A Brief Prospect Analysis of Merges and Acquisitions in China's Logistic Industry

中国物流行业

并购前景简要分析

Introduction

Since the end of last century, logistic industry has become one of the hottest areas where large-scale merges and acquisitions occur. After decades of integration within sub-industries, leading shipping lines, express couriers, freight forwarders are no longer content to keeping their current position just in their own industry, now they have been making increasing efforts in extending their business to other industries in logistic sector.

Now the decentralized and isolated logistic markets are experience decisive change. Former leaders in certain routes or regions are now forging into the supreme leader in the global market through a set of vertical integration. Some leading companies in specific sub-industry are now endeavoring to build a complete logistic industry chain by a set of horizontal integration. A new round of market partition has already begun.

3. An analysis of typical M &A patterns for in logistic industry.

4. Options for foreign and local logistic enterprises in selecting their integration mode in China.

同如火如荼的全球物流行业并购浪潮相比，目前中国物流企业间的并购活动相对平静。但考虑到中国经济持续高速增长，全球化程度日益加深，物流行业市场逐步开放，中国市场将会成长为未来全球规模最大、前景最光明同时也是并购案最集中物流市场之一，中国国内物流企业和海外物流企业都将从企业整合市场成熟的过程中受益。而由于中国的物流行业整合和重组的任务繁重，空间广阔，我们可以预见到，兼并和收购将会在中国物流行业成长成熟的过程中起到至关重要的作用。

本报告旨在通过解读物流行业本身的特点以及并购活动背后的根本驱动因素，按业内不同子行业分类研究业内一些典型的大型并购案例，并结合中国宏观经济、政策环境的变化，和国内物流、货运市场的整合程度和发展趋势，来分析外资与中资企业在未来中国物流行业内的并购可能性与最佳整合模式。全文分为四章：

通过对国际上物流企业并购整合经验的借鉴和中国市场特点和变化方向的前瞻性分析，为在中国市场开展业务的不同类型物流企业整合方向提供一个扼要的分析参考。

Table of Contents

1 An Overview of M &As in Logistic Industry

1. 1. M &As between shipping lines

   2. M &As between express companies
2. 3. More cross-industry M &As

1. Logistic Industry in China, Facts And Prospects

2.1.3.1 Glory achievements and ambitious plan of China’s logistic sector

2.1.3.2 China’s boost in economy

2.2.3 General Logistic and Freight Forwarders

2.2.4 Parcel Services

2. 3. TNT mode

3. M &A prospects for foreign companies

Corporate level integration is increasing at an astonishing pace in the logistic industry. Instead of using oversea agents or partners, since 1990s, logistic of all kind have turned to a more radical and seamless way of integration: They integrate the markets and networks by merges and acquisitions. Before we touch on integration of logistic enterprises in China, a rough study at previous large acquisitions cases and some fundamental factors that cause merges and acquisitions in logistic sector is necessary.

1. Motives behind M &As in logistic industry

Logistic companies have two options on the patterns of their networks. The first option is to build their regional, national or global networks mainly using their own resources, for example, their own oversea subsidies, transportation routes and vehicles for transportation. This strategy requires heavy fixed asset investment and takes a relatively longer cycle to establish. But when their own networks are established, the marginal operation cost and freight cost will decrease significantly within the internal networks because the carrier owns a highly integrated network and structure.

The second option is to use mainly external resource. For example, the company can sign oversea agents, join a global alliance or booking from other carriers. This strategy makes it possible for the companies to expand their business through external networks in a short time at a relatively low cost. But this kind of external networks is loose, unreliable and costly in the long run – remember that the oversea agencies always charges agency fees plus freight cost on them. Generally speaking, this strategy can only achieve fast but rather low-level integration.

Firstly, economic globalization accelerates the growth of the whole logistic industry and cause concentration of capital in this area. This is the direct cause. The growth of transportation industry depends highly on the growth of international trade and global business activities. As Chart 1.1 and Table 1.1 show, volume of transportation has a significant high positive correlation with international merchandise trades. While the share of transportation industry in total commercial service remained steadily at about 20 percent, the value created by the transportation services almost doubled in less than ten years together with international trade volume, which also increased more than 150% during that time.

To analyze future M &A opportunities in China, a brief review of recent major M &A cases and the new trends of these cases is necessary. To begin our analysis, we list these cases by their sub-industries. Every sub-industry has its distinct features in operate and growth pattern, which have great influence on the way of their M &As.

Generally speaking, shipping companies emphasize more on size and volume while express couriers emphasize more on the completeness and independence of their network. Freight forwarders make their strategies somewhere between. Chart 1.2 divides them roughly by their sensitivity to capital and networks. However, it is not easy to classify the M &As by sub-industry, because many of their business have overlaps and there are too many cross-industry acquisitions. In fact, ever since the concept "logistic" appeared, new conceptions and names such as supply chain management, third party logistic (3PL) and integrated logistic emerged consecutively. But they are logistic of different stages and forms rather than different things. Moreover, their functions are similar or complementary. So they can be discussed together. In the following part, 2 sections will be set apart for shipping lines and airlines respectively, for their business is relatively easy to define. For M &As in other industries and cross-industry M &As, Section 1.2.3 will dwell on them.

From Table 1.2, it can be concluded that after M &As, most container shipping lines increased their shipping capacity and market share, which directly drive these company to continuously increase in size. Some strengthened their market position after M &As, such as in Maersk's case. Some experienced a leap in TEU capacity and market share by acquisitions, such as in Hapad-Lloyd's case. Container shipping line is an industry with very high capital barrier and very strong scale effects. This means in a market with limited volume, only a few largest ocean carriers can survive in the competition. Others will be acquired by larger carriers or forced to exit due to uncompetitive rates, shrinking market share and high operation costs. As we will discuss in Chapter 4, Chinese shipping companies' market share is not very secure at the beginning, but through charter and bought of ships, they are growing by leap and bounds these years. To further improve their place in the rank, they will need to have some integration especially merges and acquisitions both domestically and overseas.

It can also be noticed that most large M &A cases are cross-national deals. This means before 2000, most container shipping lines had already finished integration in their domestic ocean container shipping market. In China, it is still in progress. It will take more time to see how domestic shipping companies reorganize themselves to compete with foreign shipping giants.

• April 2004: UPS bought out the minority shareholding in UPS Yamato Express and made it their wholly owned firm in Japan.

• December 2005: UPS acquired the interest held by Sinotrans, giving it access to 23 cities that cover more than 80% of the country's international trade.

• January 2006: FedEx purchase 50% share of Datian-FedEx from its partner Datian Express for $ 400 million as soon as a policy that forbid foreign owned enterprise to run express business independently was lifted.

• February 2007: FedEx Express has bought Prakash Air Freight Pvt. Ltd., which is one of the largest domestic express companies operating in India.

• February 2003: DHL buy 5% share of its partner in China, Sinotrans and signed a contract which enable it to up to 45% of Sinotrans' share with $ 200 in the following 5 years

• August 2003: Deutsch Post acquired Airborne Express and merged it into DHL Express.

• 1996: KPN, the Dutch national post and telecommunications organization makes a friendly takeover of TNT.

• 1998: TNT opens its European Express Center in Liege, Belgium. The postal division (including TNT) are demerged from KPN and listed separately on the Amsterdam Stock Exchange as TPG.

• January 2007: TNT Acquires Mercúrio, the express market leader in Brazil

From these major M &As of the top-four express couriers, Chinese express companies should find that establishing a wholly owned worldwide network requires long term investment and great patience. Some of the above-mentioned acquisitions were not possible until the lift of certain regulations, opening of foreign markets or the initial development of target areas. Despite some setbacks on the road of expansion and industrial consolidation, they set perfect examples on how to expand rapidly and steadily through reorganization, among which merges and acquisitions took a great part. As using agency or partner does not guarantee an integrated network and setting up new offices and networks in another country take too much time, merges and acquisitions are usually the first choice for the expansion. Logistic companies, especially express couriers that want to be global players need to make long-term M& A strategies to establish their global networks. Without long-term plan and step-by-step arrangement, they would probably lose the chance to complete their purchase of any local business when opportunity comes.

(The companies' names are marked with the same color of their log background to make it easy to distinguish.)

2007

• TNT signed the Equity Transfer Agreement with Hoau Group in Shanghai, to acquire its nationwide road transport and freight business in China.

• DHL acquired the Spanish logistics group Disfast on December 5

• Panalpina strengthened its leading market position in the oil and gas industry by acquiring the Singapore-based logistics provider Janco Oilfield Services and the Norwegian Overseas Shipping Group.

• Deutsche Post purchased leading contract logistics company Exel. Following the deal, DHL had a global workforce of 285,000 people (500,000 people including DPWN and other sister companies) and roughly $65 billion in annual sales.

• Panalpina consolidated its market leadership in the oil and gas business by taking over the Scottish firm Grampian International, and strengthened its position in Asia by buying the South Korea-based International Aero-Sea Forwarders.

2003

• Deutsche Post World Net completes acquisition of DHL.

2001

• TPG announced the acquisition of logistics provider CTI LOGISTX from rail and shipping company CSX Corporation.

• DHL Worldwide Express and Cathay Pacific Airways commenced their joint venture at Hong Kong International Airport, starting DHL's new Central Asia Hub facility in Hong Kong.

• Deutsche Post World Net became a shareholder in DHL.

• FedEx acquires Caliber System Inc. and creates FDX Corporation. The move creates a $16 billion transportation powerhouse, comprised of the traditional Federal Express distribution service and small-package carrier RPS, less-than-truckload (LTL) carrier Viking Freight, Caliber Logistics, Caliber Technology and Roberts Express.

1995

• UPS acquired SonicAir, making UPS the first company to offer same-day, “next flight-out” service and guaranteed 8 a.m. overnight delivery.

Firstly, M &As between large sized companies is gaining increasing prevalence. In the past, the merges and acquisitions usually happened between a large company and a small one so that a single action of acquisition would not have too much impact on the industry and global market. Now large-scale M &As is not rare for logistic industry. Every year the industry witnesses a lot of them. Cases such as Maersk Sealand's acquisition of P & O Nedlloyd and DHL's acquisition of Exel caused some shock on the market. However, those acquisitions have not been put to an end. Although Maersk Sealand and P &O Nedlloyd ranked no.1 and no.2 on market share before the acquisition, the new corporation's market share has only increased from 12.3% to 17.8% according to BRS-Alphaliner. We can find the post-merger HHI( Herfindahl-Hirschman Index, an index to estimate the concentration of a certain industry) is only 181.45 (12.3²+5.5²), which is far less than 1000. Despite on certain routes the Maersk obtained overwhelming advantage after the acquisition, on global scale the container shipping market cannot be considered very concentrated if we evaluate the change by HHI. Likewise are other M &A cases in other logistic industries. They are only the beginning of future tide of M &As in logistic area. Comparing with other industries, the level of concentration in logistic sector is still relatively low. Since there are plenty room in the market for large logistic enterprises to continue their global integration strategy, more large-scale M &As are expected to merge in the future. In the years to come, large-scale integration will remain as a major trend in this industry.

Secondly, transnational merges and acquisitions are on the rise. As Table 1.3 illustrated, many of those famous M &A case are cross boundary ones. As logistic enterprises often face high barriers in other countries, or they cannot afford the time in establishing their own set of business in a foreign market, transnational integration is a swift solution to the entrance to new markets, routes or regions and enhancement of the newly established markets. With further opening of logistic markets, transnational merges and acquisitions will be utilized by logistic companies even more frequently as a method of cross-boundary integration.

2.1 Targets of Integration Strategies

Generally speaking, merges and acquisitions have immediate effects on company's size, size of networks and new competence. Market share expansion, network building and competence obtaining are the major targets of logistic enterprises' integration.

Extension of network and new markets is another target of logistic M &A. Generally speaking, sharing network with oversea agents or using other companies' network less efficient than transport goods on company's own network. Moreover, their oversea agents will charge handling fees on them, which makes their rate less competitive than the company's internal rate when there is an own network on the route.

To form a global logistic network requires company's sound development in major industrial countries, ports and airports. Establishing these oversea branches from scratch is time taking and often countered with policy barriers from those countries. Merges and acquisitions, mostly vertical ones, can help logistic enterprises extend their network to new markets in certain countries or regions in a short time. By acquiring local companies, foreign logistic companies also suffer less in localization process.

In the last decades, some logistic enterprises grow rapidly with the tide of logistic integration. Their strategies on M &A can be viewed as classic strategic modes. Chinese logistic companies with ambition to be global market leader or comprehensive logistic provider can learn a lot from these typical M &A modes. We can also see significant difference between those modes in the scale of M &As, impact on market, marginal improvement in network, risk exposure and difficulty in integration after M &As, as is illustrated in Chart 2.1, 2.2, 2.3.

2.2.1 Maersk Mode

Risk Exposure: Low Medium High

Difficulty in Integration: Little Medium Great

In China, when a leading logistic enterprise is in a sub-industry that is heavily affected by scale effect and has relatively low interdependence to other sub-industries, the enterprise can adopt Maersk mode of M &As.

2.2.2 UPS Mode

Impact On Market: Little Medium Tremendous

Marginal Improvement In Network: Little Medium Significant

Scale of M &As: Small Medium Large

Impact On Market: Little Medium Tremendous

Major Type of M &As: Vertical Horizontal

Scale of M &As: Small Medium Large

Chapter 3 Logistic In China,