Asian Insights SparX

Modern Logistics Refer to important disclosures at the end of this report

DBS Group Research . Equity 30 November 2020

DBS Group
Focus onResearch . Equity and Agility
Technology
• Globalisation has driven rapid growth in trade but the Analyst
demand on logistics are also evolving quickly Lee Keng LING +65 6682 3703 leekeng@dbs.com

• Rise of e-commerce and shifts in supply chain Wei Le CHUNG +65 6878 7869 weilechung@dbs.com
strategies due to trade tensions and COVID-19 will
drive greater demand for modern logistics Paul YONG, CFA +65 6682 3712 paulyong@dbs.com
• Modern logistics in Asia to grow and evolve rapidly,
with Greater Bay Area development a key driver
• Operators with agile business model that leverage on
Higher trade-to-GDP shows the increasing importance of trade
logistics technology are likely long-term winners
100.0 65.0%
Trade and logistics scene is rapidly evolving. The demand on
90.0
logistics is changing quickly, with robust growth seen in the past
80.0 60.0%
two decades – global trade has more than doubled in developed
70.0
economies, and up >4x in developing economies from 2000 to
60.0 55.0%
2019. 2021 is expected to register growth of >10%. This has and
US$'tn

50.0
will help drive the logistics market. A Biden win should also be seen
40.0 50.0%
as a positive for international trade, as risks around US-China trade 30.0
relationship would ease and risks of new tariffs would decline. 20.0 45.0%

Rising complexity in logistics driving Modern Logistics growth 10.0

in Asia. The market for modern logistics (one-stop service) in Asia is 0.0 40.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019

growing with the proliferation of e-commerce and shifts in supply

chain strategies due to trade tensions and COVID-19. The World GDP (Current USD) Trade as a % of World GDP (RHS)
development of Greater Bay Area is also expected to spur
manufacturing activities and the logistics market in this region. The
most shipment by sea passes through Asia (94.4m) as compared to
Asia accounts for the bulk of international shipping
North America (34.6m) and Europe (41.1m).
What business models should logistic firms adopt? Given the
increasing complexity of the logistics market, companies that will
likely succeed are the ones who embrace changes and leverage on
logistics technology to add flexibility to their business operations.
Integrated players (warehouse + transport + distribution +
management) with agile business model are also expected to fare
better on better cost control and visibility. We believe that large
players will seek to expand quickly both organically and inorganically
to benefit from scale. Strategic alliances and M&A would also be
important to achieve an integrated supply chain capability. Smaller
players could be weeded out and the logistics market will be
reduced to a few integrated players and a few successful niche
players going forward. Data denotes container volume (TEUs)
Source: World Liner Data, Container Trade Statistics, Bloomberg Finance
L.P., DBS Bank

ed: JS / sa: AS, JC, PY, CS

Asian Insights SparX
Modern Logistics

The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting
the longer term investment thesis for a sector, country or the region. We view this as an
ongoing conversation rather than a one off treatise on the topic, and invite feedback
from our readers, and in particular welcome follow on questions worthy of closer
examination.

Table of Contents
Executive Summary 3

Overview - The (growing) importance of logistics in today’s world 5

• Globalisation has made the world more intertwined and facilitated increased trade 5
• Importance of trade to ASEAN countries 6
• Different modes of transport 6
• What is modern logistics? 7

Increasing complexity of the Global Supply Chain 9

• The evolution of the logistics industry 9
• Outsourcing trend and advantages 9
• Difference between 3PL and 4PL business model 10
• Technology – key differentiating factor between 3PL and 4PL 10

Modern Logistics Seeing rapid growth in Asia 12

• Logistics score in Asia 12
• Significant room for growth for trade and logistics in Asia 12
- China – fast growing logistics industry 14
- Indonesia – Ample room for growth in rail transport 14
- Vietnam – Vast opportunities in manufacturing and maritime 15
- Singapore – Strategic location with world-class facilities 16

Drivers of the modern logistics industry 17

• Proliferation of e-commerce 17
• US-China Trade War and Geopolitical Tensions 18
• Post COVID-19 landscape (demand and supply chain disruption) 20
• Greater Bay Area to spur manufacturing activities and logistics markets 21

Major modern logistics players, and their business model 22

• Business model for 3PL and 4PL 22
• What business models should logistic firms adopt in today’s fast-changing world? 22
• Case Study of some key logistics players
- Cainiao (Alibaba) 23
- JD.com 23
- SF Holdings 23
- Express delivery companies 23
- Deutsche Post DHL Group 24
- FedEx Corporation 24
• Business model for major logistics operators 25

Challenges 26

Conclusion 26

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Modern Logistics
Executive Summary
Globalisation has made the world more intertwined and
facilitated increased trade. Driven by globalization, the world
has become more integrated with trade volumes rising and
supply chains becoming more intertwined. Global trade more
than doubled in developed economies to US$22.3 trillion
(CAGR of 4.4%) and more than quadrupled to US$15.3
trillion (CAGR of 8.5%) in developing economies from 2000
to 2019. Growth in 2021 is expected to be strong, at 10.7%
for the advanced economies and 12.3% for the emerging
and developing nations, according to IMF forecasts. A Biden
presidency should also be seen as a positive for international
trade, as risks around US-China trade relationship would ease
and risks of new tariffs would decline.
Trade is especially important to ASEAN countries. Trade-to-
GDP in ASEAN was substantially higher than that of the top
seven GDP by country. Part of the reason is that these
countries offer a unique selling point such as being in a
strategic location, having the right infrastructure, being
efficient in turning over freight, or having low labour costs.
Rising demand for modern logistics players as businesses scale
up. With more cross-border trade, companies have found the
need to increase the scale, speed, and efficiency of their supply
chains. As such, with the increased complexity and large initial
capital outlay, some companies have opted to outsource a part
of, or their entire supply chain management to modern logistic
players (3PL/4PL) who have the infrastructure and knowledge
to operate efficiently and effectively in this field. 3PL/4PL
service providers have and will continue to play an important
role in enabling the supply chain. As a result, revenue from the
global top third party logistics players increased by 216% from
US$129bn in 2000 to US$406bn in 2019.
Logistics Technology – key driver to an efficient logistics
industry. Leveraging on technology, logistics operators will be
able to track orders, vehicles and pallets to gain greater
visibility and improve the methods of transportation. This
better visibility helps companies to optimise their flow of
goods, reduce wait times and manage their costs, which are
the key traits of logistics. Technology is fundamentally
changing the way packages move around the world, from
predictive analytics to autonomous vehicles and robotics.
Improving logistics score for developing countries in Asia but
still more room to grow. Despite the challenges in the logistics
industry for the developing countries in Asia, which include
poor infrastructure, shortage in logistics experts and a
fragmented market, logistics in Asia is improving. The Logistics
Performance Index (LPI) score for countries like Indonesia,
Vietnam and China has improved over the last few years. In
terms of ranking, Singapore and Hong Kong were among the
top 20 out of 160 countries. Though the developing countries
in Asia still have more room for improvement, they still fare
better than their counterparts in other regions.
Proliferation of e-commerce driving demand for modern
logistics. The rapid development of the modern logistics
industry over the past few years has been driven by the
proliferation of e-commerce. As more retailers adopt or
migrate to online platforms, the growth of modern logistics is
expected to continue. ASEAN is an attractive market for global
e-commerce players, and the e-commerce journey for the
ASEAN region is just beginning. COVID-19 has also accelerated
the growth of digital consumption in South-east Asia. The
average digital spending per person is expected to grow 3.5x
by 2025, according to a study by Facebook and consulting firm
Bain & Company.
US-China trade war and geopolitical tensions is causing a re-
think of supply chain strategies. The on-going US-China trade
war and the possibility of other geopolitical tensions between
nations are forcing firms to review their supply chain strategies.
While some companies have shifted a portion of their
manufacturing back home, most have adopted a China + 1
strategy – diversifying their manufacturing base into another
Asian country, with ASEAN particularly popular due to their
relatively lower cost of labour.
Demand and supply chain disruption post COVID. The
disruption to supply chain due to COVID has also led many
manufacturers to rethink their supply sources, to balance
between efficiencies, resilience, costs, and to diversify their
production networks instead of relying on a limited number of
suppliers. Companies could shift to suppliers closer to its own
manufacturing facilities in order to avoid delay in shipments, as
well as cut down on transportation costs, or to be closer to
their end consumers. We are also likely to see a paradigm shift
from ‘just in time’ to ‘just in case’, which will further increase
demand for logistics solutions in the next few years.
Greater Bay Area to spur manufacturing activities and logistics
markets. The connectivity of Hong Kong, Macau and nine cities
in Guangdong will lead to more frequent commercial and
trading exchanges among cities in the region, and also on a
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Modern Logistics

global basis. As the GBA concept gains momentum it will fuel

demand for logistics services.

Agile business model to adopt rapid transformation in logistics

industry. As the modern logistics industry continues to be
transformed by new technologies, the business model of
logistic players must be agile enough to adopt to the many
global changes underway. The conventional 3PL will not fade
but will face with the competition from the online logistic
providers. These 3PLs have to combine their logistics expertise
with advanced technology to evolve. Strategic alliance and
mergers & acquisitions will be important to achieve an
integrated supply chain capability. Smaller players could be
weed out and the freight market will be reduced to a few
integrated players and a few successful niche players going
forward.

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Overview

The (growing) importance of logistics in today’s world Higher trade-to-GDP shows the increasing importance of
trade
Globalisation has made the world more intertwined and
100.0 65.0%
facilitated the increased trade. With the onset of globalization, 90.0
the world has become more integrated with trade volumes 80.0 60.0%

rising and supply chains becoming more intertwined. From 70.0

60.0 55.0%
2000 to 2019, global trade by value has more than doubled

US$'tn
50.0
(+127.0%) in developed countries to US$22.3 trillion (CAGR of 40.0 50.0%
4.4%), and more than quadrupled (+367.6%) in developing 30.0
countries to US$15.3 trillion (CAGR of 8.5%). In 2021, 20.0 45.0%
10.0
International Monetary Fund (IMF) expects the advanced
0.0 40.0%
economies to register a 10.7% growth in trade while the

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
emerging and developing nations are expected to register a
World GDP (Current USD) Trade as a % of World GDP (RHS)
higher growth of 12.3%.
Source: World Bank, OECD, Bloomberg Finance L.P., DBS Bank
Global trade more than doubled in developed economies
and more than quadrupled in developing economies from Trade has been a key driver of GDP growth for Asia with its
2000 to 2019 large population presenting strong international demand
within the region, driving growth. Since 2000, total trade and
25.0 GDP in Asia ex-Middle East has grown at a CAGR of 8.5% and
7.0% respectively. During this period, trade as a percentage of
20.0
GDP has risen from 42.0% in 2000 to 54.6% in 2018.
US$'trillion

15.0
The region has also maintained its momentum in the recent
10.0
years. Post Global Financial Crisis (2009), Asia ex-Middle East’s
5.0 GDP grew at a CAGR of 7.0% while total trade grew at a
CAGR of 7.4%.
0.0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Trade has been a key driver for GDP growth in Asia
Developed Economies Total Trade Developing Economies Total Trade
30.0 70.0%
Source: World Bank, International Monetary Fund, Bloomberg Finance 65.0%
25.0
L.P., DBS Bank 60.0%
20.0
55.0%
Trade-to-GDP increased with GDP growth. Trade-to-GDP,
US$'tn

15.0 50.0%
which is the aggregate value of exports and imports as a % of
45.0%
GDP, indicates the relative importance of international trade 10.0
on GDP. International trade allows countries to share 40.0%
5.0
resources, goods and services, and technology. It allows 35.0%

companies to increase their sales by having a larger total 0.0 30.0%

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018

addressable market (TAM), access cheaper raw materials and

labour, and grow more quickly. According to World Bank,
Asia ex-Middle East GDP (Current USD) Trade as a % of GDP
from 2000 to 2019, the global trade-to-GDP increased from
51.0% to 60.4%, propelling the world towards an increase in Source: United Nations, World Bank, OECD, Bloomberg Finance L.P.,
GDP by 160.9%. DBS Bank

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Modern Logistics

A Biden win to ease US-China trade tensions Different modes of transport

With Joe-Biden winning the US presidential election, this could
reduce some trade uncertainty, especially between US and
China in the medium term. A Biden presidency should be seen
as a positive for international trade, as risks around US-China
trade relationship would ease and risks of new tariffs would
decline.
Four modes of transporting logistics – Road, rail, sea, and air.
The logistics transportation mode would depend on a few
factors such as whether the destination is international or
domestic, the urgency of the delivery, the size and weight of
the goods, the infrastructure available between destinations,
and the budget.

Importance of trade to ASEAN countries Below is a comparison table between the transportation
modes and they are ranked from 1 (best) to 4 (worst) based on
Trade is especially important to ASEAN countries. Most of the the assessed metric.
ASEAN countries are developing economies and the cheap cost
of labour, land, and/or location have made them attractive Comparison Between the Modes of Transporting Logistics
manufacturing hubs. As such, trade has become an integral Road Rail Sea Air
part of their economy and the trade-to-GDP in most ASEAN Speed 3 2 4 1
countries were substantially higher than that of the top seven Cost 3 2 1 4
GDP by country. Note: Rank 1 being the best
Source: DBS Bank
Trade’s importance in ASEAN
Singapore 319.1%
There is a tradeoff between the speed and the cost of delivery,
Vietnam 210.4%
with air being the quickest but most expensive mode of
transportation, with sea being on the other end. While
Malaysia 123.1%
shipping by rail is cost-effective, it has its limitation – railway
Cambodia 123.6%
tracks to and from the destinations have to be available.
ASEAN

Thailand 110.3%

Brunei 108.5%
In Singapore, Hong Kong, most of the logistics is transported
Laos 75.1%
by sea. Despite its long transit time, seaborne trade is the most
Myanmar 60.7%
popular form of shipping goods internationally due to its low
Indonesia 37.3%
cost. Being small countries with a high dependence on
0.0% 50.0% 100.0% 150.0% 200.0% 250.0% 300.0% 350.0% international trade, and access to sea, sea freight accounts for
2019 Trade as a % of GDP
almost the entirety of Singapore’s and Hong Kong’s logistics
Source: World Bank, OECD, Bloomberg Finance L.P., DBS Bank transported.
*Data for Laos: 2016, Myanmar: 2018
Volume of cargo handled by Singapore in 2019
Trade-to-GDP in the top seven countries by GDP in 2019 Volume
Air cargo handled (tonnes) 2,014,097
US 26.4%
Sea cargo handled (‘000 tonnes) 626,521
China 35.7% Source: DBS Bank, Singstat
Top 7 GDP in 2019

Japan 36.8%

Germany 88.1%

France 64.5%

India 40.0%

UK 64.3%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

2019 Trade as a % of GDP

Source: World Bank, OECD, Bloomberg Finance L.P., DBS Bank

*Data for Japan: 2018

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Breakdown by Freight Type by Volume in Hong Kong, Demand for services of modern logistics players as businesses
China, Vietnam, and India scale up. With more cross-border trade, companies have found
the need to increase the scale, speed, and efficiency of their
100%
7.0% supply chains. As such, with the increased complexity and
90%
80% 35.8% large initial capital outlay, some companies have opted to
70% 60.0% outsource a part of, or their entire supply chain management
60% 76.8% to modern logistic players (3PL/4PL) who have the
14.4%
50% infrastructure and knowledge to operate efficiently and
91.4%
40%
effectively in this field.
30%
49.7% 32.0%
20%
10% 22.9% What is modern logistics?
0%
Hong Kong China Vietnam India What is modern logistics (3PL/4PL)? Logistics refers to the
Sea/Waterway Rail Road Air movement, storage, and distribution of goods from initial
production to final delivery to the end customers. With the
Source: Singstat, Hong Kong Maritime and Port Board, CEIC, DBS Bank increase in globalization, free trade, and outsourcing,
*India’s figures are estimated from various sources transportation has become an important factor in terms of cost
and efficiency. The drive to maintain competitiveness has led
The most shipment by sea passes through Asia as compared to to the evolution of the logistic industry from a 1PL (self-
North America and Europe. Shipping is the most common sustained logistics) to a 3PL/4PL (or modern logistics). Modern
form of transporting goods internationally due to its low costs. logistic players (3PL/4PL) with integrated activities, providing a
Mihlfeld & Associates estimates that 90% of internationally full range of one-stop service with extensive application of
shipped goods are transported through the maritime channel. information technology, to transport goods from suppliers to
The amount of container volume (TEUs) shipped to, from, and the end consumers has now become the norm
within Asia (94.4m in 2019) surpasses that in North America
(34.6m) and Europe (41.1m). This re-emphasizes the 3PL – I can do it for you! 3PL or third-party logistics players
importance of trade to Asia and its significance as a major provide outsourced logistics services that involve the
manufacturing hub. management of one or more facets of procurement and
fulfillment activities: Transportation, warehousing, picking and
CTS Container Volume by Lane in 2019 (TEUs) packing, inventory forecasting, order fulfillment, packaging,
and freight forwarding. They are freight forwarders, courier
companies, and other companies that integrate and offer
subcontracted logistics and transportation services.

4PL – let me manage it for you! 4PL, also known as supply-

chain-as-a-service (SCaaS), goes one step beyond 3PL and acts
as a true extension of the business by assuming responsibility
for all supply chain-related activities. The 4PL player manages
the logistic operations it is responsible for, and becomes a
single point of contact for all parties involved.

Source: World Liner Data, Container Trade Statistics, Bloomberg
Finance L.P., DBS Bank
Focus on a more efficient supply chain drives the demand for
3PL/4PL services. Just-in-time (JIT) manufacturing involves
reducing production lead time through a more efficient
management of the supply chain. JIT manufacturing or a more
efficient supply chain allows companies to keep inventory
levels low and thus, reduces storage costs. In addition, a faster
turnover in inventories allows for shorter cash conversion
cycles, which improves the cash flow for companies.

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Global Top 28 3PL players grew faster than the market.

3PL/4PL service providers have and will continue to play an
important role in enabling the global supply chain. Scale is
critical in this industry as it allows players to operate more
efficiently and gain customers through its better service
offerings. As a result, the larger players have an advantage and
grew faster than the market. From 2013 to 2018, revenue
from the Global Bloomberg 3PL Index (top 28) grew at a CAGR
of 5.4% to US$412bn, which was faster than the industry’s
3.3%.

Global Bloomberg 3PL Index (top 28 players) grew faster than

the market
CAGR (2013 to 2018)
Top 28: 5.4%
Market: 3.3%

1,000 50.0%

800
45.0%
600
US$'bn

40.0%
400
35.0%
200

0 30.0%
2013 2014 2015 2016 2017 2018

BI Global 3PL Revenue (Top 28) Global 3PL Revenue

Market Share of Top 28 (RHS)

Source: Armstrong & Associates, Statista, Bloomberg Finance L.P., DBS

Bank

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Modern Logistics
Increasing complexity of the Global Supply Chain
The evolution of the logistics industry
1 PL
Cargo Owners - no
outsource of
logistics services
2 PL
Carriers Owners -
own means of
transport
3 PL
Logistics Service Providers –
one/two point-of-contact;
manage supply chain
4 PL
Comprehensive Supply Chain Management –
single point-of contact; manage supply chain
with the help of advance technologies
Source: DBS Bank
From traditional logistics (1 PL/2 PL) to modern logistics
(3Pl/4PL). The scattered and single operation, inefficient and
high-cost logistics activities offered by 1 PL/2 PL have now
been gradually transformed into logistics resources to
complement and integrate with each other. The traditional
business operators that often have to rely on themselves to
engaged in procurement, inventory management, delivery and
other work, and hence leading to difficulty in focusing on the
core business, is gradually being phased out.
3 PL
Business model. 3 PL is responsible for encompassing a broad
range of end-to-end transport and logistics needs. A 3PL does
not take ownership of (or title to) the products being shipped.
It is a supply chain model that involves three parties – business,
logistic provider and carrier. Services provided include
transportation, warehousing, inventory management,
packaging and delivery.
3 PL business model
3 PL
Business Logistics Carrier
/Manufacturer Provider
Delivery
Warehousing
- -
Packaging
-
Inventory
Management
-
Source: DBS Bank
Outsourcing trend and advantages
Rising trend of outsourcing. There has been an increasing
trend of outsourcing. According to a 2019 Third-Party Logistics
Study by KornFerry, total logistics expenditures accounts for
11% of the sales revenue for 3PL users. And out of this, 53%
of the total logistics expenditures is directed to outsourcing.
The most prevalent outsourced activities are domestic
transportation (81%), international transportation (71%),
warehousing (69%), freight forwarding (50%) and customs
brokerage (40%).
Advantages of Outsourcing :-
Cost savings and reduce delivery time. 3PL provides cost
savings on transportation and logistics expenses while reducing
delivery time and improving customer service. A 3PL can offer
improved network route planning, competitive transportation
rates and optimized mix of transportation modes and efficient
returns handling. A 3PL can also forward deploy commonly
used items in smaller distribution hubs for rapid, lower cost
response. A 3PL can develop a database of the items that are
high in demand and ensure inventory is managed to meet
demand.
On time deliveries pose a significant challenge for e-commerce
players in the region. Indonesia’s and Vietnam’s logistics costs
account for 20-25% of their GDP, which is typically single digit
for developed countries. In China, logistics costs comprised
14.8% of the country’s GDP in 2018. Comparatively, China’s
logistics network is a decade or more ahead of SEA’s. Cainiao
Smart Logistics Network (Cainiao), Alibaba’s logistics arm with
3,000+ partners, 200+ warehouses, and 3m+ connected
express personnel has ~81% market penetration in China.
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Modern Logistics

Focus on the core business. Outsourcing complex logistics and Difference between 3PL and 4PL business model
supply chain management to 3PLs allows company to focus on 3PL and 4PL business model
its core business.

3PL
Eliminate infrastructure resources. Companies do not have to
invest in capex heavy transport fleet and warehouses. Hence
can free up their cash to grow their business.
Business Logistics Carrier
Finding the right shoe that fits. A 3PL can scale and customize /Manufacturer Provider
services to meet customers’ needs based on their requirements
to move, store and fulfill products and materials. 3PL can
match the company’s logistics needs with the right carriers to
handle the truckloads at the most competitive price. Manufacturers, 3P
Companies turn to 3PL when their supply chain becomes too Parts and Raw Consumers/
L 3P
Materials Retailers
complex to manage internally. For example, a company may 3P L
L
grow through mergers and acquisitions and a supply chain
that was manageable at one time outgrows the in-house
4PL
capability.
Source: DBS Bank
Improved customer service. With a leaner and more efficient
supply chain, companies can be more flexible and responsive Key difference between 3 PL and 4 PL
to customers’ needs, thus improving customer service. 3 PL 4 PL
Handles the operation/logistic Handles the entire supply
4 PL process chain; coordinates the
Business model. With the rapid advancement and adoption of activities of 3 PL
technology and the spread of globalization, logistics and Major activities include :- Major activities include :-
supply chain management have become complex. The - Warehousing - Consultancy
complexities serve as a tailwind leading to the rise of 4PLs.
- Transportation - Storage
4PLs is also able to fulfill the gaps left by 3PLs. Despite the
- Packaging - Distribution
numerous advantages of a 3PL, one key disadvantage is the
lack of control. Being an outsourced service provider, business - Process
may not have full supervision and control of the entire supply
chain process. This gap can be fulfilled by a 4 PL. More for small-to-medium Better suited for medium-
business to-large business
4PL has a wider scope than 3PL. A 4PL represents a higher Focus on daily operations, Focus on optimization and
level of supply chain management, and is often the single mainly one-off transactions integration level
point of contact for all parties. 4PL providers oversee the May own assets like trucks Generally asset-light
organization and management of a whole supply chain for and warehouses or relies on
manufacturers and wholesalers, and serve as end-to-end sub-contractors
supply chain integrator. As companies transition their supply Can have more than one Single point of contact
chain model to forward deployment or decentralized point of contact
distribution, a 4PL can manage the complexity. Providers of Source: DBS Bank
4PL solutions often link e-businesses to achieve minimum cost
targets. Typically, a 4PL can leverage on technology to deliver a Technology – key differentiating factor between 3PL and 4PL
high level of visibility into the supply chain for tactical and
strategic analysis. In selecting suppliers, a 4PL can focus on The use of technologies is a key differentiating factor between
finding the best combination of value and service. a 3 PL and a 4 PL. The rising complexities in the global supply
chain market leads to the emergence of more 4 PL players.

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Logistics Technology – key driver to an efficient logistics
industry
Technology is making logistics more efficient. Leveraging on
technology, logistics operators will be able to track orders,
vehicles and pallets to gain greater visibility and improve the
methods of transportation. This better visibility helps
companies to optimise their flow of goods, reduce wait times
and manage their costs, which are the key traits of logistics.
Technology is fundamentally changing the way packages move
around the world, from predictive analytics to autonomous
vehicles and robotics.
1) Use of Big Data in Artificial Intelligence for predictive
demand and network planning
The power of Big Data is allowing logistics companies to
forecast highly accurate outlooks and optimize future
performance better than ever before. The insights of Big Data,
especially when generated by AI, can improve many facets of
the supply chain like route optimization and supply chain
transparency. For instance, tagging trucks, pallets, and
inventory provide multi-lateral views of what is happening
across the supply chain. This can allow a logistics company to
be more proactive, to change a delivery route given
unpredictable events such as accidents and weather. The
logistics sector is complex, dynamic and relies on many moving
parts. Big Data helps to oversee everything.
Having a tool for accurate demand forecasting and capacity
planning allows companies to be more proactive. By knowing
what to expect, they can decrease the number of total vehicles
needed for transport and direct them to the locations where
the demand is expected, which leads to significantly lower
operational costs. Technology is using data to its full potential
to better anticipate events, avoid risks and create solutions.
This allows organizations to then modify how resources are
used for maximum benefit.
Furthermore, AI can also identify other factors which could
influence shipment delays like climate and operational
variables. AI analysis can also be used to safeguard against risk.
Eg identify potential material shortages, access issues and
supplier status.
2) Use of blockchain to increase supply chain transparency
The application of the distributed ledger technology in logistics
allows companies involved in goods distribution to automate
the buying process, eliminate bureaucracy and commercial
process inefficiencies related to human error, secure payment
transactions and increase supply chain transparency. With each
item having a unique identifier, this technology allows for
monitoring of products’ journey from a manufacturing facility
to the end user.
3) Use of Robotics for movement and tracking of inventory
Robots are locating, tracking, and moving inventory inside
warehouses, they are conveying and sorting oversized
packages at ground distribution hubs. This helps to cut down
on the manual, laborious work of moving the inventories,
especially the bulky ones.
4) Autonomous vehicles
While driverless trucks may still be a while off, high-tech
driving assistance is coming to the logistics industry to increase
safety and efficiency. Companies like Tesla, Einride, Daimler
and Volkswagen are working on fully autonomous solutions.
Many of these autonomous vehicles are also going electric.
Electric vehicles are gaining popularity, with government
support for some countries. European governments have
expressed their willingness to expand the EV market via a
variety of support policies, including tax benefits and
movements to discontinue the sale of internal combustion
engine (ICE) vehicles.
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Modern logistics seeing rapid growth in Asia

In line with the rapid growth in global trade in developing LPI score and ranking
countries, which saw total trades more than quadrupled in the
last two decades, vs doubling in developed countries, the 4.5
7 9 12 14
logistics aspect is also seeing rapid development. 4.0 18 26 27
32 39 41
3.5 44 46
Logistics score in Asia 3.0
2.5
2.0
Improving logistics score for developing Asia countries but still 1.5
more room to grow. Despite the challenges in the logistics 1.0
industry for the developing countries in Asia, which include 0.5
poor infrastructure, shortage in logistics experts and a 0.0
fragmented market, logistics in Asia is improving. The Logistics
Performance Index (LPI) for Indonesia, SEA’s largest e-
commence market, has improved to 46 in 2018 from 53 in
2014, though high costs continue to persist. Other countries Note: number above bar denotes ranking
including Vietnam and China, have also seen an improvement Source: World Bank; DBS Bank
in LPI score. The LPI is a bi-annual report published by the
World Bank, and is based on six aspects: 1) customs and Asia ruling the high seas. Among the top 10 largest ports in
border management, 2) quality of trade and transportation the world, measured by volume of trade of twenty-foot
infrastructure, 3) ease of international shipping arrangements, equivalent units (TEU), nine are in Asia, of which seven are in
4) competence and quality of logistics services, 5) ability of China. The Chinese ports have seen significant growth in
tracking and tracing, and 6) the frequency of timely deliveries. volume in recent years. Going forward, China’s domination of
maritime shipping will only continue to strengthen with
LPI scores improved in developing countries initiatives like the One Belt One Road and the Greater Bay Area
2012 2014 2016 2018 development in place.
LPI Score*
Indonesia 2.94 3.08 2.98 3.15 Top World Container Ports by Volume 2019 (Million TEU)
Vietnam 3.00 3.15 2.98 3.27
Singapore 4.13 4.00 4.14 4.00 Shanghai, China 43.3
Malaysia 3.49 3.59 3.43 3.22 Singapore 37.2
China 3.52 3.53 3.66 3.61 Ningbo-Zhoushan, China 27.5
Hong Kong 4.12 3.83 4.07 3.92 Shenzhen, China 25.8
Global LPI Ranking Guangzhou Harbor, China 23.2
Indonesia 59 53 63 46 Busan, South Korea 22.0
Vietnam 53 48 64 39
Qingdao, China 21.0
Singapore 1 5 5 7
Hong Kong, S.A.R, China 18.3
Malaysia 29 25 32 41
Tianjin, China 17.3
China 26 28 27 26
Rotterdam, The Netherlands 14.8
Hong Kong 2 15 9 12
*higher score is better 0 10 20 30 40 50

Source: World Bank Source: Hong Kong Maritime Department; DBS Bank

In terms of ranking, Singapore and Hong Kong were among
the top 20 out of 160 countries, while the developing
countries in Asia still have more room for improvement,
though they still fare better than their counterparts in other
regions.
Significant room for growth for trade and logistics in Asia
From 2010 to 2019, total trade in China, Vietnam and
Philippines have grown noticeably faster than the US and EU.
China’s, Vietnam’s and Philippines’ trade grew at a CAGR of
4.2%, 15.2% and 5.4% respectively during this period.

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China’s, Vietnam’s and Philippines’ trade are growing Flows of FDI into ASEAN (USD bln)
noticeably faster than the US and EU
180
18.0%
160.6
16.0% 15.2%
160 155.0 153.1

14.0%
140 130.1
12.0%
121.0 118.7
116.8 113.9
10.0% 120 108.4
8.0%
5.4% 100 87.6
6.0% 4.2%
4.0% 2.8% 3.1% 2.6% 2.1% 2.9% 80
1.5%
2.0% 0.9%
60
0.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
EU US CN HK SG MY ID TH VN PH
Source: data.ASEANstats.org; DBS Bank
Total Trade CAGR from 2010 to 2019

Catalysed by trade war. The rise in China-ASEAN trade could

Source: International Monetary Fund, Bloomberg Finance L.P., DBS
Bank
Trade and logistics in Asia have significant room for growth.
The total trade in the various Asian countries are still small
when compared against the EU, US, and China, representing
significant room for growth. Current growth trends,
investments and improvements in those countries highlight the
potential for growth.
Total Trade in the ASEAN 6, Hong Kong and China in 2019
12,000
10,000
be attributed to the trade tension between the US and China.
China, being the factory to the world, is where many
manufacturing facilities are located. Some companies have
relocated to other bases in Asia, where products were
manufactured and then exported to the mainland for further
packaging.
Shifting base out of China to other ASEAN countries. Trade
war also leads to a shift in manufacturing base out of China. In
recent years, ASEAN countries, including Thailand, Vietnam,
Indonesia and Myanmar, are gaining popularity as
manufacturing sites. As a result, some MNCs are shifting their
suppliers from China to other ASEAN countries in order to
avoid the tax tariffs.

8,000
Vietnam and Indonesia are rising stars. Among ASEAN
countries, China’s bilateral trade with Vietnam has increased
US$'bn

6,000
11,254
the most dramatically. Outbound shipment to Vietnam has
4,000 soared five-fold in value from 2009-19. Year to date, China’s
2,812 imports from Vietnam recorded an astonishing surge of
5,294 215
565
2,000 4,105 506 25.5%. Meanwhile, inbound shipment from Indonesia also
377
536 rose by 5.7% y-o-y.
0 612
EU US CN + HK ASEAN 6

SG MY ID TH VN PH

Source: International Monetary Fund, Bloomberg Finance L.P.

Foreign Direct Investments (“FDI”) into Asia increases. The

flow of FDI into ASEAN increased at a CAGR of 4% during the
2010-2019 period, and the growth rate accelerated at a CAGR
of 12% during the last few years from 2016 to 2019 as
ASEAN continues to develop. The relatively lower cost of
labour is Asia is one of the key factors that attract global
investments.

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China
Top listed logistics players in China gained market share and
we expect the trend to continue. In 2019, the top 20 logistics
players in China generated revenue of RMB178bn. From 2010
to 2019, these players’ revenue grew at a CAGR of 14.3%,
which was faster than the Chinese market’s 10.1% CAGR
during the same period. The larger logistics players gained
coverage, data, and size, and we believe that they were able to
gain market share by positioning themselves more
competitively such as through the offering of quicker
deliveries, lower charges, and transparency.
We expect this trend to continue with advancements in
technology (AI, big data, autonomous vehicles, Industry 4.0)
further pushing their advantage. Based on the GDP growth
estimates from Bloomberg, we are projecting their revenue to
grow at a CAGR of 7.6% from 2019 to 2024F.
China’s top listed logistics players grew faster than the
market
6,000 350,000
5,000 300,000
4,000
250,000
200,000
RMB'bn
US$'m
3,000
150,000
2,000
100,000
1,000 50,000
0 0
China's Total Trade China Logistics Value (RHS)
Source: China Federation of Logistics & Purchasing, CEIC, DBS Bank
China’s logistics cost grew at a CAGR of 8.3% in the last 10
years; logistics were managed more efficiently. From 2010 to
2019, China’s logistics costs grew at a CAGR of 8.3% to
RMB14.6 trillion, from RMB7.1 trillion. China has indicated
that it will continue to increase railway freight volume,
upgrade its water transportation system, regulate highway
freight transport and speed up multimodal transport in a bid to
improve its logistics network and optimize its structure. As a
result, China’s logistics cost as a percentage of GDP has
declined from 22.2% in 2010 to 16.4% in 2019.
China’s Logistics Cost vs Real GDP
100.0 22.2% 25.0%
89.2
90.0
80.0 20.0%
70.0 16.4%
60.0 15.0%
RMB'tn
50.0
40.0 32.0 10.0%
30.0
20.0 5.0%
10.0
0.0 0.0%
2010 20112012 20132014 201520162017 20182019
Real GDP Logistics cost as a % of GDP (RHS)
Source: China Federation of Logistics & Purchasing, CEIC
Indonesia
Ample room for growth in rail transport. According to industry
reports from Mordor Intelligence and ReportLinker, the
Indonesian freight and logistics market is expected to witness a
CAGR of 10.3% during the forecast period (2020 - 2025).
Logistics costs is accelerating, accounting for 25% to 30% of
Indonesia’s GDP, as compared to below 10% for developed
countries. Even neighbouring countries such as Malaysia incur
half the cost as a percentage of GDP for logistics expenditure.
The Indonesia government has big plans for the railway and
subway, which means more opportunities for the logistics
players. Indonesia is preparing to spend about US$40bn to
extend Jakarta’s metro network. The government targets to
build 230km, from the current 16km. This is part of President
Joko Widodo’s ambitious road map to create a US$7 trillion
economy by 2045. Other plans include adding an express line
between Jakarta and Surabaya on the island of Java, and also
commissioned a US$6 bn, 142km high-speed train to connect
Jakarta and Bandung, the capital of West Java. Indonesia is
also planning to build train networks in Sulawesi and
Kalimantan as well as connecting some of the country’s key
airports with nearby cities by rail.
By land is the main mode of transporting logistics in Indonesia,
accounts for 90%. In Indonesia, c.90% of the logistics is
transported via land. Road transport accounts for 70-80% of
the total freight volume handled annually within the
Indonesian borders. In value terms, the share of the road
freight market stayed between 40% and 50% of the total
logistics market size. Apart from last mile delivery, most of the
logistics that are transported by road are done so through
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trucks. The number of trucks has grown at a CAGR of 6% in Maritime transport accounts for 5% of the total freight carried
the past 10 years and this rising trend is set to continue. in 2019 while the road transport accounts for the bulk of
79%, and inland waterway another 16%. The rail, together
Number of trucks in Indonesia grew at CAGR of 6% in the with airway, only account for less than 1% of the total freight
past 10 years in 2019.

9000 30.0
Freight Carried (ton mil) via various mode of transport
8000
25.0 1800
7000
1600
No. of trucks ('000)

6000 20.0
1400

Y-o-Y (%)
5000
15.0 1200
4000
1000
3000 10.0
800
2000
5.0 600
1000 400
0 0.0 200
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
0
No. of Trucks Y-o-Y (%)

Source: CEIC; DBS Bank Road Inland Waterways Maritime Transport

Rail accounts for only 1%; ample room for growth. Currently, Source: CEIC; DBS Bank
rail transport infrastructure is present only on the islands of
Sumatra and Java. Rail transport by goods volume only makes Shift of manufacturing facilities leading to rise in logistics
around 1% of the total volume of goods transported in and demand. Vietnam has established itself as one of the key
out of Indonesia. Hence there is growing needs to shift to rail manufacturing hubs in Southeast Asia. Owing to low labor
transport from land transport, as rail can provide transport costs, Vietnam has attracted a lot of foreign capital over the
with more certain in delivery time, faster, and free from traffic years, to establish assembling facilities and manufacturing
congestion. factories. The government is also encouraging business in the
manufacturing sector by establishing economic zones and
Vietnam industrial parks.

Vast opportunities in manufacturing and maritime. According Vietnam’s Foreign Direct Investments vs Real GDP Growth
to various industry reports, the logistics market in Vietnam is
projected to grow at a CAGR of 14-16% during the forecast 12,000 9.0
period, 2018-2024. The logistics market in Vietnam is in its 8.0
10,000
transition stage and the demand for logistics is rising strongly. 7.0
High economic growth, increasing domestic manufacturing, 8,000 6.0
the rise in consumption, and booming e-commerce are some 5.0
US$'m

(%)

of the key drivers of the Vietnamese freight and logistics 6,000

4.0
market.
4,000 3.0

Logistics costs, however, accounts for 15-20% of GDP in 2.0

2,000
Vietnam, which is much higher than developed markets. Poor 1.0
logistics infrastructure and inadequate transport infrastructure 0 0.0
are some of the contributing factors to the high logistics cost. 2013 2014 2015 2016 2017 2018 2019 2020

FDI (LHS) Real GDP growth

As Vietnam is along the coastal area, it holds a lot of potential
for maritime freight transport. Vietnam exports a lot of Source: General Statistics Office of Vietnam, Bloomberg Finance L.P.
seafood, vegetables, flowers and imports processed food
products and drugs. This also creates a high demand for
climate- controlled logistics service.

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The rising costs in China, as the country moves away from Cargo handled (ton ‘000) via Sea and Air
labour-intensive industries and up the value chain, couple with
700,000 2200
the trade war, is driving businesses to relocate their
2100
manufacturing facilities to Southeast Asia. The proximity and 600,000
2000
geographic location of Vietnam makes it a viable option.
1900
Further, over the past few years, Vietnam has been active in 500,000
1800
signing bilateral trade agreements with countries throughout
400,000 1700
the world, which create a favourable business environment for
domestic and foreign companies. 1600
300,000
1500

Singapore 200,000 1400

Strategic location with world-class facilities. Global trade is

intertwined with Singapore’s economic success and is the Cargo Handled - Sea (LHS) Cargo handled - Air (RHS)

lifeblood for a country with no significant domestic market and Source: SingStat; DBS Bank
natural resources. Going forward, trade activities would
continue to remain robust as a large part of Singapore’s GDP is
generated by external demand.

With Singapore’s strategic location at the cross-roads of East-

West trade, coupled with its world-class facilities including
maritime ports and airport, trade activities would flourish, and
hence logistics demand would be in high demand. Sea
transportation is the main mode of transport, followed by air.

Export and Import vs GDP Growth

600 16
14
500
12
400 10
8
300
6
200 4
2
100
0
0 -2

Exports (S$bn) - LHS Imports (S$bn) - LHS

GDP Growth (%) - RHS

Source: CEIC; DBS Bank

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Drivers of the modern logistics industry

1) Proliferation of e-commerce Number of online shoppers as a percentage of total population

in ASEAN is 5 years behind China
The rapid development of the modern logistics industry over China China ASEAN
the past few years has been driven by the proliferation of e- 2014/15 2019 2019
commerce. As more retailers adopt or migrate to online Population (m) 1,370 1,393 576
platforms, the growth of modern logistics is expected to No. of online shoppers (m) 317 610 150
continue. Retailers now have to deliver high volume of As % of population 23% 44% 26%
products directly to end consumers in many locations in a
Number of online shoppers (m) 317 610 150
timely and cost-effective manner, instead of directly to a
As a % of total population 23% 44% 26%
handful of stores.
As a % of internet users 49% 71% 42%
Source: World Bank, Internet Economy Report 2019 by Google and
ASEAN is an attractive market for global e-commerce players.
Temasek, DBS Bank
e-commerce sales in ASEAN jumped from US$5.5bn in 2014
which represented 1.1% of total retail sales to US$38.2bn in
While there is a strong growth trend for e-commerce in
2019, accounting for c.3.2% of the total retail sales. Southeast
ASEAN, one of the key challenges is managing logistics and its
Asia’s (SEA) US$590bn retail market still underdeveloped, but
cost. Complex geographical terrains, and poor road and rail
with a young population and high internet and smartphone
infrastructure make last-mile deliveries a significant challenge
penetration, global e-commerce players are enticed by the
for e-commerce players in ASEAN. Indonesia’s and Vietnam’s
attractive investment opportunities. e-commerce sales in
logistics costs account for c.20-25% of their GDP, which is
ASEAN is expected to reach US$153bn by 2025, accounting
typically in the single digits for developed countries.
for c.6.5% to the total retail sales. Indonesia is expected to
continue leading the pack at c.US$82bn in e-commerce sales
Parcel delivery costs in Indonesia (US$)
(c.54% of regional total) in 2019.

ASEAN e-commerce GMV (US$bn)

Source: INSEAD, DBS Bank

China is at least a decade ahead in logistics when compared

against the developing countries in ASEAN. Alibaba’s logistics
Source: Internet Economy Report 2019 by Google and Temasek, DBS
arm, Cainiao Smart Logistics Network (Cainiao), has over 3,000
Bank
partners, 200+ warehouses, and 3m+ connected express
personnel with an 81% market penetration in China.
The e-commerce journey for the ASEAN region is just
beginning. According to our e-commerce report: Can ASEAN
According to the National Development and Reform
be the China of this decade?, the number of online shoppers
Commission, China’s logistics expenditure comprised 14.8% of
as a percentage of its population in ASEAN is c.26% in 2019,
the country’s GDP in 2018i. Transportation is the largest
putting it five years behind China. However, when it comes to
component and it accounts for 50-55% of the logistics costs in
spending, ASEAN is nine years behind China, with e-commerce
China.
sales as a percentage of retail sales coming in at c.3% in 2019.

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Breakdown of the Cost of Logistics in China Singapore online sales catalysed by the pandemic
180.0% 30.0
100%
160.0%
13% 13% 13% 13% 13% 25.0
90% 140.0%
80% 120.0%
20.0
70% 34% 33% 32% 35% 34% 100.0%

(%)
60% 80.0% 15.0
60.0%
50% 10.0
40.0%
40%
20.0%
5.0
30% 0.0%
53% 54% 55% 52% 53%
20% -20.0% 0.0
10%
0% Online sales increase y-o-y (LHS) Proportion of online sales
2015 2016 2017 2018 2019

Transportation Keeping Management Source: Singapore Department of Statistics, CEIC

Source: China Federation of Logistics & Purchasing, CEIC Australia online sales catalysed by the pandemic

100.0%
What are consumers’ demands? – Rise of e-commerce and the 90.0%
increasing expectations of customer. As online sales take off 80.0%
and e-commerce grows, consumers have also increased their 70.0%
expectations of the delivery of their products. Consumers are 60.0%
50.0%
demanding higher standards in:
40.0%
• Speed of delivery 30.0%
• Cost 20.0%
• Shipping visibility and tracking 10.0%
• Delivery timing 0.0%
Jan-19
Feb-19
Mar-19

May-19

Oct-19

Dec-19
Jan-20
Feb-20
Mar-20

May-20
Apr-19

Jun-19
Jul-19
Aug-19
Sep-19

Nov-19

Apr-20

Jun-20
Jul-20
Aug-20
One of the most important areas is the speed of delivery. In
KPMG’s Annual Retail Survey (UK), c.43% of UK consumers Online retail sales in Australia (y-o-y % change)
choose ‘next day deliveries’, up 4% y-o-y. In addition, c.17%
of consumers abandon a brand if they face long delivery times. Source: Australia Bureau of Statistics, CEIC

Higher consumer mix during the pandemic impacts the

margins of delivery service providers. Most recently, the
COVID-19 pandemic has catalyzed the adoption of e-
commerce as many stores are forced to temporarily shut down
to comply with government lockdowns. Online sales in
Singapore and Australia jumped as consumers switched to e-
commerce as the only alternative to get their goods.
2) US-China Trade War and Geopolitical Tensions
Firms are reviewing their supply chains and exposure. Another
trend affecting the logistics industry is the US-China trade war
and geopolitical tensions. The US-China trade war tariffs have
reduced exports from China to the US. The threat of the
escalation of the trade war and the possibility of other
geopolitical tensions between nations are forcing firms to
review their strategies and risk assessment.

Instead of concentrating their production heavily in a country

where wages and rent are cheap, companies are now
considering or have begun diversifying their production to
include more than one particular geographical concentration.

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Exports from China (y-o-y % change)
Source: General Administration of Customs of China, CEIC, DBS Bank
Shift in supply chain out of China to other parts of Asia or
back to the US. Due to globalisation and the opening-up of
the Chinese economy in the past decades, China has grown
into the world’s largest manufacturing powerhouse. It
currently ranks first in the world for as the source of textiles,
plastics & rubber, metals, machinery & electrical equipment
imports, third for chemicals imports, and sixth for food and
transport equipment imports.
Average wage (RMB'000)
Among the key regional economies, Vietnam is the most
dependent on China as a source of intermediate products.
However, Vietnam has also benefited from the trade diversion
and investment diversification out of China over the past two
years as global companies look for alternative supply source
and production base.
Intermediate goods to and from China
Source: CEIC, OECD TiVA, DBS Bank
However, there is an increasing trend of MNCs shifting out of
China. Industry news suggests that Vietnam has already
overtaken China to become the largest footwear production
base for Nike and Adidas. Japan’s Fast Retailing Co. which
operates the Uniqlo clothing chain, has also shifted production
from China to Southeast Asia in recent years. The company
reportedly increased the number of Vietnamese suppliers by
40% YoY in 2018.
The outbreak of the COVID-19 pandemic has exposed the
vulnerability of global supply chain, which relies on China for
sourcing and production. This, coupled with the US-China
trade tensions and also China’s labor cost increases, will likely
prompt more China-based MNCs to diversify their supply
chains.
High labour costs in China. Another push factor out of China is
the relatively high labour costs. Average wage in China is
much higher than other developing regions like Thailand,
Indonesia and Vietnam. Furthermore, it has been on an
uptrend, increasing at more than 10% y-o-y in the last few
years.
Average Annual Wage in China grew >10% Y-o-Y in the
last few years
100 25.0
80 20.0
Y-o-Y (%)
60 15.0
40 10.0
20 5.0
0 0.0
Wage Y-o-Y (%)
Source: CEIC; DBS Bank
Shifting of strategic products back to end markets. For
strategic sectors, such as PPE, medical equipment and
pharmaceuticals, COVID-19 may trigger the production
relocation from China towards the end markets. For these
sectors deemed strategic, many countries would find it
necessary to increase self-sufficiency and reduce the over-
reliance on foreign suppliers after COVID-19.
The US is already calling for the reshoring of medical
equipment and pharmaceuticals. Incentives are offered for
companies to increase the US-based production of active
pharmaceutical ingredients. Other governments may follow
suit, using a carrot and stick approach to encourage
companies to move back the production of strategic goods.
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3) Post COVID-19 landscape (demand and supply chain Digital Consumer Growth Surpasses Expectations
disruption) 340
350 310 310

No. of digital consumers (m)

300 280
Disruption to supply chain due to COVID. Besides the trade 250
war, the disruption to the supply chain as a result of the 250
COVID-19 pandemic has led to many manufacturers to rethink 200
their supply sources, to balance between efficiencies,
150
resilience, costs, and to diversify their production networks
100
instead of relying on a limited number of suppliers. Companies
could shift to suppliers closer to its own manufacturing 50
facilities in order to avoid delay in shipments, as well as cut 0
down on transportation costs, or to be closer to their end 2018 2019 2020F 2025F 2025F*
consumers. *Previous forecast
Source: Facebook and Bain & Company; DBS Bank
COVID-19 will likely reinforce the existing trend for MNCs to
relocate the low value-added production from China to other Average Digital Spending Per Person to Grow 3.5x by 2025
emerging markets. This trend has emerged ever since a decade
ago, in the context of rapid population aging, wage cost 500
increase, and structural transition in the Chinese economy. The 450 429
Avg. spend per digital consumer

392
US tariff hikes after the outbreak of the China-US trade war in 400
2018 have further squeezed the profit margin of low value- 350
3.
added producers, therefore accelerating the process of 300
(US$)

relocation. 250
200 172
124 135
Surging digital consumption; a robust digital presence is the 150
100
way to go. COVID-19 has also accelerated the growth of
50
digital consumption in South-east Asia. The number of digital
0
consumers (those who purchase goods and services online), is 2018 2019 2020F 2025F 2025F*
expected to reach 310m by the end of this year, instead of in *Previous forecast
2025, according to a study by Facebook and consulting firm
Source: Facebook and Bain & Company; DBS Bank
Bain & Company. Consumers are also spending more and
across more categories. By 2025, digital consumers will spend,
Pandemic spurred demand for groceries…. The study by
on average, 3.5 times more than they did in 2018. Per person,
Facebook and consulting firm Bain & Company also found that
the average monetary value of goods or services purchased
the pandemic has spurred shoppers to go online for groceries
online was projected to reach US$429 (S$588) by 2025, up
more than ever before. Prior to the pandemic, this category
from the US$124 spent in 2018.
had the least online retail penetration, but the report showed
that around 43% of digital consumers said that they bought
Social distancing has led many to shop online and for
groceries online this year.
businesses, to establish a robust digital presence has become a
need rather than a good to have strategy.

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Increasing Shopping Online for Essentials, Especially Groceries New infrastructures to support demand for logistics services.
As the GBA concept gains momentum it will fuel demand for
Clothing 73% logistics services. In order to satisfy the increasing demand for
Electronics 64%
Personal care 60% cross-boarder logistics, new infrastructure needs to be built.
Beauty 50% This would provide significant opportunities in the logistics
Household appliances 46%
Groceries (packaged) 43%
sector as supply chains are upgraded. The opening of the
Groceries (fresh) 38% Hong Kong-Zhuhai-Macau bridge also offers quicker road
Non alcoholic beverages 35% access to cheaper land for the development of warehousing
Toys 29%
Alcoholic beverages 16% and storage facilities for Hong Kong freight forwarders and
Baby care 16% distributors.
Other household furnishing 15%
Home office 14%
Home gym 12% In the GBA three-year action plan, the government aims to
0% 20% 40% 60% 80% build up the expressway network over 5,000 kilometers (3,107
Source: Facebook and Bain & Company; DBS Bank miles) by 2020, which is to compare to the 3,700 kilometers
(2,299 miles) at the end of 2017. The government is also
…. leading to demand for efficient logistics. This will compel working on the GBA Railway Network Planning (2018-2035) to
third party logistics firms to invest in more distributed, small- improve the railway system. Meanwhile, the GBA plans to
scale fulfilment centres to optimise their delivery capabilities. reach 62 million TEUs of annual container throughput by
The challenges of storing and delivering fresh produce will also 2020, which is to compare with the 54 million recorded in
drive up the value of logistics real estate assets, since the 2018.
logistics firms would need to invest in either advanced
information technology systems or cold storage equipment to Greater Bay Area
move the goods quickly and safely.

4) Greater Bay Area to spur manufacturing activities and

logistics markets
Connectivity leading to more trades, both domestic and on a
global basis. Greater Bay Area (GBA) is the gateway to China’s
Belt & Road initiative. This project physically and economically
links Hong Kong, Macau and nine cities in Guangdong, and is
expected to become one of the leading megacities in China.
The framework agreement was signed in 2017 and the project
is expected to complete in phases. The connectivity of the
cities will not only lead to more frequent commercial and
trading exchanges among cities in the region, it will also
further promote commercial and trading activities on a global
basis.

Source: gzshopper.com

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Major modern logistics players and their business models
Business models for 3PL and 4PL
3PL business model – focus on daily operations. 3PL providers
mainly focus on fewer cluster of services within the whole
logistics value chain. 3PL includes freight forwarders, courier
and express delivery companies. Their business model can be
broadly classified into four types :-
3PL Providers
1) Transportation based model
- Provide comprehensive logistics offerings
- May use own assets or other firms
2) Warehouse/Distribution based model
- Provide warehouse/distribution service
3) Management based model
- Focused on the management of the shipping
process from beginning to end
- Provide technology eg transportation management
system, integrated freight management services
4) Financial based model
- Provide freight payment and auditing, cost
accounting and control, and tools for monitoring,
booking, tracking, tracing, and managing inventory
Source:DBS Bank
4PL business model - focus on optimization and integration.
4PLs generally work with other 3PLs to provide integrated and
comprehensive services. They mainly offer domestic and
international one-stop-shop logistics services and supply chain
management solutions, fulfilling various logistics needs across
the entire value chain. Their business model can be broadly
classified into three types :-
4PL Providers
1) Synergy plus model
- Partnership between 4PL and 3PL
- Provide technology, supply chain management
skills
2) Solution integrator model
- Operates comprehensive supply chain solutions for
a single client
3) Industry innovator model
- Develops and runs a supply chain solution for
multiple industry players
Source:DBS Bank
Existing major players mainly fall into three big categories :-
We classified the logistics players into three big groups and
examined their different business models :-
1) Integrated global players- presence in the entire logistics
value chain
2) e-commerce – operator of e-commerce platform
3) Express Service – focus on express/courier service
(refer to table on Business model for major logistics operators)
What business models should logistic firms adopt in today’s
fast-changing world?
Agile business model to adopt rapid transformation in logistics
industry. In today’s complexity of the logistics world,
companies that succeed are the ones who embrace changes
and leverage on logistics technology to improve their
efficiencies. As the modern logistics industry continues to be
transformed by new technologies, the business model of
logistic players must be agile enough to adopt to the many
global changes underway, fueled by factors like the rising e-
commerce trade, the shift in supply chain as a result of
globalization, geopolitical risk and trade tension. Most of the
major players are in the 3PL/4PL space. 3PL focus on daily
operations, mainly one-off transactions, while 4PL focus on
optimization and integration level.
Leveraging on logistics technology. The growing adoption of
technologies to improve efficiency and optimize returns is a
growing trend. Major logistics players are investing heavily in
technology to differentiate themselves by transforming their
businesses and to carving out a niche. They add flexibility to
business operations in order to ensure omnichannel delivery,
reduce costs and meet the ever-shifting consumer demand.
They collect large amounts of information (big data) from their
different stakeholders (customers, suppliers, etc.) and try to
“make sense” (analyze) of the data. For instance, e-commerce
firms can analyze the purchasing frequency or category of
products of specific customers and use targeted advertising to
potentially increase sales. Couriers/last-mile delivery firms may
also analyze their delivery locations and plan their delivery
routes and frequency to maximize overall customer satisfaction
through quicker deliveries and minimize costs. The path to
increased operational efficiency and customer satisfaction lies
in the digitalization of logistics workflows, and is central to a
business success.
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Major players like Cainiao (Alibaba), UPS, DHL, Federal Express,
SF Holdings, are leveraging on their data insights and
technology to facilitate the digitalization of their warehousing
and delivery process, and improving efficiency across the
logistics value chain. For example, JD.com is the world’s first e-
commerce company to commercially deploy drones for rural
deliveries.
Omnichannel logistics. Omni-channel fulfillment is an
increasing reality in the logistics industry, spurred on by the
proliferation of e-commerce. For e-commerce trades, the “last-
mile” logistics are falling on the shoulders of the retail logistics
providers and their customers, instead of the consumer, as in
the case of the traditional in-store transactions. Furthermore,
last-mile deliveries have grown increasingly complicated as
customers get more specific about delivery demands and
expect even faster shipping times.
Hence, successful logistics companies are those that have
evolved to offer more creative approaches to shipping to
navigate growing omnichannel complexities within the supply
chain.
Case study of major logistics players
1) Cainiao (Alibaba)
Collaborates with logistics partners; enhancing tech
capabilities. Cainiao Network is a logistics data platform and
global fulfillment network that primarily leverages the capacity
and capabilities of logistics partners. The collaborative platform
offers domestic and international one-stop-shop logistics
services and supply chain management solutions, fulfilling
various logistics needs of merchants and consumers at scale,
serving Alibaba’s digital economy and beyond. Its data insights
and technology facilitate the digitalization of the entire
warehousing and delivery process, improving efficiency across
the logistics value chain.
Cainiao has over 3000 logistic partners and 3 million express
courier personnel, and an 81% penetration rate in China. The
delivery routes of 80% of its parcels are calculated using big
data algorithm and it is able to delivery fresh food within 30
minutes, groceries within an hour and stored-based shipping
service within two hours.
Alibaba Group has increased its stake in Cainiao Network to
66% from 51%, highlighting Alibaba’s ambition in building an
efficient delivery logistics network, which is an increasingly
important component in today’s challenging logistics market.
2) JD.com
Leverage on logistics partners’ network; building omni-channel
supermarket. e-commerce player (3rd largest internet company
globally, after Amazon and Alphabet; second largest e-
commerce platform in China, after Alibaba) with own logistics
arm, JD Logistics. It covers 99% of China’s population, and has
a higher penetration rate among affluent urban residents, and
higher average basket size than the overall industry. JD has its
own R&D team. Research areas include data science, artificial
intelligence, virtual and augmented reality, automation,
robotics and autonomous vehicle systems.
JD has built an open supply chain platform to enable brands,
third party merchants and offline retail stores to increase their
efficiency and boost innovation in the industry as a whole. It
targets the omni-channel supermarket GMV to reach
Rmb800bn in 2023, to quadruple from FY19. JD’s strategic
investors include Tencent, Walmart and Google.
3) SF Holdings
Integrated player, leveraging on technology improve
productivity and efficiency. SF is one of the leading integrated
express logistics service providers in China. It has built up a
preliminary level of capability for providing customers with
one-stop integrated logistics solutions including warehousing
management, sales forecasting, big data analysis, and financial
management.
SF is an intelligent logistics provider with the advantage of
network of scale. It has an integrated gigantic logistics
network at home and abroad, including Aviation network - All-
cargo aircraft, commercial flight and drones, Ground network
– operating transport, distribution and services, and
Information network – Big data, blockchain, machine learning
and planning optimization.
SF has been shifting away from labour- and capital-intensive
business model towards technology-intensive operations. SF
continues to emphasize on and proactively invests in the
construction of its various smart logistics infrastructures,
aiming to grow into a technology-driven industry solution
service company.
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4) Express delivery companies – eg ZTO Express, YTO DHL increases revenue and capex to Asia Pacific
Express
12.0 10.8 10.8 11.0
10.1 10.0
Scalable network model, leveraging on partners. Express 10.0
delivery companies tend to have a scalable network partner
model, leverages its network partners to provide pickup and 8.0

EUR'm
last-mile delivery services, while controlling the mission-critical 6.0
line-haul transportation and sorting network within the express
delivery service value chain. 4.0
They provide both domestic and international express delivery
2.0
services and cover more than 90% of China’s cities and 0.6 0.6
0.2 0.2 0.2
counties. Though the bulk of the revenue is currently derived 0.0
from China, international route is an important source of 2015 2016 2017 2018 2019

growth going forward, especially with the Belt and Road APAC Revenue APAC Capex
initiatives, cross-border e-commerce business and globalization
of Chinese enterprises. Source: Deutsche Post DHL Group

5) Deutsche Post DHL Group (“DHL”) 6) FedEx Corporation (“FedEx”)

DHL believes that the four trends: 1) globalization, 2) e-
commerce, 3) digitalization and 4) sustainability will be
important drivers of growth for the logistics sector. Its belief is
reflected in its corporate strategy and DHL continues to make
significant investments in digitalization and the expansion of its
network to improve its service and ensure profitable future
growth. Between 2020 and 2025, DHL’s spending on
digitalization is expected to reach c.EUR 2 billion.
DHL is modernizing its IT systems and integrating new
technologies with the aim of steadily improving its
performance. It is also focused on improving shipment
visibility, electronic document management and a new
transport management system.
Increasing exposure to Asia Pacific (“APAC”). In the last five
years, DHL has increased its investment and exposure to APAC.
Revenue increased by 9.7% and capex increased 30.6% from
2015 to 2019.
FedEx is focusing on five key areas: 1) e-commerce, 2)
Business-to-business shipping, 3) Operational excellence, 4)
International profitability and 5) Revenue quality.
FedEx has anticipated the growth of the e-commerce trend
and strategically opened new facilities and invested in
innovation and highly advanced technologies that have
positioned FedEx Ground (low-cost, day-certain service to any
business address in the US and Canada) as the industry’s most
automated network.
Investments in technology. To make costly last-mile deliveries
more efficient, FedEx is also continuing successful
collaborations such as Last Mile Optimization. It has also
launched SenseAware ID, its next generation sensor-based
logistics device that provides real-time tracking of a package
location while it’s in the FedEx Express network using
Bluetooth Low Energy. FedEx is preparing Roxo, the FedEx On
Demand Bot, which are autonomous robots that can help with
deliveries, for a second round of testing.

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Business model for major logistics operators
Global Plays
Asset-owner - Own/lease various mode of
transport including planes,
trucks
- Own/lease warehouse,
distribution centres
- Fixed assets account for
>50% of total assets
e-commerce - Increasing focus on e-
presence commerce business, with
new investments in
technologies
Geography - Both domestic and
international
Level of technology - Increasing focus on
technology to improve
productivity and enhanced
efficiency, eg use of AI, big
data analysis
- Has own R&D team
- Pioneers in new technologies
eg using drones, robots,
electric vehicles
Examples of - DHL, FedEx, UPS
company
Source: DBS Bank, various company websites
e-commerce
- Own/lease various mode of
transport including planes,
trucks
- Own/lease warehouse,
distribution centres
- Fixed assets account for
<50% of total assets
- Has own supply chain
network to support brand
partners
- Strategic partnership with
social media players
- Both domestic and
international
- Increasing focus on
technology to improve
productivity and enhanced
efficiency, eg use of AI, big
data analysis
- Cainiao (Alibaba), JD.com
Express Services
- Own/lease mainly trucks
- Mainly leverage on network
partnership
- Own/lease sorting hubs
- Fixed assets account for
<50% of total assets
- Increasing focus on e-
commerce business
- Strategic partnership with
network companies
- Both domestic and
international
- Increasing focus on
technology to improve
productivity and enhanced
efficiency, eg use of AI, big
data analysis
- ZTO Express, YTO Express
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Challenges
Logistics management objectives include rapid response,
minimum variation, minimum inventory, integrated transport,
product quality and life cycle support. However, the
competitiveness varies among the different regions and
countries mainly due to the challenges in each region.
Poor infrastructure leading to high logistics costs. Complex
geographical terrains, and poor road and rail infrastructure
make last-mile deliveries a significant challenge for e-
commerce players in ASEAN. Indonesia’s and Vietnam’s
logistics costs account for c.20-25% of their GDP, which is
typically in the single digits for developed countries. The
current infrastructure in some developing countries is
insufficient to meet the demand for advanced logistics services,
as they do not efficiently connect to many of the logistics
hubs, preventing the establishment of advanced intermodal
logistics operations.
Shortage in logistics experts. The development of the logistics
services industry in developing countries continues to lag
behind many other developed countries as there are limited
numbers of highly trained professionals available in the
industry. The lack of logistics professionals with experience
limits the pace of development of the industry.
Fragmented market. There are still many smaller players in
each segment of the logistics market, especially in developing
countries. Low entry barriers are one of the reasons for the
fragmentation. Most players tend to compete on price. A case
in point is the trucking business in India. Only 10% of the
truck operators own a fleet exceeding 25 trucks. Most drivers
own single trucks and there is a lack of big players who can
control the market, and offer cost advantages of scale.
Multiple warehouses could exist, creating several points of
stock transfers, leading to inefficient distribution channels.
In Indonesia, local players account for approximately 70% of
the Indonesian freight and logistics industry, with the balance
from international players. Within the 70%, the market is
rather fragmented with the 10 largest players making up less
than 30% of the local market. This can be attributed to the
fact that the large players are more focused on freight
transport and providing logistics infrastructure.
Conclusion
Increasing complexity of the logistics market leading to
demand for integrated operators. In today’s complexity of the
logistics world, driven by customers’ expectation on speed and
costs, growing omnichannel complexities within the supply
chain, and the higher volume due to factors like the
proliferation of e-Commerce, trade war and shift in supply,
logistics players are bracing for more challenges ahead.
Companies that succeed are the ones who embrace changes
and leverage on logistics technology to improve their
efficiencies.
Combination of logistics expertise + advanced technology. The
market for freight transportation intermediaries is growing
with the proliferation of e-commerce, and the shift in supply
chain due to trade war and COVID-19. The conventional 3PL
will not fade but will face with the competition from the online
logistic providers. These 3PLs have to combine their logistics
expertise with advanced technology to evolve.
Agile business model. Logistics players should leverage on
technologies to improve efficiency and optimize returns. Their
business model should be agile enough to response to the
ever-changing industry and demand from the various
stakeholder, from suppliers/manufacturers to end consumers.
Big will get bigger. Strategic alliance and mergers &
acquisitions will be important to achieve an integrated supply
chain capability. Smaller players could be weed out and the
logistics market will be reduced to a few integrated players
and a few successful niche players going forward.
Ample opportunities in Asia – share resources, provide
integrated services. The logistics industry is fragmented,
especially in developing nations. Advanced logistics services
such as supply chain management, inventory management,
logistics consulting and data analytic are still under-developed
with the majority of the logistics services providers not capable
of offering full supply chain management services.
Too many smaller players scattered in various areas could also
lead to duplication of services and waste of resources, hence
unable to derive economies of scales. These players could
collaborate to cut down on costs and improve efficiencies. For
example, manufacturers can share the storage costs on
containers during shipment. Different players along the
logistics value chain could also collaborate to provide
integrated services to end customers.
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DBS Bank recommendations are based on an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return, i.e., > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable share price catalysts within this time frame)
*Share price appreciation + dividends

Completed Date: 30 Nov 2020 08:17:18 (SGT)

Dissemination Date: 30 Nov 2020 08:44:05 (SGT)

Sources for all charts and tables are DBS Bank unless otherwise specified.

GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd, its
respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in
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The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
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Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
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Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

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report or any portion thereof may not be reprinted, sold or redistributed without our written consent.

United States This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named
on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research
analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company,
public appearances and trading securities held by a research analyst. This report is being distributed in the United States by
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contact DBSVUSA directly and not its affiliate.

Other In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified,
jurisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

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Asian Insights SparX
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