasisesusingthebareminimumofresourcestocreatebasic,no-frillsproducts).
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ThisindicatesthatAsianT&Lfirmswillinnovatetoproducelow-costservicesthatwillappealnotonlytoemerging-marketconsumers,buttoincreasinglycost-consciousconsumersinWesterndevelopedmarkets.AnexampleofthisisLCCAirAsia’sincreasingpenetrationinglobalairtravelmarkets,asitexpandsgeographically,whilealsopushinguptoservehigher-valuesegmentsoncertainroutes(forinstance,onsomeroutesitofferspremiumseats,suchasflat-beds,atmuchlowerpricesthanregularairlines).
Similarly,otherT&LfirmsthatcancompeteandwinmarketshareinAsiawillbewellpositionedforglobalexpansion.AsAsiaprogressivelyaccountsforabiggershareofglobaltradeandtransportation,itislikelythattheregionwillproducemanyoftheworld’smostcompetitiveandinnovativeT&Lfirmsofthefuture.
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Barometer methodology
Toassesstheintensityofcompetitionandunderstandthechangingmarketdynamicsinkeysectors,theEconomistIntelligenceUnit(EIU)hasdevelopedtheAsiaCompetitionBarometer.Drawing
uponcompany-leveldataonprofitabilityandotherindicators,theBarometerquantifiesthechangingdynamicsofcompetitivenessinAsiaforselectindustriesbetween2004and2009.
Assessingauniverseofover275publiclylistedtransportandlogistics(T&L)companiesacrosseightcountries—China,India,Indonesia,Malaysia,thePhilippines,Singapore,ThailandandVietnam—theBarometerexamineschangingprofitabilityandthecompetitionlandscapefortheT&Lsector.
How do we define the transport and logistics sector? GiventheincreasinglyintegratednatureofglobalandregionallogisticssupplychainstheT&Lsectorencompassesbothpassengerandfreightservices.Inaddition,activityforbothtypesofservicesisdrivenbysimilarmacroeconomicfactors,particularlyrelatedtoglobaltrade.
TheT&Lsectorincludesthefollowingsub-segments:landtransportandtransportviapipelines,watertransport,airtransport,warehousingandsupport
activitiesfortransportationandpostalandcourierservices.
Methodology TheBarometerhastwodimensions:profitabilityandmarketconcentration.
Profitability IndexToassesstheaggregateprofitabilityoftheT&LsectorinAsia,theEIUdevelopedacompositeindexoffiveratiosthateachrepresentadifferentaspectofacompany’sprofitability:
• EBITDA margin (%):Ameasureofacompany’soperatingprofitability.Itisequaltoearningsbeforeinterest,tax,depreciationandamortisation(EBITDA)dividedbytotalrevenue.BecauseEBITDAexcludesdepreciationandamortisation,EBITDAmarginprovidesaclearerviewofacompany’scoreprofitability.Anincreaseincompetitionmayputpressureonanindustry’sprofitmargins.
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• Gross margin (%):Whenusedasamarketmeasureofcompetition,grossmarginmeasurestheprofitabilityconsideringonlythecostsofgoodssold.Thehigherthepercentage,themorethecompanyretainsoneachdollarofsalestoserviceitsothercostsandobligations.Anincreaseincompetitiontendstoreducefirms’abilitytoincreasepricesandtherebyincreaseitsgrossmargin.
• Return on capital employed (%):Ameasureoftheefficiencyandprofitabilityofacompany’scapitalinvestments.Returnoncapitalemployedalsoindicateswhetherthecompanyisearningsufficientrevenuesandprofitsinordertomakethebestuseofitscapitalassets.Anincreaseincompetitionmayrequirefirmstoemployadditionalcapitaltomaintainprofitability.
• Return on equity (%):Ameasureoftherateofreturnontheshareholders’equity.Itmeasuresafirm’sefficiencyatgeneratingprofitsfromeveryunitofshareholders’equity.Returnonequityshowshowwellacompanyusesshareholderfundstogenerateearningsgrowth.Ariseincompetitiontendstoputpressureonreturnsonshareholderfunds.
• Return on assets (%):Ameasureofhowprofitableacompany’sassetsareingeneratingrevenue,orhowprofitableacompanyisrelativetoitsassets.Returnonassetsdeterminesacompany’sabilitytoutiliseitsassetsefficientlyandeffectively.Highercompetitiontendstoputpressureonfirms’abilitytomaintainreturnonassets.
Weaggregatedcompany-leveldatafor275publicly-quotedT&Lcompaniesandexaminedtheirprofitabilityratios.Toenableobservationoftrendsovertime,acompositeProfitabilityIndexwasdeveloped(whereyear2005=100).EBITDAandgrossmarginaregivenahigherweightingintheindexastheyspeakdirectlytobottomlineprofitability,whilethereturnoncapitalemployed,returnonequityandreturnonassetsratiosspeaktohowacompanymakeuseofitsvariousresourcestodrivereturn(i.eefficiency/productivity).
Profitability indicator Weight in Profitability Index
EBITDAmargin(%) 35%
Grossmargin(%) 35%
Returnoncapitalemployed(%) 10%
Returnonequity(%) 10%
Returnonassets(%) 10%
19Orsummedforallthefirmsin the case that there are fewerthan50.
Market concentration Toassessmarketconcentration,theEIUcalculatedtheHerfindahl-HirschmannIndex(HHI)fortheT&LsectorinAsiafrom2004to2009.Ameasureofthesizeofcompaniesinrelationtotheindustry,andanindicatoroftheamountofcompetitionamongthem,theHHIisdefinedasthesumofthesquaresofthemarketsharesofthe50largestfirms19fromtheuniverseofover275listedcompaniesassessed.HHIvaluescanrangefrom0to1.0,movingfromanextremelyfragmentedmarket(0)toamonopoly(1).HHIvalueshavebeenmultipliedby100toachieveascaleconsistentwithprofitabilityindicators.ArisingHHIindexgenerallyindicatesfallingmarketcompetition,whileafallintheHHIsuggeststhatcompetitionisincreasing.