China Third Party Logistics Survey: Preview of Findings

1. China Third Party Logistics Survey:Preview of Findings

2. China 3PL Providers classificationCompetition in logistics is intensifying with a multitude of players from different origins entering the market. • China Resources Traditional Chinese transportation companies Foreign logistics providers • DHL • UPS • China Shipping • China Merchants • TNT • APL • Maersk • COSCO • Schenker • Hutchison • Tibbett & Britten • SINOTRANS • Panalpina • CMST1 • Exel 3PL Providers In China • FedEx • Danzas • PGL • Annto Logistics • Meiling Aquarius • China Commercial Warehousing • ST-Anda • EAS • China Overseas Logistics • Haier • Logistics • HurryTop • Bright Dairy & Food • China • Post • Attend logistics • TCL • Far East • Lianhua • Shenzhen DSL Internal logistics departments of Chinese companies Emerging Chinese logistics companies • Konka Note: 1 China Materials Storage and Transportation Co. Source: China Warehousing Association, China Logistics Market Demand & Supply Analysis Report

3. team’s survey of 3PL providers in ChinaWe have interviewed 19 of the leading providers. Foreign logistics companies Traditional transportation companies • APL Logistics • Danzas • Exel • Hutchison, Tibbet & Britten • Maersk Logistics • TNT • Confidential interviewee • China Shipping Logistics • COSCO Logistics • China National Materials Storage and Transportation • SINOTRANS Internal logistics departments Emerging logistics companies • Annto Logistics • Attend Logistics • Haier Logistics • China Overseas Logistics • EAS • HurryTop Logistics • PGL • ST-Anda

4. 3PL providers’ operationsThis is a high growth market: over 70% of 3PL companies achieved more than 30% annual growth over the last three years. Annual growth rate of 3PL providers (1999-2001) Drivers of growth The core customer base for 3PLs is increasing, as more MNCs are moving their manufacturing to China. Chinese companies are outsourcing more, as they face increased pressures to cut costs and focus on core competencies. % of respondents Customers are increasingly looking to outsource a broader range of their logistics functions. Source: teamSurvey, 2002

5. 3PL providers’ operationsThe market is highly fragmented, with no one player achieving more than a 2% market share. Gross revenue1 Market share benchmarking • The outsourced logistics market in China is estimated to be 39BB RMB in 2001. The largest provider interviewed achieved just a 1.4% market share. • National market shares of leading US logistics players provide a benchmark: • CH Robinson : 5.1 % • Ryder/ EGL/ Expeditors: 3-3.8% % of respondents Note: Gross revenue includes purchased transportation / warehousing Source: teamSurvey, 2002

6. 3PL providers’ views on execution38% of respondents have problems with execution, including management of sub-contractors, lack of agreement concerning requirements and poor infrastructure. Main sources of execution problems “It’s not easy to find a subcontractor that could meet our requirements. And it’s difficult to control their service quality” “Especially for clients with whom we have just started working, we don’t have a common understanding of the requirements. This should improve in time.” “The poor infrastructure gives us trouble. In China there are no electronic maps, so we can’t simulate the transportation and select the optimal route. And the highway system is not well developed in inland areas” “Infrastructure in China has improved a lot over the last few years, especially roads” “Key account managers are critical for implementation. But a qualified KAM is very difficult to get.” % of respondents (weighted1) Note: 1 Top three responses weighted by order of importance (#1 = X3; #2 = X2; #3 = X1) and calculated as % of total weighted responses. Source: teamSurvey, 2002

7. 3PL providers’ views on executionThe majority of providers think that owning strategic assets is and will continue to be important. Importance of asset ownership Which assets? Reasons “It’s not easy to manage and control external providers. Few of them reach our service requirements. So to keep certain degree of internal capabilities is important.” “You need to demonstrate to your clients that you can deliver what the clients want. A certain degree of asset ownership can increase your credibility” “If you have enough business, you could get higher margins by owning the assets rather than leasing the assets” Warehouses 100% Trucks 92% Terminals CY/CFS 15% % of respondents NO - Not important to own some strategic assets YES -Important to own some strategic assets Source: teamSurvey, 2002

8. Providers’ views on future growth Providers are highly bullish on their growth prospects in China. Drivers of growth in 3PL in the next three years Estimated growth rate next year % of respondents (weighted1) % of Respondents Note: 1 Top three responses weighted by order of importance (#1 = X3; #2 = X2; #3 = X1) and calculated as % of total weighted responses. Source: teamSurvey, 2002

9. Providers’ views on challenges to growthChinese providers view ‘people’ as their biggest challenge, while ‘government restrictions’ is the top issue for foreign providers. Challenges for providers For Chinese providers, finding qualified people is the biggest challenge “Some people have strong operations experience, some have a very good logistics concept. But it’s very difficult to find a person that combines the two ” For foreign providers, government restrictions is the biggest challenge “The license will be hard to get, even post-WTO. Only JV s are permitted within the first three years” % of respondents (weighted1) Note: 1 Top three responses weighted by order of importance (#1 = X3; #2 = X2; #3 = X1) and calculated as % of total weighted responses. Source: teamSurvey, 2002

10. Providers’ strategies for future growthMost providers - domestic and foreign - are looking for partnerships to help them achieve their growth targets. Expansion strategy of 3PL players in China(% of players of each type pursuing specific expansion strategy) Organic growth Acquisition Partnership • Chinese providers look for partners who can provide • Overseas network • Financial support • Management experience • Complementary functions Chinese providers 50% 42% 83% Foreign providers 43% 71% 71% Foreign providers look for partners who can provide • Customer relationships • Resources e.g strategic assets • Operational skills • Domestic network coverage Type of 3PL provider All providers 47% 53% 79% Source: teamSurvey, 2002

11. Consumer electronics • Electrolux • Haier • Hisense • KONKA • Meiling • Philips • Sharp • Whirlpool Automotive Chemicals • ChangAn • DCAC1 • FAW-Volkswagen • Ford • SGM • SVW • BP-PetroChina • Dow Chemicals • Shanghai Tianyuan • SINOPEC Shanghai • Yanshan • Beijing Tyre Food & Beverage Apparel / textile • Bright Dairy & Food • Coca-cola • Jianlibao • Kraft • Tsingtao Beer • Unillever • Etam • Hongdou • Jeanswest • Lining • Nike • Youngor team’s survey of 3PL shippers in ChinaWe focused on the six sectors with the highest potential for outsourcing logistics, and within these segments we interviewed many of the largest shippers. 35% IT & telecom • Siemens • Benq (Acer) • Hewlett P. • Huawei • Legend • Lucent • Motorola • ZTE 30% IT & Telecom 25% Automotive Industry Growth 20% Pharmaceutical & Medical 15% Consumer electronics Chemicals 10% General machinery Apparel/Textile 5% Food & Beverage 0% 0 25 50 75 Industry Logistics Spending (RMB BB) Note: 1 Dong Feng Citroen Automobile Corp. Source: China Statistics Bureau; Piper Jaffray; Pittiglio Rabin & McGraph; Bear Stearns & Co; Forrester Research.

12. Shippers’ logistics operationsReducing costs and cycle times, and improving service levels are the main challenges for shippers, although this varies by industry. Key challenges regarding logistics Top challenges by industry AutomotiveReducing inventory levels (39%) “JIT is becoming important as we grow and have larger volumes and several models of cars” Apparel & TextileShortening cycle time (42%) “In the fashion industry, quick response to market is critical to win customers, so shortening cycle times is the biggest challenge for us.” Consumer electronics and Food / beverageLowering logistics costs (39%,44%, respectively) “Due to fierce price competition, our margin is shrinking. Logistics cost reduction is becoming a way to generate profit.” % of respondents (weighted1) Note: 1 Top three responses weighted by order of importance (#1 = X3; #2 = X2; #3 = X1) and calculated as % of total weighted responses. Source: teamSurvey, 2002

13. Shippers’ logistics operationsLogistics costs are not well tracked, especially by Chinese shippers. Only 28% of shippers calculate total logistics costs. These are all MNCs. Costs tracked by shippers • Chinese shippers pay more attention to direct transportation and warehousing costs. Admin and inventory costs are not well tracked and are excluded from total logistics costs. • Only 28% of all shippers know the figure for “total logistics costs.” “ There are three entities involving in the process: purchasing dept., production dept. and an independent sales company. They all know a different piece of the logistics costs information” “We can't get the total logistics costs due to the internal fragmented organization and system. For example. for raw materials purchasing, the transportation costs are included in the materials' prices; for the transportation from factories to DC they are calculated as production costs” MNCs Chinese % of respondents 1 Note: 1 Transportation and warehousing Source: teamSurvey, 2002

14. Outbound Distribution Centers Inbound Material HandlingLocations Manufacturing Plants Reseller Suppliers Customers Current outsourcing of logisticsThe rate of outsourcing to 3PL providers is higher for outbound than for inbound. 18% of shippers outsource 40% of shippers outsource 20% of shippers outsource Source: teamSurvey, 2002

15. Current outsourcing of logisticsDirect transportation, domestic transportation management and freight forwarding are the main services currently outsourced. Services outsourced by shippers “First, our internal system is well connected, and I would worry about the system interface issue if we outsourced. Second, security of products is a worry. Finally, does the provider have the product knowledge to operate the warehouse?” “We’d like to get more logistics information services, but I don’t think the existing 3PL providers are competent enough to provide such service, especially Chinese providers” “It’s impossible for us to outsource integrated supply chain management: planning & forecasting are very crucial for us. It’s too risky to outsource. Nobody has a better understanding of our business than we do. “ % of shippers outsourcing Substantial amount Moderate amount Note: 1Different services are weighted by usage (Substantial use = X2; Moderate use = X1; No use = X0) and calculated as % of total weighted responses. Source: teamSurvey, 2002

16. Current outsourcing of logisticsWhen selecting a 3PL provider, shippers look for strong industry / operational experience, good network coverage and a low price. Criteria for selection of 3PL providers Rationale behind shippers’ criteria • Manufacturers want to see a “show-case” to understand capabilities • Network coverage is extremely important for outbound. It’s better to have a national network. But if a provider is strong in certain regions, that’s also good. • Price is always an important criterion when selecting 3PL provider(s) • Good reputation is the first step for cooperation • Owning some strategic assets, e.g. trucks and warehouses could help providers maintain flexibility and assure service level. • If a provider could do both inbound and outbound, that’s good for shippers • The ability to connect with the shippers’ IT systems is important % of respondents (weighted1) Note: 1 Top three responses weighted by order of importance (#1 = X3; #2 = X2; #3 = X1) and calculated as % of total weighted responses. Source: teamSurvey, 2002

17. Outbound Distribution Centers Inbound Material HandlingLocations Manufacturing Plants Reseller Suppliers Customers Future outsourcing of logistics - 3 years out Shippers will still focus on outsourcing outbound services. 18% of shippers outsource now 40% of shippers outsource now 20% of shippers outsource now 43% plan to outsource 80% plan to outsource 58% plan to outsource Consumer electronics, automotive, food & beverage and IT & telecom will be the main sectors outsourcing outbound logistics Automotive and IT & telecom will still the top sectors outsourcing inbound logistics Source: teamSurvey, 2002

18. Future outsourcing of logistics Shippers plan to outsource more across the board. Services outsourced by shippers - now and in 3 years These services will still be the top two services required Warehouse management will become the third most popular service Customers will require more logistics information than now Now 3 years time % of shippers outsourcing (substantial only, moderate not included) Source: teamSurvey, 2002

19. Shippers’ views on 3PL providers Shippers have a slightly higher awareness of Chinese providers than foreign providers. Awareness1 of foreign 3PL providers Awareness1 of Chinese 3PL providers 77% of MNCs and 39% of Chinese shippers are familiar with at least one foreign provider 77% of MNCs and 67% of Chinese shippers are familiar with at least one Chinese provider Note: Shippers were asked to name top providers, without prompting Source: teamSurvey, 2002

20. Lower price Local knowledge Domestic network coverage Relationship with central / local government Ownership of some strategic assets Policy protection Flexible in operation Shippers’ views on 3PL providers 31% of shippers, particularly MNCs, would prefer to outsource to foreign providers, whilst 25% of shippers, particularly Chinese, would prefer Chinese providers. No preference 45% • 30% of all shippers • 38% of MNCs • 17% of Chinese shippers • 24% of all shippers • 19% of MNCs • 33% of Chinese shippers Who prefers foreign providers? Who prefers Chinese providers? Prefer foreign provider 30% Prefer Chinese provider 24% Advantages of foreign providers Advantages of Chinese providers IT system Industry / operational expertise Standardised operation International network Financial position Logistics talent Integrated logistics capabilities Note: The charts show the advantages cited by all shippers who expressed a view, including those shippers who preferred to outsource to a different nationality of provider Source: teamSurvey, 2002

21. Comparison with provider surveyProviders have a fairly accurate understanding of why shippers decide to use their services. Reasons for shippers using 3PL providers Providers’ views Shippers’ views % of respondents (weighted1) Note: 1 Top three responses weighted by order of importance (#1 = X3; #2 = X2; #3 = X1) and calculated as % of total weighted responses. Source: teamSurvey, 2002

22. Comparison with provider surveyProviders do not have a clear understanding of why shippers decide not to use their services. Reasons for shippers not using 3PL providers In-house capabilities already No confidence in service level Good providers not available Fragmented entities in charge of different parts of supply chain Not convinced of benefits Too expensive Bad experience in past Wrong concept / mindset Providers’ views Shippers’ views Lack of IT system % of respondents (weighted1) Note: 1 Top three responses weighted by order of importance (#1 = X3; #2 = X2; #3 = X1) and calculated as % of total weighted responses. Source: teamSurvey, 2002

23. Shippers’ views on 3PL providers “Logistics is all about the talent to manage other people. So peoplealways come first” “Show-cases” for specific industries are more convincing to us than good marketing guys” “It’s better to develop from one region and a small customer base and then move forward after achieving operation excellence in existing sectors/regions” “Need to have a deep understanding of your customer’s business. Without that, you can’t come up with a viable solution” “Chinese providers need to think carefully about their strategies: ‘who are their target customers and what services should they provide?’ Providers should start from the basic services, then build some capabilities and install more advanced IT systems, until they can provide more integrated services” “Partnership with Chinese providers to expand their domestic network is a good way for foreign providers to speed up their growth in China” Advice! Source: teamSurvey, 2002

24. About team Management ConsultingWe are a leading international strategy and general management consulting firm with deep industry and functional expertise. • Staff of more than 1,200 • 21 offices around the world • Industry groups • Travel & Transportation • Communication, Information, Entertainment • Financial Institutions and Risk Management • Retailing, Consumer Goods, Healthcare • Process Flow Manufacturing • Discrete Manufacturing • Private Equity Institutions • Capability groups • Supply Chain (logistics) • Value Growth and Implementation • Customer Strategy Team • Leading edge thinking on Value Migration and Business Design

25. Representative List team experience in ChinaWe have extensive experience in transportation and logistics in China. Recent Clients in China Project Description • Large SOE: freight forwarding/logistics • Restructuring prior to IPO • Large SOE: transportation • Enhanced logistics service for a key customer • Large SOE: manufacturing • Developed dangerous goods 3PL business design • Global package delivery company • Market sizing, customer research and competitor assessment in China • International transport and distribution firm • Developed network design for China • Oil ‘supermajor’ • Re-engineered logistics and distribution processes in China.