Investment in Industrial: Part 2

Sunday, April 15, 2007 4:17

It isn’t that often that I find articles that I can not only agree with, but also disagree with. However, the recent MSN Money article written by Jim Jubak entitled Warehousing: China winning on another front is one of those articles.

1) The solutions for moving vast amounts of goods from coast to consumers are coming from China, Singapore, South Korea and Japan

This is very true especially in the coastal cities where western firms and a select group of Chinese 3PLs have strong operations. However, this is not broad based and the primary driver comes from the customers need to consolidate rather than the 3PLs ability to perform assembling, labeling, etc. The trend is towards increase VAS, but VAS in China are still well behind those in the U.S. or E.U.

One firm I spoke to mentioned that for small items, getting accurate labeling was a huge concern as common labor were not familiar with the items and mislabeling was frequent.. so was pick/pack…

2) Following that, Jubak says that the “price of the failure of the countries of the developed world to meet this challenge will be paid — once again — in the jobs of workers in the United States and other advanced economies.”

Again, I would agree that there is a trend towards moving VAS offshore and into factories/ warehousing located around the world, but there is going to be a huge amount of work once the box clears customs… so don’t grab your pick sign just yet or call Lou Dobbs.

3) And the United States still has a major edge on China in inland infrastructure — roads, railroads, etc. China is determined to catch up there, however, and that part of the battle has barely begun.

Can’t agree more. China’s inefficiencies in road and rail are large, and the government is putting in hundreds of billions to close that gap… However, they are not building the infrastructure to create a network that will export items, they are doing so for internal distribution…

4) There are 2 opportunities for investors to take advantage of this situation:

a) There’s a chance to make money from China’s perhaps temporary leading position in
global logistics.

There is a HUGE (read HUGE) opportunity for investors to make returns on investing in Chinese logistics companies… but it is not because any of them will ever be

leaders in global logistics. Most have nothing outside of China but sales offices, and I have yet to identify a single Chinese firm that has a network of in-house DCs in U.S. or E.U.

Where theyare interesting is their potential within China… which I have highlighted in
several posts

b) Second, there’s a chance to make money from the developed world’s response to China on logistics and from the competition to build out inland infrastructure

VERY INTERESTING…. and he list Berkshire’s recent purchases as support, and I am 100% sure that there are options here as those who invest in their infrastructure, people, and software taking into account China will be in a strong organizational position
5) Let’s make one thing clear: Though an abundance of cheap labor to work in these distribution centers certainly doesn’t hurt, the Chinese edge rests on sophisticated technologies that reach from warehouse to container port to ship

As I pointed out above, cheap labor does not equate to an ability of labels to make it on the right boxes or in the right languages. For those firms that are able to train cheap labor into VAS services, will of course have an advantage, but having a strong quality of service wil be more important than having a cost advantage for many.

It is the single largest reason why international multinationals are still relying on the international providers to manage exports rather than domestic firms. UPS is much more expensive than China Post… but the service is better
6) He then lists three companies, OOCL, Kerry, and Nippon Yusen Kabushiki Kaisha that are worth investing in , as well as some ports being built in the States. All of which I would agree with, but none of which I would consider primary investment targets.

overall the premise is a good one. Investors should look at the logistics market in China. It is something I have said in a number of posts, and having researched the movement of goods around China from various angles I am convinced that there are good investments in this sector. However, investors should be very careful when entering the market as it is very complicated, very fragmented, very inefficient, and leaders will need to overcome huge obstacles.

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One Response to “Investment in Industrial: Part 2”

  1. Warehousing in China: All Roads Lead to China breaks it down » Third Party Logistics News - 3plwire says:

    April 19th, 2007 at 8:25 am

    […] There was a recent article in MSN Money touting warehousing advantages in China, that All Roads Lead to China was kind enough to break down and add his input to: […]