sustainability of freight forwarding fin

SUSTAINABILITY OF BUSINESS MODELS

Freight Forwarding

1Sustainability of Freight Forwarding_fin.pptx

SUSTAINABILITY OF BUSINESS MODELS

ETH Presentation, Zurich April 24th, 2012

Contents

I. THE SPEAKER: Matthias Hanke and Roland Berger Strategy Consultants I. THE SPEAKER: Matthias Hanke and Roland Berger Strategy Consultants at a glance

II. THE INDUSTRY: Key characteristics of freight forwarding

III. THE MARKET: Drivers determining the supply and demand landscape

IV. THE STRATEGIC KEY QUESTIONS: How might the forwarder's rolechange within the overall value chain?

V. THE THREAT: Interesting examples of a similar industry (fiction for

2Sustainability of Freight Forwarding_fin.pptx© Roland Berger Strategy Consultants

V. THE THREAT: Interesting examples of a similar industry (fiction forforwarding ... so far)

VI. THE TRENDS: What is impacting the industry with short- and mid-termrelevance

VII. THE OPPORTUNITIES: Moves to sustain business medium term


I. THE SPEAKER: Matthias Hanke and Roland Berger StrategyConsultants at a glance

Let me introduce myself

MATTHIAS HANKE, PARTNER

• Weathered (1965)

• Married

• Two kids (15/17)

• Born in Hamburg, living in Basel

• Apprenticeship in steel trading (2 years)

• German Navy (2 years)

• Combined Master studies of Mechanical Engineering andBusiness Administration at TU Darmstadt (6 years)


Business Administration at TU Darmstadt (6 years)

• Junior Consultant to Senior Project Manager at RBSC (5 years)

• Executive Vice President "Network & Strategy" at Swissair, Crossair, Swiss (4 years)

• DHL Express (3 years)

• Partner with RBSC in Zurich (6 years)

• Key areas: Logistics, Aviation, Tour Operating

Roland Berger Strategy Consultants is a truly global firm –We provide strategic advice to the world's top decision makers

Our offices

Founded in 1967 in Germany by Roland Berger

47 offices in 35 countries, with 2,500 employees

About 220 RB Partners currently serving


About 220 RB Partners currently serving

~1,000 international clients

Source: Roland Berger

Active in the world's most important markets, we are proud to be a top 5 player in the global strategy market

Global market position amongst strategy consultants

75% repeat clients

30% of the top-1,000 global

companies

40% of Europe's leading

companies


# 2Germany

# 2Growth regions Chinaand Russia/CEE

# 3Core markets inWestern Europe

# 5World

1) In the strategy segment

companies

MARKET POSITION1)


II. THE INDUSTRY: Key characteristics of freight forwarding

Summary: four things to understand upfront

• Global Forwarding is one out of four basic FWD types

• Global FWD is a trading business with thin margins

• Global FWD has a brokerage function between "Shippers" and "Carriers" – thus, Global FWD takes a coordinating role in the value chain

• Value added services (VAS) reach growing importance as USP for Global Forwarders


• Value added services (VAS) reach growing importance as USP for Global Forwarders

Global Forwarding is one out of four basic FWD types

KEY CHARACTERISTICS

• Mainly trucking; growing share of railOverland Transportation

Global Forwarding

Contract

• Mainly trucking; growing share of rail• Forwarders often exercise "Selbsteintrittsrecht" and "operate"• Operation consists of carriage plus terminal operation for LTL business (groupage)• "Mama and Papa business" – low USPs ... low entry hurdles

• Core business is sea and air intercont transportation• Asset-light/ trading business (capacity brokerage) plus value added services• Low margins (RoS; don't mix up with RoC)• Interfaces with Overland Transportation and Contract Logistics

• Coordination of parts of the supply chain on behalf of the customer

FO

CU

S


ContractLogistics

Integrators;

Express Logistics

• Coordination of parts of the supply chain on behalf of the customer• Warehousing and Distribution are elements of core business• Contract duration over a longer period (~5 years) with dedicated investements• IT integration/interfacing with customer is key

• Door-to-door service, self operated (P&D, domestic linehaul, intl. linehaul, terminals)• Standing network – given fix-cost (flight gets operated ... full or empty)• Day-definite and Time-definite delivery plus even courier-services• High-cost proposition

Global FWD is a trading business with thin RoS-margins – potentiallydesastrous impact of sub-seasonal yield decline or overcapacity

Typical freight forwarder P&L structure (illustrative) [% of revenue]

85%

100%

Typical freight forwarder P&L structure (illustrative) [% of revenue]

> Forwarding business model is relatively low margin and highly sensitive to declines in revenue

> There are three key potential levers to improve profitability

– increase of net revenue (1)

– improve of cost of sales (2)

– reduction of DOE (3)

> Increase of net revenue requires

(1)

COMMENTS> Costs of 3rd

party carriers –mainly outside forwarders' direct control

> Economies of scale lead to lower cost per shipment


EBITDA

2% – 4%

Indirect Costs

5%

Direct Costs

8%

Gross Profit

15%

Cost of SalesNet Revenue

> Increase of net revenue requires continuous revision of product/ service portfolio and presence in the rapidly growing emerginglogistics markets

> Reduction of DOE finds a small overall basis only and requires continuous action on overhead costs

Direct Operating Expenses("DOE")


Global FWD has a brokerage function between "Shippers" & "Carriers" – thus, Global FWD takes a coordinating role in the value chain

VALUE ADD OF FORWARDERS

> Bundling of customer (shippers) demands

> Procuring transport capacities with volume rebates

> Coordinating many/ all transport related players (depending on the

EXAMPLE: AIR CARGO VALUE CHAIN

Trucking Company

Cargo HandlerCargo Handler

Trucking Company

Sh

ipp

er

Co

nsi

gn

ee

Handling

& Ware-

house

Line-

haul

Handling

& Ware-

housing

Airline

Airline

(Carrier)

Pickup,

Build-up,

RFS

RFS,

Break-

down,

Delivery


related players (depending on the agreed INCO terms between Shipper and Consignee)

> Enhancing transport management with value added services

regular/usual contract relationship

alternative contract relationship

alternative contract relationship

Sh

ipp

er

Co

nsi

gn

ee

Forwarder

(Carrier)

Value added services (VAS) reach growing importance as USP forGlobal Forwarders

The International Federation of Freight The International Federation of Freight Forwarders Associations defines freight forwarding as

"services of any kind relating to the carriage,

consolidation, storage, handling, packing or distribution of the goods as well as ancillary

Core Business: procurement ofinternational transport capacities

Value added services can evenreach towards significant IT


distribution of the goods as well as ancillary and advisory services in connection therewith, including but not limited to customsand fiscal matters, declaring the goods for official purposes, procuring insurance of the goods and collecting or procuring payment or documents relating to the goods".


reach towards significant ITinterfaces between the shipperand/ or the consignee


III. THE MARKET: Drivers determining the supply and demandlandscape

Summary: five things to remember

• Within the forwarder controlled market segments DHL, K+N and DB Schenker are clear market leaders – overall high fragmentation

• The European overland transportation market is even more fragmented with lessthan 10% total volume controlled by the top five players

• The overall forecast for global transportation needs is very prosperous - given stability of current paradimgs (global warming?, free trade?, ...)


stability of current paradimgs (global warming?, free trade?, ...)

• Individual country performance concerning GDP development and trade balance is significantly impacting the relevant "Trade Lanes" for hauliers and forwarders

• Freight rates are becoming increasingly volatile and demand on the forwarders side for more sophistication of steering purchased capacities

Within the forwarder controlled market segments DHL, K+N and DB Schenker are clear market leaders – overall high fragmentation

Top 10 freight forwarding players [% of total freight forwarding market, 2011]

1.4%

1.5%

1.7%

3.5%

Sinotrans

Expeditors

6.8%

DHL1.5%

Agility

CEVA

Nippon

Express1.7%

0.5%

0.4%

0.5%

1.5%

SinotransSDV

DAMCO 0.5%

Nippon

Express

Agility 0.5%

0.7%

K+N

2.0%

AIRFREIGHT – MARKET SHARE OCEAN FREIGHT – MARKET SHARE


2.9%

3.5%

K+N

DB Schenker

3.0%

Express

UPS

1.8%

Panalpina

0.9%

1.5%Expeditors

Panalpina

0.7%

DB Schenker

DHL1.0%

> DHL is the market leader with a significant lead towards the

nearest competitors

> DB Schenker, K+N and Panalpina are relatively equal sized

and competing to become the 2nd largest

> K+N leads the ocean freight market and has a sound lead to

competitors

> DHL is the second largest with DB Schenker, Panalpina and

Expeditors competing for 3rd place

Source: Merril Lynch, West LB, Roland Berger analysis

The European overland transportation market is even more fragmen-ted with less than 10% total volume controlled by the top five players

Overland transportation – European supply structures

MARKET SHARES (EUROPE)

Overland transportation – European supply structures

3.3%

1.5%

2.3%

90.7%

1.7%

CHARACTERISTICS

> European overland transportation is highly fragmented, driven by very low entry barriers in the industry

> Basic transportation service is mainly delivered by local haulers, with few large international players

> Market competition is characterized by low product differentiation – price is the main competitive lever

> Process efficiency and network cost are key levers for providers

16Sustainability of Freight Forwarding_fin.pptxSource: West LB, Roland Berger

DSVDB

Schenker

DachserDHL Geodis Other

0.5%

1.5%> Process efficiency and network cost are key levers for providers

to reduce price (terminal operation, driver costs, asset costs)

> Value added services are offered mainly for MNCs as a differentiator, by large logistics service providers

> A 40-tons truck from MUC to HAM bears total cost of some EUR 650 and leads to a maximum profit of ~EUR 30 – depending on overall asset utilization and truck load-factor

The overall forecast for global transportation needs is very prosperous -given stability of current paradimgs (global warming?, free trade?, ...)

World GDP and Export growth [Euro, trillion]World GDP and Export growth [Euro, trillion]

147139132125118112105100948984

5148

4643

4038

3533

3129

2725

242221201917161513

20

25

30

35

40

45

50

55Gross Domestic Product (GDP), Nominal

Exports of Goods and Services, Nominal

> Growth of GDP and world exports are the main external factors influencing the size of the global transportation industry

> World GDP and trade is expected to continue growing at high single digit growth rates (6-7% year over year)

> By 2030 the value of exported

17Sustainability of Freight Forwarding_fin.pptxSource: IHS, Roland Berger

10094898479747066636056534846

161513

0

5

10

15

2029

2028

2027

2026

2025

2024

2023

2022

2021

2030

2012

2011

2010

2020

2019

2018

2017

2016

2015

2014

2013

> By 2030 the value of exported goods/services might have increased almost 300% compared with 2010

> World exports are forecasted to growwith a multiple >1 compared to GDP – indicating a significant growth for the global transportation industry until 2030

Individual country performance concerning GDP development & trade balance is impacting the relevant "Trade Lanes" for hauliers and FWDs

Individual country performance concerning import and exportIndividual country performance concerning import and export

> Relevant trade lanes derive from individual country performance concering imports and exports

> Huge imbalances between exports and imports are a problem for the transportation industry (China in the recent years)

> Imports and exports from China, EU, Japan and the US do by far have the largest impact,


and the US do by far have the largest impact, due to the size compared to other trading regions

> Even micro-economic events can impact the global transportation industry: An example is Apple Computers' launch of "The new iPad" which saw Transpacific airfreight rates soar with over 20% in less than a week

Source: Drewry, Roland Berger

Freight rates are becoming increasingly volatile and demand on the forwarders side for more sophistication of steering purchased capacities

International freight rate development

2,500

3,500

3,000

1,500

2,000

Dec 11Oct 11Aug 11May 11Jan 11 Dec 12

International freight rate development

USD per 40 foot container

OCEAN FREIGHT > In the current uncertain economic climate, it is difficult to provide reliable forecasts for the KPIs driving world trade

> As a result, freight rates are becoming increasingly volatile, with carriers adjusting rates based on short-term capacity and demand development

> Freight rates are expected to rise in 2012

High forecast

Low forecast


3.5

4.0

4.5

5.0

5.5

Aug 11Jun 11Apr 11 Dec 11 Dec 12Feb 11

USD per kg

Source: Drewry, Roland Berger

AIRFREIGHT> Freight rates are expected to rise in 2012

– ocean freight carriers have suffered large losses and are pushing rate increases, while rising fuel costs will force air cargo carriers to increase rates

> Freight forwarders must adapt capacity management, in order to reduce their exposure to market volatility

Fuel price based


IV. THE STRATEGIC KEY QUESTIONS: How might theforwarder's role change within the overall value chain?

The global forwarder: "... between the chairs" or "... always on the winner's side"

KEY STRATEGIC QUESTIONSTRANSPORT MODE

How will the global forwarders' role change within the value chain?> Need for forward integration> Need for backward integration> Need for innovation and VAS?

Which and how many assets does a forwarder need to leverage market opportunities and offset threats?

What are the underlying market trends?

KEY STRATEGIC QUESTIONS

1

2

3

Shipper

Global for-

Air Sea Land

TRANSPORT MODE

VA

LU

E C

HA

IN


What are the underlying market trends?> By major trade lanes> By major industry

What are the underlying trends on the capacity supply side (by air, sea, land)?

What risk management processes will be needed?

3

4

for-warder

Carrier

VA

LU

E C

HA

IN

5

An international forwarder's growth strategy needs to be robust against different scenario characteristics

Illustrative scenariosIllustrative scenarios

> Strong consolidation of asset owners leads to bottlenecks and significant margin deterioration of forwarders

> Increased direct business between shippers and carriers with significant volume decline/stagnation for forwarders

> Volume growth is tendered by

2 possible

> Strong demand on shipper side –Forwarder improves towards preferred supplier position

> Overcapacity on carrier side facilitates access to cheap capacity – Forwarder is able to exploit/improve its forwarder power

> New globally introduced value-added services strengthen


NETWORK & QUALITY

FORTRESS

FORWARDER

UNDER SIEGE

> Volume growth is tendered by large shipper conglomerates –sourcing processes put pressure on forwarders

possible scenarios

added services strengthen forwarder's USP's – shippers steer additional capacity on forwarder

Two fundamental dimensions determine an international forwarder's potential move to further secure sustainable growth

Securing price competitive access to cargo capacity with alternative risk exposure

Strengthening commercial attractiveness by adding USP's for shippers

capacity with alternative risk exposure

lower(only broker)

medium(fix allotments)

higher(own assets)

Which innovations and value added services2) does a forwarder need to offer in order to maintain/improve its

Inter-national

Forwarder

?

?Excellence

Excellence on selected value chain items

EXISTING MARKETS


1) To be differentiated by trade lanes 2) To be differentiated by products

shippers maintain/improve its role in the transport value chain?

How much risk1) does a forwarder need to take in the future to sustain/grow its

market position?

??Excellence on all value chain items

NEW MARKETS


V. THE THREAT: Interesting examples of a similar industry(fiction for forwarding ... so far)

Summary: Interesting examples of a similar industry – TOUR OPERATING

• Tour Operating is a very similar industry:− trading with capacities (hotel & air), − trading with capacities (hotel & air), − brokerage function between customers and hotels/ airlines (bundling of demand and

purchasing big volumes with rebate)− value added services (packaging, on-site transportation, insurance, ...)− thin margins, decreasing RoS

• Along the value chain, tour operators are intermediaries – so are travel agents, online portals and destination management agents

• New internet based techniques and fueled by a high degree of data standardization havebeen resulting into new distribution channels for airlines and hotels


been resulting into new distribution channels for airlines and hotels

− directly (B2C)

− into travel agencies (stores and online) (B2B)

• In essence, the legacy tour operating for package tours in the volume segment will be dead in the forthcoming 5 years

• Some learnings to be transfered into the global forwarding industry?

Tour operating is a very similar industry

TYPICAL BOTTOM-LINE STRUCTURE

Staff cost

% of Sales

100% 83-90% 8-12%10-17% 2-5%

CHARACTERISTICS• trading with capacities (hotel & air), • brokerage function between customers and

hotels/ airlines (bundling of demand and purchasing big volumes with rebate)

• value added services (packaging, on-site transportation, insurance, ...)

• thin margins

PROFIT LEVERS


EBITIndirect

cost

GOPDirect cost

- Airline

- Hotel

- Transfer

Sales

Marketing & Adv.

Other Exp.

Deprec. & Rental

PROFIT LEVERS1. Measures "above Gross Operating Profit"

a. Improve revenue by sales and pricing measuresb. Lower direct cost by better sourcing contracts

2. Measures "below Gross Operating Profit"a. Improve production, sales, service and

administrational processesb. Reduce staff, material and financial cost

deta

illed

on fu

rthe

rpa

ges

Along the value chain, tour operators are intermediaries – so aretravel agents, online portals and destination management agents

New internet based techniques and data

VALUE CHAIN: ALTERNATIVE LAYOUTS

Description Share of ExpectedValue-chain steps New internet based techniques and data

standardization have been resulting into new

distribution channels for airlines and hotels

• Hotels publish fares via selected bed-banks and

via on web-pages

• Airline aleady publish flights via computer

reservation systems and via own web pages

• A new software provider enables virtual

packaging of independent flight and hotel offers

~43%

~19%

Description Share ofrevenuecurrently

Expecteddevelopment(5 years)

LTKundeRB/ OTA

T/O ZGB-A

Value-chain steps

ClassicalValue Chain

T/O withdirect sales

Content


packaging of independent flight and hotel offers

• Legacy Travel Agents use the new techniques

and also build packages

• T/O value-add for specific segments has

vanished completely~32%

~7%

Content marketing via data bases/ bedbanks

B2Cmarketing ofcontentproviders

Quelle: Euromonitor, Roland Berger Strategy Consultants

LT: Leistungsträger (Airline, Hotel, Mietwagen), Content ProvidersZGB-A: Zielgebietsagentur, Destination Management CompaniesRB: Reisebüro ("Offline Travel Agent")

OTA: Online Travel AgentT/O: Tour Operator

In essence, the legacy tour operating for package tours in thevolume market will be dead in the forthcoming 5 years

PORTFOLIO OF LARGE T/OS COMMENTARY

• For TUI, Thomas Cook, Hotelplan, Kuoni, ... thepackage tour business in the mass market havebeen the profit machine for the company in history

• The former value-add of tour operators(destination know-how, exclusive access tocharter flights, ...) has almost been vanished

• Hotels and airlines have been pursuing a verticalintegration along the value chain

� Package tours short-haul�mass market− high yield market

� Package tours long-haul

� Individual tours short-haul and long-haul

� Specialist tours (sailing, climbing, safari, diving, ...)


integration along the value chain

• Tour operators have to refocus their portfolio andto put more emphasis on value added services, exclusive hotel access (assets?), destinationbased services/ activities and control of customerexperience

• Big question: more invest into assets to ensureaccess to exclusive product offeres???

diving, ...)

� Cruise ship journeys

� Retail shops

� Destination Management agents

� Hotel ownership

Some learnings to be transfered into the global forwardingindustry?

• Replacement tendencies amongst the various players along the value chain?• Replacement tendencies amongst the various players along the value chain?

• Fight for the ownership of the customer interface?

• Shift of value-add from providing freight capacities towards value-added services?

• Online portals for freight capacities and transportation services ... provided somesignificant progress concerning data standards is being achieved?


• Consolidation tendencies within the freight forwarding industry?

• Stagnation of Western European Markets and shift of activities to BRIC plus Asean-5?

• Necessary move into assets to ensure unique selling positions and more sophisticationrequired to steer the increased risk position?


VI. THE TRENDS: What is impacting the industry with short- andmid-term relevance

Key trends in the logistics service provider industry that might endanger sustainability of current business models

• YIELD DECLINE: Shippers and Carriers negotiate for profit pools

1 • MODAL SPLIT: Demand shift from air transport to sea and (increasingly) rail – FWDs need to adapt

6

negotiate for profit pools

• VERTICAL INTEGRATION: Carriers and shippers increase profit pools by "conquering" additional parts of the value chain

• SHIFT OF KEY TRADELANES: legacy trade-lanes dissappear – new tradelanes partially require adaptations to the FWD's business model

• CHANGE OF INCO TERMS (CN): Chinese shippers tend to move from CIF to FOB for import

2

3

4

sea and (increasingly) rail – FWDs need to adapt business relationships

• SPECIALIZATION AND VALUE ADDED SERVICES: increasingly complex supply chains in shipper industries will call for increasingly specialized logistic service providers

• INDUSTRY SPECIFIC IT: the increasing call for specialized global FWDs wil also require tailormadeIT solutions

7

8

31Sustainability of Freight Forwarding_fin.pptxSource: Roland Berger

shippers tend to move from CIF to FOB for import business and v.v. for exports

• HINTERLAND CONNECTIONS: efficiency of increasing importance – even an entry condition for business with Chinese shippers

5

IT solutions

• GLOBALIZATION VS. REGIONALIZATION? will the demand for "global total solutions" remain growing or might the trend reverse back to regionalization?

• CONTRACT LOGISTICS - CHALLENGES: ten-dency towards shorter contract life-cycles will increase hurdles for an appropriate ROI

9

10

YIELD DECLINE: Shippers and Carriers negotiate for profit pools

Price developments in air- and ocean freight [Index] Yields for global freight forwarders [EBIT RoS-margin, %]3)

2.0

2.5

3.0

3.5

4.0

4.5

5.0

FORWARDERS IN A SANDWICH POSITION

• Overcapacities in sea/air fostercarrier efficiency initiatives andthus impact FWD's margins

Index 2006= 100

Ocean freight

Airfreight0

20

40

60

80

100

120

1)

2)

Price developments in air- and ocean freight [Index] Yields for global freight forwarders [EBIT RoS-margin, %]

• Shippers also see them-selves exposed to economic volatility and submit parts of the pressure to their vendors – FWDsmargin once more impacted


2.0

2006 2007 2008 2009 2010

> Ocean freight rates declined since 2005

> Airfreight rates overall stable – however include significant fuel price increases

> For global forwarders, falling rates after procurement are critical, increasing rates after procurement are beneficial

> Forwarders' profitability is overall under pressure – new sources of margins to be elaborated (new USPs)

Note: Yield is defined as profit per unit 1) HARPEX container price index 2) IATA global air cargo revenue compared to volume 3) Consolidated figure for leading forwarders

Source: HARPEX, IATA, Linehaul, Annual reports, Roland Berger

Airfreight0

201120102009200820072006

margin once more impacted

"Hinterland

VERTICAL INTEGRATION: Carriers and shippers increase profit pools by "conquering" additional parts of the value chain

Vertical integration (along the value chain)

TerminalSea/ Air "Hinterland transport"/ RFS

Terminalhandling

Air/ Sea Carrier

Terminal operators

Sea/ Airtransport

Global Forwarders

e.g. HHLA

e.g. Maersk

Shippers

Shippers Global FWDs

?

Co

nso

lidat

ion

with

in th

e pl

ayer

's in

dust

ries

(Ho

rizo

nta

l in

teg

rati

on

)

e.g. Hapag Lloyd


> Dilution of traditional division> Will this become a general trend?

Terminal operators

Intermodal operators

Railway operators

e.g. Eurokombi

e.g. HHLA

e.g. DB Schenker

Co

nso

lidat

ion

pl

ayer

's in

dust

ries

(Ho

rizo

nta

l in

teg

rati

on

)

SHIFT OF KEY TRADELANES: legacy trade-lanes dissappear – new tradelanes partially require adaptations to the FWD's business model

COMMENTS

> Economic developments have created a structural change of logistics flows especially to/from/in Asia

> Production streams are increasingly being redesigned as manufacturing costs rise in current low-cost countries

> Basic manufacturing is moving towards new low-cost locations

> Freight forwarders have not previously had a strong presence in these countries and reorganize to support future

Traditional key tradelanes

2020 key tradelanes

1

23

34Sustainability of Freight Forwarding_fin.pptxSource: Roland Berger

had a strong presence in these countries and reorganize to support future growth from these markets

2020 key tradelanes

1 South America – Asia

> Tradelane is forecasted to cover 5% of world trade by 2020

> Mainly driven by an increased consumer spending in South America

2 Middle-East, Africa – Asia


> Mainly driven by an increased consumer spending in Africa and Chinese investment in African natural resources

3 Intra–Asia


> Growth mainly driven by an increased trading between emerging economies in Asia

World trade flows are shifting – In ~20 years China will take over USA's role as the dominant trading nation

COMMENTS

> New tradelanes grow in

TOP 20 TRADELANES 2009 TOP 20 TRADELANES 2030

SHIFT OF KEY TRADELANES

Origin Destination Value1)

1 China USA 290,960

2 China Japan 207,677

3 Japan USA 146,523

4 China Korea 140,342

5 Germany USA 118,773

6 Germany UK 113,209

7 China Germany 102,171

8 UK USA 97,624

9 Japan Korea 69,008

10 UK Netherlands 68,062

11 Korea USA 66,443

Status Origin Destination Value1)

1 China USA 594,741

2 China Japan 336,183

3 China Korea 281,140

4 China India 263,063

5 China Germany 201,382

6 Japan USA 189,785

7 China Singapore 178,291

8 NEW China Indonesia 169,356

9 Germany USA 167,467

10 NEW China Malaysia 162,376

11 NEW China Nigeria 151,570

> New tradelanes grow in importance for the logistics industry

> China is expected to be the dominant trading nation –15 of top 20 tradelanes will have origin or destination in China

> Tradelanes from developing economies will be bilateral, instead of


11 Korea USA 66,443

12 UK France 62,388

13 Hong Kong USA 58,016

14 China Singapore 56,446

15 France USA 54,414

16 China Australia 54,163

17 Netherlands USA 51,989

18 Japan Hong Kong 45,941

19 China Netherlands 43,319

20 UK Belgium 43,177

1) 2009 USD million Note: Excluded tradelanes that can be serviced without Ocean freight and/or Airfreight

11 NEW China Nigeria 151,570

12 Germany UK 144,131

13 UK USA 143,725

14 NEW China Thailand 141,201

15 NEW China Saudi Arabia 140,320

16 NEW China Brazil 136,295

17 NEW USA India 125,826

18 NEW China UK 121,603

19 NEW China UAE 120,318

20 China Australia 117,340

will be bilateral, instead of mainly focusing on export to developed countries

> Shifts focus of the logistics industry and creates challenges to build up a presence in the emerging markets

Source: PWC Future of World Trade, Roland Berger

Overland transportation markets in developing economies, lead by China and India, are outgrowing markets in developed economies

Overland freight (road, rail and inland waterways) markets [billion tkm]


COMMENTS

> BRIC overland transportation markets will grow at twice the rate of developed markets

> China and India are forecasted to see the highest percentage growth until 2020, growing annually with over 5%

Top regional freight markets 2011 Top regional freight markets 2020

EU27 2,308

USA 4,886

China 6,653

India

USA

China 10,619

5,472

3,231

Overland freight (road, rail and inland waterways) markets [billion tkm]


> Growth markets present key opportunities for logistics service providers

> Entering these markets is challenging, as they are often less mature and difficult to offer an attractive USP949Brazil

1,793India

Russia 2,251 3,160

2,736

Brazil

EU27

1,407

Russia

Source: Progtrans World Transport Report 2010/2011; Roland Berger

There are three things FWDs need to retain about growing logistics in China

FWDs need to CONSIDER THE WEST Growth dynamics across China's provinces


FWDs need to CONSIDER THE WEST

Stronger growth of manufacturing and trading in Central and Western China provinces will shift logistics focus away from the port cities to the hinterland

FWDs need to UNDERSTAND Chinese AUTHORITIES

Without governmental interaction and support, larger growth initiatives in China are doomed to fail (economically)

BeijingTianjin

Hebei

Shanxi

Inner Mongoliaaut. region

Liaoning

Jilin

Heilongjiang

Jiangsu

Shandong

Henan

Shaanxi

Gansu

Qinghai

Ningxia Hui aut. region

Growth dynamics across China's provinces


are doomed to fail (economically)

FWDs to BECOME (more) CHINESEIn order to capture genuine China business, a certain, yet real domestic footprint in asset-based logistic activities is required, which can realistically only be built up by M&A – with all the potential pitfalls thereof

Shanghai

Zhejiang

Anhui

Fujian

Jiangxi

Hubei

Hunan

GuangdongGuangxi

Hainan

Sichuan

Guizhou

Yunnan

Chongqing .

Export and Import above average

Import above average

Export above average

Export and Import average

CHANGE OF INCO TERMS (CN): Chinese shippers tend to move from CIF to FOB for import business and v.v. for exports

Competitive analysis of bill of lading practices

Market share of international trade in FOB/CIF

54% 46%Volume split by im/export1)

Trends in import

> CIF term is currently more commonly used by Chinese buyers, but FOB term is on the rise, which favors forwarders with strong local logistics capability

– As Chinese importers get more sophisticated in supply chain mgmt, they are tending to shift to FOB term in import due to the need to have

30%CIF

60%


FOB term in import due to the need to have more control over supply chain and lead time

– They will likely prefer integrated solution that encompass forwarding and local logistics (iewarehousing, transportation) with some value added offerings

1) Based on breakdown of air cargo exported/imported in 2009, by tons

Source: Traffic Yearbooks; Expert Interview; Roland Berger Analysis

Exports

40%

Imports

FOB

60%

70%

HINTERLAND CONNECTIONS: efficiency of increasing importance – even an entry condition for business with Chinese shippers

Land transport – Port hinterland connections

> USA: "Connectivity issues are a major focus of seaportsnationwide, as essential road and rail networks experience near-critical congestion." (Florida Seaport Transportation and Economic Development Council)

> INDIA: "Congestion seems to persist at several port locations on account of delayed evacuation of cargo due to inadequate road and rail capacity" (Secretariat for the

Examples from other continentsExample Europe – Expected increase in number of trains over the next 10 years

N

WPoland

Denmark

Lower Saxony

Northern Ports

Western Ports

Berlin/Brandenburg

Saxony-Anhalt

SaxonyNorth-Rhine-

Land transport – Port hinterland connections


to inadequate road and rail capacity" (Secretariat for the Committee of Infrastructure)

> CHINA: Currently few bottlenecks due to:– Heavy infrastructure investments over the last years

– Extensive network of harbors, also in the hinterland at large rivers

– Special economic zones and industry areas near ports

Future risk of bottlenecks once industry starts to localize away from ports as salary levels increase

Hungary

Slovakia

Austria

Bavaria

Czech Republic

France

Switzerland

Italy

Hesse

Baden-Wuerttemberg

SaxonyNorth-Rhine-Westphalia

Rhineland-Palatinate

MODAL SPLIT: Demand shift from air transport to sea and (increasingly) rail – FWDs need to adapt business relationships

Modal split of international trade with China [by value]

66%

2.174

63%

1.760

61%

1.422

61%

2.563

By Sea 65%

2.208

By Road

Global ocean container and air freight

growth [% change YoY]Ocean

container

Air freight

100%

80%

60%

40%

20%

0%

-20%

-40%

-60%2007 2008 2009 2010

Market share

gain SEA

Market share

gain AIR

RAIL

After the demand crisis, strong modal share gain of sea

Europe-Asia rail bridge to strenghten rail


40

16%

16%

2007

2%

18%

17%

2006

2%

19%

18%

2005

1%

19%

18%

2008

2% 2%

By Air17%

By Rail

and Others

2009

17%

By Road

99% of total volumeAprox. 20.000 km1)

30-45 day1)

Price leader

<1% of total volumeApprox. 10.000 km1)

22-28 days1)

Up to 50% higher than sea freight

SEACurrent share:

Distance:Delivery time:

Prices:

RAILCurrent share:

Distance:Delivery time:

Prices:

Source: CEIC; Roland Berger analysis

Growing competition of cheaper transport modes along with growing capacity will influence the air cargo market

MODAL SPLIT

Outside-in view on air cargo trends

DEMAND restricted to value goods CAPACITY increase expected further Twin aisle aircraft deliveries by region

[Number of aircraft]

Air share of containerized international trade in terms of weight

and value

1.0%

1.5%

2.0%

2.5%

3.0%

20%

30%

40%

50%

Outside-in view on air cargo trends


> Lower unit value goods will be diverted from air cargo to other

cheaper, though slower, modes of transport (sea freight,

trucking)

> New deliveries ordered in "boom" times might be postponed

or only partly cancelled – Still high number to arrive on the

market in coming years

> Due to low fuel price, older, less efficient aircraft stay longer

in operations

0.0%

0.5%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

0%

10%

Source: Seabury; IATA; Roland Berger

Regular rail operation between Asia and Europe will have only long-term impact on sea/air freight

Rough estimate of Rail operation impact on container traffic (short to medium term)

MODAL SPLIT

Rough estimate of Rail operation impact on container traffic (short to medium term)

VOLUME FAR EAST – EUROPE ['000 EUR]

Assumptions train

> 80 TEU/train

> 10 trains/day

– bottlenecks

– weather conditions

> 360 days 288

13,513

110


> Rail potential only single digit percentages of total volume> Possibly slightly higher potential in the long term when

bottlenecks can be reduced

Potential Rail

Sea2009

Air20091)

1) Assumptions: all freight containerized; 12 tons/TEU

Trans-Siberian Railway

Baikal Amur Mainline

Ocean route Hamburg - Dalian

Trans-Mongolian Railway

Connection Trans-Siberian Railway - Western Europe

SPECIALIZATION AND VALUE ADDED SERVICES: increasingly complex supply chains in shipper industries will call for increasingly specialized logistic service providers

Extract from RB study "Switch points in logistics"

LSP

LSP

EX

PE

CTA

TIO

NS

INT

EG

RA

-T

ION

Tasks will increasingly be integrated and performed by large businesses offering complete solutions

> Increasingly complex supply chains and intenseproduct specialization in shipper industries will call for increasingly specialized logistics service providers

> Value added services: Industry knowledge and industry-specific logistics solutions have already become a key requirement to gain customers in specialized industries such as pharmaceuticals, aviation, consumer goods.


COMMENTS

LSP LSP


LSP

LSP54 %

SP

EC

IAL

IZA

-T

ION

Specialization and division of tasks between business will intensify - complexity of supply chains will require logistics service providers with specialized knowledge

EX

PE

CTA

TIO

NS

> Shippers have an incentive to chose several logistics service providers for their supply chains, both for reasons of contingency/security and to ensure that the supply chain is not dependent on one single provider

> Trend contradicts last decade's integration of contract logistics with other logistics segments, particular freight forwarding has been integrated with contract logistics

Note: Study conducted with 150 industry experts, University of St. Gallen, and Roland Berger

Source: Roland Berger "Switch points for the Future of Logistics"

INDUSTRY SPECIFIC IT: the increasing call for specialized global FWDs wil also require tailormade IT solutions


EX

PE

CTA

TIO

NS

GL

OB

AL

S

TAN

DA

RD One global IT standard will emerge in

logistics, to facilitate smooth cooperation between different logistics service providers

> Proprietary IT systems are expected to emerge after 2015 – critical to achieve process efficiency, service innovation and product- differentiation & customization

> Recent service innovation/differentiation examples include capacity platforms1) and dedicated shipper interaction platforms

> Proprietary IT systems will be a challenge for smaller logistics service providers, due to the resources


COMMENTS


59 %

PR

OP

RIE

TAR

Y

SY

ST

EM

S

Several proprietary IT standards will be developed by competing logistics service providers. Small businesses will have to ensure compatibility with one or more standards

EX

PE

CTA

TIO

NS

logistics service providers, due to the resources required to develop the systems

> IT service providers will compete to provide platform solutions for the logistics industry e.g. Oracle and SAP

> Opportunities exist for logistics service providers to differentiate service offering via current IT interfaces – in parallel join/drive an emerging global standard early in its development

Note: Study conducted with 150 industry experts, University of St. Gallen, and Roland Berger 1) IT platform to automatically calculate prices, similar to online booking of flight tickets


GLOBALIZATION VS. REGIONALIZATION? Will the demand for "global total solutions" remain growing or reverse back to regionalization?

Globalization vs. regionalization – Factors for potential regionalization

Cost efficiency

Rise of energy prices> Increases benefits of

geographically short material flows

Rising wages in emerging countries> Reduces benefits of

Environment

Ecological awareness> Local products preferred

by customers

Governmental regulations> Increased governmental

regulations or involvement in businesses enforces

Supply Chain requirements

Just-in-time delivery> Flexibility and fast

response times required

Fast innovation cycles> Short and quick SC

required> Low inventories require

Globalization vs. regionalization – Factors for potential regionalization


> Reduces benefits of remote production

in businesses enforces local / national sourcing

Local unavailability of resources> Materials> Skilled labor> Water & Energy

> Low inventories require Just-in-time deliveries

> Roll-out of new production techniques more difficult in decentralized production

favorableneutraldetrimental

Impact of factors on regionalization:

CONTRACT LOGISTICS - CHALLENGES: ten-dency towards shorter contract life-cycles will increase hurdles for an appropriate ROI


EX

PE

CTA

TIO

NS

STA

BIL

IZ-

AT

ION

Product life cycles will stabilize or lengthen due to the development of robust "base items" that permit design changes or functionality updates

> Product life cycles are expected to shorten further, which creates challenges for contract logistics providers – shorter lifecycles lead shippers to push for shorter contract periods

> Current volatile logistics environment (freight rates, oil prices, economic crises) means that shippers are conservative and try to reduce their risks by avoiding long contract periods


COMMENTS

Sales


68 %

EV

ER

S

HO

RT

ER

Product life cycles will decrease further as technological innovations and changing consumer taste require complete product replacements at increasing frequencies

EX

PE

CTA

TIO

NS

> Setting up contract logistics operations are related to financial investments, which was previously recouped through longer (5+ years) contract periods

> Shorter contract periods means that the time to generate return on investments is reduced – this transfers risks of the investment from the shipper to the logistics service provider


Note: Study conducted with 150 industry experts, University of St. Gallen, and Roland Berger

Time


VII. THE OPPORTUNITIES: Moves to sustain business medium term

The opportunities: Moves to sustain business medium term

• Critically review overall portfolio of logisticsactivities

−

• Re-think purchasing strategies of transport capacities

− develop different models of purchasing – trade-lane− question exposure to contract logistics

− question exposure to overland transportation

− focus on core competencies

− think about partnerships with carriers

• Capture Chinese tradelanes

− understand needs of Chinese customers; broaden customer scope away from only EU based MNCs

− invest into local warehousing and distribution

− develop different models of purchasing – trade-lanespecific (fixed, ad-hoc, mixed forms, ...)

− develop more sophistication of capacity steeringmechanisms

• Continue with cost-slimming concerning the indirectcost

− business off-shoring of parts of IT, payroll, accountspayable/ receivable

− overall review of make-or-buy

− standardizing IT and related processes to themaximum


− invest into local warehousing and distributioncapabilities

− build-up regional management representation

• Develop industry-specific forwarding solutions

− professionalize industry specific salesapproaches

− develop industry specific VAS

− develop industry specific IT solutions, supporting the VAS

maximum

− e-transformation of all paper-work processes(shipment docs etc.)

− continuous process improvement and organizationalshaping

− find the right balance between central functions andduplication of regional functions

• ...

− ...

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