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State of China’s Logistics and
Potential Business Opportunities
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Section One- State of China’s Logistics - Challenges & Future
Growth
� State of China’s Logistic Market � Market Characteristics � Understanding the Costs and Challenges � Industry Trends and Drivers � Future Market Potential
� Laying China’s Logistic Infrastructure � Current and Future Transportation Infrastructure � Logistic Hub, City and Passage Development � Chinese Government’s Support for Industry
� Leading Logistic Players in the Market � Leading Domestic & Foreign Players � Recent Business & M&A
� Market size of Logistics industry in China set a new record high in 2010, at US$15.75 billion, with growth of almost 30% Y-o-Y.
China Market Becoming Attractive
Market Size at Record Manufacturing Bias
Source: KPMG
Source: KPMG Source: National Development & Reform Commission
2009 Value
(bn RMB)
Yoy
Growth
Mkt
Share
Agricultural
products 2,236 43% 18%
Industrial
Products 113,103 14.6% 90%
Imported
Products 9,431 22.1% 7.5%
Recycled
products 446 39.5% 0.4%
Comm & Pers
Products 198 14.7% 0.2%
Total 125,413 15%
� Industrial products has a 90% share of the goods transported.
Logistic market growing and in-transition- offers new business opportunities
� Measures logistics value to GDP ratio, increasing since 2006;recovered from the financial crisis from 2.9 to 3.2 in 2010
Market Demand on Increase
Market Demand Recovering Expansion of Value-Added
Source: CFLP Source: CFLP
� Logistic value-added showing market expansion since 2006- value-added increasing at rate of tiertary (service) sector
Market for logistic services on the increase with broad-based demand
Logistic Demand Coefficient
5
Source: National Development & Reform Commission
Transportati
on
55%
Management
12%
Warehouse
8%
Other
Storage
25%
Breakdown of China’s Total Logistics Cost
(2009)
Logistic Cost as % GDP High Transport is Major Cost
Logistic Cost High vs Global Peers
� Chinese total logistics cost is high (at Rmb7100Bil in 2010) with low logistics efficiency (China ratio is 17.8% vs USA 7.7%).
Chinese logistics has significant room for cost & efficiency gains..
� Transport and labor costs account for typically 60% of Chinese distribution center cost structure vs 8-10% for US/Japan
Source: ATKearney Report Chinese Logistics 2015
6
Challenges faced …
China’s Logistic Industry Large but Undeveloped..
Logistic practices not upto global standdards..Foreign companies only
allowed into sector in 2005 and still not fully plugged-into the market
Lack of modern logistic
facilities and sufficient
warehouses space
Poor penetration by 3PLs;
spend on 3PL only 2.7% in
2009 vs 30% for EU
3PL3PL3PL3PL
Poor use of logistics i.e. lack
of cold-chain logistics; poor
planning tools
2009 China Other
% Coldchain 10% US/JPN: 80%
ME: 50%
Number.
refrigerated
trucks
60,000 US: 250,000
JP: 150.000
Source: GZ Cold-chain Logistics Assoc.
Business Development Needs to Consider -Infrastructure to Planning
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Industry Trends (1).. Economic Shift – Movement of Manufacturing
Locations to the West
Source: CB Ellis
Increasing Land and Labour cost of coastal cities driving manufacturing
factories to move into the hinterlands- for both YRD and PRD… benefiting
new logistic hubs like Wuhan, Chengdu, etc
Coming Demand & Growth in Logistics due to
shift in Manufacturing to Western China
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Industry Trends (2)..
China’s Strategic Shift towards Consumption Drive Demand
Source: PWC Report on Asia Retail 2010
Demand for sophisticated retail logistics management & warehouse space from
the expansion of global retailers Walmart, carrefour plus other retail/consumer
brands from coastal into rural and inner cities creates demand
Expansion in Online
Shopping similarly adds
to demand
De-regulated environment
allows foreign participation
In China retail
Modern Logistic a pillar in
“China’s 11th Year Plan”
IMF estimates that by 2025,
retail will dominate
75% of domestic logistics
Asia Retail Forecast 2014
Coming Demand & Growth in Consumption-Driven Retail Logistics
offers new business opportunities
Major consumption centres are building up inland i.e. Strong retail sales for
past 3 years in Chongqing, Changsha, Chengdu, Xian where logistics will be
required to transport consumer goods to these cities.
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Industry Trend (3) …
Market in Growth Stage with Increasing Competition
Market is fragmented (Top 20 operators with 6% of total revenues); Dominated
by companies with limited scale/limited service scope. M&A Trend as Govt
push to nuture domestic giants; interest from foreign players looking for an
entry into the Chinese market
Source: ATKearney Report on Chinese Logistics by 20 15
Fragmented & Growing market – Opportunity for Consolidation to become
Market Leader
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Industry Trend (4) …
Build-up of Nationwide Transportation Network
Currently China suffers one of the heaviest freight density in the world- driving up
transportation cost. In 2009-2010: RMB 1.4 trillion invested in rail network. By
2020- 120,000km highspeed railway network to be completed- dramatically
improve speed of delivery and nationwide access
Rail Network brings significant new efficiencies in land transportation;
New hubs will be created
Rail Network 2020
HubsHubsHubsHubs
Continued Investment in Transportation Infrastructure
Source: China’s Future Transport Infrastructure , T singhua University
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Industry Trends (6)
Market Demands Improvements in Efficiency
With increasing market competitiveness, efficiency gains from improved
logistic management critical to firms remaining competitive; Domestic firms
investing in advanced SCM IT system and online logistics
Source: Fraunhofer IML
Advanced SCM Platform eLogistics
Opportunity to bring world-class SCM capabilities as Value-added
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Industry Trends (7)
Development of Domestic 3PL +Rise of Outsourcing
Currently only in China 2.7% outsource vs 15.7% global norm but market
segment growing at 25% annually vs overall logistics- By 2013 China expected
to be largest contract logistic market in Asia-Pacific reaching RMB183.5 billion
market value.
0
20
40
60
80
100
120
140
160
180
200
2003 2004 2005 2006 2007 2008 2009 2013F
China’s Contract Logistics Market
Source: Transport Intelligence, Colliers Internatio nal
RMB billion
Contract Logistics Market Forecast (2009-2013)
Geographies CAGR
Asia 12.8%
Western Europe 6.5%
North America 9.8%
Global 9.5%
China 20.6%
Source: Transport Intelligence, Colliers Internatio nal
Inter Asia Trade Forecast (2010-2015)
2010 30.1 million TEU’s
2015 44.1 million TEU’s
Potential to build 3PL market hub leader leveraging global skills
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Source: NDRC and Nankai University
Outsourcing Rate Increasing Outsourcing Characteristics
Case Study: Outsourcing Trends
� Survey of Chinese enterprises shows outsourcing volume increasing to 61% in 2009 from 35% in 2005 (does not reflect whole market only sample)
Market for more sophisticated 3PLs on the increase..
� Enterprises outsourcing more of internal logistics especially transportation & distribution functions; future needs are advanced logistic functions
Source: Extracts from NDRC and Nankai Survey
Outsourcing Vol. Domestic Enterprises
70% enterprises surveyed outsourced
more than 50% of logistic functions; while
40% outsourced more than 80%
Types of Functions Outsourced
Future Planned Functions Outsourced
Future Growth for Logistics Market
China Market to Reach US$ 450 billion
Market demand, the development of transportation infrastructure plus
availability of world-class logistic facilities and systems will support the
overall upgrading of China’s logistic market
Consumption-related
Spend will drive 5 key
logistic segments!
Source: ATKearney Report on Chinese Logistics by 20 15
Express
Road freight
Air freight
Intl freight fwding
3PL outsource
Broad growth in market segments and various transport modes
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Section Two- State of China’s Logistics - Challenges & Future
Growth
� State of China’s Logistic Market � Market Characteristics � Understanding the Costs and Challenges � Industry Trends and Drivers � Future Market Potential
� Laying China’s Logistic Infrastructure � Current and Future Transportation Infrastructure � Logistic Hub, City and Passage Development � Chinese Government’s Support for Industry
� Leading Logistic Players in the Market � Leading Domestic & Foreign Players � Recent Business & M&A
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Transportation Network Long Term Goals
Transportation Infrastructure Build-up Plan (I)
Source: Research Centre for Modern Logistics Tsinghua University, National Bureau Statistics
Transportation accounted for 75% of the RMB 3 trillion investments in logistics in 2010.
Early phase of transportation network build-up focused on road and deepwater ports in support of
the manufacturing and export demand. Chinese ports rapidly led in world container traffic
Early Phase
Focus
Priority on transportation reflects Govt priority on improving logistics
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Transportation Capacity
Traffic Capacity by Transportation Modes
Source: National Bureau Statistics
Road Transportation remained the primary mode for passenger and freight traffic while air
transportation mode saw the strongest rise. While road traffic capacity has increased…
MILEAGE PER CAPITA CHINA VS US ONLY 10%
Current capacity relies on road transportation which is still restrictive
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Transportation Network Long-term Goals
Transportation Infrastructure Build-up Plan (II)
Source: Research Centre for Modern Logistics Tsinghua University
Primary goal from 2010 to 2020 is to ramp up the domestic transportation network to support the
growing, broadening and deepening of the domestic consumption-focused economy
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10
to 2
02
0
Recognising this focus- identify rail/coastal ports for early partnerships
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Roads and Expressways Network 2020
Multiple Highways & Trucking Hubs (42)
Source: Research Centre for Modern Logistics Tsinghua University
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Rail Network and Hubs 2020
Railway Container Hubs (18)
Hub
Source: Research Centre for Modern Logistics Tsinghua University
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Case Study: China Rail
Opportunity and Challenge
Source: Research by Zheng Wan , University of California
Xiang Liu, University of Illinois Urbana-Campaign
• Major passenger carrier
• 2007: 1.4bn pax;3.2bn tons goods
• 2007-2012: US$300bn invested
Using Force Field Analysis as decision-tool - Insights into future development of
the Chinese rail transport system appears to be positive
Growth of China Rail
Energy Saving Most energy efficient
transport mode cpr to
Japan’s rail system
3 3
5 5
4 4
5 5
Social Demand Already high load density
but demand outstrip supply.
Need further expansion
Container Transport Development crucial for
inland economy; increase
share of land transport
Govt Support Financial & policy support
plus independent Ministry
of Railway
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Competition Intense competition from
other transport modes esp.
road with heavy investment
Poor Financing High construction capex
funded through domestic
bonds; limited flexibility
Limited Profitability Profit margin 1-2%; Low
pricing esp passenger as
viewed as public service
Strict Control Viewed as strategic asset
with semi-military control;
lacks market flexibility
3 3
3 3
4 4
4 4 13 VSVSVSVS
Driving Force Restraining Force
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Coastal and Large-Scale Ports
Vibrant World-class Port Network
World Ranking of Container Ports
Source: Research Centre for Modern Logistics Tsinghua University
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Civil Airport Network in 2020
Core Hub Formed by BJ, SH, GZ Airports
Source: Research Centre for Modern Logistics Tsinghua University
Sub-hubs in each Geographical area with
International, Regional and Trunk Airports
North-West Hub Northern Hub
China Eastern Hub
China Southern Hub
South east Hub
Source: Research Centre for Modern Logistics Tsinghua University
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Current Developments -Logistic Hub/Pks
Total of 1300 + Logistic Parks have been Developed
• 85% supported by local govt
• Govt build infrastructure
• Special tax incentives for tenants
• Cluster development
• Value of land increase primary
motivation for investment
• Overcapacity- only 40% utilization.
• Corruption contract allocation
• Design not meet business needs
• Lack multimodal transport
A Crowded market.. Need to offer unique proposition
to stand out against Competition
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Logistics Hubs Bloom Across China
5 Major Logistic Hubs Across China
Broadly classified into 3 categories (1) Primary hubs are the leading coastal cities
of Shenzhen/Guangzhou; Shanghai and Beijing/Tianjin (2)Secondary hubs are
extensions from the primary (3) Emerging hubs are in the inland and have risen
priomarily due to strong retail/consumption story
Source: Research Centre for Modern Logistics Tsinghua University
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Examples of Primary Hubs
Primary Hubs are formed from the Early Economic Zones
A significant number of logistic parks and warehouse facilities have already co-
located within these hubs
Harbor City Tianjin-Bohai Bay
Shanghai Hub
PRD Hub
Source: Research Centre for Modern Logistics Tsinghua University
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Logistic Cities
City Locations with Logistic Potential
State Council designated Cities due to being part of air, land or sea transportation
nodes; State Council also identified 10 logistic passages with key traffic volume
Need for in-depth study to study opportunities offered by cities
• 21 Nationwide Junction cities
• 17 Regional Junction cities
Source: LiFung Research
Recent Chinese Policies Supporting
Logistics Market
1. To reduce tax burden for all logistics companies effectively
2. To increase support for Logistics Land Policy
3. To promote and facilitate convenient passages for transportation vehicles
4. To improve management of logistics enterprises
5. To encourage integration of logistics facilities and resources
6. To promote innovation and application of logistics technology
7. To increase investment in logistics industry
8. To promote development of agricultural logistics.
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Under 12th Five Year Plan by NDRC- Logistics Key Focus
Leverage on Chinese Govt Support to Drive Growth of Logistic Hub
Eight key preferential terms for logistic market
Targets set by NDRC
& CFLP by 2015 • Total Logistics value grow at CAGR 14%
• Logistics Value-added increase at CAGR 15%
High-Level Co-ordination Still Weak..
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G to G efforts would be required to ensure nation-wide co-ordination
Lack of co-ordination among Govt Dept leads to multiple jurisdictions and limits development
of logistic industry; provincial level authority still exerts influence and impacts industry
Re-Org of Govt. Dept Constraints at Provincial
Level
� Functions of government
departments regulating civil
aviation, postal services,
communications and urban
public transportation
consolidated under
establishment of Ministry of
Transport in 2008
� Other dept still responsible
for monitoring different
aspects of logistics industry
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Section Two- State of China’s Logistics - Challenges & Future
Growth
� State of China’s Logistic Market � Market Characteristics � Understanding the Costs and Challenges � Industry Trends and Drivers � Future Market Potential
� Laying China’s Logistic Infrastructure � Current and Future Transportation Infrastructure � Logistic Hub, City and Passage Development � Chinese Government’s Support for Industry
� Leading Logistic Players in the Market � Leading Domestic & Foreign Players � Recent Business & M&A
31
Leading Logistics Enterprises..
Performance of Domestic Logistic Business for 2009
Revenues of Domestic Enterprises
Low profitability opens partnership and profit improvement opportunities
Profitability in 2009
Source: NDRC and Nankai University
Average profit margins of domestic
enterprises was 6% in 2010 down by
7.1% yoy
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Leading Logistics Enterprises..
Foreign Logistic Enterprises Continue to Expand
Foreign enterprises seek to enter China also opens partnership opportunities
Market share of foreign logistic players still small but growing especially in the land freight
and air express freight segments
1. Fedex Asia-Pacific delivery center in Guangzhou Baiyun Airport
commenced operations in 2009- largest outside the US.
2. UPS relocated its intra-Asia hub from Clarke in Philippines to Shenzhen in
2010
3. DHL entered agreement with China Merchants Maritime Logistics in June
2010 to establish a global distribution center in Qinghai, Shenzhen
4. TNT established and invest EUR 170M in a wholly-owned road
transportation subsidiary in Hangzhou
5. In 2010 Japan’s largest logistic co. Yamato Holdings will setup cold-chain
land transport company in YRD with aim to reach 30 bn yen in 5 years
Logistics Real Estate Developers:
- Government Ind/Log Parks, Local and Central SOEs.
- Private Co.: GLP (Prologis), AMB, Goodman, Ascendas, Mapletree Log. etc.
- Funds: A-Reit, ING Real Estate, Cache (ARA-CWT), PingAn,
Equity Int’l, China Inv Corp, Canadian Pension Fund etc.
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Portfolios of Key Private Developers : (sqm by 2009) (Lease rates) 2010/11 New Devt. On hand & under construction
-
44000
150,000
270,000
300,000
850,000
- 96,000
40,000 82,000
- 220,000
60,000
170,000
1000,000
2,800,000
300,000
500,000
1,850,000 5,100,000
Leading Logistic RE Players..
Gaining Interest from Foreign RE Developers and Funds
Recent New Business Starts..
� Large sports retailers: eg. Nike & Adidas.
� E-commerce: eg Alibaba, DangDang, Amazon.
� Retailers: eg. Carrefour, Tesco, Watson etc.
� Automobile & Car components: eg. Benz, BMW; GiTi, Faurecia.
� Food Industry: eg. Havi LC (McDonald) vs YLC (Yum! KFC)
� Cold chain logistics: eg. Americold, China Merchant Log, PFS.
� Others: Medical Pharma, Chemical logistics. eg. CWT, Kerry Log.
SERVICE PROVIDERS:
� 3PLs: moving from freights (DHL, Fedex, UPS) to Contract Logistics:
eg. APL- Hanes, Legend; YCH- Dell; Schenker- BMW.
� 3PLs-Shippers: eg. CEVA, Maersk, K+N, Samudera.
� SCM / BPO: eg. Banks- CitiBank, DEM/OEM- Hi-P, Eternal Asia.
Market Developments focused on Specialist Sectors
Knowing the Market Needs and Trends..to identify opportunities
Retail and consumer brand enterprises have been aggressively expanding and
building logistic capabilities- in-house and through 3PL partnerships; Automotive
logistic has also been a sector targeted by foreign enterprises
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Recent Market M&A..
M&A Driven by Foreign Logistic companies….
World Class centres needed to support world class players’ logistics needs
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Section Two- Identifying Business Opportunities in China
� Scoping of Opportunities � Screening Attractive Market Segments � Case Examples
Scoping of Opportunities…
Identify Possible Market Segment Opportunity
Screen Potential of Market Landscape & Competitiveness; Analyse
Opportunity Transportation Mode vs Industry Segment
Road/
Rail
Freight
Air
Freight
Air
Express
Intl
Freight
Remark
Non-Food
Retail
Logistics
Vol + Margins
(Luxury gds –
strong Margins
Import
Pharma
Logistics
Domestic Market
only
Domestic Market
only Gd. Margins
Hi-tech/Auto
Logistics
Efficient SCM
required; Export
Food + Agro
Logistics
Domestic Market
only
Domestic Market
only Niche Cold Chain
logistics – Gd
Margins
Large Mkt
Med. Mkt
Small. Mkt
Retail & Hi-Tech/Auto Logistics Looks like good opportunities
Source: Various, Internal Analysis
Scoping of Opportunities…
Identify Possible Market Segment Opportunity
Screen Potential of Market Landscape & Competitiveness; Analyse
Opportunity Transportation Mode vs Logistic Segment
Non-Food
Retail Logistics
Pharma
Logistics
Hi-tech/Auto
Logistics
Agro-Food
Logistics
Remark
Transportation
Outsourcing
trend
Distribution
Outsourcing
trend
Warehousing
Outsourcing
trend
Packaging &
Processing
Logistic IT &
Mgt Systems
Future demand
Large Mkt
Med. Mkt
Small. Mkt
Transportation, distribution & warehousing current hot Sectors
Source: Various, Internal Analysis
Scoping of Opportunities..
Identify Possible Market Segment Opportunity
Screen Potential of Market Landscape & Competitiveness; Screening
Opportunity by Transportation Mode vs Location
Road/Rail
Freight
River
Freight
Air
Freight/Exp
Intl Remark
Western
Chengdu
Chongqing
Mega-hub
Central
Wuhan
Eastern
Shanghai
Northeast
Bohai-Tianjin
Southern
GZ-SZ
Larger Opportunities in emerging logistic hubs
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Case Examples- Logistic Function
Overview of Warehousing Investments…
Recent continued investments continue into warehousing sector
As land &labor costs increase in the coastal cities, warehousing expansion continues
in 2nd / 3rd tier cities with need for better, quicker and more accurate deliveries
demanded by customers- hence opportunity for foreign investments
Source: Tomkins International Survey 2009
State of Chinese Warehouses Foreign Investments
• Current automation levels low
• Only 5% have good IT systems
• Existing warehouse in populated areas
which restricts trucking
• Foreign investments concentrated inBeijing,
Shanghai and Guangzhou hubs
• Warehousing focus for retail, apparel, auto,
pharma, electronics and tobacco sectors
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Case Examples- Segment Investment
Recent New Business/Investments by Segments…
Non-Food
Retail
Logistics
Pharma
Logistics
Hi-Tech/Auto
Logistics
Food + Agro
Logistics
Invests U$1.2bn
in logistics Asia Distribution
Center
Italian fashion retail
Invests to open
Retail + warehouse
in TJ
Zhejiang
International invests
US$15M in Pharma
logistic center
Nhwa Pharma
invests US$18M in
Xuzhou Logistic
Center
Invests U$200M
In Suzhou to cater
for manufacturing
& supermart retail
RMB680M
Distribution Centre
in Chongqing
Metro Hypermart JV with
Shuanghui for delivery of all
frozen products
Substantial Investments seen into Auto/Consumer/Retail Segments
Active investments into building logistic infrastructure evident especially
from foreign logistic-focused RE players..
Source: Various, Internal Analysis
42
Case Examples – Location Investments
New Inland Hubs away from the Coast
Pop. GDP Transport
Nodes Economic
Drivers
Competitive
Edge
Wuhan
(Central)
8.9M RMB
456bn
• 4th Aviation
Hub
• Road/Rail hub
• Largest inland
River port
• Hi-tech
• Biotech
• Auto- Honda, PSA
• Logistic – TNT,
DHL
• Large pool U grads
• Strong IT foundation
• Rel. low land/labour costs
• Strategic centre of China’s
transport network
Wuhan is identified as the Central Logistic and Transportation hub and
provincial capital of Hubei province
Wuhan’s 1+8 Cluster of surrounding
cities offers multiple re-development
opportunities
Source: Chinese Govt. Sources
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Case Examples – Location Investments
New Inland Hubs away from the Coast
Pop. GDP Transport
Nodes Economic
Drivers
Competitive
Edge
Chengdu
(Southwest)
11.4M RMB
450bn
• Aviation Hub
• Asia’’s largest
rail container
hub
• Largest rail
network
• Hi-tech and IT
• BPO hub
• Biotech
• Food processing
• Logistic – TNT,
DHL
• Large pool U grads
• Strong IT foundation
• Rel. low land/labour costs
• Strategic centre of China’s
transport network
Chengdu will become China’s Southwest logistic hubs to drive economic
development further inland
Emerging Hubs appear to offer broader investment opportunities
Source: Chinese Govt Sources