Asia's economic rebound signals change in logistics strategies

As Asia continues to move toward recovery, global logistics providers are reinvesting in traditional gateways while looking at alternative routes to market.

By Patrick Burnson -- Logistics Management, 9/1/1999

ASIA'S ECONOMY IS ON THE REBOUND, A DEVELOPMENT THAThas shippers and service providers alike breathing a sigh of relief. Although few companies doing business in Asia abandoned the region during its economic downturn, many companies were forced to cut back on manufacturing and transportation capacity in the Pacific. The effects of the "Asian Flu" were felt worldwide, as falling sales led companies to slash operating costs across the board.

Now that the region is beginning to revive, the freight-transportation industry also is showing signs of recovery. In July, for example, Taiwan's second-largest airline, EVA Airways Corp., revised its 1999 sales and profit forecasts upwards. The airline, which flies mainly to Hong Kong, Japan, and the U.S. West Coast, announced that it expected to earn a pretax profit of 1.23 billion in New Taiwanese dollars (the equivalent of $38 million)--more than twice its earlier forecast of NT$521 million. Also in July, Korean Air Cargo announced that it was leasing an additional Boeing 747-400F aircraft and adding flights to New York, San Francisco, and Dallas to meet what the carrier termed "remarkable demand." During the first six months of 1999, the airline carried 84,300 metric tons of cargo, an increase of 21 percent compared with numbers from the same period in 1998.

Ocean carriers, too, are starting to see signs of Asia's recovery. According to a recent report by the Port Import-Export Reporting Service (PIERS), container vessel use in the trans-Pacific trade rose in the first quarter of this year. According to Mike Fusillo, head of the maritime research division at PIERS, outbound vessels during that period were 60 percent full on average, a 4-percent increase compared with the same quarter in 1998. PIERS also reports that export cargo's share of the total tonnage carried jumped during that period from 55 to 64 percent--a strong indication that the balance of exports and imports is changing as Asian markets regain their buying power.

Now that Asian trade appears to be on the mend, shippers are wondering whether it will be business as usual or whether they will need to change the way they manage logistics activities there. One thing that is changing, according to several logistics-service providers in the region, is routing. Changes in distribution and manufacturing strategies within Asia, increased congestion and higher costs in Hong Kong, and the continuing shift of manufacturing capacity to China, they say, are leading shippers to take a fresh look at Asia's traditional freight gateways--and to develop some new ones.

Singapore Gains Strength

There are three major, established logistics zones in Asia: Singapore, Hong Kong, and Tokyo, says Scott Rasco, managing director of Asian operations for UPS Worldwide Logistics. Singapore serves Southeast Asia and the India/Pakistan region, Hong Kong is a sourcing point for North Asia, and Tokyo is the key hub for Japan. He expects that all three will continue to fulfill these roles after Asia's economies are back in full swing.

Of these three established logistics centers, Singapore is growing fastest. When manufacturing began to shift from higher-cost countries like Japan and South Korea to Southeast Asian countries in the 1980s, Singapore's government began a campaign to develop the city-state into a transshipment hub for products originating in Singapore, Malaysia, Indonesia, and Thailand.

Back then, a number of international logistics service providers, including Air Express International (AEI), UPS Worldwide Logistics, and Emery Worldwide, established distribution centers in Singapore that offered a wide range of logistics services. Although Asia's economic crisis slowed the pace of business for a while, these and other providers recently demonstrated their confidence in Southeast Asia's economies by investing in larger, more modern distribution facilities there.

UPS Worldwide Logistics, for example, will open a 285,000-square-foot, multi-user logistics center in April of 2001. That project is part of the company's response to a growing "build-to-order" manufacturing trend that Rasco and others consider to be inexorable. This strategy relies on the availability in Asia of parts and components, which then are assembled to order as close to the end user as possible. That strategy is attractive for both cost and service reasons. "The movement of inventory to Asia to serve Asia means faster fulfillment to customers," Rasco says. "This also serves as a means of lowering production costs."

Singapore has been targeted for further development by DHL Worldwide Express, which announced in July that it would spend $34 million to set up a package-sorting and handling hub within a free-trade zone at Changi International Airport. Also aiming for a 2001 deadline, the 100,000-square-foot facility will handle 180,000 tons of air cargo annually.

"This is to be a major transfer point for shipments between Southeast Asia, the Middle East, and Europe," says DHL Chief Executive Officer Charles Longley. "We are optimistic that it will be ready for the resurgence of the Asia-Pacific economies." The new facility will be completed none too soon: Longley expects that his company's 1999 revenue from Asian operations will be up as much as 18 percent compared with 1998.

In March of this year, Circle International opened a 200,000-square-foot distribution center at its Asian headquarters in Singapore. The facility offers turnkey assembly, packing, and shipping services to multinational companies. Like other logistics providers in the region, Circle focuses on Southeast Asia's computer, electronics, automotive, and apparel industries. In addition, Circle last year gained a stronger presence in Singapore by purchasing Concord Express, a third-party logistics firm specializing in sourcing materials and distributing products for high-tech manufacturers.

Will China Overtake Hong Kong?

Though Singapore is the undisputed logistics center for Southeast Asia, a battle for dominance over trade with China is shaping up between Hong Kong and fast-growing ports in Southeast China.

Shortly after the "handover" of Hong Kong to the People's Republic of China in 1997, some trade analysts predicted that the former British colony would lose its position as "greater China's gateway." Two years later, airfreight and ocean-freight volumes moving through Hong Kong are continuing to rise, and nearly everyone familiar with Hong Kong's dynamic business culture appears to have dismissed that notion.

"Hong Kong plays a prominent role in high-tech sourcing, and it remains a front-end manufacturing point for computer-parts replenishment," says Jon Himoff, logistics marketing director for international forwarder MSAS Global Logistics. "With its new airport and efficient harbor," he adds, "there are not many ways for other regions to compete."

Hong Kong's new Chek Lap Kok airport experienced information-system problems that led to enormous backlogs of cargo when it first opened last year, but those problems have been resolved and the airport is well on its way to recapturing its leading position in the region. Fred Luessen, an aircargo consultant for Lee-Sun & Associates in Phoenix, Ariz., says that although China's mainland airports are opening up to international trade, he does not expect a profound operational shift from Hong Kong. "I know that Lufthansa and Cargolux are exploring other possibilities," he says, "but Hong Kong still commands a great deal of respect from most [air] carriers."

Federal Express, which recently won approval from the U.S. Department of Transportation to add four more weekly round trips to China, also is bullish on Hong Kong's future as a distribution hub. According to a company representative, FedEx's express business in Asia is growing by 20 percent annually--double the global average. Hong Kong can support that demand for premium value-added service with its high-quality infrastructure and workforce, FedEx executives believe.

Although Hong Kong has held onto its position as China's leading gateway, its escalating terminal charges and rising labor costs as well as increasing congestion are forcing some major United States-based forwarders to consider alternative routes for cargo moving into and out of China. Given the explosive growth in trade volumes between the United States and the People's Republic, cost increases in Hong Kong may represent millions of dollars in additional expenses for the forwarders' customers. For example, although Hong Kong's port offers shippers many advantages, its container-stuffing charges are about 25 percent higher than they are in southern China. Terminal handling charges are about $200 more per container in Hong Kong than on the mainland. Despite Hong Kong's reversion to Chinese rule, moreover, shipments from China that move through Hong Kong must pass through customs in both locations. And Hong Kong's escalating labor and land costs preclude building more warehouses there, which constrains the forwarders' ability to handle their customers' growing business.

All these were factors behind the Fritz Cos.' decision to open a new warehouse at the Port of Yantian in July. The two-story, 400,000-square-foot facility, one of the few bonded distribution centers in southern China, is the biggest warehouse in the region. Fritz will provide a full range of services, including consolidation, customs supervision for exports, a vendor-managed inventory program, and an automated warehouse-management system.

Yet another reason for opening the facility was the region's growing importance as a distribution point for markets in southern China. "Even though Hong Kong is China's shipping capital, southern China has become the production center of the country," says Dennis Pelino, Fritz Cos.' president. Within the next several years, he says, more shipments are expected to shift to Yantian from Hong Kong.

That seems likely, because truck traffic often backs up en route from Yantian to Hong Kong, causing delays of up to 13 hours, says Billy Tse, managing director of Fritz Cos., Hong Kong/China. He notes that improvements to highway infrastructure that will make Yantian no more than 40 minutes from any point in the region now are under way. Expansion plans at the port, moreover, call for it to double in capacity during the next five years to handle almost 4 million containers annually.

In a similar move, AEI announced in July that it had formed a logistics company in Shanghai to capitalize on the accelerating demand for third-party supply chain management services in China's East Central region. "Encouraged by the Chinese government's pro-growth policies, Shanghai and its surrounding areas have become magnets for foreign investment," said Theo Gleichman, AEI's vice president, northeast Asia, in announcing the launch. "Multinational companies are entering the region in record numbers, notably in the high-tech and retailing sectors. The result has been a growing demand for third-party logistics services."

The new company, AEI Logistics (Shanghai) Co. Ltd., will operate AEI's first full-service distribution center on the Chinese mainland. The center is in the Pudong Waigaoquao Free Trade Zone, located about 40 miles from the heart of Shanghai. The 25,000-square-foot facility is situated 20 miles from the new Shanghai airport, which is set to open by year's end. It also is a 10-minute drive from Shanghai's busy port.

The logistics center can accommodate more than 1,600 pallets but also has capacity for loose, bulk cargoes. It will offer value-added services such as pick-and-pack, kitting, labeling, and light assembly.

The opening of the Shanghai logistics center is the latest step in AEI's expansion into the Chinese logistics market. Last year the company opened four new offices in that country, bringing the number of Chinese cities where it has a presence to 13.

The Future Is China

Projections for future growth in trade between North America and Asia remain high; many freight-industry observers expect those volumes will return to former levels within the next two or three years. Carriers and forwarders, therefore, will continue to invest in distribution centers that offer sophisticated logistics-management capabilities not only in established logistics hubs like Singapore and Hong Kong, but also in up-and-coming locations like the Philippines, where Federal Express has invested millions of dollars in its Subic Bay hub.

But any discussion of emerging markets and evolving consumer demands--and their effect on Asian distribution strategies--must include China, says one trade analyst. Speaking at the annual meeting of the Agricultural Ocean Transportation Coalition in San Francisco last summer, Bill Kruse, a principal of Manalytics International, said he believed Asia's economic recovery would be a direct consequence of China's growing need for U.S. products. Put that together with North America's insatiable appetite for low-cost Chinese goods and it seems likely that, in the near future, South and Central China will beat out Singapore and Hong Kong when it comes to growth in the transportation and logistics fields.

Patrick Burnson is a West Coast-based freelance writer who specializes in logistics issues.