Logistics_Management

THE YEAR 2004 SURVEY: CEO PERSPECTIVES ON THE CURRENT STATUS AND FUTURE PROSPECTS OF THE THIRD PARTY LOGISTICS INDUSTRY IN THE ASIA-PACIFIC REGION Dr. Robert Lieb Professor of Supply Chain Management College of Business Administration Northeastern University 214 Hayden Hall Boston, MA 02115 617-373-4813 r.lieb@neu.edu Brooks A. Bentz Associate Partner Accenture—Supply Chain Management 100 Williams Street Wellesley, MA 02481 617-454-4708 brooks.a.bentz@accenture.com January 28, 2005 The Year 2004 Survey: CEO Perspectives on the Current Status and Future Prospects of the Third Party Logistics Industry in the Asia-Pacific Region INTRODUCTION As the third party logistics (3PL) industry has continued to evolve, it has clearly become more global in nature. In responding to the needs of a customer base that is increasingly global in it sourcing, manufacturing, sales, and distribution large 3PL service providers have been challenged to put global service networks in place. The providers have responded in a variety of ways that have included acquisitions in other countries, development of alliances with foreign providers, and initiating their own operations new geographies. The task of designing, building and effectively operating these broad networks around the globe is challenging to say the least. Over the past eleven years, we have attempted to provide insight into these and other changes on the provider side of the 3PL industry in the United States by conducting annual surveys of the CEOs of many of the largest 3PL companies operating in the United States, based on sales volume. While the CEOs surveyed were also asked questions concerning the international operations of their companies, the primary focus of the annual surveys was their operations in the United States. During 2004, reflecting on the globalization of the industry discussed above, we decided to restructure our annual CEO surveys, and focus on three separate third-party logistics marketplaces. The three areas selected were North America, Europe, and the Asia-Pacific region. Questionnaires were developed that specifically focused on each of those regions, and the CEOs of major companies operating in each region were contacted and asked to participate in the market-specific surveys. We were very fortunate that many of those individuals agreed to participate, and share their perceptions of regional market dynamics with us. Collectively, the results of the three CEO surveys allow us to gain a truly global overview of the third party logistics industry from the perspective of the CEOs of many of the major 3PL industry participants. This paper focuses on the Asia-Pacific (APAC) region survey. A questionnaire was developed that focused on a variety of issues including the key marketplace dynamics in the APAC 3PL industry, the industry’s service offerings in the region, the changing requirements of customers in the region, and the current status and future prospects of the industry in the region. The 2004 survey also gave considerable attention to such issues as the extent to which RFID technology has been embraced by APAC 3PL service users, company sales strategies, and efforts of providers to address long-standing industry problems. The chief executive officer (CEO) of each of the companies included in the survey was contacted by telephone or email, and asked to participate in the survey. A target group of 15 companies was contacted, and the CEOs of all of those companies agreed to participate. However, only 11 usable questionnaires were returned. Exhibit 1 lists the companies that participated in the 2004 APAC survey. Two points should be noted before proceeding. First, due to individual company policies concerning financial disclosure, some questions were not answered by all respondents. Second, in a number of instances, average industry data is presented in this paper, but there is often substantial variability around those averages. That variability undoubtedly reflects a number of factors including differences in company strategies, operating policies, and markets served. RESULTS Revenues and Profitability Several revenue and profitability issues were addressed in the 2004 survey. Each issue is discussed below. Annual Regional Provider Revenues. The annual revenues for 2003 reported by the respondents for the APAC region ranged from $15 million to $1.3 billion. One company included reported annual regional operating revenues in excess of $1 billion. Collectively, this group of companies accounted for more than $4.5 billion in operating revenues in the APAC 3PL marketplace during 2003, with the average being $425 million. The average figure reported by the group for 2002 and 2001 were $367 million and $298 million respectively. We also asked the CEOs about their companies’ success in meeting regional revenue growth projections during 2003. Five indicated that their companies’ had exceeded their projections for that time frame, and five others indicated that their companies had met their revenue projections. Those surveyed were also asked to project for the next three year period what percentage of revenue growth their companies’ expected to come from internal growth versus growth from acquisitions in the region. On average, they projected that 65% would come from internal growth (range 20-100%), and 35% would come from acquisitions (range 20-70%). Regional Company and Industry Profitability. The CEOs were asked to categorize the profitability of their companies’ APAC business units during 2003. One indicated that his company had been very profitable, seven categorized company performance as moderately profitable, and one said his company had broken even during 2003. None indicated their company had been unprofitable for the period. The CEOs were also asked to categorize their views concerning the profitability of the 3PL industry in the APAC region during 2003.One said very profitable, eight said moderately profitable, and one said breakeven. None believed the 3PL industry in the region had been unprofitable during 2003. Revenues Generated by Country. Each CEO was asked to indicate the percentage of their company’s 2003 operating revenues that was generated in specific countries in the APAC region, and were also asked to project what that revenue split would be in 2006. The results are shown in Table 1. While the significance of individual countries vary widely to these companies, the average company involved in the survey generated 40% of their 2003 APAC regional revenues in China, 18% in Japan, 18% in Australia, 9% in India, and 15% in other countries in the region. According to the respondents, on average, those four countries will generate a smaller percentage of their collective APAC revenues by 2006. China will still generate the largest share of revenues in the region, accounting for an average of 38% of the regional revenues of the companies, while Japan and Australia will each account for 14% of revenues, and India will generate 12% of regional revenues. The balance, 22% of the revenues will originate in other APAC countries. This will represent more than a 50% increase in the contribution of those countries to the regional revenue base of the companies surveyed. Operations in India. The 2004 APAC survey also sought specific information about the provision of 3PL services in India. Six of the eleven companies participating in the survey reported that they provide 3PL services in India, with the range of services varying widely from provider to provider. When asked what range of logistics services were offered by their companies in India, several CEOS said they provided the full range of logistics services offered by their companies in other parts of the world, and the others indicated that they offered a much more limited range of services including warehousing (offered by all six companies), air and sea freight services, freight forwarding, domestic distribution, vendor-managed-inventory, freight consolidation services, and delivery to production lines. The CEOs of the six companies providing 3PL services in India were also asked to comment on the success of their company’s efforts to date in that country. In terms of establishing the company brand in India, four indicated that their companies have been very successful, and the other two said their companies had been successful. None reported being unsuccessful on that dimension. Similarly, all six reported that their companies had been successful in generating operating profits in India. Only one CEOs reported that his company has experienced any significant problems while operating in India, and those problems were attributed to the complexity of the nation’s transportation system. Customer Selectivity and Defining High-Quality Customers Nine of the eleven companies involved in the APAC survey indicated their companies’ specialize in a limited number of industry verticals in serving the region. The most frequently mentioned verticals were high technology/electronics (8), automotive (7), retail (6), and consumer goods (3). Verticals receiving a single mention by one CEO were energy, healthcare, aerospace, and apparel. Reflecting what appears to be a worldwide trend in the 3PL industry, ten of the eleven CEOs indicated their companies had become increasingly customer-selective, and have started to focus more attention on the quality of existing accounts in the region. When asked how that had affected the sales/marketing and contract renewal processes of their companies, their responses were quite varied. Individual respondents said that the following changes had taken place within their companies: • We make more extensive use of key performance indicators, and continuous improvement processes allow more effective negotiations with targeted customers. • Customer sales and development efforts are more focused. • The company now places greater emphasis on delivering improved service quality • More emphasis is now given to the concept of customer intimacy • The company does a more thorough financial analysis of prospective customers • We no longer wait for RFQs. We develop products that we want to sell and seek customers looking for those solutions. • The company is far more selective in responding to RFQs • Management is now more proactive in identifying target customers • The company now places greater emphasis on yield management. In attempting to become more customer-selective, many companies develop a profile of a high-quality customer. As a result, the CEOs were asked to identify and rank the five most important attributes of a high-quality customer. The following attributes were listed as the most important by at least one of the CEOs: is a market leader (2), has multi-country requirements (2), shows high growth prospects, is financially stable, clearly communicates requirements and expectations, understands the value of outsourcing and the strategic importance of supply chain management, and buys value-added services. Many other customer attributes were ranked 2 through 5 by the CEOs. The following attributes were mentioned by four CEOs: sound payment practices, and is committed to the partnership. Three mentioned effective customer communications skills, financial strength, willingness to share information with the provider, customer use of specific performance metrics and related rewards performance for performance. The growth potential of customers, and customer flexibility were each mentioned by two CEOS. Selling Along the Supply Chains of Customers Because of the perceived value of supply chain integration, it seems that a real market opportunity exists for 3PL service providers to market their services to the supply chain partners of existing customers. When asked if their companies had launched strategies aimed at selling their services along the supply chains of their major accounts, ten of the eleven CEOs involved in the survey said yes. Those ten were then asked how effective that strategy had been, and what their experience had been in developing such relationships. Again, the responses were quite varied. Most indicated that their experiences with the concept have been at least moderately successful, with one CEO noting that new customers gained through such efforts now comprise 15% of his company’s revenue base in the APAC region. Another noted his company had gained new vendor-managed inventory accounts and freight management business through that strategy. One mentioned that the best opportunity for attracting such business comes from managing a vendor hub due to the resulting interaction with their customers. The only negative observation contained in the responses to this question was that many companies in the region still treat their 3PL relationships as propriety, and they don’t want to share resources or information with other members of their supply chains. Employee Issues A number of employee-related issues were addressed by the survey. Among the topics covered were the ease with which these companies find and keep qualified employees in the Asia-Pacific region, company employment levels, recruiting efforts, employee turnover rates, and the existence of training programs for new employees. Employment Base. The APAC regional employment base of the companies involved in the survey varied considerably. Four companies reported employing fewer than 1,000 people in the region, two had between 2,000 and 3,000 employees, two other companies reported having between 3,001 and 4,000 employees, and one company indicated that it employed more than 5,000 in the region. When asked to indicate the major sources of managerial talent for the companies in the region, the CEOs, on average, indicated that 40% of their managers are hired from universities, and 29% come from other 3PL providers operating in the region. Among the other sources cited were customers and consulting companies. The annual employee turnover rates experienced by these companies in the APAC region varied from 2-18% with the average being 7%. Finding and Keeping Qualified People. For the past several years, the CEOs included in our annual North American 3PL provider CEO survey have indicated that the ability to find and keep qualified people has been a major problem for their companies. Of the 11 CEOs involved in the 2004 APAC survey, six said companies considered this to be a major problem in the APAC region. Those CEOs were there asked what steps their companies had taken to address the issue. Their responses varied widely, and included the following: • Expansion of company recruiting efforts in Asia, and also in other geographies • Institution of a more aggressive recruiting program • Establishment of a more robust management development program • Recognition of talent, and development of a reward system to keep it • Creation of personal growth opportunities for managers • Development of an environment in which ideas can be shared • Allowing managers the freedom to manage their own areas, while accepting the related responsibilities. The“Total Package” Offered to Potential Employees. The survey also investigated the components of the total package offered to potential employees in the Asia-Pacific region by these companies. In many instances, non-compensation incentives can provide differentiation in the eyes of individuals being recruited by the companies. In addition to the basic compensation package offered to candidates, five companies reported offering profit-sharing programs, three offered mentoring program, stock options were offered by two companies, and one company reported offering signing bonuses. Management Training Programs. Only four of the eleven companies included in the survey reported offering formal management training programs for new hires in the region. Those programs varied considerably in both duration and content/format. The programs varied in length from two weeks to two years, with the longest program including two one-year assignments in specific functions or divisions. Several executives also reported that the duration of training programs for new company employees varied according to the specific position into which the individual was hired. In terms of content, the reported training programs tended to emphasize development of international business and management skills. The format of the training programs varied widely, ranging from on-the-job training to formal courses offered by universities. Several CEOs mentioned mentoring programs, and one executive indicated that his company used stretch assignments as a means of developing management skills. Joint Implementation Training Programs. Our previous research efforts have indicated that provider/customer problems frequently emerge during the implementation stage of new contracts. While there are a many reasons for those problems, we believe that some problems might be eliminated through development of joint implementation training programs for the employees of both companies involved in the project. However, not all 3PL providers offer such programs. As a result, we decided to investigate this issue in our APAC CEO survey. When asked if their new customer contracts generally include joint implementation training programs involving employees of both companies, seven of the 11 CEOs said yes. Eight of the ten believed that such programs should be included in each new contract signed by their companies. Among the topics covered in the existing programs are: systems capability and processes, operational and service requirements, project management skills, process mapping, development of key performance measures, operating procedures, delineation of customer requirements, and understanding of the new business. RFID Technology During the past several years there has been extensive discussion of the potential use of RFID technology in logistics operations. In recognition of the importance of this issue, we included several questions concerning that technology in our 2004 APAC CEO survey. Nine of the 11 CEOs responded to this group of questions. The CEOs were asked to indicate how significant they believed the RFID movement would be in terms of requirements of their current or prospective customer base in the APAC region. One classified the technology as very significant, five others said significant, and three indicated it was not significant. They were next asked to approximate the percentage of their current customers in the region that had already committed to using RFID technology in their logistics operations. The average response was 15%, with a range of 5% to 40%. They were also asked approximate the percentage of their existing customers in the region that were conducting pilot studies of RDID applications in their organizations. The average response was 12%, with a range of 2% to 30%. Likely 3PL Support Expected by RFID Users. The CEOs were then asked to identify the types of support RFID adopters would likely expect from their 3PL providers. In responding, they indicated those expectations would likely include the following capabilities: • Understanding of the technology • Ability to implement related systems • Modification of warehouses to receive shipments and control inventory using the new technology • Ability to exchange data and modify communications networks • Willingness to participate in pilot studies of the technology • Upgraded systems to handle RFID technology • Willingness to participate in efforts to drive down the cost of RFID tags. Potential Impact on 3PL Service Offerings and Capital Spending. Several respondents to the survey believed that RFID technology would have broad impact on their companies, particularly with respect to capital spending. That spending would likely involve not only physical modification of warehouses and upgrades of information systems, but also the acquisition of tags and tag-reading technology. Several CEOs categorized those potential expenditures as huge, but also indicated that the potential payoff on the investment would likely be substantial. Those respondents believed much of the required capital spending would take place over the next several years years, and one CEO suggested that the investment would be necessary to differentiate the service offerings of his company by 2006. Steps Being Taken to Prepare for RFID. The CEOs who indicated that their companies believed the RFID movement was significant in the Asia-Pacific region said their companies were already taking internal steps to prepare for the potential widespread adoption of RFID technology by their present and prospective clients. Among those steps were: • Establishment of dedicated RFID teams at the corporate and regional levels • Development of a corporate RFID center of competence • Participation in pilot programs with current customers • Meetings with key customers to investigate possible RFID initiatives • Conducting pilot studies in alliance with RFID providers • Deployment and use of RFID technology on a limited basis within their own operations • Upgrading IT systems to handle RFID data • Identification of business areas in which RFID can be deployed and generate savings in excess of the related investment. Other Information Technology Issues During the past several years, the CEOs involved in our annual North American provider CEO surveys identified the high cost and low rate of return on IT investments, as being one of the most significant problems faced by 3PL providers in that region. In the 2004 APAC survey, we asked the CEOs if their companies had experienced a similar problem in the APAC region, and seven of the 10 CEOs who answered the question said yes. They were then asked what they believed to be the major causes of that problem, and several issues emerged in their responses. First, the technology changes rapidly, and systems quickly become obsolete, necessitating upgrades. Second, many customers want systems customized to their individual requirements, and customization costs are quite high. Further, the resulting systems generally don’t meet the needs of other customers. Third, customers generally don’t see IT support as a value-added service, but rather view it as part of the basic service package, and do not expect to pay for it. As a result, the margins on technological applications are generally low or non-existent. Fourth, the lack of industry standards raises the costs of systems development. Fifth, company technology solutions are often easily duplicated by competitors. Finally, many existing systems, particularly in the WMS space, are over built and therefore are not widely applicable in emerging markets. The CEOs were then asked to discuss any steps management had taken to reduce the severity of that problem in the region, and they mentioned the following initiatives: • Formation of customer focus groups to discuss IT requirements • Packaging of IT tools as part of value-added services • Efforts to minimize the variation of technology solutions offered to clients • Investigation of locally adopted, low-cost, simple IT solutions for customers • Development of collaborative efforts with customers that focused on defining customer requirements, training, and testing of possible technology applications. Those surveyed were also asked if there had been a significant change in the nature of the information technology support expected of their companies by their major clients in the region. Eight said yes. Among the types of support now expected by the clients of these companies are the following: more comprehensive IT solutions, real-time access to information, greater visibility, the ability to change to the most updated version of systems in an expedited manner, EDI capability, shared platforms, greater systems integration with their 3PL providers, integration with ERP systems, and 3PL provider absorption of system set-up costs. Security Issues In the aftermath of September 11, 2001 and other terrorist acts, there have been numerous changes in government security regulations that have affected the international logistics community. The CEOs were asked to categorize the impact of those changes on company operations in the Asia Pacific region. In response, four of the CEOs categorized the impact as very significant, three as significant, and surprisingly four said the impact was not significant. The following were mentioned as specific impacts of those regulatory changes: • Increased costs related to automation of and transmission of documents to support security requirements • Significant increases in costs related to background checks on employees • Higher training costs • Infrastructure investments in scanning equipment, material handling equipment, and changes in IT systems • Imposition of security surcharges by carriers that reduce company margins • Cost increases related to security audits • The inability to recover these increased security costs from customers. Current Status and Future Prospects of the Industry In each of our previous annual North American provider CEO surveys, the CEOs have been asked a series of questions concerning their perceptions of the current status and future prospects of the 3PL industry. Specifically, each year they have been asked to identify the most important 3PL industry dynamics, opportunities, and problems. They have also been asked to indicate the most important developments within their companies and within the 3PL industry during the past year. CEO responses to similar questions posed in the 2004 APAC provider CEO survey are discussed below. Industry Dynamics. It is obviously important for management to understand the dynamics that are operating in the marketplace for the company’s goods or services. In this survey, the CEOs were asked to identify, and rank order, the three most important industry dynamics that were operating in the Asia-Pacific marketplace for 3PL services at the time of the survey. As we have done in our previous North American surveys, a first-place mention was given three points, a second-place mention was given two points, and a third-place mention was given one point. These points were used in calculating the total weighted points shown in Table 2. As shown, growth of the Chinese economy ranked first, not only in terms of total weighted points with 23, but also with respect to first-place votes with seven. Ranking second in terms of total weighted points with 12, and two first-place mentions was continuing downward pressure on pricing. Ranking a distant third in terms of total weighted points with six was increased customer expectations with respect to IT support. Rounding out the top five industry dynamics with five total weighted points each were increased customer interest in outsourcing a broader array of logistics services, and, formation of business alliances to broaden service offerings. Industry Opportunities. The CEOs were also asked to identify the most significant opportunities available to providers in the APAC 3PL marketplace at the time of the survey. The CEOs identified a number of opportunities, and not surprisingly, seven of the ten highlighted market opportunities in China related to the continued growth of the Chinese economy. Other market opportunities mentioned by multiple respondents included the following: • the increasing opportunity to sell logistics services in other countries in the region, particularly Japan, Korea, and India • opportunities to sell 3PL services to the managers of many companies within the region who have recently come to understand the potential benefits of logistics outsourcing • the growing opportunity to sell broader end-to-end solutions to existing clients in the region, growing client demand for more advanced technological solutions • and opportunities to sell services to companies that have recently entered the region due to the combination of the area’s strong economic growth and relatively low cost of doing business. Industry Problems. The CEOs also identified a wide range of problems facing 3PL service providers in the APAC region. The most important problem identified by the CEOs was continuing downward pressure on pricing with 23 total weighted points and three first-place votes. In second-place was coping with cultural diversity in the region with 10 total weighted points and two first-place votes. According to the CEOs the third most significant problem was the uncertain economic future of the region with seven total weighted points and one first-place vote. Other problems identified as being significant by the CEOs included a shortage of logistics talent in the region, the steadily escalating demands of 3PL users for additional IT support, and additional security costs. Most Significant Developments During the Past Year. The CEOs were also asked to identify what they believed to be the most significant developments that had taken place within their companies and within the APAC 3PL industry during the past year. The two most frequently mentioned company developments were expansion of service offerings in China, and company IT upgrades which were each mentioned by five CEOS. Among the other company developments mentioned by more than one CEO were mergers and acquisitions in the region, expansion of service offerings in India, and the outsourcing of IT development activities to India. With respect to the most significant developments in the past year in the APAC 3PL industry, the CEOs clearly focused on expansion of the Chinese market for 3PL services, with seven CEOs identifying that as the most significant industry development. Among the other industry developments cited by the CEOs were regional consolidation of 3PL service providers, and expansion of industry IT capabilities in the region. Major Changes Expected During the Next Three Years. Those surveyed were also asked what major changes they expected to take place in the APAC 3PL industry during the next three years, and there was a broad range of responses. Among the changes envisioned by the CEOs were: • Increased foreign ownership in China • Growth of strategic alliances and partnerships involving 3PL providers in the region • Further consolidation of 3PL providers in the region, driven by pricing pressure, squeezing out mid-sized competitors • Increased interest in outsourcing in the region • Expansion of outbound 3PL opportunities from China and India • Continued pricing pressures in the region • A more significant role for Japan in Chinese business, and economic growth in Japan as a result of that linkage. Estimated Revenue Growth Rates Finally, the CEOs were asked to estimate annual company and industry revenue growth rates in the APAC region for the one and three-year periods. As shown in Table 3, the average one-year company revenue growth projection for the APAC region was 19%, with the projected three-year company revenue growth average being 17%, It should be noted that the estimates varied significantly among the respondent companies with the one-year company projections ranging from 8% to 30%, and the three-year projections ranging from 8% to 25%. In terms of APAC region industry growth projections, the CEOs projected the industry’s one-year and three-year regional revenue growth rates to be slightly lower than the company averages. Both the one and three-year industry growth rates were projected to average 15%. The projections of the industry’s regional growth rates ranged from 8% to 20% for the one-year period, and 8% to 20% for the three-year period. Not surprisingly, when asked to identify the countries in the APAC region that offered the greatest potential for growth in demand for 3PL services over the next three years, all ten CEOs said China. When asked what country would rank second in terms of three-year growth potential, six mentioned India, two Australia, and Korea and Malaysia were each mentioned by one CEO. In terms of APAC region countries offering the third greatest growth potential over that period, Japan, Malaysia, and Indonesia were each mentioned by two CEOs, and India and Korea were each mentioned once. SUMMARY AND IMPLICATIONS The companies that participated in this survey have experienced significant growth in the market for 3PL services in the Asia-Pacific region during the past several years, with much of it related to the explosive growth of China as a sourcing, manufacturing, and sales hub. All ten of the companies that answered the financial questions included in the survey indicated that they at least met company revenue projections during 2003, with half surpassing those targets. All anticipate continued revenue growth over the next three years, with an average of 65% of that growth projected to come from internal sources versus acquisitions in the region. In terms of profitability, all but one of the companies reported that they were profitable during the year, and the other company reported that it broke even. With respect to the Asia-Pacific region 3PL industry, none of the CEOs surveyed believed the industry was unprofitable during 2003. As a revenue source, the significance of individual countries in the region varied considerably within this group of eleven companies, but on average the companies generated 40% of their revenues in China during 2003. The CEOs forecast that percentage to drop slightly during the next three years, with much of the growth being expected to come from other Asian countries including Japan, Korea and India. The large 3PL providers serving the Asia-Pacific region have become increasingly customer-selective in recent years not only in terms of their new account prospects, but also with respect to contract renewals. That strategy has been reflected in their sale and marketing efforts in the region. Nearly all have also adopted the strategy of selling along the supply chains of their major customers, and indications are that the strategy has been at least moderately successful in the region. While finding and keeping management talent is seen as a major problem by nearly all CEOs of large providers serving other geographies, only half of the CEOs involved in the Asia-Pacific region indicated that was a problem in the region. Despite the fact that only four of the eleven companies involved in this regional survey reported that they offer formal management training programs to new employees, average employee turnover rates are relatively low in the region. Seven of the eleven companies do, however, use joint implementation training programs for employees of both companies as a component of new contracts. The possible incorporation of RFID technology into the Asia-Pacific logistics networks of current or prospective customers was viewed as a significant issue by two-thirds of the CEOs involved in this survey, and collectively those companies have taken a broad range of steps to prepare for that possibility. With respect to other technology issues, the majority of the CEOs indicated that their companies had significant problems with the high-cost and low-return on IT investment in the region, and they primarily attributed those problems to rapidly changing technology, and continuing customer demands for customization of systems. Not surprisingly, the CEOs identified the continued growth of the Chinese economy as the most important Asia-Pacific 3PL market dynamic, followed by continuing downward pressure on pricing, and increasing customer expectations with respect to IT support. In terms of the most important market opportunities in the region, the CEOs not only highlighted the expanding market opportunities in China, but also focused on 3PL growth prospects in Japan, Korea, and India. According to the CEOs, the most significant problems facing providers in the region are price erosion, coping with the cultural diversity of the region, and the uncertain economic prospects of the region. The CEOs were quite bullish with respect to company and industry prospects for 3PL revenue growth in the region. On average, they forecasted a one-year revenue growth rate of 19%, and an average growth rate of 17% for the three-year period. Their projections for industry revenue growth rates averaged 15% for both the one and the three-year period. Implications We share the optimism of the CEOs who participated in this survey concerning the growth prospects for large 3PL providers serving the Asia-Pacific marketplace. Continued economic growth, particularly in China, over the next three years should present real opportunities to expand the regional customer base of these companies. At the same time, the liberalization of Chinese policies concerning foreign ownership, coupled with the growing Westernization of business practices in the region, will permit larger 3PL providers to establish a stronger market presence, and may allow them to attract more purely local business. The increased provider emphasis not only on customer-selectivity in the region, but also on selling along the supply chains of their major customers should improve regional margins. That may be at least partially offset by the continuing demands of customers in the region for not only lower prices, but also provision of customized IT systems at non-compensatory prices. There are, however, other issues that may slow the growth of 3PL use in the region, and they are primarily related to infrastructure and management issues. While data generated in this survey, and other surveys we have conducted in previous years, have indicated that few 3PL providers and users have experienced significant problems with regional transportation infrastructure to this point, we question whether than will continue to be the case. As economic activity, particularly in China, continues to grow, we believe that the transportation infrastructure will become more of an issue. Trucking, rail, and port capacity may effectively limit the growth of logistics services, as will the availability of management resources. Within the past year, China has acknowledged a significant shortfall of logistics professionals within the country, and the related talent pool limitations are likely to affect both sellers and users of 3PL services in the region. It may also force large providers to rely more heavily upon dramatically more expensive ex-patriots to staff their regional operations, thereby limiting the pace at which professional logistics management emerges in many Chinese organizations. That will make the selling, implementation, and contract management process more difficult for 3PL providers in that market. | | |Exhibit 1 | |3PL Companies Included in the 2004 APAC Region CEO Survey | | | |APL Logistics | |BAX Global | |Caterpillar Logistics Services | |Eagle Global Logistics | |Exel Logistics | |GeoLogistics | |Landstar | |NYK Logistics | |Ryder | |TNT | |UPS Supply Chain Solutions | | | |Table 1 | |Percentage of Revenues Generated by Country in the APAC Region | |2003 and 2006 Forecast | |Country |Actual 2003 |Projected 2006 | |China |40% |38% | |Japan |18% |14% | |India |9% |12% | |Australia |18% |14% | |Other |15% |22% | Table 2 CEO Perception of the Three Most Important APAC Region 3PL Industry Dynamics |Industry Dynamic |# of CEOs Ranking It #1,|# of CEOs |# of CEOs Ranking It #3|Total Weighted Points | | |2004 |Ranking It #2 |2004 |2004 | | | |2004 | | | |Continued growth of |6 | |2 |20 | |Chinese economy | | | | | |Continued downward |2 |2 |2 |12 | |pressure on prices | | | | | |Growing customer | |2 |2 |6 | |expectations for IT | | | | | |support | | | | | |Customer interest in |1 | |2 |5 | |outsourcing broader | | | | | |array of logistics | | | | | |activities | | | | | |Formation of business | |2 |1 |5 | |alliances to broaden | | | | | |service offerings | | | | | |Table 3 | |One and Three-Year Average Revenue Growth Rate Projections, | |Company and Industry, APAC Region | |One-Year |Three-Year Projection, Company |One-Year Projection, Industry |Three-Year Projection, Industry| |Projection, Company | | | | |19% |17% |15% |15% | ----------------------- 22