Government Initiative Drive I: Connecting the Region, Building Infrastructure and Cities

Abstract

Asian countries are pursuing urbanization and regional connectivity to open new channels for multi-year sustained growth. Low-income countries like India are upgrading manufacturing and China and middle-income Southeast Asian countries are shifting toward higher-value-added production. By deepening regional integration, Asia’s diverse countries are exploiting their comparative advantages and jointly converging into the world’s most potent economic bloc. Big government strategies include Make in India, China’s One Belt, One Road, Made in China and proposed regional trade pact, and the ASEAN Economic Community and Greater Mekong Sub-region development. Governments are building infrastructure linking countries, along with cities to absorb rural migrants and slum dwellers, in the process creating economies of agglomeration and colossal consumer markets.

Appendices

Case Study 6.1: Kerry Logistics Network: Asia’s 3PL Specialist

By Pongsak Hoontrakul

Kerry Logistics Network (KLN) is a Hong Kong (HK)-based third-party logistics (3PL) solution provider. As top three in China and one of Asia’s leading 3PL and integrated logistics (IL) service providers, KLN offers multiple services in value-added ¹ warehousing and distribution and transportation management. This includes international freight forwarding (IFF) by air, land , and sea, merchandise return ² and repair management, and clearance sales. ³

Its main strengths are in extensive Pan-Asia networks with over 500 service locations primarily in Asia across 37 countries, hub-and-spoke distribution, customized services with advance business model to serve global modern supply chains , especially in China and ASEAN (Association of Southeast Asian Nations). KLN has its propriety IT systems – the Warehouse Management System (WMS) to manage its operation from end-to-end, from manufacturer to customer supply chain . Its online portal site, KerrierVison, enables its client to monitor IL and IFF process (e.g., inventory, delivery status, etc.) KLN’s uniqueness is its business mix of IL customized to industrial specific needs (e.g., fashion , automobile, electronic, pharma , food and beverage, etc.). Consequently, almost half of the world’s top 100 brands from diversified industrial base use KLN. ⁴ This yields KLN’s higher return and better growth prospect than industry average given China and Asia as the world’s fastest growth and largest logistics spending country and region with good margin.

As a spin-off from family majority-owned HK-listed Kerry Properties Limited on December 19, 2013, KLN leveraged from its owned nine warehouse with about 5.3 million square feet (sq ft) GFA (gross floor area) with average unit rate in HK$977/sq ft in HK (USD126/ sq ft). ⁵ This becomes a cash cow unit with a high and stable yield . Despite of KLN’s humble logistic business origin in 1990s as track delivery from warehouse to local distribution in HK, it has aggressively expanded its geographic coverage by strong internal growth and leap and bound merger and acquisition (M&A) . For example, in 2014 to accommodate automobile parts, fashion industry, and consumer electronic business, KLN completed its built-to-suit properties to fit the different requirements of industrial specific customers of two new centers in Zhengzhou (366,00 sq ft) and Kunshan (363,000 sq ft). ⁶ On other hand, in 2011 to serve its chemical goods and light item delivery, KLN bought, for instance, 70 percent interest in Shanghai Hi Cheng and Shandong D-Express. ⁷ Given highly fragmented logistic business in Asia – over 10,000 providers in China alone – more M&A deals are anticipated with upside potential as the industry is consolidating. Hence, its Chinese logistic presence has increased about 5 times from 1.1mil sq ft in 2007 to 5.1 mil sq ft in 2013. ⁸ This pays off handsomely as the explosive growth in China’s e-commerce has opened new logistics business opportunities with CAGR ⁹ of 70 percent during 2000–2014 and forecasted sale CAGR of 20 percent in the next three years. ¹⁰

The next strategic move is to have early move advantage to ASEAN market in anticipation of high trading potential areas. KLN has, for instance, built up strong presence in Thailand (e.g., Kerry Bangna Logistics Centre, Kerry Siam Seaport, Kerry Express, etc.). Apart from acquiring an express delivery business in Vietnam , Thailand becomes its hub to serve CLMV (Cambodia, Loa, Myanmar , and Vietnam ) markets. The main drives for this business growth are plenty. Just to name a few, these are AEC (ASEAN Economic Community), ACFTA (ASEAN-China Free Trade Area), China’s initiative – “One Belt, One Road” (OBOR) – and e-commerce high growth potential. In 2015, KLN is among the first 3PL to provide cross-border road freight connection from and to between China and ASEAN with the Kerry Asia Road Transport (KART) services . This is to leverage on its bilateral agreement and AEC ’s gradual rolling out of free movement of goods, services , investment, and labor policy starting in Jan 1, 2016, coupled with Chinese strategically relocating its labor -intensive industry to CLMV .

It is particularly worth noted that KLN is forecasted to have its revenue in 2016 to be about HK$ 23.1 bn (USD2.98bn) with net profit about 1.5bn HK$ (USD190mil) representing the EPS (earning per share) growth of 14.7 percent. ¹¹

Source: Company data and Kwock, Joyce, Wanyne Lee, Jinsong Du and Kelvin Tam (2015) “Kerry Logistics: A Global Quality Logistics Player,” Credit Suisse, 12 March 2015, Figure 63, p. 33

Notes

• 1. Garment-on-hanger, tagging, sorting, ironing, gift picking, and stamping are among the value-added services provided by KLN .

• 2. It is interesting to note that in March 2014 China has passed a new consumer protection law that has one provision to allow any buyer to return its purchased goods within seven days of receipt without any explanation. Hence, the passage of the law has created new business opportunities and challenges, particularly in e-commerce space.

• 3. Handling of returned or out of season products (e.g., recollecting, re-tags, re-packs, re-distribution, etc.) is among fine examples of the return management.

• 4. Lin, Eric and Tiffany Chen (2014) “Kerry Logistics Network: Pan-Asia 3PL specialist for global brands,” UBS, 22 Oct 2014, p. 1.

• 5. Ibid., Figure 57 on p. 25.

• 6. Credit Suisse (2015) “Kerry Logistics: A global quality logistics player,” Credit Suisse, 12 March 2015, Figure 22 on p. 12.

• 7. Ibid.

• 8. Ibid., p. 11.

• 9. CAGR = Compounding Annual Growth Rate.

• 10. Lin and Chen (2014) Figure 57 on p. 13.

• 11. Credit Suisse (2015) “Kerry Logistics: A global quality logistics player,” p. 1.

References

• Credit Suisse. 2015. Kerry Logistics: A Global Quality Logistics Player. 12 March 2015, pp. 1–48.

• Lin, Eric, and Tiffany Chen. 2014. Kerry Logistics Network: Pan-Asia 3PL Specialist for Global Brands. UBS, 22 October 2014, pp. 1–43.

Case Study 6.2: Adani Port & SEZ Ltd. India: Indian Connection to Growth

By Pongsak Hoontrakul

Adani Port & SEZ Ltd . (APSEZ) is the biggest private multiple sea port operator in India. Out of six ports and two terminals, Mundra Port located on the Gulf of Kutch dominates as the largest private port of India with a successful special economic zone (SEZ) in the state of Gujarat. As a matter of fact, Mundra Port, with total capacity of 240 million tons (MT) for bulk, crude, and container, represents 75 percent of all APSEZ’s shipment volume of 145 MT in 2015 serving mainly Middle East and Europe . ¹ The rest (e.g., Dahej, Hazira, Mormugao, Vizag, and Kandla) are small ports ranging from 6.5 to 35 MT. APSEZ is then forecasted to have the total shipment volume to be increased by 60 percent (232 MT) in 2019. ²

APSEZ has help from being a part of Adani Group – an integrated infrastructure conglomerate in India. Adani Group found in 1988 partially consisted of Adani Enterprises – the biggest coal importer and Adani Power – the largest private power firm. In conjunction with agreement with Indian Oil Corporation, the largest commercial state-owned enterprise for single-point berthing entry facility for crude oil in 2002, APSEZ’s total handling tonnage has exploded as the port is fully equipped with modern facility (e.g., the world’s largest fully mechanized coal handling terminal, 9 berths multipurpose terminals, 21 dockside warehouse for dry bulk cargo, etc.) and multi-modal connectivity (e.g., private rail line to national railway network, private four lanes to national and state highways, pipelines, and even private airstrip).

SEZ policy to stimulate industrialization in India has long been pursued by India government since 2000 in order to emulate China’s success story. But few have succeeded so far. Mundra SEZ spread over half of the total designated land area 15,000Ha (150 square kilometer) is India’s largest operational multi-product SEZ . Free trade warehousing zone is also established over the area of 168 hectares (1.68 sq. km). One of its key success factor is the cluster development approach. Textile and apparel park, petrochemical and plastic cluster, and food and agriculture group are among the targeted industrial development sector to pool resources, for cost saving and networking.

All the above are not possible without conceptualized visionary and risk-taking entrepreneur Chairman Mr. Gautam Adani. With the right move at the right time, the first-generation billionaire Mr. Adani’s fortune has risen remarkably coincided with the rise of PM Narendra Modi. Mr. Adani’s fortune was a fraction of Indian richest man – Mr. Mukesh Ambani, head of Reliance Industries Ltd. – when Modi became the chief of minister of Gujarat state in 2001. In his early 50s, Adani’s net worth has tripled to US$6bn as his APSEZ and Adani Power Ltd. prices has tripled, outpacing 46 percent gain in the Indian main index since PM Modi has been in the PM’s office in 2014 – less than a year. ³ In 2015 when billionaire Adani was seen with PM Modi in most of PM’s overseas trips including addressing the United Nations and state visits to China, Japan, Australia, Brazil, and France, again Adani’s fortune topped US$8.7bn as his shares continue to ascend rapidly. ⁴ Many speculate Adani’s stocks leveraging from the power proximity, crown jewel deals, and apparent sector leaders while Modi promotes “Made-in-India” initiative internationally. As the price of energy has collapsed more than 30 percent and the world market is high uncertain environment , especially after Fed’s first rate hike in 10 years, Adani enterprise is in high gearing. Still Adani shows sign of confidence to weather the external storms given his unmatched connection in high office.

Notes

• 1. Credit Suisse (2015) “Adani Ports and SEZ – Reasonable performance despite weak trade,” 3 Nov 2015, Figure 1 on p. 2.

• 2. Ibid, Fig. 2 on p. 2.

• 3. Mehrotra, Kartikay and Jack Witzig (2014) “Adani’s $4.1 Billion Wealth Surge in 8 Months Fuels attacks,” 6 May 2014, http://www.bloomberg.com/news/articles/2014-05-05/adani-s-4-1-billion-wealth-surge-in-8-months-fuels-modi-attacks

• 4. Mehrotra, Kartikay and Jack Witzig (2015) Meet the Billionaire Globe Trotting With India’s Modi, 28 May 2014, http://www.bloomberg.com/news/articles/2015-05-27/meet-the-billionaire-trotting-the-globe-with-indian-leader-modi

References

• Credit Suisse. 2014. Adani Ports and SEZ Ltd.: Sailing steadily. 6 Jan 2014, pp. 1–42.

• Credit Suisse. 2015. Adani Ports and SEZ – Reasonable Performance Despite Weak Trade. 3 November 2015, pp. 1–14.

• Kishore, Sumit, Deepika Mundra, and Karen Li. 2015. Adani Ports and Special Economic Zone: Traffic miss price in, well positioned to tap growth opportunities. J.P. Morgan, 19 November 2015, pp. 1–10.

• Mehrotra, Kartikay, and Jack Witzig. 2014. Adani’s $4.1 Billion Wealth Surge in 8 Months Fuels attacks, 6 May 2014. http://www.bloomberg.com/news/articles/2014-05-05/adani-s-4-1-billion-wealth-surge-in-8-months-fuels-modi-attacks

• Mehrotra, Kartikay, and Jack Witzig. 2015. Meet the Billionaire Globe Trotting With India’s Modi, 28 May 2014, http://www.bloomberg.com/news/articles/2015-05-27/meet-the-billionaire-trotting-the-globe-with-indian-leader-modi