Chapter 3: Analysis of Logistics M&A in China as a market entry
3.3 Motives and drivers of logistics M&A in China
3.3.2 Acquisition of customer portfolio
Main reason explaining preference of acquiring private companies among foreign entities is gaining access to wide customer portfolio. Acquiring and maintaining mutually beneficial relations with customers is a key success factor for any corporation. This rule is especially important in East Asia where personal connections, built up through years of
cooperation, are essential in business environment, often more important than contracts signed concerning poor efficiency of Chinese courts. Therefore, acquisition of private companies is a quick and efficient method of acquiring customers. According to China Federation of
Logistics and Purchasing more than 80% private domestic companies had foreign entities as
52 The Influence of Foreign M&A on the Private Logistics Enterprise of China Yuan Ping-hong (Anhui University of Finance & Economics, Bengbu 233041, China)
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their clients. More successful ones often maintained successful relations with big MNC's, for example China Baoyun Logistics which was one of the 30 biggest private logistics
companies before acquisition by Schneider National had served such customers like P&G, Phillips, Electrolux, Siemens, Nestle, Watson's, Samsung, LG, AkzoNobel or Delphi53. 3.3.3 Increase of market expansion speed
Another crucial factor supporting mergers and acquisitions as mode of market entry is quick access to domestic logistics network of the acquired company. Foreign enterprises by leveraging know - how and resources of local partner can significantly shorten the time of setting up its Chinese operations. Moreover, in case when foreign investor has a sizeable global network, the synergy coming from combining capabilities in China and abroad would lead to better financial results required to cover the premium often paid for acquired
companies. Acquisition of HOAU Logistics (华宇物流) by TNT is a distinctive example of such conduct. Before the merger the company was one of the biggest providers of ground logistics services in China. Its network comprised of 1100 operating locations with over 3000 vehicles in all 30 provinces and direct-controlled municipalities. Through acquisition of Huayu Logistics TNT not only purchased a comprehensive road transport network but also obtained a portfolio of 180 000 customers, providing the company with resources supporting expansion into mid-range market.
3.3.4 Overcoming restrictions towards foreign entities
Moreover, through M&A global players gain access to areas restricted by government for fully owned foreign enterprises. For example multinationals are allowed to operate in
53The Influence of Foreign M&A on the Private Logistics Enterprise of China Yuan Ping-hong (Anhui University of Finance & Economics, Bengbu 233041, China)
66
international express sector, however still can't provide domestic express delivery services.
Therefore in 2006, one of the four key players in the sector, American FedEx, decided to acquire stake in its partner Da Tian W. Group. As a result foreign giant gained access to domestic express network in major Chinese cities. Acquiring local partner enabled FedEx to extend its services scope and gain first mover advantage over its major rivals In 2009 German DHL completed a 300 mln RMB worth acquisition of Shanghai based private company A Plus Express which now provides domestic express delivery services for DHL. Main
competitors such as UPS and Dutch TNT, are still in the stage of application for permission to provide express delivery services.
3.3.5 Global strategy purposes
Third Party Logistics is one of the fastest globalizing sectors in world's economy.
According to Hout, Porter and Rudden (1982)54, in a global industry competitive advantages of an enterprise in one country are affected by its market position in other region. Moreover, based on Kim and Mauborgne (1988) research55, global strategy has significant impact on choice of market entry by multinational enterprises. Through M&A foreign companies are mainly seeking to increase its global market share and synergies stemming from operating on a global scale. By acquiring local partners multinationals increase their level of control and prevent emergence of potential competitors. Recent expansion of TNT is a distinctive example of such conduct. Its acquisition of HOAU Logistics (华宇物流) was a part of company's global strategy that pursued increase of global market share in consolidating industry. In recent years TNT engaged in many similar deals in such countries like Vietnam, Thailand, Singapore or Malaysia to secure its position in perspective Asian market. According
54 Hout, Thomas, Michael E. Porter & Eileen Rudden. How global companies win out[J]. Harvard Business Review, 1982(60):98-108.
55 Kim, W. Chan & Renee A. Mauborgne. Becoming an effective global competitor[J]. The Journal of Business Strategy, 1988(1):33-37.
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to Kim, Hwang and Burgers research global scope of operation allow companies to benefit from synergy effects56. They may be observed in many aspects of entities operations, such as R&D or marketing. In case of logistics enterprises such synergy comes mainly from network integration, that enables multinationals to provide high value added, one stop shopping service for its customers. Acquisitions conducted by Menlo Worldwide can be a good example of such strategy. In 2007 this leading American supply chain management services supplier acquired Shanghai CHIC (上海熙可控股公司) and Singapore based Cougar Express Logistics. As a result of this acquisitions gained access to one of the most comprehensive logistics network in East Asia. Menlo Worldwide expansion in this fast growing region enabled its parent company Conway Holdings to offer integrated services for its customers in America and Europe. Importance of Chinese market and high level of synergy between domestic and global operations of logistics multinationals justifies paying high premium for Chinese companies and therefore outbidding local competitors unable to benefit from such significant synergy effects.
56 Kim, W. Chan, Peter Hwang & W.P. Burgers.. Global diversification strategy and corporate profit performance[J]. Strategic Management Journal, January-February, 1989,10(1):45-57
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Figure 3 - 3 Main M&A's of foreign 3pl companies in China
2005.01 Malaysian based Kerry Logistics acquires 70% stake in Datong International for 380 million RMB.
2005.03 Meridian IQ, a subsidiary of leading provider of transportation and global logistics services YRC Worldwide Inc acquires Shanghai-based GPS Logistics Group.
2006.01 FedEx acquired 50 percent share of the FedEx-DTW International Priority express joint venture from DTW Group and DTW Group's domestic express network in China for US$ 400 million.
2006.09 American YRC Worldwide purchased a 50% stake in JHJ International Transportation Co. Ltd.
2007.03 03 Dutch TNT acquired Chinese largest cargo and parcel transporter, Heilongjiang-based HOAU Logistics Group for 135 million USD.
2007.09 Schneider National acquired BaoYun Logistics one of the top 30 private owned logistics companies in China.
2007.09 Menlo Worldwide acquired Shanghai based 3PL CHIC in a deal worth for 60 million USD.
2008.05 Agility Logistics, Kuwait based giant with has acquired Cosa Freight, a full service ocean freight forwarder with offices in six key locations in China.
2008.08 YRC Worldwide bought a 65 percent share of Chinese Shanghai Jiayu Logistics Co for 45 million USD
2009.01 German DHL together with its partner Sinotrans acquired Apex100 for 300 million RMB.
2009.03
American ProLogis acquired assets in order to expand its platform at one of its largest industrial parks located in Suzhou, China in a deal worth 1,5 billion RMB 2010.01 Sagawa Global Logistics acquired 100% of the shares in Silox Shanghai and
Qingdao Silox, two China based logistics companies from Silver Ox Inc and established them as subsidiary companies.
2011.07 Kerry Logistics acquired controlling interest in two companies in 3PL sector in China; Shanghai Wisdom Group and Shanghai Huicheng Logistics.
Source: YUAN Ping-hong, Logistics Sci - Tech, No 8. 2009, The Influence of Foreign M&A on the Private Logistice Enterprise of China, Anhui University of Finance & Economics, Bengbu 233041, China
3.4 Impact of M&A on Chinese 3PL sector
By entering the market through mergers and acquisitions of Chinese 3PL providers Multinationals had significant impact on logistics sector as a whole. Within a short period of time foreign entrants had significantly contributed to the process of increasing concentration of fragmented logistics industry in China. Due to implementing most recent know-how and technologies global players also played a crucial role in raising efficiency within the industry.
By providing world class services foreign entrants played a significant role in facilitating
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growth of trade between china and abroad, and as a result contributed to acceleration of GDP growth. However, from Chinese point of view, raising level of foreign ownership in such a key sector as logistics may become an obstacle for local players to grow due to high level of competition from better positioned overseas companies57.
3.4.1 Contribution to economy growth
At the beginning of M&A wave Chinese logistics industry was still in its infancy.
Government by opening the market hoped that entrance of foreign enterprises will not only help to develop logistic industry, but also provide services that enable growth of other sectors.
Nowadays majority of key global players already established their operations in China. They provided Chinese logistics industry not only with capital, but also more important assets such as technology and experience gained through years of global operations. Therefore
significantly raising sophistication level of services offered in the market and bringing better growth perspectives for the whole economy.
3.4.2 Increased market concentration levels
China logistics sector has a very low concentration level by international standards with many locally operating companies often consisting of one self-employed owner.
Exceptionally low levels of concentration often lead to inefficient allocation of assets and unnecessary multiple performing of many activities. Small companies by engaging in stiff competition often waste significant amount of resources which don't result in increase in efficiency of industry as a whole. Mergers and acquisitions in the industry have a positive impact by increasing the concentration levels and bringing better quality services even to the less developed areas of the country.
57 Research on Transnational logistics Corporation Mergers in China
Wang Yu-nan Research Center for the International Business & Economics of Liaoning University of International Business & Economics, Dalian 116052. China
70 3.4.3 Increasing competition
Local 3PL providers are still far behind global players in such aspects as market share, customer portfolio, marketing activities or brand recognition. According to research
conducted by Mercer58 vast majority of the companies operating in the industry belong to SME59.As a proof of this thesis, not a single company included in the research has exceed level of 2% market share. Multinational supported by global logistics network and extensive capital had gained a significant part of the higher value added market such as 50% of export and 60% of import related services60.
Chinese logistics industry is still relatively immature. Low concentration is combined with low entry barriers, especially in case of less sophisticated services. Low entry barriers lead to very high levels of often destructive competition. Entry of foreign players increased its levels even further. Overall, M&A of multinational enterprises had more positive than
negative impact on the industry development exposing bottlenecks affecting the sector and providing it with most recent know-how and services61.
58 Research on Transnational logistics Corporation Mergers in China
WANG Yu-nan Research Center for the International Business & Economics of Liaoning University of International Business & Economics, Dalian 116052. China
59 according to Chinese classification yearly revenue has to remain below 50 mln RMB
60 The Effects of Foreign Capital’s Entrance into
China’s Logistics Industry WU Yue，LIANG Chen and WEN Wei- juan(Beijing Wuzi University，Beijing101149，
China)
61 Tactics of Transnational Logistics Corporations in China and the Revelation
Li Dongguang（Business School, Liaocheng University, Liaocheng, Shandong 252059）
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Chapter 4: Conclusion
4.1 Main Findings
This research reviewed current situation as well as future prospects of China's 3PL market applying the viewpoint of foreign companies operating in the industry. Moreover the analysis of market entry modes and competitive strategies has been conducted with focus of M&A activities of foreign multinationals. Moreover, recommendations for further growth strategies of 3PL providers are provided.
According to the research, the logistics industry as a whole has very good prospects and growth potential, with majority of expansion to occur in domestic market services. Main reasons for such growth distribution is the Chinese government policy targeting domestic market demand expansion, as well as slowing growth of international trade flows between China and the world. Moreover, current low efficiency of logistics implies huge growth potential for the industry that will be supported by big-scale development of transport related infrastructure. The tendency of logistics activities outsourcing is clearly visible as companies choose to focus on enhancing their core competences. Also rising competitive advantages of Chinese enterprises and, as a consequence, gradual globalization of their activities will be a huge market opportunity, particularly for foreign 3PL providers.
Acknowledging current and future importance of Chinese market majority of the key global players in the industry have entered China in 1980's and 1990's, long before the main period analyzed in the thesis. Due to government restrictions towards foreign entities they were operating mainly in form of joint-venture with local partners. Their main market focus was supporting foreign trade activities of both foreign and local companies.
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According to the research M&A wave of multinational 3PL providers in China had been influenced by several key factors. Firstly, loosening of government policies enabled foreign companies to conduct business in China as a wholly owned enterprises instead of joint ventures with local partners. Therefore it allowed foreign enterprises to buy out their partners share. The main reason for such buyout wave were common arguments between the
associates. Since the management often had different views stemming from very diverse cultural backgrounds the cooperation wasn't always very smooth. Therefore foreign companies preferred to take things in their hands and gain ability to make decisions
independently, based solely on their own considerations. Since the majority of foreign players were much bigger in size then their Chinese cooperates, the deals were conducted as
acquisitions rather than mergers.
Another factor determining the popularity of M&A was its speed a particularly crucial factor when considering strategies in such fast growing markets as China. When the
restrictions were loosened, there were already many capable local players competing in the market. M&A was a method that enabled foreign companies to attain scale economy in a short period of time, instead of building up capabilities in house.
In spite of popularity of M&A, many of deals in the industry didn't bring expected results. Acquired companies either failed to create synergy with the parent enterprise, or the foreign players wrongly targeted low value added services in domestic market, where they weren't able to compete with local companies possessing various competitive advantages on the local market. Therefore, many M&A transactions ended in failure and in extreme cases foreign multinationals have decided to sell entities acquired before.
73 4.2 Recommendations
Several recommendations are made after analysis of foreign 3PL providers expansion in China:
Customer focus:
Foreign multinationals should focus to serve customers whose logistics
operations are characterized with at least some level of sophistication, in the low value added market services local providers have
competitive advantages stemming from better understanding of Chinese business environment.
In order to success in cost oriented customer segment the companies
should thoroughly analyze their supply chain cost structure and try to provide more effective solutions based on their know-how,
technological advantages. Inefficiency of logistics industry as a whole implies that there is a lot of room for improvement in this matter.
Educate customers, emphasize added value creation and savings due to
implementation of more efficient logistics operations. Spending more money on logistics services can still provide big savings by decreasing inventory cycles and working capital needs.
Closely cooperate with key customers, if necessary take part in joint-ventures responsible for forward integration of their logistics activities
Leverage complementors, suppliers and capabilities of parent company:
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Due to big fragmentation of the market foreign 3PL should act as
integrators, leveraging competences of local suppliers and complementors, providing complete supply chain solutions.
Leverage economy of scale and focus on high value added services
such as multi-modal transport, supply chain management or international logistics.
Improve efficiency by implementing know-how and management skills of parent company
Pursue vertical integration with top performing complementors through
M&A, through purchasing minority stake multinationals can gain better access and first hand information from the market. Moreover they will also gain better position to persuade management of benefits brought by long term win - win cooperation.
While conducting M&A foreign entrants should focus on the human
side of mergers. In Chinese business environment personal connections of key managers in the company are one of the key competences determining competitive advantage of a company. Therefore their remuneration should be closely bonded with company's results, providing strong incentives for better performance.
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4.3 Research limitation and further research suggestions
Since not all data included in the research are the most recent one, some inconsistency may occur, especially during comparisons. Moreover, since the companies are unwilling to provide detailed data about their business to prevent their competitors from obtaining
confident information, many constrains occurred during the analysis of operations of selected 3PL provider operations.
Due to very specific Chinese social cultural environment a further analysis determining the methods that foreign enterprises apply to overcome its "foreignness"
disadvantages. The analysis should be made with special focus on Japanese entities since bad sentiment towards this country is still very common among common Chinese citizens.
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