Optimizing costs help auto logistics industry out of crisis

China now is believed the true land of opportunity for the automotive industry and its suppliers during the global recession. According to speakers at this year's Automotive Logistics China conference, though the market is buoyant compared to Europe or the US, the automotive logistics industry has still been severely impacted in China by the financial crisis. Firstly, car sales growth is modest by Chinese standards. Secondly, the growth in the logistics sector declined by 30% this year, with 60% of logistics companies experiencing a contraction. Port throughput is significantly down, following the drop in exports. Gasgoo.com invited Dr. Stephen W. Dyer, Principal of A.T. Kearney (Shanghai) Management Consulting to elaborate the impact of financial crisis on China's automotive logistics industry.

Gasgoo.com: Is automotive logistics industry affected by the global financial crisis? In what aspects?

Stephen W.Dyer: As global consumers re-evaluate their spending habits due to the economic crisis, the decrease in consumption has led to a significant decline in global trade, severely affecting the logistics industry. At the same time, the expected automotive market slowdown in China caused auto-related logistics expenditures to drop toward the end of 2008. As the Chinese auto market rebounded starting in February 2009, however, the lack of stock resulted in increasing expenditures for expedited logistics within the industry.

Overall, the China automotive and non-automotive logistics industry is affected by three major trends related to the economic crisis:

-Continued downward pressure on demand (mainly for international shipping lanes) and a shifting mix of services required;

-Cost restructuring necessary as profits decline and become more volatile;

-Renewed investment interest and further consolidation expected.

Downward demand and shifting mix: The Q42008 year-on-year growth rate for total logistics expenses, including spending on transportation, inventory and other logistics services, dropped to 1% from a 19% Q3 2008 year-on-year growth rate, highlighting the negative impact of the economic crisis on the logistics industry. Declining international and domestic trade in the second half of 2008 created a drop in demand for logistics services. Especially in international sea and air trade, which volume decreased by7% and 14% in November 2008 respectively. As auto and non-auto companies try to improve efficiency and reduce costs both global and local brand companies are restructuring their supply chains. These users of logistics look for flexibility and scalability in addition to cost and are eager to outsource logistics assets and operations.

Cost restructuring necessity: Logistics services prices have dropped across most sectors of the logistics industry because of overcapacity due to the economic downturn. More than 210 container ships cut service globally due to decreased trade volume in January 2008, creating much excess capacity. The China Containerized Freight Index dropped 7% from October to November 2008. China’s average market price for LTL Heavy Freight decreased by 10%. The profit margin of a typical road transportation company is 3-5%, meaning that such price drops quickly drive transportation companies into loss-making situations. The upcoming China fuel price reform policy, which will loosen price controls on fuel will make costs for logistics even more volatile in future.

Renewed investment interest: China's logistics industry remains highly fragmented.

Industry players continue to seek to build strong domestic networks with more comprehensive mode and geographic coverage to achieve economies of scale.

Gasgoo.com: What can logistics companies do to confront the financial crisis?

Stephen W.Dyer: To address these strategic trends, logistics companies can first work to generate additional revenue through product portfolio, customer retention, and effective pricing initiatives.

Secondly, to optimize costs (e.g. through process efficiency improvement, fleet management and outsourcing, network optimization, etc.);

And third, development of an M&A strategy (including strategic objectives, candidate identification, due diligence, deal valuation and close, and post-merger integration) for those companies who choose to seek an aggressive strategy to take advantage of the shifting industry trends to solidify their competitive position.

About Dr. Stephen W. Dyer：

A.T. Kearney (Shanghai) Management Consulting

MBA, University of Michigan Ross School of Business, Ann Arbor, Michigan; Ph.D., M.S., Mechanical Engineering, University of Michigan, Ann Arbor, Michigan: B.S., Mechanical Engineering, Brigham Young University, Provo, Utah

Dr. Dyer has over fourteen years of industry and consulting experience in the automotive, aerospace, and process industries. During his time in industry he led research and development efforts and technology strategy for an automotive and industrial technology product company.

Focusing on the automotive industry, Dr. Dyer’s consulting expertise includes such topics as corporate strategy, branding and distribution, product portfolio rationalization and complexity reduction, innovation management and product development effectiveness, and design and purchasing cost reduction.

After initially joining A.T. Kearney’s Detroit office, Dr. Dyer transferred to China in 2005 to support A.T. Kearney’s growing automotive consulting practice in China. Since coming to China, he has served both Chinese and multinational passenger and commercial vehicle clients, helping them develop brand and product strategies, structure sales and distribution networks, transform marketing and engineering organizations, evaluate strategic supply opportunities, perform market due diligence, etc.

A U.S. citizen, Dr. Dyer speaks English and Mandarin Chinese fluently.