Sustainability of Freight Forwarding Fin
Content
Freight Forwarding
SUSTAINABILITY OF BUSINESS MODELS ETH Presentation, Zurich April 24th, 2012
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Contents
I. II. III.
THE SPEAKER: Matthias Hanke and Roland Berger Strategy Consultants at a glance THE INDUSTRY: Key characteristics of freight forwarding THE MARKET: Drivers determining the supply and demand landscape
IV. THE STRATEGIC KEY QUESTIONS: How might the forwarder's role change within the overall value chain? V. THE THREAT: Interesting examples of a similar industry (fiction for forwarding ... so far)
VI. THE TRENDS: What is impacting the industry with short- and mid-term relevance VII. THE OPPORTUNITIES: Moves to sustain business medium term
© Roland Berger Strategy Consultants Sustainability of Freight Forwarding_fin.pptx 2
I. THE SPEAKER: Matthias Hanke and Roland Berger Strategy Consultants at a glance
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Let me introduce myself
MATTHIAS HANKE, PARTNER
• Weathered (1965) • Married • Two kids (15/17) • • • • • • • • Born in Hamburg, living in Basel Apprenticeship in steel trading (2 years) German Navy (2 years) Combined Master studies of Mechanical Engineering and Business Administration at TU Darmstadt (6 years) Junior Consultant to Senior Project Manager at RBSC (5 years) Executive Vice President "Network & Strategy" at Swissair, Crossair, Swiss (4 years) DHL Express (3 years) Partner with RBSC in Zurich (6 years)
• Key areas: Logistics, Aviation, Tour Operating
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Roland Berger Strategy Consultants is a truly global firm – We provide strategic advice to the world's top decision makers
Our offices
Founded in 1967 in Germany by Roland Berger
47 offices in 35 countries, with 2,500 employees
About 220 RB Partners currently serving ~1,000 international clients
Source: Roland Berger
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Active in the world's most important markets, we are proud to be a top 5 player in the global strategy market
Global market position amongst strategy consultants
75% repeat clients 30% of the top-1,000 global
companies
40% of Europe's leading
companies
MARKET POSITION1)
Germany Growth regions China and Russia/CEE
1) In the strategy segment
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#2 #2
Core markets in Western Europe World
#3 #5
II. THE INDUSTRY: Key characteristics of freight forwarding
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Summary: four things to understand upfront
• • • •
Global Forwarding is one out of four basic FWD types Global FWD is a trading business with thin margins Global FWD has a brokerage function between "Shippers" and "Carriers" – thus, Global FWD takes a coordinating role in the value chain Value added services (VAS) reach growing importance as USP for Global Forwarders
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Global Forwarding is one out of four basic FWD types
KEY CHARACTERISTICS
Overland Transportation Global Forwarding Contract Logistics Integrators; Express Logistics
• • • • • • • • • • • • • • • •
Mainly trucking; growing share of rail Forwarders often exercise "Selbsteintrittsrecht" and "operate" Operation consists of carriage plus terminal operation for LTL business (groupage) "Mama and Papa business" – low USPs ... low entry hurdles Core business is sea and air intercont transportation Asset-light/ trading business (capacity brokerage) plus value added services Low margins (RoS; don't mix up with RoC) Interfaces with Overland Transportation and Contract Logistics Coordination of parts of the supply chain on behalf of the customer Warehousing and Distribution are elements of core business Contract duration over a longer period (~5 years) with dedicated investements IT integration/interfacing with customer is key Door-to-door service, self operated (P&D, domestic linehaul, intl. linehaul, terminals) Standing network – given fix-cost (flight gets operated ... full or empty) Day-definite and Time-definite delivery plus even courier-services High-cost proposition
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FOCUS
Global FWD is a trading business with thin RoS-margins – potentially desastrous impact of sub-seasonal yield decline or overcapacity
Typical freight forwarder P&L structure (illustrative) [% of revenue]
100% > Costs of 3rd party carriers – mainly outside forwarders' direct control > Economies of scale lead to lower cost per shipment
(1)
85%
Direct Operating Expenses ("DOE")
15% 8% 5% Net Revenue Cost of Sales Gross Profit Direct Costs Indirect Costs 2% – 4% EBITDA
COMMENTS > Forwarding business model is relatively low margin and highly sensitive to declines in revenue > There are three key potential levers to improve profitability – increase of net revenue (1) – improve of cost of sales (2) – reduction of DOE (3) > Increase of net revenue requires continuous revision of product/ service portfolio and presence in the rapidly growing emerging logistics markets > Reduction of DOE finds a small overall basis only and requires continuous action on overhead costs
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Source: Roland Berger
Global FWD has a brokerage function between "Shippers" & "Carriers" – thus, Global FWD takes a coordinating role in the value chain
EXAMPLE: AIR CARGO VALUE CHAIN VALUE ADD OF FORWARDERS > Bundling of customer (shippers) demands > Procuring transport capacities with volume rebates > Coordinating many/ all transport related players (depending on the agreed INCO terms between Shipper and Consignee) > Enhancing transport management with value added services
Pickup, Build-up, RFS
Handling & Warehouse Cargo Handler
Linehaul
Handling & Warehousing
RFS, Breakdown, Delivery
Shipper
Trucking Company
Trucking Company
(Carrier) Forwarder
regular/usual contract relationship
alternative contract relationship
alternative contract relationship
Consignee
Airline
Airline
Cargo Handler
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Value added services (VAS) reach growing importance as USP for Global Forwarders
The International Federation of Freight Forwarders Associations defines freight forwarding as "services of any kind relating to the carriage, consolidation, storage, handling, packing or distribution of the goods as well as ancillary and advisory services in connection therewith, including but not limited to customs and fiscal matters, declaring the goods for official purposes, procuring insurance of the goods and collecting or procuring payment or documents relating to the goods".
Source: Roland Berger
Core Business: procurement of international transport capacities Value added services can even reach towards significant IT interfaces between the shipper and/ or the consignee
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III. THE MARKET: Drivers determining the supply and demand landscape
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Summary: five things to remember
• • • • •
Within the forwarder controlled market segments DHL, K+N and DB Schenker are clear market leaders – overall high fragmentation The European overland transportation market is even more fragmented with less than 10% total volume controlled by the top five players The overall forecast for global transportation needs is very prosperous - given stability of current paradimgs (global warming?, free trade?, ...) Individual country performance concerning GDP development and trade balance is significantly impacting the relevant "Trade Lanes" for hauliers and forwarders Freight rates are becoming increasingly volatile and demand on the forwarders side for more sophistication of steering purchased capacities
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Within the forwarder controlled market segments DHL, K+N and DB Schenker are clear market leaders – overall high fragmentation
Top 10 freight forwarding players [% of total freight forwarding market, 2011]
AIRFREIGHT – MARKET SHARE
Sinotrans Expeditors 1.4% 1.5% Agility 1.5% CEVA 1.7% Nippon 1.7% Express 1.8% UPS
2.9%
OCEAN FREIGHT – MARKET SHARE
Sinotrans SDV DHL 6.8% DAMCO Nippon Express 0.5% Agility 0.5%
3.5% 0.5%
0.5%
0.4%
K+N 2.0%
DB Schenker 3.0% K+N
Expeditors
0.7%
0.9%
1.5%
Panalpina
> DHL is the market leader with a significant lead towards the nearest competitors > DB Schenker, K+N and Panalpina are relatively equal sized and competing to become the 2nd largest
Source: Merril Lynch, West LB, Roland Berger analysis
DB Schenker > K+N leads the ocean freight market and has a sound lead to competitors > DHL is the second largest with DB Schenker, Panalpina and Expeditors competing for 3rd place
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Panalpina
1.0%
DHL
The European overland transportation market is even more fragmented with less than 10% total volume controlled by the top five players
Overland transportation – European supply structures
MARKET SHARES (EUROPE)
90.7% 3.3%
CHARACTERISTICS > European overland transportation is highly fragmented, driven by very low entry barriers in the industry > Basic transportation service is mainly delivered by local haulers, with few large international players
2.3% 1.7%
> Market competition is characterized by low product differentiation – price is the main competitive lever
1.5%
> Process efficiency and network cost are key levers for providers to reduce price (terminal operation, driver costs, asset costs)
0.5%
> Value added services are offered mainly for MNCs as a differentiator, by large logistics service providers > A 40-tons truck from MUC to HAM bears total cost of some EUR 650 and leads to a maximum profit of ~EUR 30 – depending on overall asset utilization and truck load-factor
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DB DHL Schenker
DSV Dachser Geodis Other
Source: West LB, Roland Berger
The overall forecast for global transportation needs is very prosperous given stability of current paradimgs (global warming?, free trade?, ...)
World GDP and Export growth [Euro, trillion]
Gross Domestic Product (GDP), Nominal Exports of Goods and Services, Nominal
24 132 21 22 118 125 20 105 112 17 19 94 100 15 16 84 89 13 70 74 79 66 56 60 63 46 48 53
25
27
29
31
33
35
38
40
43
46
48
51
55 50 45 40 35 30 25 20 15 10 5 0
> Growth of GDP and world exports are the main external factors influencing the size of the global transportation industry > World GDP and trade is expected to continue growing at high single digit growth rates (6-7% year over year) > By 2030 the value of exported goods/services might have increased almost 300% compared with 2010 > World exports are forecasted to grow with a multiple >1 compared to GDP – indicating a significant growth for the global transportation industry until 2030
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139 147
Source: IHS, Roland Berger
2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010
Individual country performance concerning GDP development & trade balance is impacting the relevant "Trade Lanes" for hauliers and FWDs
Individual country performance concerning import and export
> Relevant trade lanes derive from individual country performance concering imports and exports > Huge imbalances between exports and imports are a problem for the transportation industry (China in the recent years) > Imports and exports from China, EU, Japan and the US do by far have the largest impact, due to the size compared to other trading regions > Even micro-economic events can impact the global transportation industry: An example is Apple Computers' launch of "The new iPad" which saw Transpacific airfreight rates soar with over 20% in less than a week
Source: Drewry, Roland Berger Sustainability of Freight Forwarding_fin.pptx 18
Freight rates are becoming increasingly volatile and demand on the forwarders side for more sophistication of steering purchased capacities
International freight rate development
OCEAN FREIGHT
3,500 3,000 2,500 2,000 1,500
Jan 11 May 11 Aug 11 Oct 11 Dec 11 Dec 12
Low forecast USD per 40 foot container High forecast
> In the current uncertain economic climate, it is difficult to provide reliable forecasts for the KPIs driving world trade > As a result, freight rates are becoming increasingly volatile, with carriers adjusting rates based on short-term capacity and demand development > Freight rates are expected to rise in 2012 – ocean freight carriers have suffered large losses and are pushing rate increases, while rising fuel costs will force air cargo carriers to increase rates > Freight forwarders must adapt capacity management, in order to reduce their exposure to market volatility
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AIRFREIGHT
5.5 5.0 4.5 4.0 3.5
Feb 11 Apr 11 Jun 11 Aug 11 Dec 11 Dec 12
USD per kg Fuel price based
Source: Drewry, Roland Berger
IV. THE STRATEGIC KEY QUESTIONS: How might the forwarder's role change within the overall value chain?
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The global forwarder: "... between the chairs" or "... always on the winner's side"
TRANSPORT MODE
Air Sea Land
KEY STRATEGIC QUESTIONS
1 How will the global forwarders' role change within the value chain? > Need for forward integration > Need for backward integration > Need for innovation and VAS? Which and how many assets does a forwarder need to leverage market opportunities and offset threats? What are the underlying market trends? > By major trade lanes > By major industry What are the underlying trends on the capacity supply side (by air, sea, land)? What risk management processes will be needed?
Shipper
VALUE CHAIN
2 Global forwarder
3
Carrier
4 5
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An international forwarder's growth strategy needs to be robust against different scenario characteristics
Illustrative scenarios
> Strong demand on shipper side – Forwarder improves towards preferred supplier position > Overcapacity on carrier side facilitates access to cheap capacity – Forwarder is able to exploit/improve its forwarder power > New globally introduced valueadded services strengthen forwarder's USP's – shippers steer additional capacity on forwarder > Strong consolidation of asset owners leads to bottlenecks and significant margin deterioration of forwarders > Increased direct business between shippers and carriers with significant volume decline/stagnation for forwarders > Volume growth is tendered by large shipper conglomerates – sourcing processes put pressure on forwarders
2 possible scenarios
NETWORK & QUALITY FORTRESS
FORWARDER UNDER SIEGE
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Two fundamental dimensions determine an international forwarder's potential move to further secure sustainable growth
EXISTING MARKETS
Securing price competitive access to cargo capacity with alternative risk exposure lower medium higher (only broker) (fix allotments) (own assets)
Strengthening commercial attractiveness by adding USP's for shippers
Excellence on selected value chain items Excellence on all value chain items
International Forwarder
? ?
?
Which innovations and value added services2) does a forwarder need to offer in order to maintain/improve its role in the transport value chain?
How much risk1) does a forwarder need to take in the future to sustain/grow its market position?
1) To be differentiated by trade lanes 2) To be differentiated by products
NEW MARKETS
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V. THE THREAT: Interesting examples of a similar industry (fiction for forwarding ... so far)
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Summary: Interesting examples of a similar industry – TOUR OPERATING
• Tour Operating is a very similar industry: − trading with capacities (hotel & air), − brokerage function between customers and hotels/ airlines (bundling of demand and purchasing big volumes with rebate) − value added services (packaging, on-site transportation, insurance, ...) − thin margins, decreasing RoS Along the value chain, tour operators are intermediaries – so are travel agents, online portals and destination management agents New internet based techniques and fueled by a high degree of data standardization have been resulting into new distribution channels for airlines and hotels − directly (B2C) − into travel agencies (stores and online) (B2B) In essence, the legacy tour operating for package tours in the volume segment will be dead in the forthcoming 5 years Some learnings to be transfered into the global forwarding industry?
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• •
• •
Tour operating is a very similar industry
TYPICAL BOTTOM-LINE STRUCTURE
% of Sales
100%
83-90%
10-17%
8-12%
2-5%
CHARACTERISTICS • trading with capacities (hotel & air), • brokerage function between customers and hotels/ airlines (bundling of demand and purchasing big volumes with rebate) • value added services (packaging, on-site transportation, insurance, ...) • thin margins PROFIT LEVERS 1. Measures "above Gross Operating Profit" a. Improve revenue by sales and pricing measures b. Lower direct cost by better sourcing contracts 2. Measures "below Gross Operating Profit" a. Improve production, sales, service and administrational processes b. Reduce staff, material and financial cost
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Staff cost
Other Exp. Deprec. & Rental
Sales
Direct cost - Airline - Hotel - Transfer
GOP
Indirect cost
EBIT
detailled on further pages
Marketing & Adv.
Along the value chain, tour operators are intermediaries – so are travel agents, online portals and destination management agents
VALUE CHAIN: ALTERNATIVE LAYOUTS
Description Value-chain steps Share of revenue currently
LT
Expected development (5 years)
Kunde
RB/ OTA
New internet based techniques and data standardization have been resulting into new distribution channels for airlines and hotels • Hotels publish fares via selected bed-banks and via on web-pages • Airline aleady publish flights via computer reservation systems and via own web pages • A new software provider enables virtual packaging of independent flight and hotel offers
T/O ZGB-A
Classical Value Chain
~43%
T/O with direct sales
~19%
Content marketing via data bases/ bedbanks B2C marketing of content providers
~7%
• Legacy Travel Agents use the new techniques and also build packages • T/O value-add for specific segments has vanished completely
OTA: Online Travel Agent T/O: Tour Operator
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~32%
LT: Leistungsträger (Airline, Hotel, Mietwagen), Content Providers ZGB-A: Zielgebietsagentur, Destination Management Companies RB: Reisebüro ("Offline Travel Agent")
Quelle: Euromonitor, Roland Berger Strategy Consultants
In essence, the legacy tour operating for package tours in the volume market will be dead in the forthcoming 5 years
PORTFOLIO OF LARGE T/OS
Package tours short-haul mass market − high yield market Package tours long-haul Individual tours short-haul and long-haul Specialist tours (sailing, climbing, safari, diving, ...) Cruise ship journeys Retail shops Destination Management agents Hotel ownership
COMMENTARY • For TUI, Thomas Cook, Hotelplan, Kuoni, ... the package tour business in the mass market have been the profit machine for the company in history • The former value-add of tour operators (destination know-how, exclusive access to charter flights, ...) has almost been vanished • Hotels and airlines have been pursuing a vertical integration along the value chain • Tour operators have to refocus their portfolio and to put more emphasis on value added services, exclusive hotel access (assets?), destination based services/ activities and control of customer experience • Big question: more invest into assets to ensure access to exclusive product offeres???
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Some learnings to be transfered into the global forwarding industry?
• • • • • • • Replacement tendencies amongst the various players along the value chain? Fight for the ownership of the customer interface? Shift of value-add from providing freight capacities towards value-added services? Online portals for freight capacities and transportation services ... provided some significant progress concerning data standards is being achieved? Consolidation tendencies within the freight forwarding industry? Stagnation of Western European Markets and shift of activities to BRIC plus Asean-5? Necessary move into assets to ensure unique selling positions and more sophistication required to steer the increased risk position?
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VI. THE TRENDS: What is impacting the industry with short- and mid-term relevance
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Key trends in the logistics service provider industry that might endanger sustainability of current business models
• 1 • 2 YIELD DECLINE: Shippers and Carriers negotiate for profit pools VERTICAL INTEGRATION: Carriers and shippers increase profit pools by "conquering" additional parts of the value chain SHIFT OF KEY TRADELANES: legacy tradelanes dissappear – new tradelanes partially require adaptations to the FWD's business model CHANGE OF INCO TERMS (CN): Chinese shippers tend to move from CIF to FOB for import business and v.v. for exports HINTERLAND CONNECTIONS: efficiency of increasing importance – even an entry condition for business with Chinese shippers • MODAL SPLIT: Demand shift from air transport to 6 sea and (increasingly) rail – FWDs need to adapt business relationships • SPECIALIZATION AND VALUE ADDED 7 SERVICES: increasingly complex supply chains in shipper industries will call for increasingly specialized logistic service providers • 8 INDUSTRY SPECIFIC IT: the increasing call for specialized global FWDs wil also require tailormade IT solutions
• 3
• 4
• 5
• GLOBALIZATION VS. REGIONALIZATION? will 9 the demand for "global total solutions" remain growing or might the trend reverse back to regionalization? • 10 CONTRACT LOGISTICS - CHALLENGES: tendency towards shorter contract life-cycles will increase hurdles for an appropriate ROI
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Source: Roland Berger
YIELD DECLINE: Shippers and Carriers negotiate for profit pools
Price developments in air- and ocean freight [Index]
120 100 80 60 40 20 0 2006
Ocean freight1) Airfreight
2)
Yields for global freight forwarders [EBIT RoS-margin, %]3)
5.0 4.5 4.0 3.5 3.0 2.5 2.0
2006
Index 2006= 100
FORWARDERS IN A SANDWICH POSITION • Overcapacities in sea/air foster carrier efficiency initiatives and thus impact FWD's margins • Shippers also see themselves exposed to economic volatility and submit parts of the pressure to their vendors – FWDs margin once more impacted
2007 2008 2009 2010
2007
2008
2009
2010
2011
> > > >
Ocean freight rates declined since 2005 Airfreight rates overall stable – however include significant fuel price increases For global forwarders, falling rates after procurement are critical, increasing rates after procurement are beneficial Forwarders' profitability is overall under pressure – new sources of margins to be elaborated (new USPs)
1) HARPEX container price index 2) IATA global air cargo revenue compared to volume 3) Consolidated figure for leading forwarders
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Note: Yield is defined as profit per unit
Source: HARPEX, IATA, Linehaul, Annual reports, Roland Berger
VERTICAL INTEGRATION: Carriers and shippers increase profit pools by "conquering" additional parts of the value chain
Vertical integration (along the value chain) Shippers
Shippers
Consolidation within the player's industries (Horizontal integration)
Global FWDs
Sea/ Air transport
Terminal handling
"Hinterland transport"/ RFS
Global Forwarders Air/ Sea Carrier Terminal operators Intermodal operators Railway operators
e.g. Hapag Lloyd
?
e.g. Maersk e.g. HHLA e.g. Eurokombi e.g. DB Schenker
> Dilution of traditional division > Will this become a general trend?
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SHIFT OF KEY TRADELANES: legacy trade-lanes dissappear – new tradelanes partially require adaptations to the FWD's business model
COMMENTS > Economic developments have created a structural change of logistics flows especially to/from/in Asia > Production streams are increasingly being redesigned as manufacturing costs rise in current low-cost countries > Basic manufacturing is moving towards new low-cost locations > Freight forwarders have not previously had a strong presence in these countries and reorganize to support future growth from these markets
3 Intra–Asia > Tradelane is forecasted to cover 25% of world trade by 2020 > Growth mainly driven by an increased trading between emerging economies in Asia
2 1
3
Traditional key tradelanes 2020 key tradelanes
1 South America – Asia > Tradelane is forecasted to cover 5% of world trade by 2020 > Mainly driven by an increased consumer spending in South America
2 Middle-East, Africa – Asia > Tradelane is forecasted to cover 18% of world trade by 2020 > Mainly driven by an increased consumer spending in Africa and Chinese investment in African natural resources
Source: Roland Berger
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SHIFT OF KEY TRADELANES
World trade flows are shifting – In ~20 years China will take over USA's role as the dominant trading nation
TOP 20 TRADELANES 2009
Origin
1 China 2 China 3 Japan 4 China 5 Germany 6 Germany 7 China 8 UK 9 Japan 10 UK 11 Korea 12 UK 13 Hong Kong 14 China 15 France 16 China 17 Netherlands 18 Japan 19 China 20 UK
1) 2009 USD million
TOP 20 TRADELANES 2030
Value1)
290,960 207,677 146,523 140,342 118,773 113,209 102,171 97,624 69,008 68,062 66,443 62,388 58,016 56,446 54,414 54,163 51,989 45,941 43,319 43,177 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
COMMENTS
594,741 336,183 281,140 263,063 201,382 189,785 178,291 169,356 167,467 162,376 151,570 144,131 143,725 141,201 140,320 136,295 125,826 121,603 120,318 117,340
Destination
USA Japan USA Korea USA UK Germany USA Korea Netherlands USA France USA Singapore USA Australia USA Hong Kong Netherlands Belgium
Status
Origin
China China China China China Japan China China Germany China China Germany UK China China China USA China China China
Destination Value1)
USA Japan Korea India Germany USA Singapore Indonesia USA Malaysia Nigeria UK USA Thailand Saudi Arabia Brazil India UK UAE Australia
> New tradelanes grow in importance for the logistics industry > China is expected to be the dominant trading nation – 15 of top 20 tradelanes will have origin or destination in China > Tradelanes from developing economies will be bilateral, instead of mainly focusing on export to developed countries > Shifts focus of the logistics industry and creates challenges to build up a presence in the emerging markets
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NEW NEW NEW
NEW NEW NEW NEW NEW NEW
Note: Excluded tradelanes that can be serviced without Ocean freight and/or Airfreight
Source: PWC Future of World Trade, Roland Berger
SHIFT OF KEY TRADELANES
Overland transportation markets in developing economies, lead by China and India, are outgrowing markets in developed economies
Overland freight (road, rail and inland waterways) markets [billion tkm]
Top regional freight markets 2011
China USA EU27 Russia India Brazil 2,308 2,251 1,793
949
Top regional freight markets 2020
China USA India Russia EU27 Brazil 3,231 3,160 2,736 1,407 5,472 10,619
COMMENTS > BRIC overland transportation markets will grow at twice the rate of developed markets > China and India are forecasted to see the highest percentage growth until 2020, growing annually with over 5% > Growth markets present key opportunities for logistics service providers > Entering these markets is challenging, as they are often less mature and difficult to offer an attractive USP
6,653 4,886
Source: Progtrans World Transport Report 2010/2011; Roland Berger
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SHIFT OF KEY TRADELANES
There are three things FWDs need to retain about growing logistics in China
FWDs need to CONSIDER THE WEST Stronger growth of manufacturing and trading in Central and Western China provinces will shift logistics focus away from the port cities to the hinterland FWDs need to UNDERSTAND Chinese AUTHORITIES Without governmental interaction and support, larger growth initiatives in China are doomed to fail (economically) FWDs to BECOME (more) CHINESE In order to capture genuine China business, a certain, yet real domestic footprint in asset-based logistic activities is required, which can realistically only be built up by M&A – with all the potential pitfalls thereof
Growth dynamics across China's provinces
Heilongjiang
Inner Mongolia aut. region Liaoning Beijing Tianjin Hebei Shandong Henan Jiangsu Sichuan Chongqing . Zhejiang Hunan Guizhou Fujian Yunnan Guangxi Guangdong Jiangxi Hubei Anhui Shanghai
Jilin
Gansu Shanxi Ningxia Hui aut. region Qinghai Shaanxi
Hainan
Export and Import above average Import above average Export and Import average Export above average
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CHANGE OF INCO TERMS (CN): Chinese shippers tend to move from CIF to FOB for import business and v.v. for exports
Competitive analysis of bill of lading practices
Market share of international trade in FOB/CIF
Volume split by im/export1) 54% 46%
Trends in import
> CIF term is currently more commonly used by Chinese buyers, but FOB term is on the rise, which favors forwarders with strong local logistics capability – As Chinese importers get more sophisticated in supply chain mgmt, they are tending to shift to FOB term in import due to the need to have more control over supply chain and lead time – They will likely prefer integrated solution that encompass forwarding and local logistics (ie warehousing, transportation) with some value added offerings
CIF
30% 60%
FOB
70% 40% Exports Imports
1) Based on breakdown of air cargo exported/imported in 2009, by tons
Source: Traffic Yearbooks; Expert Interview; Roland Berger Analysis Sustainability of Freight Forwarding_fin.pptx 38
HINTERLAND CONNECTIONS: efficiency of increasing importance – even an entry condition for business with Chinese shippers
Land transport – Port hinterland connections
Example Europe – Expected increase in number of trains over the next 10 years
Denmark
Examples from other continents
> USA: "Connectivity issues are a major focus of seaports
Berlin/ Brandenburg Saxony-Anhalt Poland Saxony
Northern Ports Western Ports
Lower Saxony
N
nationwide, as essential road and rail networks experience near-critical congestion." (Florida Seaport Transportation and Economic Development Council)
> INDIA: "Congestion seems to persist at several port
locations on account of delayed evacuation of cargo due to inadequate road and rail capacity" (Secretariat for the Committee of Infrastructure)
W
North-RhineWestphalia Hesse Rhineland -Palatinate
Czech Republic Bavaria Austria Hungary Slovakia
> CHINA: Currently few bottlenecks due to:
– Heavy infrastructure investments over the last years – Extensive network of harbors, also in the hinterland at large rivers – Special economic zones and industry areas near ports Future risk of bottlenecks once industry starts to localize away from ports as salary levels increase
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France
BadenWuerttemberg Switzerland
Italy
MODAL SPLIT: Demand shift from air transport to sea and (increasingly) rail – FWDs need to adapt business relationships
Modal split of international trade with China [by value]
After the demand crisis, strong modal share gain of sea
1.422 1.760 2.174 2.563 2.208
100% 80% 60% 40% 20%
Global ocean container and air freight growth [% change YoY]
Market share gain SEA
Ocean container Air freight
By Sea
61%
61%
0%
63%
66%
65%
-20% -40% -60% 2007
Market share gain AIR
2008 2009 2010
Europe-Asia rail bridge to strenghten rail
By Road By Air 18% 18% 19% 2% 17% 18% 2% 16% 16% 2% 17% 17% 2%
SEA Current share: 99% of total volume Distance: Aprox. 20.000 km1) Delivery time: 30-45 day1) Prices: Price leader
40
By Rail 19% and Others 1%
RAIL Current share: <1% of total volume Distance: Approx. 10.000 km1) Delivery time: 22-28 days1) Prices: Up to 50% higher than sea freight
2005 2006 2007 2008 2009
Source: CEIC; Roland Berger analysis
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MODAL SPLIT
Growing competition of cheaper transport modes along with growing capacity will influence the air cargo market
Outside-in view on air cargo trends
DEMAND restricted to value goods
Air share of containerized international trade in terms of weight and value
3.0% 2.5% 2.0% 30% 1.5% 20% 1.0% 0.5% 0.0% 2000 10% 0% 2009 50% 40%
CAPACITY increase expected further
Twin aisle aircraft deliveries by region [Number of aircraft]
2001
2002
2003
2004
2005
2006
2007
2008
> Lower unit value goods will be diverted from air cargo to other cheaper, though slower, modes of transport (sea freight, trucking)
> New deliveries ordered in "boom" times might be postponed or only partly cancelled – Still high number to arrive on the market in coming years > Due to low fuel price, older, less efficient aircraft stay longer in operations
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Source: Seabury; IATA; Roland Berger
MODAL SPLIT
Regular rail operation between Asia and Europe will have only longterm impact on sea/air freight
Rough estimate of Rail operation impact on container traffic (short to medium term)
VOLUME FAR EAST – EUROPE ['000 EUR]
Assumptions train > 80 TEU/train > 10 trains/day – bottlenecks – weather conditions > 360 days 13,513
288 Potential Rail Sea 2009
110 Air 20091)
Trans-Mongolian Railway Trans-Siberian Railway Baikal Amur Mainline Ocean route Hamburg - Dalian Connection Trans-Siberian Railway - Western Europe 1) Assumptions: all freight containerized; 12 tons/TEU
> Rail potential only single digit percentages of total volume > Possibly slightly higher potential in the long term when bottlenecks can be reduced
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SPECIALIZATION AND VALUE ADDED SERVICES: increasingly complex supply chains in shipper industries will call for increasingly specialized logistic service providers
Extract from RB study "Switch points in logistics"
COMMENTS INTEGRATION Tasks will increasingly be integrated and performed by large businesses offering complete solutions LSP
EXPECTATIONS
LSP LSP LSP
54 %
LSP
SPECIALIZATION
Specialization and division of tasks between business will intensify - complexity of supply chains will require logistics service providers with specialized knowledge
> Increasingly complex supply chains and intense product specialization in shipper industries will call for increasingly specialized logistics service providers > Value added services: Industry knowledge and industry-specific logistics solutions have already become a key requirement to gain customers in specialized industries such as pharmaceuticals, aviation, consumer goods. > Shippers have an incentive to chose several logistics service providers for their supply chains, both for reasons of contingency/security and to ensure that the supply chain is not dependent on one single provider > Trend contradicts last decade's integration of contract logistics with other logistics segments, particular freight forwarding has been integrated with contract logistics
Note: Study conducted with 150 industry experts, University of St. Gallen, and Roland Berger
Source: Roland Berger "Switch points for the Future of Logistics" Sustainability of Freight Forwarding_fin.pptx 43
INDUSTRY SPECIFIC IT: the increasing call for specialized global FWDs wil also require tailormade IT solutions
Extract from RB study "Switch points in logistics"
COMMENTS GLOBAL STANDARD One global IT standard will emerge in logistics, to facilitate smooth cooperation between different logistics service providers > Proprietary IT systems are expected to emerge after 2015 – critical to achieve process efficiency, service innovation and product- differentiation & customization > Recent service innovation/differentiation examples include capacity platforms1) and dedicated shipper interaction platforms > Proprietary IT systems will be a challenge for smaller logistics service providers, due to the resources required to develop the systems > IT service providers will compete to provide platform solutions for the logistics industry e.g. Oracle and SAP > Opportunities exist for logistics service providers to differentiate service offering via current IT interfaces – in parallel join/drive an emerging global standard early in its development
1) IT platform to automatically calculate prices, similar to online booking of flight tickets
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EXPECTATIONS
59 %
PROPRIETARY SYSTEMS
Several proprietary IT standards will be developed by competing logistics service providers. Small businesses will have to ensure compatibility with one or more standards
Note: Study conducted with 150 industry experts, University of St. Gallen, and Roland Berger
Source: Roland Berger "Switch points for the Future of Logistics"
GLOBALIZATION VS. REGIONALIZATION? Will the demand for "global total solutions" remain growing or reverse back to regionalization?
Globalization vs. regionalization – Factors for potential regionalization
Cost efficiency
Rise of energy prices > Increases benefits of geographically short material flows Rising wages in emerging countries > Reduces benefits of remote production
Environment
Ecological awareness > Local products preferred by customers Governmental regulations > Increased governmental regulations or involvement in businesses enforces local / national sourcing Local unavailability of resources > Materials > Skilled labor > Water & Energy
Supply Chain requirements
Just-in-time delivery > Flexibility and fast response times required Fast innovation cycles > Short and quick SC required > Low inventories require Just-in-time deliveries > Roll-out of new production techniques more difficult in decentralized production
Impact of factors on regionalization: detrimental neutral favorable
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CONTRACT LOGISTICS - CHALLENGES: ten-dency towards shorter contract life-cycles will increase hurdles for an appropriate ROI
Extract from RB study "Switch points in logistics"
COMMENTS STABILIZATION Product life cycles will stabilize or lengthen due to the development of robust "base items" that permit design changes or functionality updates
Sales
68 %
Time
Note: Study conducted with 150 industry experts, University of St. Gallen, and Roland Berger
Source: Roland Berger "Switch points for the Future of Logistics" Sustainability of Freight Forwarding_fin.pptx 46
EVER SHORTER
Product life cycles will decrease further as technological innovations and changing consumer taste require complete product replacements at increasing frequencies
> Product life cycles are expected to shorten further, which creates challenges for contract logistics providers – shorter lifecycles lead shippers to push for shorter contract periods > Current volatile logistics environment (freight rates, oil prices, economic crises) means that shippers are conservative and try to reduce their risks by avoiding long contract periods > Setting up contract logistics operations are related to financial investments, which was previously recouped through longer (5+ years) contract periods > Shorter contract periods means that the time to generate return on investments is reduced – this transfers risks of the investment from the shipper to the logistics service provider
EXPECTATIONS
VII. THE OPPORTUNITIES: Moves to sustain business medium term
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The opportunities: Moves to sustain business medium term
• Critically review overall portfolio of logistics activities − question exposure to contract logistics − question exposure to overland transportation − focus on core competencies − think about partnerships with carriers Capture Chinese tradelanes − understand needs of Chinese customers; broaden customer scope away from only EU based MNCs − invest into local warehousing and distribution capabilities − build-up regional management representation Develop industry-specific forwarding solutions − professionalize industry specific sales approaches − develop industry specific VAS − develop industry specific IT solutions, supporting the VAS • Re-think purchasing strategies of transport capacities − develop different models of purchasing – trade-lane specific (fixed, ad-hoc, mixed forms, ...) − develop more sophistication of capacity steering mechanisms Continue with cost-slimming concerning the indirect cost − business off-shoring of parts of IT, payroll, accounts payable/ receivable − overall review of make-or-buy − standardizing IT and related processes to the maximum − e-transformation of all paper-work processes (shipment docs etc.) − continuous process improvement and organizational shaping − find the right balance between central functions and duplication of regional functions ... − ...
Sustainability of Freight Forwarding_fin.pptx 48
•
•
•
•
thanks for your attendance
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SUSTAINABILITY OF BUSINESS MODELS ETH Presentation, Zurich April 24th, 2012
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Contents
I. II. III.
THE SPEAKER: Matthias Hanke and Roland Berger Strategy Consultants at a glance THE INDUSTRY: Key characteristics of freight forwarding THE MARKET: Drivers determining the supply and demand landscape
IV. THE STRATEGIC KEY QUESTIONS: How might the forwarder's role change within the overall value chain? V. THE THREAT: Interesting examples of a similar industry (fiction for forwarding ... so far)
VI. THE TRENDS: What is impacting the industry with short- and mid-term relevance VII. THE OPPORTUNITIES: Moves to sustain business medium term
© Roland Berger Strategy Consultants Sustainability of Freight Forwarding_fin.pptx 2
I. THE SPEAKER: Matthias Hanke and Roland Berger Strategy Consultants at a glance
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Let me introduce myself
MATTHIAS HANKE, PARTNER
• Weathered (1965) • Married • Two kids (15/17) • • • • • • • • Born in Hamburg, living in Basel Apprenticeship in steel trading (2 years) German Navy (2 years) Combined Master studies of Mechanical Engineering and Business Administration at TU Darmstadt (6 years) Junior Consultant to Senior Project Manager at RBSC (5 years) Executive Vice President "Network & Strategy" at Swissair, Crossair, Swiss (4 years) DHL Express (3 years) Partner with RBSC in Zurich (6 years)
• Key areas: Logistics, Aviation, Tour Operating
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Roland Berger Strategy Consultants is a truly global firm – We provide strategic advice to the world's top decision makers
Our offices
Founded in 1967 in Germany by Roland Berger
47 offices in 35 countries, with 2,500 employees
About 220 RB Partners currently serving ~1,000 international clients
Source: Roland Berger
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Active in the world's most important markets, we are proud to be a top 5 player in the global strategy market
Global market position amongst strategy consultants
75% repeat clients 30% of the top-1,000 global
companies
40% of Europe's leading
companies
MARKET POSITION1)
Germany Growth regions China and Russia/CEE
1) In the strategy segment
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#2 #2
Core markets in Western Europe World
#3 #5
II. THE INDUSTRY: Key characteristics of freight forwarding
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Summary: four things to understand upfront
• • • •
Global Forwarding is one out of four basic FWD types Global FWD is a trading business with thin margins Global FWD has a brokerage function between "Shippers" and "Carriers" – thus, Global FWD takes a coordinating role in the value chain Value added services (VAS) reach growing importance as USP for Global Forwarders
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Global Forwarding is one out of four basic FWD types
KEY CHARACTERISTICS
Overland Transportation Global Forwarding Contract Logistics Integrators; Express Logistics
• • • • • • • • • • • • • • • •
Mainly trucking; growing share of rail Forwarders often exercise "Selbsteintrittsrecht" and "operate" Operation consists of carriage plus terminal operation for LTL business (groupage) "Mama and Papa business" – low USPs ... low entry hurdles Core business is sea and air intercont transportation Asset-light/ trading business (capacity brokerage) plus value added services Low margins (RoS; don't mix up with RoC) Interfaces with Overland Transportation and Contract Logistics Coordination of parts of the supply chain on behalf of the customer Warehousing and Distribution are elements of core business Contract duration over a longer period (~5 years) with dedicated investements IT integration/interfacing with customer is key Door-to-door service, self operated (P&D, domestic linehaul, intl. linehaul, terminals) Standing network – given fix-cost (flight gets operated ... full or empty) Day-definite and Time-definite delivery plus even courier-services High-cost proposition
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FOCUS
Global FWD is a trading business with thin RoS-margins – potentially desastrous impact of sub-seasonal yield decline or overcapacity
Typical freight forwarder P&L structure (illustrative) [% of revenue]
100% > Costs of 3rd party carriers – mainly outside forwarders' direct control > Economies of scale lead to lower cost per shipment
(1)
85%
Direct Operating Expenses ("DOE")
15% 8% 5% Net Revenue Cost of Sales Gross Profit Direct Costs Indirect Costs 2% – 4% EBITDA
COMMENTS > Forwarding business model is relatively low margin and highly sensitive to declines in revenue > There are three key potential levers to improve profitability – increase of net revenue (1) – improve of cost of sales (2) – reduction of DOE (3) > Increase of net revenue requires continuous revision of product/ service portfolio and presence in the rapidly growing emerging logistics markets > Reduction of DOE finds a small overall basis only and requires continuous action on overhead costs
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Source: Roland Berger
Global FWD has a brokerage function between "Shippers" & "Carriers" – thus, Global FWD takes a coordinating role in the value chain
EXAMPLE: AIR CARGO VALUE CHAIN VALUE ADD OF FORWARDERS > Bundling of customer (shippers) demands > Procuring transport capacities with volume rebates > Coordinating many/ all transport related players (depending on the agreed INCO terms between Shipper and Consignee) > Enhancing transport management with value added services
Pickup, Build-up, RFS
Handling & Warehouse Cargo Handler
Linehaul
Handling & Warehousing
RFS, Breakdown, Delivery
Shipper
Trucking Company
Trucking Company
(Carrier) Forwarder
regular/usual contract relationship
alternative contract relationship
alternative contract relationship
Consignee
Airline
Airline
Cargo Handler
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Value added services (VAS) reach growing importance as USP for Global Forwarders
The International Federation of Freight Forwarders Associations defines freight forwarding as "services of any kind relating to the carriage, consolidation, storage, handling, packing or distribution of the goods as well as ancillary and advisory services in connection therewith, including but not limited to customs and fiscal matters, declaring the goods for official purposes, procuring insurance of the goods and collecting or procuring payment or documents relating to the goods".
Source: Roland Berger
Core Business: procurement of international transport capacities Value added services can even reach towards significant IT interfaces between the shipper and/ or the consignee
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III. THE MARKET: Drivers determining the supply and demand landscape
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Summary: five things to remember
• • • • •
Within the forwarder controlled market segments DHL, K+N and DB Schenker are clear market leaders – overall high fragmentation The European overland transportation market is even more fragmented with less than 10% total volume controlled by the top five players The overall forecast for global transportation needs is very prosperous - given stability of current paradimgs (global warming?, free trade?, ...) Individual country performance concerning GDP development and trade balance is significantly impacting the relevant "Trade Lanes" for hauliers and forwarders Freight rates are becoming increasingly volatile and demand on the forwarders side for more sophistication of steering purchased capacities
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Within the forwarder controlled market segments DHL, K+N and DB Schenker are clear market leaders – overall high fragmentation
Top 10 freight forwarding players [% of total freight forwarding market, 2011]
AIRFREIGHT – MARKET SHARE
Sinotrans Expeditors 1.4% 1.5% Agility 1.5% CEVA 1.7% Nippon 1.7% Express 1.8% UPS
2.9%
OCEAN FREIGHT – MARKET SHARE
Sinotrans SDV DHL 6.8% DAMCO Nippon Express 0.5% Agility 0.5%
3.5% 0.5%
0.5%
0.4%
K+N 2.0%
DB Schenker 3.0% K+N
Expeditors
0.7%
0.9%
1.5%
Panalpina
> DHL is the market leader with a significant lead towards the nearest competitors > DB Schenker, K+N and Panalpina are relatively equal sized and competing to become the 2nd largest
Source: Merril Lynch, West LB, Roland Berger analysis
DB Schenker > K+N leads the ocean freight market and has a sound lead to competitors > DHL is the second largest with DB Schenker, Panalpina and Expeditors competing for 3rd place
Sustainability of Freight Forwarding_fin.pptx 15
Panalpina
1.0%
DHL
The European overland transportation market is even more fragmented with less than 10% total volume controlled by the top five players
Overland transportation – European supply structures
MARKET SHARES (EUROPE)
90.7% 3.3%
CHARACTERISTICS > European overland transportation is highly fragmented, driven by very low entry barriers in the industry > Basic transportation service is mainly delivered by local haulers, with few large international players
2.3% 1.7%
> Market competition is characterized by low product differentiation – price is the main competitive lever
1.5%
> Process efficiency and network cost are key levers for providers to reduce price (terminal operation, driver costs, asset costs)
0.5%
> Value added services are offered mainly for MNCs as a differentiator, by large logistics service providers > A 40-tons truck from MUC to HAM bears total cost of some EUR 650 and leads to a maximum profit of ~EUR 30 – depending on overall asset utilization and truck load-factor
Sustainability of Freight Forwarding_fin.pptx 16
DB DHL Schenker
DSV Dachser Geodis Other
Source: West LB, Roland Berger
The overall forecast for global transportation needs is very prosperous given stability of current paradimgs (global warming?, free trade?, ...)
World GDP and Export growth [Euro, trillion]
Gross Domestic Product (GDP), Nominal Exports of Goods and Services, Nominal
24 132 21 22 118 125 20 105 112 17 19 94 100 15 16 84 89 13 70 74 79 66 56 60 63 46 48 53
25
27
29
31
33
35
38
40
43
46
48
51
55 50 45 40 35 30 25 20 15 10 5 0
> Growth of GDP and world exports are the main external factors influencing the size of the global transportation industry > World GDP and trade is expected to continue growing at high single digit growth rates (6-7% year over year) > By 2030 the value of exported goods/services might have increased almost 300% compared with 2010 > World exports are forecasted to grow with a multiple >1 compared to GDP – indicating a significant growth for the global transportation industry until 2030
Sustainability of Freight Forwarding_fin.pptx 17
139 147
Source: IHS, Roland Berger
2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010
Individual country performance concerning GDP development & trade balance is impacting the relevant "Trade Lanes" for hauliers and FWDs
Individual country performance concerning import and export
> Relevant trade lanes derive from individual country performance concering imports and exports > Huge imbalances between exports and imports are a problem for the transportation industry (China in the recent years) > Imports and exports from China, EU, Japan and the US do by far have the largest impact, due to the size compared to other trading regions > Even micro-economic events can impact the global transportation industry: An example is Apple Computers' launch of "The new iPad" which saw Transpacific airfreight rates soar with over 20% in less than a week
Source: Drewry, Roland Berger Sustainability of Freight Forwarding_fin.pptx 18
Freight rates are becoming increasingly volatile and demand on the forwarders side for more sophistication of steering purchased capacities
International freight rate development
OCEAN FREIGHT
3,500 3,000 2,500 2,000 1,500
Jan 11 May 11 Aug 11 Oct 11 Dec 11 Dec 12
Low forecast USD per 40 foot container High forecast
> In the current uncertain economic climate, it is difficult to provide reliable forecasts for the KPIs driving world trade > As a result, freight rates are becoming increasingly volatile, with carriers adjusting rates based on short-term capacity and demand development > Freight rates are expected to rise in 2012 – ocean freight carriers have suffered large losses and are pushing rate increases, while rising fuel costs will force air cargo carriers to increase rates > Freight forwarders must adapt capacity management, in order to reduce their exposure to market volatility
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AIRFREIGHT
5.5 5.0 4.5 4.0 3.5
Feb 11 Apr 11 Jun 11 Aug 11 Dec 11 Dec 12
USD per kg Fuel price based
Source: Drewry, Roland Berger
IV. THE STRATEGIC KEY QUESTIONS: How might the forwarder's role change within the overall value chain?
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The global forwarder: "... between the chairs" or "... always on the winner's side"
TRANSPORT MODE
Air Sea Land
KEY STRATEGIC QUESTIONS
1 How will the global forwarders' role change within the value chain? > Need for forward integration > Need for backward integration > Need for innovation and VAS? Which and how many assets does a forwarder need to leverage market opportunities and offset threats? What are the underlying market trends? > By major trade lanes > By major industry What are the underlying trends on the capacity supply side (by air, sea, land)? What risk management processes will be needed?
Shipper
VALUE CHAIN
2 Global forwarder
3
Carrier
4 5
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An international forwarder's growth strategy needs to be robust against different scenario characteristics
Illustrative scenarios
> Strong demand on shipper side – Forwarder improves towards preferred supplier position > Overcapacity on carrier side facilitates access to cheap capacity – Forwarder is able to exploit/improve its forwarder power > New globally introduced valueadded services strengthen forwarder's USP's – shippers steer additional capacity on forwarder > Strong consolidation of asset owners leads to bottlenecks and significant margin deterioration of forwarders > Increased direct business between shippers and carriers with significant volume decline/stagnation for forwarders > Volume growth is tendered by large shipper conglomerates – sourcing processes put pressure on forwarders
2 possible scenarios
NETWORK & QUALITY FORTRESS
FORWARDER UNDER SIEGE
Sustainability of Freight Forwarding_fin.pptx 22
Two fundamental dimensions determine an international forwarder's potential move to further secure sustainable growth
EXISTING MARKETS
Securing price competitive access to cargo capacity with alternative risk exposure lower medium higher (only broker) (fix allotments) (own assets)
Strengthening commercial attractiveness by adding USP's for shippers
Excellence on selected value chain items Excellence on all value chain items
International Forwarder
? ?
?
Which innovations and value added services2) does a forwarder need to offer in order to maintain/improve its role in the transport value chain?
How much risk1) does a forwarder need to take in the future to sustain/grow its market position?
1) To be differentiated by trade lanes 2) To be differentiated by products
NEW MARKETS
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V. THE THREAT: Interesting examples of a similar industry (fiction for forwarding ... so far)
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Summary: Interesting examples of a similar industry – TOUR OPERATING
• Tour Operating is a very similar industry: − trading with capacities (hotel & air), − brokerage function between customers and hotels/ airlines (bundling of demand and purchasing big volumes with rebate) − value added services (packaging, on-site transportation, insurance, ...) − thin margins, decreasing RoS Along the value chain, tour operators are intermediaries – so are travel agents, online portals and destination management agents New internet based techniques and fueled by a high degree of data standardization have been resulting into new distribution channels for airlines and hotels − directly (B2C) − into travel agencies (stores and online) (B2B) In essence, the legacy tour operating for package tours in the volume segment will be dead in the forthcoming 5 years Some learnings to be transfered into the global forwarding industry?
Sustainability of Freight Forwarding_fin.pptx 25
• •
• •
Tour operating is a very similar industry
TYPICAL BOTTOM-LINE STRUCTURE
% of Sales
100%
83-90%
10-17%
8-12%
2-5%
CHARACTERISTICS • trading with capacities (hotel & air), • brokerage function between customers and hotels/ airlines (bundling of demand and purchasing big volumes with rebate) • value added services (packaging, on-site transportation, insurance, ...) • thin margins PROFIT LEVERS 1. Measures "above Gross Operating Profit" a. Improve revenue by sales and pricing measures b. Lower direct cost by better sourcing contracts 2. Measures "below Gross Operating Profit" a. Improve production, sales, service and administrational processes b. Reduce staff, material and financial cost
Sustainability of Freight Forwarding_fin.pptx 26
Staff cost
Other Exp. Deprec. & Rental
Sales
Direct cost - Airline - Hotel - Transfer
GOP
Indirect cost
EBIT
detailled on further pages
Marketing & Adv.
Along the value chain, tour operators are intermediaries – so are travel agents, online portals and destination management agents
VALUE CHAIN: ALTERNATIVE LAYOUTS
Description Value-chain steps Share of revenue currently
LT
Expected development (5 years)
Kunde
RB/ OTA
New internet based techniques and data standardization have been resulting into new distribution channels for airlines and hotels • Hotels publish fares via selected bed-banks and via on web-pages • Airline aleady publish flights via computer reservation systems and via own web pages • A new software provider enables virtual packaging of independent flight and hotel offers
T/O ZGB-A
Classical Value Chain
~43%
T/O with direct sales
~19%
Content marketing via data bases/ bedbanks B2C marketing of content providers
~7%
• Legacy Travel Agents use the new techniques and also build packages • T/O value-add for specific segments has vanished completely
OTA: Online Travel Agent T/O: Tour Operator
Sustainability of Freight Forwarding_fin.pptx 27
~32%
LT: Leistungsträger (Airline, Hotel, Mietwagen), Content Providers ZGB-A: Zielgebietsagentur, Destination Management Companies RB: Reisebüro ("Offline Travel Agent")
Quelle: Euromonitor, Roland Berger Strategy Consultants
In essence, the legacy tour operating for package tours in the volume market will be dead in the forthcoming 5 years
PORTFOLIO OF LARGE T/OS
Package tours short-haul mass market − high yield market Package tours long-haul Individual tours short-haul and long-haul Specialist tours (sailing, climbing, safari, diving, ...) Cruise ship journeys Retail shops Destination Management agents Hotel ownership
COMMENTARY • For TUI, Thomas Cook, Hotelplan, Kuoni, ... the package tour business in the mass market have been the profit machine for the company in history • The former value-add of tour operators (destination know-how, exclusive access to charter flights, ...) has almost been vanished • Hotels and airlines have been pursuing a vertical integration along the value chain • Tour operators have to refocus their portfolio and to put more emphasis on value added services, exclusive hotel access (assets?), destination based services/ activities and control of customer experience • Big question: more invest into assets to ensure access to exclusive product offeres???
Sustainability of Freight Forwarding_fin.pptx 28
Some learnings to be transfered into the global forwarding industry?
• • • • • • • Replacement tendencies amongst the various players along the value chain? Fight for the ownership of the customer interface? Shift of value-add from providing freight capacities towards value-added services? Online portals for freight capacities and transportation services ... provided some significant progress concerning data standards is being achieved? Consolidation tendencies within the freight forwarding industry? Stagnation of Western European Markets and shift of activities to BRIC plus Asean-5? Necessary move into assets to ensure unique selling positions and more sophistication required to steer the increased risk position?
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VI. THE TRENDS: What is impacting the industry with short- and mid-term relevance
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Key trends in the logistics service provider industry that might endanger sustainability of current business models
• 1 • 2 YIELD DECLINE: Shippers and Carriers negotiate for profit pools VERTICAL INTEGRATION: Carriers and shippers increase profit pools by "conquering" additional parts of the value chain SHIFT OF KEY TRADELANES: legacy tradelanes dissappear – new tradelanes partially require adaptations to the FWD's business model CHANGE OF INCO TERMS (CN): Chinese shippers tend to move from CIF to FOB for import business and v.v. for exports HINTERLAND CONNECTIONS: efficiency of increasing importance – even an entry condition for business with Chinese shippers • MODAL SPLIT: Demand shift from air transport to 6 sea and (increasingly) rail – FWDs need to adapt business relationships • SPECIALIZATION AND VALUE ADDED 7 SERVICES: increasingly complex supply chains in shipper industries will call for increasingly specialized logistic service providers • 8 INDUSTRY SPECIFIC IT: the increasing call for specialized global FWDs wil also require tailormade IT solutions
• 3
• 4
• 5
• GLOBALIZATION VS. REGIONALIZATION? will 9 the demand for "global total solutions" remain growing or might the trend reverse back to regionalization? • 10 CONTRACT LOGISTICS - CHALLENGES: tendency towards shorter contract life-cycles will increase hurdles for an appropriate ROI
Sustainability of Freight Forwarding_fin.pptx 31
Source: Roland Berger
YIELD DECLINE: Shippers and Carriers negotiate for profit pools
Price developments in air- and ocean freight [Index]
120 100 80 60 40 20 0 2006
Ocean freight1) Airfreight
2)
Yields for global freight forwarders [EBIT RoS-margin, %]3)
5.0 4.5 4.0 3.5 3.0 2.5 2.0
2006
Index 2006= 100
FORWARDERS IN A SANDWICH POSITION • Overcapacities in sea/air foster carrier efficiency initiatives and thus impact FWD's margins • Shippers also see themselves exposed to economic volatility and submit parts of the pressure to their vendors – FWDs margin once more impacted
2007 2008 2009 2010
2007
2008
2009
2010
2011
> > > >
Ocean freight rates declined since 2005 Airfreight rates overall stable – however include significant fuel price increases For global forwarders, falling rates after procurement are critical, increasing rates after procurement are beneficial Forwarders' profitability is overall under pressure – new sources of margins to be elaborated (new USPs)
1) HARPEX container price index 2) IATA global air cargo revenue compared to volume 3) Consolidated figure for leading forwarders
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Note: Yield is defined as profit per unit
Source: HARPEX, IATA, Linehaul, Annual reports, Roland Berger
VERTICAL INTEGRATION: Carriers and shippers increase profit pools by "conquering" additional parts of the value chain
Vertical integration (along the value chain) Shippers
Shippers
Consolidation within the player's industries (Horizontal integration)
Global FWDs
Sea/ Air transport
Terminal handling
"Hinterland transport"/ RFS
Global Forwarders Air/ Sea Carrier Terminal operators Intermodal operators Railway operators
e.g. Hapag Lloyd
?
e.g. Maersk e.g. HHLA e.g. Eurokombi e.g. DB Schenker
> Dilution of traditional division > Will this become a general trend?
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SHIFT OF KEY TRADELANES: legacy trade-lanes dissappear – new tradelanes partially require adaptations to the FWD's business model
COMMENTS > Economic developments have created a structural change of logistics flows especially to/from/in Asia > Production streams are increasingly being redesigned as manufacturing costs rise in current low-cost countries > Basic manufacturing is moving towards new low-cost locations > Freight forwarders have not previously had a strong presence in these countries and reorganize to support future growth from these markets
3 Intra–Asia > Tradelane is forecasted to cover 25% of world trade by 2020 > Growth mainly driven by an increased trading between emerging economies in Asia
2 1
3
Traditional key tradelanes 2020 key tradelanes
1 South America – Asia > Tradelane is forecasted to cover 5% of world trade by 2020 > Mainly driven by an increased consumer spending in South America
2 Middle-East, Africa – Asia > Tradelane is forecasted to cover 18% of world trade by 2020 > Mainly driven by an increased consumer spending in Africa and Chinese investment in African natural resources
Source: Roland Berger
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SHIFT OF KEY TRADELANES
World trade flows are shifting – In ~20 years China will take over USA's role as the dominant trading nation
TOP 20 TRADELANES 2009
Origin
1 China 2 China 3 Japan 4 China 5 Germany 6 Germany 7 China 8 UK 9 Japan 10 UK 11 Korea 12 UK 13 Hong Kong 14 China 15 France 16 China 17 Netherlands 18 Japan 19 China 20 UK
1) 2009 USD million
TOP 20 TRADELANES 2030
Value1)
290,960 207,677 146,523 140,342 118,773 113,209 102,171 97,624 69,008 68,062 66,443 62,388 58,016 56,446 54,414 54,163 51,989 45,941 43,319 43,177 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
COMMENTS
594,741 336,183 281,140 263,063 201,382 189,785 178,291 169,356 167,467 162,376 151,570 144,131 143,725 141,201 140,320 136,295 125,826 121,603 120,318 117,340
Destination
USA Japan USA Korea USA UK Germany USA Korea Netherlands USA France USA Singapore USA Australia USA Hong Kong Netherlands Belgium
Status
Origin
China China China China China Japan China China Germany China China Germany UK China China China USA China China China
Destination Value1)
USA Japan Korea India Germany USA Singapore Indonesia USA Malaysia Nigeria UK USA Thailand Saudi Arabia Brazil India UK UAE Australia
> New tradelanes grow in importance for the logistics industry > China is expected to be the dominant trading nation – 15 of top 20 tradelanes will have origin or destination in China > Tradelanes from developing economies will be bilateral, instead of mainly focusing on export to developed countries > Shifts focus of the logistics industry and creates challenges to build up a presence in the emerging markets
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NEW NEW NEW
NEW NEW NEW NEW NEW NEW
Note: Excluded tradelanes that can be serviced without Ocean freight and/or Airfreight
Source: PWC Future of World Trade, Roland Berger
SHIFT OF KEY TRADELANES
Overland transportation markets in developing economies, lead by China and India, are outgrowing markets in developed economies
Overland freight (road, rail and inland waterways) markets [billion tkm]
Top regional freight markets 2011
China USA EU27 Russia India Brazil 2,308 2,251 1,793
949
Top regional freight markets 2020
China USA India Russia EU27 Brazil 3,231 3,160 2,736 1,407 5,472 10,619
COMMENTS > BRIC overland transportation markets will grow at twice the rate of developed markets > China and India are forecasted to see the highest percentage growth until 2020, growing annually with over 5% > Growth markets present key opportunities for logistics service providers > Entering these markets is challenging, as they are often less mature and difficult to offer an attractive USP
6,653 4,886
Source: Progtrans World Transport Report 2010/2011; Roland Berger
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SHIFT OF KEY TRADELANES
There are three things FWDs need to retain about growing logistics in China
FWDs need to CONSIDER THE WEST Stronger growth of manufacturing and trading in Central and Western China provinces will shift logistics focus away from the port cities to the hinterland FWDs need to UNDERSTAND Chinese AUTHORITIES Without governmental interaction and support, larger growth initiatives in China are doomed to fail (economically) FWDs to BECOME (more) CHINESE In order to capture genuine China business, a certain, yet real domestic footprint in asset-based logistic activities is required, which can realistically only be built up by M&A – with all the potential pitfalls thereof
Growth dynamics across China's provinces
Heilongjiang
Inner Mongolia aut. region Liaoning Beijing Tianjin Hebei Shandong Henan Jiangsu Sichuan Chongqing . Zhejiang Hunan Guizhou Fujian Yunnan Guangxi Guangdong Jiangxi Hubei Anhui Shanghai
Jilin
Gansu Shanxi Ningxia Hui aut. region Qinghai Shaanxi
Hainan
Export and Import above average Import above average Export and Import average Export above average
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CHANGE OF INCO TERMS (CN): Chinese shippers tend to move from CIF to FOB for import business and v.v. for exports
Competitive analysis of bill of lading practices
Market share of international trade in FOB/CIF
Volume split by im/export1) 54% 46%
Trends in import
> CIF term is currently more commonly used by Chinese buyers, but FOB term is on the rise, which favors forwarders with strong local logistics capability – As Chinese importers get more sophisticated in supply chain mgmt, they are tending to shift to FOB term in import due to the need to have more control over supply chain and lead time – They will likely prefer integrated solution that encompass forwarding and local logistics (ie warehousing, transportation) with some value added offerings
CIF
30% 60%
FOB
70% 40% Exports Imports
1) Based on breakdown of air cargo exported/imported in 2009, by tons
Source: Traffic Yearbooks; Expert Interview; Roland Berger Analysis Sustainability of Freight Forwarding_fin.pptx 38
HINTERLAND CONNECTIONS: efficiency of increasing importance – even an entry condition for business with Chinese shippers
Land transport – Port hinterland connections
Example Europe – Expected increase in number of trains over the next 10 years
Denmark
Examples from other continents
> USA: "Connectivity issues are a major focus of seaports
Berlin/ Brandenburg Saxony-Anhalt Poland Saxony
Northern Ports Western Ports
Lower Saxony
N
nationwide, as essential road and rail networks experience near-critical congestion." (Florida Seaport Transportation and Economic Development Council)
> INDIA: "Congestion seems to persist at several port
locations on account of delayed evacuation of cargo due to inadequate road and rail capacity" (Secretariat for the Committee of Infrastructure)
W
North-RhineWestphalia Hesse Rhineland -Palatinate
Czech Republic Bavaria Austria Hungary Slovakia
> CHINA: Currently few bottlenecks due to:
– Heavy infrastructure investments over the last years – Extensive network of harbors, also in the hinterland at large rivers – Special economic zones and industry areas near ports Future risk of bottlenecks once industry starts to localize away from ports as salary levels increase
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France
BadenWuerttemberg Switzerland
Italy
MODAL SPLIT: Demand shift from air transport to sea and (increasingly) rail – FWDs need to adapt business relationships
Modal split of international trade with China [by value]
After the demand crisis, strong modal share gain of sea
1.422 1.760 2.174 2.563 2.208
100% 80% 60% 40% 20%
Global ocean container and air freight growth [% change YoY]
Market share gain SEA
Ocean container Air freight
By Sea
61%
61%
0%
63%
66%
65%
-20% -40% -60% 2007
Market share gain AIR
2008 2009 2010
Europe-Asia rail bridge to strenghten rail
By Road By Air 18% 18% 19% 2% 17% 18% 2% 16% 16% 2% 17% 17% 2%
SEA Current share: 99% of total volume Distance: Aprox. 20.000 km1) Delivery time: 30-45 day1) Prices: Price leader
40
By Rail 19% and Others 1%
RAIL Current share: <1% of total volume Distance: Approx. 10.000 km1) Delivery time: 22-28 days1) Prices: Up to 50% higher than sea freight
2005 2006 2007 2008 2009
Source: CEIC; Roland Berger analysis
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MODAL SPLIT
Growing competition of cheaper transport modes along with growing capacity will influence the air cargo market
Outside-in view on air cargo trends
DEMAND restricted to value goods
Air share of containerized international trade in terms of weight and value
3.0% 2.5% 2.0% 30% 1.5% 20% 1.0% 0.5% 0.0% 2000 10% 0% 2009 50% 40%
CAPACITY increase expected further
Twin aisle aircraft deliveries by region [Number of aircraft]
2001
2002
2003
2004
2005
2006
2007
2008
> Lower unit value goods will be diverted from air cargo to other cheaper, though slower, modes of transport (sea freight, trucking)
> New deliveries ordered in "boom" times might be postponed or only partly cancelled – Still high number to arrive on the market in coming years > Due to low fuel price, older, less efficient aircraft stay longer in operations
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Source: Seabury; IATA; Roland Berger
MODAL SPLIT
Regular rail operation between Asia and Europe will have only longterm impact on sea/air freight
Rough estimate of Rail operation impact on container traffic (short to medium term)
VOLUME FAR EAST – EUROPE ['000 EUR]
Assumptions train > 80 TEU/train > 10 trains/day – bottlenecks – weather conditions > 360 days 13,513
288 Potential Rail Sea 2009
110 Air 20091)
Trans-Mongolian Railway Trans-Siberian Railway Baikal Amur Mainline Ocean route Hamburg - Dalian Connection Trans-Siberian Railway - Western Europe 1) Assumptions: all freight containerized; 12 tons/TEU
> Rail potential only single digit percentages of total volume > Possibly slightly higher potential in the long term when bottlenecks can be reduced
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SPECIALIZATION AND VALUE ADDED SERVICES: increasingly complex supply chains in shipper industries will call for increasingly specialized logistic service providers
Extract from RB study "Switch points in logistics"
COMMENTS INTEGRATION Tasks will increasingly be integrated and performed by large businesses offering complete solutions LSP
EXPECTATIONS
LSP LSP LSP
54 %
LSP
SPECIALIZATION
Specialization and division of tasks between business will intensify - complexity of supply chains will require logistics service providers with specialized knowledge
> Increasingly complex supply chains and intense product specialization in shipper industries will call for increasingly specialized logistics service providers > Value added services: Industry knowledge and industry-specific logistics solutions have already become a key requirement to gain customers in specialized industries such as pharmaceuticals, aviation, consumer goods. > Shippers have an incentive to chose several logistics service providers for their supply chains, both for reasons of contingency/security and to ensure that the supply chain is not dependent on one single provider > Trend contradicts last decade's integration of contract logistics with other logistics segments, particular freight forwarding has been integrated with contract logistics
Note: Study conducted with 150 industry experts, University of St. Gallen, and Roland Berger
Source: Roland Berger "Switch points for the Future of Logistics" Sustainability of Freight Forwarding_fin.pptx 43
INDUSTRY SPECIFIC IT: the increasing call for specialized global FWDs wil also require tailormade IT solutions
Extract from RB study "Switch points in logistics"
COMMENTS GLOBAL STANDARD One global IT standard will emerge in logistics, to facilitate smooth cooperation between different logistics service providers > Proprietary IT systems are expected to emerge after 2015 – critical to achieve process efficiency, service innovation and product- differentiation & customization > Recent service innovation/differentiation examples include capacity platforms1) and dedicated shipper interaction platforms > Proprietary IT systems will be a challenge for smaller logistics service providers, due to the resources required to develop the systems > IT service providers will compete to provide platform solutions for the logistics industry e.g. Oracle and SAP > Opportunities exist for logistics service providers to differentiate service offering via current IT interfaces – in parallel join/drive an emerging global standard early in its development
1) IT platform to automatically calculate prices, similar to online booking of flight tickets
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EXPECTATIONS
59 %
PROPRIETARY SYSTEMS
Several proprietary IT standards will be developed by competing logistics service providers. Small businesses will have to ensure compatibility with one or more standards
Note: Study conducted with 150 industry experts, University of St. Gallen, and Roland Berger
Source: Roland Berger "Switch points for the Future of Logistics"
GLOBALIZATION VS. REGIONALIZATION? Will the demand for "global total solutions" remain growing or reverse back to regionalization?
Globalization vs. regionalization – Factors for potential regionalization
Cost efficiency
Rise of energy prices > Increases benefits of geographically short material flows Rising wages in emerging countries > Reduces benefits of remote production
Environment
Ecological awareness > Local products preferred by customers Governmental regulations > Increased governmental regulations or involvement in businesses enforces local / national sourcing Local unavailability of resources > Materials > Skilled labor > Water & Energy
Supply Chain requirements
Just-in-time delivery > Flexibility and fast response times required Fast innovation cycles > Short and quick SC required > Low inventories require Just-in-time deliveries > Roll-out of new production techniques more difficult in decentralized production
Impact of factors on regionalization: detrimental neutral favorable
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CONTRACT LOGISTICS - CHALLENGES: ten-dency towards shorter contract life-cycles will increase hurdles for an appropriate ROI
Extract from RB study "Switch points in logistics"
COMMENTS STABILIZATION Product life cycles will stabilize or lengthen due to the development of robust "base items" that permit design changes or functionality updates
Sales
68 %
Time
Note: Study conducted with 150 industry experts, University of St. Gallen, and Roland Berger
Source: Roland Berger "Switch points for the Future of Logistics" Sustainability of Freight Forwarding_fin.pptx 46
EVER SHORTER
Product life cycles will decrease further as technological innovations and changing consumer taste require complete product replacements at increasing frequencies
> Product life cycles are expected to shorten further, which creates challenges for contract logistics providers – shorter lifecycles lead shippers to push for shorter contract periods > Current volatile logistics environment (freight rates, oil prices, economic crises) means that shippers are conservative and try to reduce their risks by avoiding long contract periods > Setting up contract logistics operations are related to financial investments, which was previously recouped through longer (5+ years) contract periods > Shorter contract periods means that the time to generate return on investments is reduced – this transfers risks of the investment from the shipper to the logistics service provider
EXPECTATIONS
VII. THE OPPORTUNITIES: Moves to sustain business medium term
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The opportunities: Moves to sustain business medium term
• Critically review overall portfolio of logistics activities − question exposure to contract logistics − question exposure to overland transportation − focus on core competencies − think about partnerships with carriers Capture Chinese tradelanes − understand needs of Chinese customers; broaden customer scope away from only EU based MNCs − invest into local warehousing and distribution capabilities − build-up regional management representation Develop industry-specific forwarding solutions − professionalize industry specific sales approaches − develop industry specific VAS − develop industry specific IT solutions, supporting the VAS • Re-think purchasing strategies of transport capacities − develop different models of purchasing – trade-lane specific (fixed, ad-hoc, mixed forms, ...) − develop more sophistication of capacity steering mechanisms Continue with cost-slimming concerning the indirect cost − business off-shoring of parts of IT, payroll, accounts payable/ receivable − overall review of make-or-buy − standardizing IT and related processes to the maximum − e-transformation of all paper-work processes (shipment docs etc.) − continuous process improvement and organizational shaping − find the right balance between central functions and duplication of regional functions ... − ...
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