Asia worth the wait
Patience will be rewarded if shippers, service providers take time
to study markets, work out distribution strategies.
By Eric Johnson
Entering Asia may seem a dizzying prospect for shippers, with a thousand paths to choose from and no assurance that any are correct.
But Christopher Logan, chief strategy and marketing officer for logistics powerhouse Agility, sees the decision as much more straightforward.
'To enter Asia, you can either tailor existing solutions to undeveloped markets, or you can design local solutions,' Logan said at the 2008 Global Distribution Strategies – Asia Pacific, held by Transport Intelligence in Hong Kong in December. 'With the first option, you're basically trading labor for technology, but this may not work. With the second option, you have local staff who better understand the challenges. The drawback is that you need the right people with the right skills. As a company you have to be willing to invest in unconventional ideas.'
The conference probed at questions of uncertainty and missteps taken by shippers and logistics partners in the often-confounding Asian economies. But it also highlighted success stories. For one, if it's not clear by now, there is no one Asia.
'You have to look at customer- or product-specific networks as opposed to looking at Asia as a whole,' Logan said. 'It may span more than one country in Asia, but it won't be Asia-wide. In the U.S. everyone has five major hubs and 20 to 25 sub-hubs. It's stable and everyone's needs are similar. Asia is a different animal. It's growing and its demands are changing all the time.'
Agility has a significant presence throughout Asia's burgeoning markets, with a particular focus in India (home to half of the company's overseas offices) and China.
Logan presented two case studies about those markets that illuminated how innovative thinking rules the day in emerging economies. First he pointed to the German retailer Metro's foray into India, where it introduced a chain of supermarkets.
'They had no infrastructure or ability to manage cold chain on a national or regional basis,' Logan said. 'The spoilage rate (for produce) was 35 percent because of a lack of logistics infrastructure.'
After setting up its own cold chain infrastructure with Agility, spoilage is now down to 10 percent, he said.
|'As a company you have to be willing to invest in unconventional ideas.'|
chief strategy and
'Traditionally 3PLs wouldn't get involved in cleaning and sorting procedures right off the farm,' he said. 'But that's what we had to do in India. The challenges of the local market meant we had to go beyond the scope of what we normally do. We had to invest in logistics infrastructure that didn't exist. The traditional subcontracting scenario wouldn't have worked because the support infrastructure didn't exist.'
Logan then noted Agility's work with Borouge, an Abu Dhabi petrochemical group exporting plastics to China.
'We looked at the best way to go from raw petroleum to finished plastic goods to the Chinese domestic market,' he said. 'The best way was to develop a logistics hub and manufacturing site in Shanghai. The decision was whether to add value in the Middle East or in China. That's the kind of decision that needs to take place in emerging markets.'
Another case study demonstrated that just showing up with a good product and good idea doesn't always cut it.
Joe Gallick, senior vice president of global sales for Penske Logistics, explained how Penske helped German tire manufacturer, Continental Corp., enter the China market.
'They were new to the Chinese market and wanted to service the after-market segment – replacement tires,' he said. 'They spent a lot of time developing a distribution base, but they didn't dedicate enough time developing a logistics network to keep their distribution promises. And because Continental was new to China, their demand forecast was less than reliable.'
Penske had been predominantly focused on the North American market but was brought to Asia by its customers.
'In the high growth parts of the world, high logistics costs are just the cost of doing business there,' Gallick said. 'But we've seen a preoccupation with price over value in Asia. We need to figure out how to solve that problem internally. We need to develop a value proposition that's attractive to our customers. We struggle all the time to sell value beyond cost. The way to bridge the gap between shippers and service providers is a set of rewards and penalties in the contract.'
Global consumer goods manufacturer Unilever has been a titan in Asia for decades, but still has problems working out its best strategy in the vast, fast-changing region.
'The average distance (cargo) travels per day in Asia is less than 500 kilometers,' said Sundarrajan Bhyravan, regional logistics manager of Asia, for Unilever. 'That hurts responsiveness to market and the reliability of lead times. It means we have to build more stocks. And every movement between two countries has to go through customs procedures. There's no NAFTA here. Also, our vendor bases are very local. In India, Indonesia or China, they might not even be pan-country, but localized vendors. It's very fragmented, and it's hard for us to partner.'
Bhyravan said that certain costs are inevitably higher, often wiping out the gains of lower cost labor.
'Transportation spend is much higher than warehousing,' he said. 'Labor costs in India, for example, are one-tenth that of Europe or the U.S. But because labor costs are low, it means warehouses are not optimized. There's little cross-docking and consolidation. It's hard to scale.'
Unilever classifies markets into two categories: those with modern trade, where consumers rely on big retailers; and those with general trade, where consumers rely on mom and pop stores, where rural areas provide a big percentage of sales, and where wholesalers are dominant.
'Asia is a hybrid market,' he said. 'You go from Australia, where it's nearly 100 percent modern to India, where it's only 10 percent modern. But modern trade is growing. It's doubling every year, and that's an important driver for growth.'
Another major manufacturer, Rubbermaid, plans to increase its presence in Asia this year.
Tony Wong, the company's director of Asia supply chain and global sourcing, said Rubbermaid plans to lower its manufacturing profile and source more. In 2006, the company spent $2.5 billion on 5,100 suppliers. In 2009, it's targeting to spend $3.5 billion, but to 3,400 suppliers.
'More spending on fewer, but better suppliers,' he said. 'Thirty-five to 55 percent of the sourcing will happen in Asia.'
A higher profile within Asia for Rubbermaid will of course increase transit time for products destined for Western Hemisphere markets.
'We need the supply chain from Asia to the U.S. to be 30 days, but in reality it's 40,' he said. 'Lead time is inventory and inventory is our money,' adding that a four- to eight-day delay in transit time can result in a doubling of inventory carrying costs.
Rubbermaid is planning to centralize into three regional distribution centers in Asia in the next few years instead of fragmented warehouses throughout the region.
'If we can have good demand planning and forecasts, and share information from country to country, we can get around the traditional model of distributing close to the customer,' Wong said.
He said that 2009 will also see the company hedge against its reliance on China.
'We need to mitigate our dependence on China, so we're looking at Thailand, Vietnam and India,' Wong said. 'In Vietnam, we have to go through Singapore (for ocean services), and that adds time and costs. So it's maybe not as attractive as India.'
Meanwhile, Gallick pointed out that simply chasing low-cost labor is not a viable strategy anymore.
'Near-shoring was already happening because the gap in labor costs between China and the Southeast U.S. has narrowed to a negligible point in some product categories,' he said of the concept of manufacturing moving closer to consumption markets in the West because of higher transportation and labor costs in Asia. 'If the sole reason a company moves abroad is to capitalize on low-cost labor, that's not a long-term strategy.'
Whatever reason a company chooses to come to Asia, it seems apparent that larger shippers will rely increasingly on the big 3PLs to make it happen.
'We trust our 3PL in the (Asia Pacific region), so we outsource all warehousing (unlike in North America, where the company operates its own warehouses),' said Wong, of Rubbermaid. 'Eighty percent of our sales are in North America, so we need to have our own assets. It's a different scenario in Asia. We don't want to own and operate our own warehouses. If (our 3PL) doesn't do it right, we can change easily.'
Unilever similarly relies on 3PLs, but is wary of their upfront limitations.
'Using MNCs is important because it helps our economies of scale to work with only a few global service providers,' Bhyravan said. 'However, the catch is that we rely on them to develop warehouse and transportation networks in new markets, so a lot of the time we find ourselves feeding them information about the market.'
Darren Plested, vice president of business development in Asia for DHL Exel Supply Chain, said that increasing the use of information technology is a must in Asia. But he also said that Asian companies are much more reticent to spend profits to adopt those technologies.
|'We need the supply chain from Asia to the U.S. to be 30 days, but in reality it's 40. Lead time is inventory and inventory is our money.'|
director of Asia supply
chain and global sourcing,
'The companies we're dealing with (in Asia) have segmented silos, meaning a single company will have different (profits and losses) and may be unwilling to take on the costs of an IT system,' he said. 'European and U.S. companies have a bigger appetite to take on these costs. Shippers should look at managing (profits and losses) across the global network, not in individual markets.'
He said the on-demand model of transportation and distribution management software will probably have the most traction in Asia.
'In this part of the world, you need to look at low-cost models for visibility.' Plested said. 'Our customers will look at niches across the supply chain. There's not one application that can do everything. There are horses for courses.'
Of course, everyone is wary of unnecessary costs these days, what with demand down and unlikely to recover for a few months at least. Logan, however, said there's no need to worry about the long-term viability of Asia's brightest markets.
'If you're driving in a car at 100 mph and you slow to 50 mph, you're going to feel it,' he said. 'You'll notice the change in velocity, but it still means you're going forward. Both India and China have a growing middle class and strong domestic consumption. It's not a given that China's domestic consumption will increase, but the growth of China's spending power is a long-term trend. They don't have the credit crisis to deal with. In terms of which consumer your want to bet on, we're comfortable with our investment in that market.'
If anything, the only worry is whether shippers and logistics companies have the stomach to ride out the tough times in markets that can swing up and down.
'To be successful in emerging markets, you have to be committed,' Logan said. 'There are going to be political issues and infrastructure issues. The companies we do business with will be on the front page of newspapers, and not usually for good things. But to be successful, you can't go in and out. You need fortitude to stay the course.'
And with most trades flatlining or losing volume, intra-Asia is one that could help keep shippers afloat.
'The growth in Asia from 2007 to 2008 was cut in half, or worse, but the market is still growing,' he said. 'It may not be in the transpacific, but it's growing in non-traditional lanes. The web of freight flow within Asia dwarfs other single trades. That's provided some shelter from the downturn. It also reinforces the fact that these emerging markets have become much more important for us to figure out.'