China Logistics Industry Investment Promotion Report 2015-2016

Deloitte Research, May 2017

Content

Chapter 1 China’s logistics industry was upgrading in competition 1 1.1 China’s logistics industry ranks top in emerging markets 1 1.2 Growth of China’s logistics industry slows down but opportunities remain 4 1.3 Logistics industry may not develop without policy guidance and state system and mechanism innovations 7 1.4 Intensifying competition among logistics enterprises 8 Chapter 2 China’s logistics industry tends to be lean 10 2.1 Logistics industry facilitates cross-border e-commerce to seize first opportunities 10 2.2 Cold-chain logistics is seeking a way out under the challenges 12 2.3 More research and innovation are needed for the "last mile" of logistics 13 2.4 The curtain of reverse logistics and green logistics rises 14 Chapter 3 The way of development for efficient logistics in the Internet age 15 3.2 Big data facilitates intelligent management of warehousing system 16 3.3 Building intelligent logistics systems requires the development of full system integration capabilities as priority 18 System integrators are playing a core role throughout the supply chain 20 Chapter 4 Capital facilitates the development of China’s logistics industry 22 4.1 Investment and financing in logistics industry reaches the peak, but is still focused on the stage of development 22 4.2 Enthusiasm for M&A runs high in logistics industry with sharp increase in the number of cross-border M&A 23 4.3 Steady increase in the number of IPOs in logistics industry with a boom of back door listing in express sector 25

Industry Investment Promotion Series Reports Drafting Committee Director: Liu Dianxun

Deputy Director: Wang Xu, Zhang Yuzhong, Li Yong, Yi Yang

Members: Xu Dansong, Lin Ruochen, Huang Qinghong, Shi Dongli, Wang Rui, Wang Xinran, Huang Meimei, Wu Ming

China Logistics Industry Investment Promotion Report Drafting team members Chief Editor: Li Yong

Executive Chief Editor: Wang Xinran, Xu Sitao, David Lung, Zhang Tianbing

Associate Chief Editor: Qi Ning, Tian Chunming, Lydia Chen, John Song

Members: Wang Qian, Pan Fengguang, Iris Li, Wang Yun, Zhao Jiexian, Gigi Wang

Document title | Section title

Summary

Initiated by the Investment Promotion Agency of the Ministry of Commerce of China and prepared by Deloitte Research, China Logistics Investment Promotion Report 2015-2016 is an annual analysis report on the development of China’s logistics industry. This report provides a comprehensive analysis on four aspects of China’s logistics industry in 2015-2016, including industry development and competition status, transformation into lean logistics, ways of development for efficient logistics in the Internet age, and capital impetus for the industry development.

Since the release of the Medium and Long-term Planning on Logistics Development (2014-2020) in 2014, China’s logistics industry has entered into a new development stage focusing on cost reduction and efficiency improvement, resources integration at the strategic development level, and enhancement of core competitive edges. In 2015, the State Council announced an action guidance on “Internet plus” and included “Internet plus efficient logistics” into its 11 priority initiatives. On this premise, this report focuses on four aspects of logistics development for building efficient logistics, including: Chapter 1 China’s logistics industry is upgrading in competition - this section identifies the internal drivers and external competitive factors of China’s logistics through analysis on the development tendency of global logistics, the development status of China’s logistics and competition levels among logistics enterprises; Chapter 2 China’s logistics tends to be lean - this section reveals the challenges and issues all market segments encounter during the transformation and upgrade of China’s logistics industry and its development tendency by highlighting cross-border logistics, cold- chain logistics, the last mile of logistics, logistics financing, reverse logistics and green logistics; Chapter 3 The way of development for efficient logistics in the Internet age - this section offers a detailed analysis on O2O platform models for arterial logistics integration, intelligent warehouse system models catering to the development needs of e-commerce, as well as all-integrated models with intelligent devices and systems required to build an intelligent logistics system; Chapter 4 Capital facilitates the development of China’s logistics industry – this section identifies capital as a driving force for logistics enterprises in integration business, reinforcement of business layout and international competitiveness through a one-year dynamic analysis on investment and financing market, M&A market and IPO market.

Main sources of information for this report include: China Statistical Yearbook – Logistics, National Bureau of Statistics, Ministry of Commerce, Deloitte Research Center, China Federation of Logistics & Purchasing and other domestic and foreign logistics research institutes. We sincerely hope to make this report one with authority, guidance and reference in respect of research and investment in China’s logistics industry. However, due to the limitations of time and knowledge, there may be omissions and deficiencies in this report. We appreciate your comments and corrections for further improvements.

China Logistics Industry | Chapter 1: China’s logistics industry was upgrading in competition

Chapter 1: China’s logistics industry was upgrading in competition

1.1 China’s logistics industry ranks top in emerging markets Global logistics industry is growing in scale and overall efficiency. As a major trend of the world economic development, economic globalization is rapidly changing and reshaping the ways of resources allocation and goods movement. International divisions of labor tend to become increasingly interdependent and complementary with each other, and distribution of raw materials, key technologies and manufactured goods are no longer limited within developing or developed countries, but within the world in a much more integrated manner. Meanwhile, increased trade dependence among countries suggests that there are more goods moving more frequently among countries and regions. In this context, modern logistics industry continues to scale up, with total volume of logistics rising year by year, and reduce logistics cost while gradually improve logistics efficiency through the use of high-tech information technology and means of transportation.

This chapter focuses on third party logistics for the study of global logistics and provides an overview of the revenue, risks, and development trends of the logistics industry. According to the explanation in the Language of Logistics 2006 Updated Version by the Council of Supply Chain Management Professionals, third party logistics (3PL) is to outsource all or part of a company’s logistics operation to specialized companies, and these specialized companies who can provide clients with diversified logistics services become 3PL providers. In 2014, revenue of global third party logistics market rose to USD750.7 billion, and third party logistics market in the US grew by 7.4% reaching USD157.2 billion.

Figure 1-1: Revenue of global third party logistics (USD billion)

800.00 751 704 685 700.00 662 631 600.00 507 507 489 500.00 471

400.00

300.00

200.00

100.00

0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: Wind

1 The Development of China’s logistics industry tops other emerging markets China ranked the first among 45 emerging markets in respect of annual logistics index. The index ranks 45 emerging economies based on underlying data and supported by an independent survey comprised of nearly 1,000 executives in the logistics and supply chain industry. The BRICS (Brazil, Russia, India, China, and South Africa) account for a vast majority of growth and investment in emerging markets, topping the list of the index. China, ranking top for years in a row, still remains on top of the list. According to the report of 2015 Agility Emerging Markets Logistics Index, in 45 countries, China ranks the 3rd in terms of business environment index, and the 4th in terms of transportation and logistics infrastructure index. Indicate source The volume of China’s economy and consumer market has concealed the fact that, compared with other emerging markets, China ranks top in terms of creating open business climate.

Table 1-1: Rankings of emerging markets logistics index

Ranking Country 2015 index 2014 index Changes in rank 1 China 8.09 8.11 -

2 Saudi Arabia 6.76 6.77 Up 1

3 Brazil 6.71 6.80 Down 1 4 Indonesia 6.7 6.59 Up 1

5 India 6.66 6.75 Down 1

6 United Arab Emirates 6.63 6.50 No change

7 Russia 6.57 6.45 No change 8 Malaysia 6.36 6.14 No change

9 Mexico 6.3 6.09 No change

10 Turkey 6.06 6.01 No change

11 Chile 5.93 5.92 No change 12 Qatar 5.87 5.88 No change

13 Oman 5.7 5.70 No change 14 Thailand 5.58 5.46 No change

15 South Africa 5.46 5.38 No change

Source: 2015 Agility Emerging Markets Logistics Index

2 China Logistics Industry | Chapter 1: China’s logistics industry was upgrading in competition

M&A drives multinational logistics enterprises to re-establish global footprints Further development of economic globalization brings along the global expansion of multinational enterprises, expanding their operation activities from within a region or a country to a global scope. To support the international transaction strategy, it is necessary to have logistics facilities redeployed and upgraded globally. Operating across multiple countries and regions set higher requirements for the distribution of logistics systems. Logistics enterprises needs to deliberate on how to make use of the support of the new system and connect with customs public systems in each country in order to grasp the real-time operation of various transit points and routes. In addition, the development of international logistics also requires higher level of logistics standardization. At present, the USA and Europe have basically realized unified standardization of logistics instruments and facilities, which could enormously reduce logistics costs and decrease difficulty in transfer. Mergers and reorganization of enterprises in various industries all over the world continues to boost the development of globalization in logistics industry, and the development trend of logistics enterprises’ globalization will inevitably push and facilitate joint mergers and acquisitions (M&A) by logistics enterprises in each country. Certain large logistics enterprises are crossing the border to launch joint M&A and expand international logistics market vigorously for more market shares.

In face of a complex and changing global market, it is especially difficult for express enterprises in China to go international as they are still in their primary stage exploring international operation modes and confronted by the rapid penetration and aggressive squeeze in their local market by global express giants. Leveraging the capital market and building up barriers to competition perhaps are only the first step of going out.

3 1.2 Growth of China’s logistics industry slows down but opportunities remain 2015 was the last year for the 12th Five-Year Plan. In general, the fundamentals of China’s economy towards a positive long-term trend remained unchanged. However, there existed both hopes and challenges. In 2015, growth of China’s economy slowed down to 6.9%, the lowest in 25 years. China set the economic growth in 2016 at 6.5%-7%, as the world encountered a sluggish economic recovery which would affect and impact China whose economy was deeply integrated in the world economy. China’s economy was also transforming, and certain contradictions which had been accumulating for a long period were standing out. However, it should not be overlooked that China was in the process of its industrialization and urbanization, there still had rooms for industry upgrades and effective demands were still to be completely released. Chief Economist of Deloitte held that though things were not looking good in 2016, there would not be a hard landing for China’s economy. In this context where both hopes and challenges exited, the logistics industry also started a comprehensive transformation under modest growth. Social logistics in connection with internal demands grew rapidly, and logistics infrastructure continued to improve while the quality steadily increased. Transformation and upgrade of the logistics industry was driven by the transformation and upgrades of multiple industries, in return, the reduction of costs and increase in efficiency also accelerated the process of transformation and upgrades in other industries. Currently logistics industry is facing multiple challenges including reorienting its position, expanding market shares and increasing profitability, etc.

Distribution of logistics network infrastructure continues to improve High-speed growth for China’s logistics industry in the past 10 years or more ended and gradually slowed down to around 6%. The accumulated volume of social logistics in China reached RMB219.2 trillion in 2015, a 5.8% accumulated growth at comparable prices.

Figure 1-2: Volume of social logistics in China and growth rate

250.00 RMB trillion %16 15.0 214 219 14 198 200.00 12.3 177 12 158 10 150.00 9.5 125 9.8 7.9 8 97 100.00 90 5.8 6

4 50.00 2

0.00 0 2008 2009 2010 2011 2012 2013 2014 2015 Logistics: Volume of China’s Logistics: Volume of China’s social logistics: 物流业:全国社会物流总额:累计值物流业:全国社会物流总额:可比价:累计同比 social logistics: aggregate comparable prices: aggregate

Source: Wind

Social logistics in connection with internal demands maintained a trend of high-speed growth in recent years. According to data of the National Bureau of Statistics, agricultural products in connection with internal demands grew by 2% from last year in 2014, and 8% for goods for work units and residents. This reflected a shift of economic growth mode from pro-growth to stable growth, and a transition from a traditional unbalanced, uncoordinated, and unsustainable extensive mode to an intensive one. On the other hand, benefiting from the explosion of e-commerce, there were increased convenience and choices for consumers to shop, potential consumption demands were released.

4 China Logistics Industry | Chapter 1: China’s logistics industry was upgrading in competition

Figure 1-3: Transaction volume of online retail market in China 2010-2015 (RMB100m)

45000 40,059 40000

35000

30000 28,211

25000

18,851 20000

15000 13,205

10000 8,019 5,141 5000

0 2010 2011 2012 2013 2014 2015e

Source: China E-Commerce Research Center

Distribution of logistics network infrastructure continued to improve. 2016 is the first year for China’s 13th Five-Year Plan, which proposes to “optimize the layout of transportation systems, build Beijing, Shanghai, and Guangzhou, etc. as international comprehensive transportation hubs, improve the level of national, regional and local comprehensive transportation systems, strengthen the construction of key hubs in middle and western China, promote the construction of key port hubs in coastal areas, improve internal and external radiating capacity of hubs.” As of 2015, total mileage of China’s comprehensive transportation reached 4,577,300 million kilometers. The state has paid high attention to the construction of logistics infrastructure including railways and roads in the middle and western areas, in a vision to remedy the short board in these areas. There has been a significant growth of investment in fixed assets within the field of transportation in the past 10 years, especially in road transportation.

Figure 1-4: Volume of completed investment in fixed assets (RMB100m)

Source: Wind

5 The Belt and Road Initiative brings opportunities for economic development of different regions in China Regional logistics and regional economy are a unity of interdependence and mutual promotion. As a fundamental, pillar and comprehensive industry for the national economy in the 21st century, modern logistics industry plays a critical role in the development of regional economy, and regional economy in return also drives the development of modern logistics. It has become urgent issues demanding prompt solutions in the development of regional economy and regional economic integration as of how to build a modern regional logistics system that fits with the goals of regional economic development in terms of characteristics of the regional economy; and how to determine the mode for modern regional logistics development based on the growth pattern of regional economy and the strategy of regional development.

Figure 1-6: Status of logistics parks in eight major economic regions in 2015

200 181 180

160 133 140 126 114 120 107 100 78 80 68

60 50 50 35 40 38 40 30 32 21 18 18 14 16 11 20 5 9 10 0 Northern Mid reach of Mid reach of Eastern Southern Southwest Northeast Northwest coast Yangtze Yellow River coast coast River

Planning Under construction In operation

Source: The Forth National Logistics Parks (Bases) Survey Report

Logistics is the bottleneck for the development of countries en route the Belt and Road Initiative, and also the engine driving future development. The Belt and Road Initiative includes macro-level strategic designs for national logistics, which requires both the integration of domestic logistics resources and the connectedness with international logistics channels. In order to produce chain effects between the Belt and Road Initiative and the transformation and development of logistics industry, it requires improvement of logistics main lines from macroscopic perspective and continuous enhancement of micro-loop logistics. In addition, establishing large logistics hubs in key development areas to drive local development of urbanization through the agglomeration effect of enterprises, population, and resources, as well as leveraging the strong platform effect of Internet to link up fragmented regional interests of en route countries and implement strategic plans and network construction of the Belt and Road Initiative would also be new measures worth trying under current economic trend.

The Belt and Road Initiative contributes largely to exports, and is expected to continue boosting logistics demand in the future. At present, most provinces and cities en route the Belt and Road are accelerating the development of logistics industry, especially the mid-western area radiated by the Silk Road Economic Belt, represented by Zhengzhou, Xi’an, Lanzhou, and Urumqi, in a vision to build themselves as logistics hubs en route the Belt and Road. After the establishment of transportation logistics hubs, certain export processing enterprises targeting Europe and other regions may choose to produce, process, disassemble and package locally; it would also agglomerate populations in the mid- western area, accelerating its process of urbanization.

6 China Logistics Industry | Chapter 1: China’s logistics industry was upgrading in competition

1.3 Logistics industry may not develop without policy guidance and state system and mechanism innovations  Medium and Long-term Plan for the Development of Logistics Industry (2014-2020) On October 4, 2014, the State Council issued the Medium and Long-term Plans for the Development of Logistics Industry (2014-2020) (“Plans”) proposing a comprehensive and innovative reform mentality for the development of logistics industry, in a vision to accelerate the development of modern logistics, establish and improve modern logistics service system, enhance the development of logistics industry, in order to provide logistics service assurance for the building of a comprehensive well-off society. The word “strategic” was first used in national logistics plans which eliminated the misunderstanding that logistics industry equaled the freight sector, re-recognizing the role of logistics industry by the state. From that on, logistics industry would gradually step into the new normal of logistics guided by the new normal of economy, with cost reduction and improved efficiency as the core, considering to integrate resources at strategic development level and develop core competitive edges.

 E-commerce logistics is brought up to strategic level for the first time On March 17, 2016, Ministry of Commerce, National Development and Reform Commission, Ministry of Transport, General Administration of Customs, State Post Bureau, State Standardization Administration jointly published the National Special Plan for the Development of E-Commerce Logistics (2016-2020), setting the objective of development to basically build up an e-commerce logistics system with “comprehensive layout, optimized structure, strong function, efficient operation, and quality services” by 2020.

 Express sector poised for multiple favorable policies On October 26, 2015, the State Council issued the Several Opinions on Promoting the Development of Express Sector which explicitly proposed to encourage capitals of all kind to go into the express sector, support mergers and reorganization as well as IPOs of express enterprises, integrate small and medium enterprises, optimize resources allocation, seek alliance and complementary advantages between strong enterprises, speed up the forming of several enterprise corporations with global competitiveness, and encourage enterprises to “go out” and engage in global competition.

 Cross-border e-commerce under policy support urgently requires interlinked cooperation of cross-border logistics On June 16, 2015, General Office of the State Council issued guiding opinions on promoting the healthy and rapid development of cross-border e-commerce, proposing to encourage all online transactions for trading between enterprises, continuing to extend the scope of tradable commodities; support cross-border e-commerce retail export enterprises to strengthen cooperation with foreign enterprises, merge into foreign retail systems through normative modes of “overseas warehouses”, experience stores, and distribution outlets, etc., foster a batch of high profile in house platforms, encourage enterprises to use in house platforms to speed up brand development and expand marketing channels; encourage alliance between strong domestic enterprises and foreign e-commerce enterprises.

7 1.4 Intensifying competition among logistics enterprises 2015 was the year of transformation for logistics. Under the economic downturn, it would help quality enterprises with both Internet gene and traditional enterprise experience and endeavored to conduct business diligently and honestly and good at marketing emerge from intensive competition and await their booming development in 2016. Data of the Top 50 Logistics Enterprises in China initiated by China Federation of Logistics and Purchasing (CFLP) showed higher threshold requirements as revenue of the enterprises on the list increased. On top of the list was China Ocean Shipping Group Company, with a logistics business revenue of RMB144.15 billion; Newtimes International Transport Service Co., Ltd. ranked the 50th with a logistics business revenue of RMB2.24 billion, a threshold with an increase of RMB210 million from last year. Distribution of the enterprises tended to be diversified. Table 1-2: 2015 top 20 logistics enterprises in China

Rank Company Logistics revenue (RMB10 k)

1 China Ocean Shipping Group Company 14,414,820 2 China Railway Material Group Co., Ltd. 7,632,421 3 China Shipping (Group) Company 6,764,517 4 Sinotrans & CSC Holdings Co., Ltd. 5,828,320 5 Hebei Logistics Industry Group Co., Ltd. 5,818,003 6 Kailuan Group International Logistics Co., Ltd. 4,423,713 7 Xiamen Xiangyu Co., Ltd. 3,537,580 8 CNPC Transportation Company Limited 3,040,718 9 China National Materials Storage and Transportation Corporation 3,000,880 10 S.F. Express Co., Ltd. 2,570,000 11 HNEC Guolong Logistics Co., Ltd. 2,170,563 12 Fujian Provincial Communication Transportation Group Co., Ltd. 1,767,495 13 Anji Automotive Logistics Co., Ltd. 1,476,000 14 Shuohuang Railway Development Co., Ltd. 1,430,905 15 Gaogang Port Logistics Park 1,112,000 16 Kerry Logistics (China) Investment Limited 982,218 17 Beijing Expeditors International Freight Forwarder Co., Ltd. 959,718 18 Chongqing Gangwu Logistics Group Co., Ltd. 932,931 19 CNPC Beijing Natural Gas Pipelines Co., Ltd. 926,038 20 Deppon Logistics Co., Ltd. 863,333 Source: CFLP

8 China Logistics Industry | Chapter 1: China’s logistics industry was upgrading in competition

Most state-owned logistics enterprises are evolved from national state-owned enterprises in warehousing and transportation sectors in a monopoly position for a long period in the past with advantages in specialized segments such as household appliances, electronics, chemicals, and exposition logistics, etc. Mostly asset-intensive and relying on state policy benefits and market shares accumulated for many years in traditional business sectors, these enterprises enjoy mature development in distribution of network, asset allocation, and warehouse space, with stable market prominence. Traditional logistics businesses still contribute to a major share of revenues for state owned logistics enterprises.

State-owned Enterprises Foreign-funded Enterprises Private Enterprises

 Including COSCO, Sinotrans &  Including companies invested by  There is a great number of these CSC, China Shipping, China investors in foreign countries enterprises in every segment Post, CRCT, Air China Cargo and and Hong Kong, Macau, and markets including road other branches of state owned Taiwan, such as Fedex, DHL, transportation, domestic express enterprises, as well as logistics UPS, Kerry, GLP, etc. delivery, warehousing, etc. companies affiliated to large Some enterprises also develop  Usually logistics service manufacturing enterprises such national network in certain fields providers among the world’s top as CNPC, Sinopec with certain market shares, such 500 enterprises, with network as S.F., YTO, STO, Yunda, etc.  These enterprises generally have spanning around the globe, advantages in segment markets extensive experience in logistics,  Private enterprises are mainly with restricted access by other numerous logistics talents, distributed in segment sectors types of logistics enterprises strong capabilities in corporate with relatively lower threshold, management, keen market gaining their competitive edges insights, mature business by low prices. operation philosophy, solid client resources, and diverse funding channels.

9 Chapter 2: China’s logistics industry tends to be lean

2.1 Logistics industry facilitates cross-border e-commerce to seize first opportunities A blowout boom in cross-border e-commerce triggers logistics industry to follow up quickly China E-commerce Research Center released its forecasts that in 2018 the number of China's cross- border online shoppers will reach 35.6 million, while the consumption will amount to RMB1 trillion, due to the increasing consumption potential of Chinese market with the rise of the middle class. The upgrade of consumption structure has prompted a blowout boom in cross-border e-commerce importers.

Figure 2-1: Cross-border online transaction frequency index of Chinese consumers

2,000 1854 1,800

1,600

1,400

1,200

1,000

800

600 433 400 197 144 200 107 93 86 67 22 17 0 美国USA 英国UK Japan日本 Hong香港 Kong Canada加拿大 Germany德国 Australia澳大利亚 France法国 Korea韩国 Italy意大利

Source: Chinese cross-border consumption index annual report (2015)

As the main body of the cross-border industrial chain, cross-border e-commerce platforms can be divided into cross-border business of large-scale comprehensive e-commerce and vertical e- commerce. Starting with domestic business, large-scale comprehensive e-commerce gradually expands its merchandise category and develops its own cross-border business when the appropriate moment arrives. Typical representatives of such companies are Tmall Global, JD Worldwide and SuningGlobal.

10 China Logistics Industry | Chapter 2: China’s logistics industry tends to be lean

Table 2-1: Selected comprehensive e-commerce involved in cross-border business

Strength Weakness Core competence

Taobao Correct market orientation, High cost of management, High level of consumer loyalty, easy to pay low degree of credibility low cost of operation and labor SuningGlobal Strong bargaining power Late starter, contradicted Deeply exploiting the value of over suppliers due to its with its own physical stores marketing channels superiority of chain operation, self-build logistics system and payment method of Yifubao, membership- based marketing activities, focusing on providing perfect after-sale services

JD Worldwide Self-built logistics system Narrow range of goods, low Developing on core values of enhancing efficiency of gross profit margin, and customers supply chain unstable supply

Tmall Global Evading legal risks while Due to the policy uncertainty, Bond entry and overseas being guaranteed by law, its future development direct shipping complementing shortened consumers' time remains to be seen each other between order confirmation and acceptance of goods, improved the convenience of overseas direct shipping services

AmazonGlobal Building warehouses in Stocking up goods takes Operating a self-funding cross- bonded areas greatly massive funds, while border B2C platform improves the speed of cross- requiring higher efficiency in border shopping with organizing the source of significantly increased goods and good convenience understanding of user needs. It may be affected by industrial policy changes Source: Deloitte Research

The new tax policy accelerated the differentiation of cross-border e-commerce These platforms may face rising price pressures in the short run and suffer losses of large amounts of customers under the large-scale operation mode of hot collections E-commerce with low per customer transaction, considering that their with low price customers are extremely sensitive to price change. strategy

The e-commerce completely relied on stocking up bonded goods may face some challenges. Stocks rebuilding, E-commerce promotional mode and mechanism of merchandise Tax Policies on relied on selection may need some time to complete the upgrade Cross-Border E- stocking up and iteration and to re-organize the supply chain system. Commerce Retail bonded goods The e-commerce that fail to make appropriate Imports adjustments may face great growth pressures, while the e-commerce overly depending on capital investment may be left behind.

Large-scale Large-scale comprehensive e-commerce have stronger March, 2016 comprehensiv anti-venture ability. As the overall operating costs of the e e-commerce cross-border e-commerce going up after the tax reform, The MOF and other small and medium cross-border e-commerce have suffered a violent hit. The trend of mergers and two departments acquisitions in logistics industry will accelerate, while the survival of the fittest competition will be intensified.

11 2.2 Cold-chain logistics is seeking a way out under the challenges Market-based degree of cold-chain logistics is low, third-party logistics is underdeveloped The cold-chain logistics market in China is highly fragmented. There are more than 500,000 third- party logistics service providers in China, whereas some of the biggest providers have less than 2% of the logistics market. There is no lack of refrigerating cabinets on the upper stream and downstream of the cold-chain logistics, but the intermediate link has obvious breaks. For some products, disconnecting the cold-chain midway does more harm to their quality than not using the cold-chain. On the surface, many domestic products have cold-chain coverage, but on closer examination none of them has complete coverage. Few cold-chain logistics can cover the whole logistics process of the products, and there is hardly any such third-party national cold chain logistics enterprises that meet this criteria. Therefore, most logistics of perishable food is operated by producers, processors and retailers themselves, which has largely impeded the cost-effectiveness of the cold-chain logistics markets.

Under the context of a rapidly evolving situation of the current competitive landscape of the cold-chain industry, the enterprises should concentrate their resources on exploring their own proper business models of the core competence in line with their development. Cold-chain logistics enterprise should build entry barriers by entering into market segments. Throughout the business modes of the cold chain logistics, it is not difficult to find that each mode has its own focus and clear differentiation, as shown below.

Table 2-3: Overview of the business modes of the cold chain logistics

Main Business Domestic representative Feature description enterprises Transport logistics  Trunk transportation  Rokin Logistics  The factors of success  Regional distribution  Shuanghui Logistics involves temperature  City distribution  Zhongrong Logistics control and setting up a wide range of cold chain transportation network Warehouse  Offers storage, preserve  SinoTransPFS  Enterprises with heavy logistics and transfer services for  Swire Cold Chain assets cooler cargo Logistics  Centered on technique level of the refrigerating cabinets and the ability of inventory management Logistics with city  Low-temperature city  Express Channel Food  Focused on the cold chain warehousing and warehousing Logistics within a single region and distribution  City distribution  Shanghai Xintiantian had some regional network Dazhong Cold limitations Logistics  Shenzhen Shuguang Logistics  Provides comprehensive  China Merchants  Usually are large-scale Comprehensive services including low- Americold enterprises logistics temperature  Grand Logistics  Can provide full range of warehousing, trunk  China-cold Logistics services from the transportation and city manufacturers to the distribution consumers

 Dominated with wholesale  Jiangsu Runheng  Requires efficient market Transactional market and distribution  Unicom Baishazhou management ability of logistics center, primarily engages  Higreen services and goods for in cold-chain warehousing multiple clients

 Provides overall solution  Lanesync  Provides diversified supply for the core enterprise chain service for clients, Supply-chain and covers the whole including purchase and logistics cold chain finance

Source: collected and sorted by Deloitte

12 China Logistics Industry | Chapter 2: China’s logistics industry tends to be lean

2.3 More research and innovation are needed for the "last mile" of logistics The "last mile" of logistics, which connects two ends of the online shopping and makes the delivery of goods to your door timely against requirements, is the last aspect of the distribution. To solve the predicament of the logistics development, the logistics enterprises should stress on the two aspects of goods dispatching and the distribution of the last few miles, that is, the process from the distribution center to the customers. This process faces a more prominent challenge of cost control which existing logistics enterprises are unable to solve. Relevant market research report predicts that in 2020 the turnover of the "last mile" of the delivery services will reach USD6 trillion. The "last mile" has clearly become the most potential development part of the logistics at present. Due to the specificity of this process, the high costs and different characteristics revealed by each division, discussion on the difficulty and countermeasure of the "last mile" of the logistics become more and more intense. Whether or not the innovative business modes succeed is yet to be tested by the market.

Logistics vehicles, smart cabinets, crowdsourcing express delivery, and collection by convenience stores collaboratively solve the "last mile" problem Express sector is a labor intensive sector, which determines that the professionalism of the service staff will have a direct impact on the user experience. For the moment, problems such as repetitive dissemination, long waiting time, and loss of express items erupt one after another, which indicated that the connection and supporting facilities for the "last mile" of logistics fail to keep up with the breakout growth spurts in E-commerce. Federal Logistics had made a statistic that the cost of the terminal distribution accounted for over 30% of the total logistics costs.

Logistics vehicles Smart cabinets Electric logistics vehicle automakers have put their This mode preliminarily vehicles separately into explores "smart express, cold-chain and community" and builds an moving sectors. Logistics initial structure of a good vehicle enterprises, community business including Dongfeng Motor, ecosystem. In the future, Chongqing Ruichi, BYD more brand-new business Autos, Lifan Autos, Yantse modes such as chain stores automobile, etc., set their and E-commerce entering sights on terminal logistics into communities and and signed contracts for applying the idea of shared sales of automobiles with economy into the property express enterprises like The "last mile" management, will spring YTO, STO, and ZTO, etc. problem up.

Crowdsourcing logistics Collection by Allied with six express service convenience stores enterprises, Cainiao Network announced to launched its Convenience stores begins to professional express-taking cooperate with express crowdsourcing plan and companies. In this way, the provide services in five cities delivery couriers do not need to including Beijing, Shanghai, send the express to the recipients' Guangzhou, Shenzhen and home but rather to their partnered Hangzhou. community convenience stores.

13 2.4 The curtain of reverse logistics and green logistics rises Reverse logistics has become one of the new development strategies E-commerce war and O2O retail war helped fuel an unprecedented spending binge for consumers. Meanwhile, more and more enterprises are facing the challenge of reverse logistics, which is to the logistics from the customer to the distributor network due to recall of defective products or return of goods. There were a lot of factors that could activate reverse logistics, such as return of off-season goods, goods returning for repairs, overstocked products, and scrapped products, etc., the costs of which is estimated to account for about 5% of the total sales of the enterprises. Based on the survey and estimation from professional organizations, the market capacity of reverse logistics in China is worth over RMB1 trillion. The demand of returning online shopping goods from e-commerce enterprises to the suppliers and returning off-season goods and packing damaged goods from the retailing stores to the suppliers have provided great development space and market for reverse logistics. In China, the concept of reverse logistics is still at an introduction stage. A lot of new enterprises are yet to recognize the detective value of reverse logistics in respect of product life cycle and its guiding role in respect of the overall sales process.

With online shopping becoming a mainstream consumption pattern, the needs of recycling logistic packages and alleviating environmental pollution are growing stronger day by day. So far, a large quantity of express packages are thrown away after a single use, which is a waste of resources and pollution to the environment. The excessive packaging of goods, including the use of one-time packages, and heavy use of adhesive tapes and stuffing, have placed great pressures on the environment. E-commerce express enterprises, as big carton users, have not rolled out carton- recycling service in that it requires additional human and material resources, generating more costs. During the period of the 13th Five-Year Plan, the exigency of the sustainable development will be further highlighted. The 13th Five-Year Plan concentrates on promoting the high-value utilization of waste resources and maximizing the opportunities for recycling, both of which are also a times requirements to establish a circular economic development model. The logistics capability and hardware facilities of a single enterprise are rather limited. Actively exploring the integration and sharing of logistics resources, realizing the urban joint distribution to reduce intermediate links and form a closed-loop supply chain will effectively reduce the cost of logistics distribution.

14 China Logistics Industry | Chapter 3: The way of development for efficient logistics in the Internet age

Chapter 3: The way of development for efficient logistics in the Internet age

3.1 Freight O2O platforms integrate less-than-truckload freight + OEM market Highway freight is still in the phase of preliminary development While embracing much space for development in the market, China's highway freight which starts late, is still primarily featured with extensive competition. In 2015, the total volume of highway freight reached 31.5 billion tons in China. The market is seeing an increasing number of players in this industry with over 300 million freight drivers. However, the industrial ecosystem is very premature with over 85% of large trucks operated by self-employed businessmen and highway freight industry particularly dominated by "small-scale, scattered and disorderly" development for multiple years. Based on the survey by China Road Transport Associations on 700,000 freight companies in September 2014, each Chinese freight company has only 1.6 trucks on average, and each truck has an average capacity of only 5 tons.

Figure 3-1: Total volume and year-on-year increase of highway freight in China 2004-2015

350 16

300 14

12 250 10 200 8 150 6 100 4

50 2

0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

公路货运量Highway Aggregate累计同比 year- freight volume on-year increase

Source: Wind

15 Highway freight market in China mainly follows the model of the loosely regulated street market and simply equipped parking-lot market. Freight operators, trucks operated by self-employed businessmen and people providing peripheral services constitute the main elements of the market. Transaction cost is frequently pushed up by factors including lack of a system for efficient resource allocation, asymmetric information and fees charged by scalpers. The penetration of Internet model into the highway freight sector is too limited to tackle the underlying problems in the sector. As the existing APPs in the freight market are mainly designed for integrating resources on platforms and expanding scale, it will be the common challenge for platforms to maintain their profitability.

It is urgent for freight O2O enterprises to improve core competitiveness Freight O2O market has developed rapidly since 2014 with APPs designed for less asymmetric information and matching between trucks and goods springing up. So far, there are more than 200 freight APPs covering intra-city freight, intercity freight and comprehensive freight. As market players adopting such model are subject to few market access limitations and technical challenges, the number of freight APP enterprises grows rapidly in a short period.

It is, however, not easy to connect the "fast" Internet with the "heavy" logistics. As more and more drivers and goods owners use such platforms, many problems are emerging and enterprises are faced with similar development bottlenecks. First, platforms are similar in basic functions and promotion methods, leading to low user loyalty. Second, offline marketing is time-consuming and requires considerable resources; it is uncertain whether there will be more efficient marketing approach in the future. Third, there is no industry leader dominating the market. The existing enterprises stepping in the market are not innovative in business models and lack the potential for continuous development. Some enterprises even end up with bankruptcy. Fourth, the platform models fail to meet the deep needs of goods owners and drivers.

The market is expected to see an inevitable trend featured by intensive development driven by elimination of enterprises that lack core competitiveness via integration, financing and M&A, commitment to excellent quality of the platforms and seeking for more complementary cooperation in function and market. Meanwhile, diversified highway logistics can be realized based on active transformation of traditional logistics enterprises and enterprises with Internet genes and cooperation between the two types of enterprises. Traditional logistics enterprises have strong advantages in logistics parks, direct lines and intra-city service based on their heavy-asset models that have developed for many years, the existing operational models and truck and goods resources; while enterprises with Internet genes are more likely to stand out in products, technologies and service.

3.2 Big data facilitates intelligent management of warehousing system Realize online logistics management based on big data Intelligent logistics enables logistics systems to simulate human intelligence by using integrated intelligent technologies for informationization, intelligentialization, cyberization and electronization of logistics, and transformation of traditional logistics to modern logistics. Data analysis is indispensable for the development and realization of the two trends in logistics. Besides, big data is essential for the realization of great logistics and intelligent logistics. All these highlight the importance of big data for the upgrading and development of logistics.

16 China Logistics Industry | Chapter 3: The way of development for efficient logistics in the Internet age

Figure 3-2: Major application of big data in logistics enterprises

Source: Internet Plus Logistics

While logistics orders created by Taobao.com on November 11, 2015 almost doubled that of November 11, 2014, the logistics system worked smoothly without any overloaded warehouses reported. It is attributed to the selection of commodities and the position of commodities on the webpage based on algorithm on November 11. Cainiao, the hub of the logistics system of Taobao.com and Tmall.com, provided data forecast to logistics partners, taking into account the public logistics data of express enterprises, data related to customers’ behaviors including purchasing presold products, browsing products, adding products to carts and adding shops to favorites on Tmall.com and Taobao.com, and stocking data of the merchants. More accurate data analysis and forecast enabled express enterprises to deal with different situations more accurately and easily.

Cloud-based warehousing network relying on intelligent logistics warehousing system According to the Report on Global Third Party Logistics 2016, of the main management indicators for the evaluation of third party logistics suppliers, warehousing ability (64%), transportation management (60%), visibility of logistics process (60%) and exchange of electronic data (54%) are considered as the four most essential indicators. In response to the big data and the big logistics, the leading system integrators in China are investing in innovative logistics operation service for new drivers of profit growth. Cloud-based warehousing network relying on intelligent logistics warehousing system is one of the key strategies.

China has a warehousing cost per unit of GDP doubling or tripling that of the developed countries such as the US and Japan, and the gap is growing in recent years. China's warehousing cost per unit of GDP is much higher than that of other BRICS, too. It is mainly resulted from the high percentage of manufacturing and the impact of low management efficiency, low informationization of management and high management cost. Establishing a modern automatic warehousing system can effectively improve management efficiency, reduce logistics warehousing cost, and improve business performance.

17 According to the statistics of the Information Center of China Logistics Technology Association, the automatic logistics warehousing system market in China has been growing rapidly by an average rate of 20% each year over the past 14 years, and the growth is accelerating in recent five years. It is expected to develop into a market with a capacity of RMB100 billion by 2018.

3.3 Building intelligent logistics systems requires the development of full system integration capabilities as priority Professional logistics is in need of intensive management in the Internet age With the development of high-end manufacturing, more scale-up and intensive development of production and distribution and flexibility-oriented development of supply chains, enterprises are subject to higher requirements regarding logistics efficiency in the Internet age. Intensive logistics such as cold chain logistics, medicine logistics and automobile logistics are in urgent need of intelligentialization. The Plan for Formulating and Revising National Standards 2010 issued by Standardization Administration of the People's Republic of China covers cold chain logistics, steel logistics, automobile and auto parts logistics, emergency logistics, shelves and warehousing technologies. The potential market for intelligent logistics system is worth more than RMB100 billion.

Figure 3-3: Scheme of intelligent logistics industry

Source: Deloitte Research

18 China Logistics Industry | Chapter 3: The way of development for efficient logistics in the Internet age

Intelligent production will gradually generate demand for automatic logistics Elimination of outdated capacity required by supply-side reform in China is bound to impact investment, which will decrease or postpone as a result of the impact. Undoubtedly, automation- oriented reform of factory logistics will generate potentials much more than e-commerce logistics. In other words, intelligent logistics-oriented reform of factories will lead to enormous demand for intelligent logistics systems. Intelligent logistics systems are needed for support and improvement in response to the highly personalized needs of customers, shortening product innovation cycle and accelerating production pace. Intelligent unitized logistics technologies, automatic logistics equipment and intelligent logistics information system are the core elements needed to create intelligent logistics.

Intelligent logistics equipment make up the main structure of intelligent logistics, as the practical operation and application of logistics network rely on various intelligent equipment. According to the data provided by China Logistics Information Center in 2015, the capacity of intelligent logistics equipment market in China reached RMB49.6 billion in 2014 with an increase of 28%. This number was RMB68.4 billion in 2015 and is expected to reach RMB136 billion in 2018 with an annual growth rate of over 20%. Intelligent sorting equipment for express service and intelligent logistics systems adopted in e-commerce industry will be the drivers for growth.

Figure 3-4: The capacity and growth rate of the intelligent logistics equipment market in China

1600 40% 1360 1400 34% 35% 38% 38% 1200 1133 30% 24% 1000 914 25%

20% 800 684 20%

600 496 15% 360 400 10%

200 5%

0 0% 2013 2014 2015 2016E 2017E 2018E Market capacity 市场总量（亿元）增长率 Growth rate (RMB100 million)

Source: China Logistics Information Center

19 System integrators are playing a core role throughout the supply chain Compared with other players throughout the development of intelligent logistics, providers of logistics system solutions make the most profit. The data of international giants in 2014 indicates that the giants have grown as core equipment suppliers and have advantages in hardware technologies. Such enterprises include DAIFUKU, DEMATIC and KSEC Logistics. Other enterprises have developed as logistics software developers with strong competitiveness in the development of software technologies. Typical representatives include Swisslog and New Trend International. According to the latest ranking in 2014, DAIFUKU ranked No.1 in the global market with a revenue of US$2.54 billion, replacing SSI SCHAEFER which previously topped the list of automatic system integrators. DAIFUKU, SSI SCHAEFER, DEMATIC and Vanderlande have operated business with factories in China for many years.

Table 3-4: Top 10 providers and integrators of intelligent logistics equipment

Ranking Company Global revenue Global revenue Growth rate in Growth rate Country in 2014 in 2013 (US$1 in 2014 (US$1 the most recent in the million) million) year % recent two years %

1 DAIFUKU 2463 2536 3 7 Japan

2 SSI 2654 2487 -6.03 -3.2 Germany SCHAEFER 3 DEMATIC[grjin1] 1500 1600 6.7 23.1 the US

4 Muratec 9600 1100 14.6 4.8 Japan

5 Vanderlande 956 1051 10 33.9 The Netherlands

6 Mecalux 952 952 0 0 Spain

7 Beumer 864 902 4.4 24.9 Germany

8 Fives Group 721 721 0 16.9 France

9 Swisslog 658 712 8.2 4.7 Switzerland

10 Intelligrated 583 627 7.5 19.7 the US

Source: MMH2014

20 China Logistics Industry | Chapter 3: The way of development for efficient logistics in the Internet age

Foreign providers of automatic logistics systems have competitive edge in technologies and project experience with strengths in high-end logistics hardware and software technologies and industry experience. The domestic counterparts, with advantages in price and local services, win competitive edge in mid-range and low-end projects by offering automatic logistics products with independent intellectual property rights and good local services. However, domestic enterprises are outweighed in product quality and stability for lack of technology resources.

Price competition is prevalent among small and medium-sized logistics equipment manufacturers. With increasingly intensified competition in domestic logistics equipment sector and higher industry concentration, most domestic logistics equipment providers with small scale, few technology resources and low added value of products are involved in intensive competition in unit price and are identified at the low end of the industry chain in terms of profitability.

Figure 3-11: Focuses of competition by intelligent logistics equipment system integrators

Source: Deloitte Research

Domestic manufacturers are mainly serving as equipment suppliers or system sub-contractors with each of them operating on a small scale. With the improvement in research and development as well as production of intelligent logistics equipment enterprises, equipment provided by domestic manufacturers are able to meet the needs of most general-purpose application, significantly impacting and taking considerable market share of foreign manufacturers who are fully engaged in intelligent logistics equipment production and sell products at high prices. Moving forward, domestic manufacturers need to increase their input in research and development to improve the level of hardware lean production, software performance and stability of production capacity. Soaring demand in the future for intelligent equipment in price-sensitive industries such as express industry will provide more space for the development of domestic manufacturers which offer strongly competitive prices. Based on integration experience gained over time and better knowledge about local enterprises in the industry in China, domestic manufacturers will have the opportunity to expand their scales and become stronger in some application fields.

21 Chapter 4: Capital facilitates the development of China’s logistics industry

4.1 Investment and financing in logistics industry reaches the peak, but is still focused on the stage of development The number of financing enterprises in 2015 reached the peak in ten years As shown from Figure 4.1, both the number of financing enterprises and financing amount in logistics showed volatility industry during the years from 2006 to 2015. Beginning from 2006, influenced by the healthy macro-economy, favorable incentive policy and self-development of the logistics industry, the number of enterprises obtaining PE/VC and the transaction amount showed a trend of steady growth, and kept a strong growth momentum even in the global economic crisis of 2008. Following the development downturn in 2012, the trend of volatile development continued in 2013 and the years after. In 2015 the number of financing enterprises reached the peak in 10 years, indicating that more enterprises had obtained the capital as well as new development opportunities. However, the total financing amount in 2015 was yet to return to the previous high.

Figure 4-1: Financing amount and the number of participating financing enterprises in logistics industry over the years

2500 35

30 2000 25

1500 20

15 1000

10 500 5

0 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Number企业数量 of 融资金额（FinancingUS$ M） Enterprise Amount (US$ M)

Source: CV source s

Internet leads the new-round of investment trend Logistics industry has been enjoying increasing popularity in recent years. The success of DiDi KUAIDADI and Xiaomi has made Internet thinking prevail, which attracts capital to launch on the logistics Internet platform; the booming development of mobile Internet and gradual maturity of technologies such as cloud computing, Internet of things and big data have make it possible to set up logistics and other technological platforms. Logistics companies such as Ane, Transfer, Apex and Ishansong, ranking among the Top 5 in terms of financing in 2015, have pioneered new development areas by combining traditional logistics model and new Internet technologies, thus winning the favor of capital.

22 China Logistics Industry | Chapter 4: Capital facilitates the development of China’s logistics industry

4.2 Enthusiasm for M&A runs high in logistics industry with sharp increase in the number of cross-border M&A In 2015, enthusiasm for M&A ran unprecedentedly high among logistics enterprises The rapid development of Chinese economy is indispensable from the development of logistics enterprises. Under the circumstances of increasingly open-up of Chinese logistics market, it is the most efficient way to accelerate growth and enhance integrated competitive edge through mergers and acquisitions. The figure below indicates the change in the number of M&A cases and M&A amount in logistics industry from 2006 to 2015. The number and amount of M&A in logistics enterprises experienced a leap-forward growth in 2015. In respect of the number of enterprises, the number of M&A in 2015 increased by 77% compared with that in 2014, and in respect of M&A amount, the aggregate amount of M&A in 2015 was 8.5 times that in 2014. Hence it can be seen that the year of 2015 was a year that the enthusiasm for M&A ran unprecedentedly high among logistics enterprises, and a year that apparently distinguished from the previous 10 years in the course of development.

Figure 4-2: The number and amount of M&A by logistics enterprises in China from 2006 to 2015

45000 250

40000

35000 200

30000 150 25000

20000 100 15000

10000 50 5000

0 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

并购数量（个）Number of 交易金额（百万美元）Transaction amount M&A (USD million)

Source: CVsource

Foreign capital influx: For the large market and great opportunities of Chinese logistics, large international logistics enterprises begin to speed up their deployment in Chinese market and gradually penetrate each segment market of Chinese logistics industry, i.e. domestic express, automobile logistics, cold-chain logistics, pharmaceutical logistics, logistics real estate in recent years. In the process of sweeping into Chinese market aggressively, mergers and acquisitions of local logistics enterprises has become the significant way by these international enterprises to realize low-cost and localized operation, which as exemplified by A.R Moller-Maersk’s joint-investment in Schwitzer Tug Boat and the Dongjiakou Port.

23 Dominance of domestic M&A, and surge in the number of cross-border M&A in 2015 Among the M&A cases by enterprises in recent 10 years, most of them were domestic M&A, i.e. both the buyer enterprise and target enterprise of M&A were domestic enterprises, accounting for 88% of the total M&A cases. Cross-border M&A, in which domestic enterprises acquired foreign enterprises, accounted for 10% of the total M&A cases. Despite previous absolute advantage in the number of domestic M&A, there were some changes in strength proportion of the three M&A methods in 2015, which indicated an increasingly strong willingness of "going global" of enterprises.

Figure 4-3: Changes in the proportion of cross-border M&A amount from 2006 to 2015

20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

出境并购占比Proportion of 入境并购占比Proportion of cross-border domestic M&A M&A

Source: CVsource

M&A boosts further integration of the industry Further development of economic globalization brings along the global expansion of multinational enterprises, expanding their operation activities from within a region or a country to a global scope. To support such an international transaction strategy, it is necessary to have logistics facilities redeployed and upgraded globally. Operating across multiple countries and regions set higher requirements for the distribution of logistics systems. Logistics enterprises needs to deliberate on how to make use of the support of the new system and connect with customs public systems in each country in order to grasp the real-time operation of various transit points and routes

In addition, the development of international logistics also requires higher level of logistics standardization. At present, the USA and Europe have basically realized unified standardization of logistics instruments and facilities, which could enormously reduce logistics costs and decrease difficulty in transfer. Mergers and reorganization of enterprises in various industries all over the world continues to boost the development of globalization in logistics industry, and the development trend of logistics enterprises’ globalization will inevitably push and facilitate joint mergers and acquisitions by logistics enterprises in each country. Certain large logistics enterprises are crossing the border to launch joint M&A and expand international logistics market vigorously for more market shares. In the development course of the top four international express enterprises, significant strategy developments were always accompanied with active M&A activities. Take Fedex as example, as a rising enterprise among the top four, Fedex took off from the State of Tennessee in the USA, and by now it has become "the King of Air Express" with business network all around the world, which is indispensable from its successful multi-line M&A.

24 China Logistics Industry | Chapter 4: Capital facilitates the development of China’s logistics industry

4.3 Steady increase in the number of IPOs in logistics industry with a boom of back door listing in express sector Gradual increase in the number of IPOs among logistics enterprises Below figure shows the number of and total proceeds raised by listed enterprises in logistics industry within the 10 years from 2006 to 2015. As seen from the figure, proceeds raised by logistics enterprises in the 3 years from 2006 to 2008 were the highest in terms of total proceeds, with a total of USD89.76 million raised in 2007. 2015 and 2010 had the most IPOs, each having 13, but the total proceeds raised by the listed enterprises in 2015 was apparently lower than that of 2010. Compared with 2010 and before, the number of IPOs in recent 2 years has undergone a steady increase, however, the total proceeds raised exhibited obvious decline and slump. From 2011, the total IPO proceeds raised by enterprises was less than USD 25 million. Although the number of IPOs in 2015 bounced back to a peak, the total proceeds raised was still at a low level.

Figure 4-4: The number and proceeds of IPOs

14 10000 9000 12 8000 10 7000 6000 8 5000 6 4000

4 3000 2000 2 1000 0 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

上市企业数（个）Number of IPOs 募资金额（百万美元）Total proceeds (USD million)

Source: CV Source

Back door listing boom in express sector The Chinese government holds a supportive attitude towards express sector on leveraging the capital market. The Several Opinions on Promoting Development of Express Delivery Industry (the "Opinions") promulgated by the State Council on October 26, 2015 indicates that in 2020 the scale of Chinese express sector will leap to a new level, with an annual business volume reaching 50 billion pieces and an annual business income reaching RMB800 billion. The Opinions also encourages all sources of capital to enter into express delivery sector according to the law, and supports express enterprises to carry out mergers, acquisitions and public financing, and integrate medium and small enterprises to optimize the allocation of resources, achieve alliance and complementary advantages among giant enterprises, and facilitate the formation of a number of international competitive corporations, who are encouraged to "go global" and compete with international players.

The express sector is encountering a boom of back door listing. In the last decade the express sector has expanded rapidly with a compound annual growth rate ("CAGR") of approximately 30%. Along with its further transformation and upgrade, the industry barrier has been increased, and concentration ratio has been stabilized, which make Chinese express sector enter into the maturity period equipped with conditions to go public. As at July, 2016, back door listing enterprises in the express sector have expanded to four enterprises, i.e. S.F. Express, STO Express, YTO Express and YUNDA Express. Main competitors in the express sector such as ZTO Express, Quanfeng Express and Deppon Logistics also have plans to be listed in 2016 or 2017. In particular, normative listing requirements could force family enterprises to carry out system reform of modern enterprises, which is beneficial for the transformation and upgrade of enterprises, improvement of service quality,

25 expansion of new markets, business integration of the enterprise, enhancement of business deployment and international competitiveness, increase of business income of the listed enterprises and so on. A large number of express enterprises are expected to land on the capital market in the following 2 years.

Figure 4-5: Listing process of express enterprises

Express Enterprises Listing process STO Express Back door listing by virtue of IDC in December, 2015

YTO Express Back door listing by virtue of Dayang Trands in March, 2016

S.F. Express Back door listing by virtue of Dingtai Rare Earth & New Materials Co., Ltd on May 23, 2016 YUNDA Express Announced back door listing by virtue of Ningbo Xinhai Electric Technology CO.,LTD in July, 2016 ZTO Express planned to go public in the USA by the end of 2016 or at the beginning of 2017 Deppon Logistics has submitted the IPO prospectus

Quanfeng Express will be listed in new OTC market Best Express planned to go public in the USA or HK during 2017 to 2018

TTK Express planned back door listing by the end of 2016

Source: Deloitte Research

The course of logistics industry listing is still full of challenges At present, Chinese logistics industry is undergoing the predicament of "meager profits, no profit and losses". As a result, large amount of capital is needed for logistics enterprises to enlarge and perfect their deployment of express transportation and express delivery business, and such capital pressure is one of the main reasons for many enterprises to seek for listing. It should be noted by express enterprises that "going public" is not the panacea for all challenges. In fact, many difficulties exist in the course of listing, and express enterprises will still be confronted with many challenges after their successful listing.

No standard financial indicators Low industry profit Chinese logistics is a late starter, and Logistics industry is a labor intensive the standardization of most of traditional industry requiring large capital investment logistics enterprises was poor in their (vehicle/staff/site, etc.) with relatively low early stage of development. profit rate. In recent years, demographic Organizational structure, or personnel dividend gradually vanishes with the allocation or management model were increase of labor and transportation cost relatively rough, which made it difficult (accounting for 75% of the total cost), and to manage according to standardized gas price and rental price all rise along with enterprise model as their scales the labor cost. As a result, the already low continue to expand. gross profit margin is expected to decline apparently.

High industry volatility Low appeal to capital market

State of operation of logistics Although with the rise of emerging enterprises is extremely unstable with Internet industry, more and more many factors influencing their attention has been given to the logistics performance. Many logistics enterprises industry connecting with Internet, have a certain stress on their customer ultimately logistics enterprises still bases, and minor changes of each require on-land operation model and customer base will give rise to operation physical operation to complete. Sudden changes of logistics enterprises, such expansion of enterprises scale will not characteristic of logistics industry is also appear, so it will not draw much the main reason that causes unstable attention from investors. profits and failure in IPO evaluations. .

26 China Logistics Industry | Chapter 4: Capital facilitates the development of China’s logistics industry

Althoug

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