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Inc. Langdon Seah | Hyder Consulting | EC Harris
“Logistics in a world of slowing globalization –
scale, scope & investment”
CeMAT Southeast Asia/TransAsia/Cold Chain Indonesia 2017
ICE – BSD City, Jakarta, 2-4 March
Dr Jonathan Beard
4th March
© 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
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=100Brent Crude Oil Spot Price FOB
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World Merchandise Trade Volume (2005 = 100, not seasonally adjusted)
© 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
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Source: Arcadis based on AAHK
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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
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China Exports Value
China Imports Value
China Merchandise Trade Y-o-Y Growth
© 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
China Re-Balancing – Soft or Hard Landing?Long-term constraints & challenges – re-balancing growth will take time
Rebalancing the Economy
− Infrastructure pump prime is increasingly played
out - returns on capital are diminishing
− Rationalisation of capacity without mass
unemployment? Capacity utilization:
Steel industry 50%, 2015 (~400mil of ~800mil
tonnes pa output)
Cement industry 50%, 2013
Impetus for Belt and Road?
Source: IMF October 2013; Gavekal Dragonomics
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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
− Consumer cannot replace demand over-night - last
decade accounted for small and declining share of
GDP: ~35-36% of GDP.
− Growth of shadow banking and debt overhang?
− Geographical re-balancing also slowing: e.g. property
markets: Shenzhen & Shanghai still buoyant growth,
whilst smaller cities still struggling with a property glut
Household Debt as a percentage of GDP
© Arcadis 2015
China Re-BalancingDemographics and supply chain re-alignment may suppress trade growth, but strong upside for agricultural trades
Demographics – labour force has peaked. Will “China grow old before it gets wealthy”?
- Easing of one child policy may be too late…and can couples afford it anyway? By 2050 24%
of population >65yrs (9% 2015)
Access to resources: water, but also demand from a growing middle class for imported
food
Sources: Australian Bureau of Agricultural and Resource Economics and Sciences
China’s imports of selected agricultural
commodities
© Arcadis 2015
China’s New Normal - Delivering Sustainable Economic GrowthCan high economic growth be delivered whilst addressing environmental degradation & pollution?
China is way ahead of many developing countries in its
environmental policy formulation….and considerably
ahead of any developed economies at similar stages of
development
However the challenges are immense:
– Illnesses and premature deaths linked to China’s pollution cost about 3% of annual GDP (World Bank)
– Bad air contributes to an estimated 1.6 mil deaths a year; ~4,400 people per day
– Firms struggle to fill executive roles. 34.9% of firms in 2013, 48% in 2014, 53% in 2015 (Bain; Amcham China)
Source: www.chinadialogue.net
China’s PM2.5 historical data
© Arcadis 2015
What About “Belt and Road”?Game changing driver of globalisation….or poorly conceived dumping of surplus capacity?
Ambitious plan by Beijing leadership to
build and upgrade highways, railways,
ports, and other infrastructure
throughout Asia & Europe designed to
enrich the economies of China &
~60 of its nearby trading partners.
Has generated enthusiasm and a high
level of interest, but also cynicism and
concern.
Some see the initiative as a solution to
China’s over-capacity at home (e.g. in
the steel & manufacturing sectors) by
accessing / investing in new markets
overseas.
May have significant economic impacts for the smaller economies in central Asia, but less so elsewhere
Funding has been primarily loans rather than grants, and not without “white elephants” / vanity projects
of local politicians – beware the experience of Sri Lanka.
Is already influencing investment
decisions by China backed
transportation firms:
“Our development plan mirrors One Belt One Road and this is the
primary driver of our expansion strategy. We continue to look for
more partners to work with overseas.” Bai Jingtao, Managing
Director at CMHI, Mar 2016
© 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
14Source: Chinese Academy of Social Sciences
© Arcadis 2015
How have key supply chain actors weathered the storm?Terminal operators continue to outperform lines
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APMT HHLA Eurogate DP World ICTSI HPH HPH Trust CMHI PSA
EBITDA Margin - CT Operators2009 2010 2011 20122013 2014 2015
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ers
k
CM
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loyd
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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
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ag‐L
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K2010 2011 2012 2013 2014
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ITD
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CathayPacific*
SingaporeAirlines
JapanAirlines*
Air China AirAsia Delta AirLine
Lufthansa
EB
ITD
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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; ICF;
Arcadis
Growth of Container Ship Capacity and Demand, 2000-16
$/FEU
Weak demand growth and
declining unit revenues….
…must cut unit costs, including
via mega-vessels, which has
exacerbated the supply-
demand gap and depressed
utilisation levels…and hence
revenues
Situation will continue for the
medium term. Hence
profitability 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 reductionFocus on reducing network costs, including lower port costs
© Arcadis 2015
Safer Together - Filling up the mega-vesselsEconomies of scale via larger alliances…
New alliances to defray risk of introducing larger vessels
during weak 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; Maersk – Hamburg Sud) is causing
restructuring of alliances:
– Ocean Alliance
– The Alliance
– 2M
Account for significant portions of capacity on major trade
lanesSource: Alphaliner
© Arcadis 2015
Major shipping lines want high performance / high port productivity
- > 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?
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; ICF; Arcadis
Port Planning & Performance in an Era of Mega-vessels & Alliances
© Arcadis 2015
Key factors or KPIs for competitive transhipment hubs include:
– Proximity to main shipping lanes, thus avoiding diversion costs;
– Infrastructure to accommodate the largest mother vessels;
– Low cost operations (container handling charges, port charges / harbour dues, etc.)
– High service quality, especially productivity;
– Streamlined customs & trade regulations, including regulation of liner activity relative to
competitors;
– No cabotage restrictions on vessels or feeder on-carriage;
– The ability to serve a large number of small markets in the region;
– Stable regulatory (labour, pricing, etc.) and security environment;
– A dense network of connections & feeders – large lines or alliances may bring their own
networks, but once established this network helps re-inforce or ‘lock-in’ competitiveness;
– Import/Export (IE) cargo baseload to attract direct calls – the ability for a port to service both
transhipment & IE markets is an advantage, but many transhipment ports have thrived without
large IE hinterland, notably Singapore, Dubai and PTP
Mega alliances pose challenges for terminal operators in terms of scale of capacity required and inter-
terminal transfers (ITTs)
Yield per lift for transhipment is less than for IE cargo – implications for terminal financial performance
and return on the major infrastructure investment typical of a major transhipment hub
International Transhipment MarketWider geography of competition and more ‘footloose’ than import/export cargo, but mega-
alliances / vessels may be changing this…
© Arcadis 2015
Mega vessels & alliances pose new challenges for
transhipment hub competitiveness
Fully accommodating an alliance in key transhipment (TS) markets (e.g. SE Asia) may require
7-9 million TEU capacity…
...or mitigate risk with dual hubs (at additional cost & / or inability to fully “re-set” network)
Thus barriers to entry have
risen in some port markets
– must build to accommodate
the largest vessels and large
volumes in major TS markets
(e.g. SE Asia). Can no longer
enter the market with just
~6-800m of berth
Threshold for direct calls raised –
does this mean “lock-in” for the
mega-hubs?
Strategy of MPA / PSA at Tuas?
BIMP-EAGA ports too small to
compete for international TS:
focus on gateway and domestic
TS (including roro)
Source: World Bank; ICF; Arcadis
© Arcadis 2015
Greater bargaining power to lines…or does size &
complexity limit options?
Lines / alliances now so big &
complex they may have less
market power: i.e. too large to
move easily – in SE Asia, there
are few options for a “mega-hub”
with available capacity.
TS market appears to be slowing,
even before the
boost from mega-vessel
mania has passed
Capex spend up, unit revenue
down – how do terminal
operators
maintain margins?
SE Asia Transhipment Market
Source: MPA; Port Authorities; Arcadis
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?
© Arcadis 2015
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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
is 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
Ports of the Future – New Technology, New
Ways of thinking, New Ways of Competing?
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;
© 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 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
operationsSource: ICF, Arcadis
© 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 tried to put 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
01 March 2017 29Source: *A Ansar (2016) Oxford University
Thank you
Any questions?
1-3-2017 30
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
PETER ROBINSONCountry Director IndonesiaArcadis Level 18 Ratu Plaza Office TowerJl. Jendral Sudirman Kav. 9Jakarta 10270IndonesiaT +62 21 7397550 F +62 21 7397846E peter.robinson@arcadis.com
© Arcadis 201501 March 2017 31
© Arcadis 2015 32
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