Asia Logistics Wrap

TNT's Plans for Asia Pacific II

Continuing with news on TNT, FTB Asia recently reported on the company's Asia road network and efforts to establish network security.

The article is by Chew Wai Yee out of Singapore and starts off with:

Just four months into the launch of its Asia Road Network, TNT Express has launched a security control centre in Petaling Jaya, Malaysia, to monitor the company's integrated road network spanning across Singapore, Malaysia and Thailand.

Built at a cost of RM1m (US$275,000), the Asia Security Control and Command Centre (ASCCC) is located at its Malaysian operations centre and managed 24/7 by its team of security personnel in the country. The investment forms part of TNT's broader RM15m ($4m) earmarked for investments in Malaysia in 2006 which will include the upgrade and expansion of facilities in Johor Bahru, Penang and Kuala Lumpur International airport, scheduled for completion by the end of the year.

I have highlighted in the past how insufficient and underdeveloped cross-border road links to China's western, southern and northern borders basically ensures that air cargo is the primary choice for firms engaging in trade in these areas. TNT realizes appropriately that any economic infrastructure it puts in place must be paralleled by a security architecture:

The ASCCC is the security backbone for TNT's Asia Road Network (ARN), particularly for high-value goods in transit. The network was first introduced in December last year and aims to link over 120 cities across 4,000km once Laos, Cambodia and Vietnam are added later this year with access to more cities when the road network is expanded to include China by 2007.

Once regularly established, these links should be boon for 2nd and 3rd tier trade due to accessibility and lower costs:

According to TNT, the ARN offers businesses day-definite express delivery services at lower costs compared with air freight and transit times two to three times faster than sea freight.

Gerry Power, MD, TNT Malaysia, told reporters at the launch of the ASCCC that some of the company's air and sea freight customers had switched their transport modes to the ARN. The cost was probably 40% cheaper than air freight, he said. But "you can't be on the roads in Asia without taking security seriously, " he said, adding that "businesses dealing in hi-tech, high-value goods need the assurance that the transportation process is secure."The ASCCC was TNT's answer to that challenge, he claimed.

The physical and informational architecture being deployed is strategically intertwined:

TNT currently operates ten 40ft trucks, carrying cargo to and from Singapore, Thailand and parts of Malaysia. Utilising GPS technology, the ASCCC is touted as the only system in Malaysia able to monitor three countries at the same time.

A particular feature of its system is that the GPS modules are placed on both the trucks and the containers, ensuring that officers at the ASCCC are constantly monitoring the status of the cargo.

TNT's tracking system is also inbuilt with data on the security and safety record of specific locations. If, at any point, officers at the ASCCC suspect the security of the truck or the container is compromised, for instance when passing through hijack-prone locations, the system is able to stop the vehicle remotely using the GPS modules on the container/ trucks.

This road network's success and failures should be benchmarked by regions looking to implement, or in serious need of, similar systems.

TNT's Plans for Asia Pacific (UPDATED)

Recently, I have come across a couple articles regarding the firm TNT, and both provide different angles from which to take a look at TNT's operations in Asia. For those unaware of TNT, below is a brief summary of the firm provided via its website:

TNT N.V. provides businesses and consumers worldwide with an extensive range of services for their mail and express delivery needs. TNT serves more than 200 countries and employs over 128,000 people (over 163,500 people including the division Logistics, which is intended to be divested). For 2005 the company reported € 10.1 billion in revenues (€ 13.6 billion including Logistics). TNT N.V. is publicly listed on the stock exchanges of Amsterdam and New York.

The first article, via the Wall Street Journal of July 14, does an excellent job at introducing us to TNT's efforts in Asia. Titled "TNT Plans Aggressive Asia Growth," the article is written by Arien Stuyt and highlights some of TNT's recent business transactions and strategic direction:

"Dutch postal and express company TNT NV is targeting aggressive expansion in Asia by developing its own transportation networks, executives said. The company is restructuring after a difficult few years and is selling off its logistics business to focus on postal and express-mail expansion. The relatively immature Asian express-mail market, mainly in China and India, is expected to expand rapidly in the next few years and TNT wants to be the clear leader in the region, the company said."

The article moves on by exploring the perspective of the CEO and by highlighting the pressures surrounding his efforts:

""We are committed to grow the business, both by organic growth and acquisitions," TNT Chief Executive Officer Peter Bakker said at a recent company gathering in Amsterdam. Growth has to come from fortifying TNT's position in Europe and quick expansion in Asia, he said."

"Mr. Bakker is under pressure from investors to produce results. The company has faced two separate accounting-irregularity probes at some of its European units in recent years, which have hit the bottom line. The company also has had to exit from the logistics business after failing to keep up with more aggressive competitors, and it is being scheduled for sale in the second half of 2006. Its Dutch postal monopoly, meanwhile, is being opened to competition in 2008, and postal deregulation in other European countries offers new expansion opportunities."

So, with a number of factors coming from the core European market, in addition to a number internal problems hindering past and current performance, basically it is time for TNT to buckle down and right the ship by focusing on what it does best and using the capital gains from a sale of its logistics business to reinforce its core business--the postal and express delivery market.

In terms of the numbers:

"TNT wants to grow its express-mail unit 10% to 15% a year, from Euro 5.3 billion ($6.73 billion) in sales in 2005. The world market is around Euro 130 billion, and China, with $3.5 billion in express-mail revenue in 2005, is set to become the world's sixth-largest market by 2010, provided it continues expanding at an average 20% a year, according to Datamonitor, the market-research company."

The problem is that TNT's competitors are also aggressively targeting Asia and won't be looking to give up any ground:

"Mr. Bakker said this burgeoning region offers growth potential compared with the more mature U.S. market, where its competitors dominate. TNT's biggest global competitors, FedEx Corp. and United Parcel Service Inc. of the U.S. and Germany's DHL, part of Deutsche Post AG, are already vying for Asian business. The three giants split the majority of the U.S. market, making it tough for TNT to compete there."

As for FedEx:

"FedEx, with express-mail revenue of $21.5 billion for the year ended May 2006, this year said it had bought the express operations of its joint-venture partner DTW Group of China, taking over 89 depots."

As for UPS:

"Market leader UPS, with express-mail sales of $36.6 billion in 2005, acquired the package-shipping operations of Chinese partner Sinotrans Ltd., which served 23 cities in 2004."

As for Deutsche Post:

"Deutsche Post, with Euro 18.6 billion, has a long history in the region. Deutsche Post's express and air-freight service, DHL, has invested $1.6 billion in the Asian-Pacific region in the past few years to strengthen its network infrastructure and to meet the evolving demands of customers; it significantly strengthened its position in the Asian-Pacific region in 2005 with the acquisition of British logistics and freight group Exel PLC for ￡3.7 billion ($6.79 billion)."

Overall, however, "TNT, which has about 21% of Europe's express-mail market, is off to a strong start in Asia. In China it is in the final phase of takeover talks with HOAU Logistics Group, which has 12,000 employees. That acquisition would give TNT access to an express-mail business spanning the country's biggest private-road network, with around 1,100 hubs and depots. No financial details have been disclosed."

Parallel to these efforts, TNT is looking at solidifying the infrastructure necessary to attain its strategic goals in the region:

"The company is building a road network from Singapore to northern China, said TNT board member Marie-Christine Lombard, who oversees TNT's Express unit. "Our advantage is that we've soon got a network in place to deliver throughout Southeast Asia," Ms. Lombard said at a meeting at its Liege, Belgium, hub. Analysts say building a network should give TNT a strong foothold in the region. A full network could help create a "money machine," enabling TNT to keep per-unit costs down and boost volume, said Robert Tasiaux, vice president for travel and transportation at management-consultancy firm A.T. Kearney."

Mr. Tasiaux makes an important point about the risks involved in this venture:

""The question is whether your global network is dense enough to be competitive and profitable," Mr. Tasiaux said. "To ensure that, the express companies will look for acquisitions, in a market where only a handful of players has adequate size.""

Interestingly, TNT has stumbled in Japan where it was attempting to work out a partnership with Japan Post. As I have noted before, currently Japan Post is undergoing a significant number of changes that challenge the cultural and bureaucratic norms associated with a government enterprise. Personally, it seems unreasonable that Japan Post would layer on top of these dramatic changes a significant partnership with a foreign firm such as TNT. Thus, when TNT blames cultural differences as the reason for the failure to secure a partnership (mentioned further below), the details probably involve the depth of the partnership and the timing involved in building that depth. In fact, my recent write-up on Japan Post indicated that one of the key issues was ownership ratios:

As the article also comments, "the move comes after Japan Post and Dutch express operator TNT postponed a JV earlier this year, unable to agree on ownership ratios." The fact that Japan Post eventually decided on a joint-venture with a Japanese firm over TNT in the short-term indicates that perhaps Japan Post's management has yet to undergo the transformation necessary to respond to the full spectrum of business opportunities in the global arena. This is not unexpected, but will be interesting to watch as more and more Japanese companies operating abroad are becoming comfortable with letting go of traditional logistics partners based in Japan in favor of foreign firms with more competitive pricing and service platforms.

In my further opinion, Japan Post would want to take this type of partnership slow (retain majority ownership) as it developed into a private enterprise and began to ease into the new management systems and organizational structure it is now in the process of implementing nationwide:

"Still, expanding into a new market doesn't come without its headaches. TNT recently suffered a setback in Japan, which is currently Asia's biggest express market. A proposed international-delivery joint venture with Japan Post collapsed a few weeks ago, mainly because of cultural differences. Mr. Bakker said TNT isn't ready to "jump ship" from Japan Post, but he isn't ruling out looking for another partner. "It's a case of going back to the drawing board [in Japan]," Mr. Bakker said. "Of course, it's a pity that our initial plans didn't materialize, but there are still other possibilities for cooperation.""

Another foreign firm, possibly a TNT competitor, could use this as an opportunity to approach Japan Post with a more patient and long-term perspective in hand. Especially if the foreign firm attempts to understand well the changes taking place internally within Japan Post and how it is reshaping its national infrastructure.

UPDATE: On July 26, The Financial Times reported on the bidders for TNT's logistics arm:

"Private-equity investors are the only bidders left in the race to buy the contract logistics business of TNT, the Dutch mail group. The business is estimated byanalysts to be worth €1.8bn-€2.2bn ($2.3bn-$2.8bn). A short list of potential buyers includes Apollo Management, the US private equity group, and PAI, the European buy-out company.

"CVC Capital Partners has also been closely involved in negotiations, as has Blackstone, another private-equity group, but the status of their involvement is unclear."

The article goes on to detail the concerns of unions with members in the logistics arm:

"International unions have warned prospective buyers of the bulk of TNT's worldwide logistics business that they will fight to protect the employment rights of the division's 37,000 workers.

"Unions, angry that they have not been consulted over the sale, are concerned that a private-equity buyer would seek to boost returns by "making the assets sweat", costing jobs and undermining employment conditions."

Recent Reports on Asia

Have recently come across some reports that will be of interest to readers.

First, out of Morgen & Evan, an M&A services firm with Asia offices in Tokyo and Shanghai:

Japanese M&A: Beyond the Headlines

Opportunities with Japan's Consolidating Logistics Industry 2005

Acquiring in China 2005

M&A in China 2005

Acquisition and Investment Opportunities in China 2005

China Acquisition Opportunities 2005-2006

In addition, below is a new logistics report from All Roads Lead to China:

Recent Changes in the Rearview Mirror, and the Road Ahead

The above are all free and publicly available on the representative firms' website(s). Enjoy!

Governmental Logistics Initiatives in Japan

In a recent issue of the New Japan Distribution News, a print newspaper in Japanese, there was a front-page article on the policy of the Japan Business Federation (日本経団連) in regards to improving the national efficienty of Japanese logistics.

I have written before on trends in Japanese logistics and also mentioned this report on Northeast Asia logistics. The policies summarized below should be considered in the context of that information; especially in regards to one of the issues I have mentioned before: that Japan has a problem with legacy infrastructure--in relation to roads, sea ports, air ports, and rail--built up during its boom days but that lacked a national strategy. Now with increasing competitive pressures due to globalization, Japan is finding it difficult to build a national logistics network strategy on top of this legacy infrastructure. In fact, without renewal in infrastructure, the logistics efficiencies the Japanese government is trying to draw out of the industry will not come to fruition with the appropriate timing or manner necessary to increase the business throughput desired.

So that is the focus of this policy--infrastructure renewal that aims to eliminate bottlenecks towards establishing the ideal logistics network nationwide. Below I go into the infrastructure areas and summarize the articles main points for each.

1. Roads: The idea is to reduce traffic congestion while smooting out the flows of people and product between East and West Japan. In East Japan especially, the goal is to accelerate as much as possible improvement in the road linkages between central Tokyo and the outer highways. Another important effort will be made to improve road access into airports and sea ports envisioned in creating inland logistics hubs. These roads especially would focus on creating logistics arteries specifically to improve the flow of set-route trucking that would link with containerized sea freight, eliminate bottlenecks and enhance "modal shift" opportunities.
2. Sea Ports: For the efficiency and advancement of port functionality, the goal is improve terminal functionality that would create seamless and speedy logistics links with Asian neighbors. In particular, this would take advantage of the economic tie-ups growing with ports along the Sea of Japan, building more comprehensive port facilities.
3. Air Ports: Not as much was written here except to say that improvements in equipment that can be realized should be accelerated as quickly as possible.
4. Rail: To improve transportability, the goal is to shorten total shipping time. In addition to improving railway capabilities, another important goal is to improve the ability of rail stations to better service the loading and unloading of goods, enhancing modal shift opportunities. It will be necessary to investigating the fitting of logistics hubs with smooth rail linkages.
5. Logistics Infrastructure Renewal: As I stated before, the article reiterates the fact that much of the modal logistics infrastructure mentioned above was built in the 50's and 60's during the post-war boom period. As a result, comprehensive improvement and renewal will increase. But in order to do this, a significant amount of funds will have to be procured.

I have seen a lot written by the government on improving nationwide logistics--the real question is whether these ideas can be executed. In my opinion, a number of cultural and bureaucratic hurdles will need to be overcome to do so and, although cliche, only time will tell if this is possible at the pace the government would like to see.

Truck Dispatching via Skype in Japan

With margins being squeezed by continuously high gas prices and the strengthening of environmental regulations in regards to vehicle operation here in Japan, transportation-focused logistics firms have to be increasingly creative in not only managing costs but finding peripheral areas from which to create added-value.

In July 18th's Logistics Japan newspaper (printed in Japanese), there was an interesting article on how one firm--Showa Rikuun (昭和陸運)--had introduced Skype technology into its dispatching process. The benefits of using Skype in dispatching work are as follows:

• Software can be downloaded for free.
• Functionality includes real-time chat, phone and video.
• Skype-to-Skype communication is free.
• Skype-to-fixed phone or cell phone fees are considerably low.
• Transmission quality is relatively problem free.

In dispatching, because of the frequent need for phone calls, sales offices can interact without the need for repeated calling via leaving a message through the chat function or voice message. Chat messaging can also be automatically saved for reference in the future to confirm the information that was exchanged between internal and external supply chain partners.

If only critical calls are made to fixed phones or cell phones via Skype, costs can be lowered considerably. One-to-one video conferencing can be done via attaching PC cameras to already existing computers. Encouraging your primary, external supply chain partners to adopt the same solution will bring about mutual savings that didn't previously exist.

Apparently, according to the article, the Trabox logistics network company is currently applying this technology to help link logistics firms in the transportation industry. Although the technology hasn't deeply penetrated the transportation industry just yet, the possibilities that exist by using Skype-like technology in this industry are intriguing.

Quotes from K&N Asia Pacific's MD (UPDATED)

Via FTB Asia, I just want to highlight some quotes from an article covering a conversation with Kuehne & Nagel's Managing Director for the Asia Pacific, Andy Weber. K&N is described in the following way at its website:

Kuehne + Nagel is one of the world’s leading logistics providers.

Across a global network of 750 offices in more than 100 countries, the company develops and delivers integrated logistics solutions of outstanding quality and operational excellence tailored to industry and customer requirements.

Already a global leader in seafreight and airfreight, the Kuehne + Nagel Group now also ranks among the top five worldwide contract logistics players following its recent acquisition of ACR Logistics. Worldwide, Kuehne + Nagel relies on the logistics know-how of its more than 40,000 employees.

As a result of its obvious global influence, it is always important to know what K&N's leaders are saying, especially for this site in regards to the Asia Pacific.

The article is written by Simon Saunders, and first looks at Mr. Weber's background leading to his position in the firm today:

By progressing from the position of marketing manager in Johannesburg almost 25 years ago, to that of MD, Andy Weber has achieved a lot by anyone's standards. But it is the numbers which really add up in his favour. Since assuming his current role in 1999, he has built the regional network up from a workforce of 1,500 and a turnover of Sfr36m (US$29.8m) to more than 4,000 people and a corresponding turnover of Sfr118m in 1995.

Weber's career in logistics, and the realisation of a boyhood dream of discovering different cultures, began immediately after graduation from the Swiss Commercial School in Basel with an apprenticeship at an international freight forwarder. However, with Switzerland-based Kuehne + Nagel being one of the world's leading logistics companies, it wasn't long before their paths crossed and he hasn't looked back since.

Weber on the atmosphere at K&N:

"The dynamic growth of Kuehne + Nagel has provided me with the opportunity to take on ever increasing responsibilities. The company is characterised by a strong sense of entrepreneurial spirit, enabling me to constantly improve and grow, " says Weber.

Regarding Weber's view of China within K&N's Asia business:

Weber has overseen much of this expansion and today he heads up a network of more than 100 offices across 19 countries. But his proudest moments are perhaps reserved for the company's operations in China, where K+N was one of the first international logistics companies to gain a foothold, back in 1979.

"One of my proudest achievements was seeing Kuehne + Nagel become the first global logistics company to have been granted legal status to own 100% of its operating subsidiary in China under CEPA...The licence represents a major milestone for our business development in China and the Asia Pacific region. We now have 19 offices in 16 cities in China with plans to open a further ten, " says Weber.

Weber on the overall experience of doing business in Asia:

A lesser man could become complacent, but too much about the regional industry still excites Weber to not allow him to rest on his laurels.

"With business trends continuing to move towards globalisation and the continued relocation of production facilities to Asia, logistics providers are faced with an ever-growing demand from manufacturing and trade companies for the organisation of their value-added processes. That, and the management and optimisation of the global flow of goods, and the ability to adapt procurement and sales structures to changing conditions at short notice, are a big challenge, " says Weber.

"In order to optimise costs, customers worldwide are focusing on a few selected providers which can deliver integrated logistics services. Kuehne + Nagel will be able to benefit from this trend." His experience has also taught him some invaluable lessons about both Asia and the importance of nurturing manpower. The latter is something about which he feels particularly passionate.

"In Asia, organisational structure is still somewhat conventional--based upon strict functional divisions and hierarchies. Different social environments, labour variations and language differences make Asia a very diverse marketplace and, hence, pose challenges in running supply chains..What's more, this diversity does not only exist between countries, but also between cities and provinces in countries such as China and India.

"In order to overcome these challenges, recruiting, developing and maintaining a team of motivated logistics professionals is of paramount importance...Kuehne + Nagel takes measures to support employees in presenting themselves to customers as competent, highly qualified and engaged logistics partners, and is therefore continually increasing its commitment to education, further training and staff development."

Since I have some friends within K&N in Japan, I will attempt to follow up with some additional personal experience that could provide further insight into the company.

UPDATE:  After contacting my friends in K&N Japan, I obtained some additional insight into the company's approach in Asia--in particular, their approach to managing human capital, primarily in the context of Japan. The following are original comments from an executive in the Japan office and I have highlighted parts for emphasis.

On the background of K&N's staff:

"Depending on what part of the world the backgrounds vary a great deal. For instance in Germany, many of our staff have had apprenticeships that have specifically prepared them for careers in the logistics industry. In general it is not uncommon for our employees to have advanced university degrees specializing in the logistics industry. In many other countries, such as Japan, most of our employees have University degrees and/or extensive experience in the logistics industry. We carefully consider the qualifications and potential of people applying to work within our company. Especially in Japan, where lapses of service are not permitted, the selection of candidates is one of the most important aspects of increasing an already successful business.

"In general, the logistics industry has become extremely professionalized. Comprehensive contract logistics solutions that require client data integration are difficult to sell and even more difficult to implement requiring teams of qualified individuals.  More and more Kuehne + Nagel employees have not only University degrees, but also advanced degrees specializing in logistics."

Details on desired qualifications:

In addition, they need to have the following qualities:

1. Mobility without borders – being flexible.  In times of global competition, mobility has become an essential success factor.  This is particularly the case for a company like Kuehne + Nagel, with operations spanning the world.  International staff transfers across the globe demonstrate our ongoing endeavors to secure international know-how and experience.
2. Internationality – The world is the market.  And Kuehne + Nagel is present all over the world – with over 40,000 employees at 750 locations in over 100 countries.  National offices are multicultural.  Think globally and act locally.  Wherever the market is, Kuehne + Nagel is there.  With staff focused on common goals.  And who speak the same language,. the language of our customers.
3. Communication – Speaking with partners.  Ask, listen, understand, act.  This is how the needs of demanding customers from all over the world are attended to.  With solutions that last.  For maximum efficiency of communication and speed of implementation, all workplaces are globally networked using the latest technology.
4. Long-term success -  In times when rapid change is normality, we make a big point of continuity.  Qualified and responsible logistics specialists need to take on new challenges on a daily basis – and this long-term.  Therefore, it is our committed strategy to invest in the training and development of our employees.

On the most advanced areas of K&N's 3PL service offerings:

"Which is the most advanced is difficult to say, but we have many advanced 3PL services that required specialized knowledge and systems within its realm. For instance both Aviation and Ship’s Parts Logistics require an intense knowledge of how the industry itself works so that logistics professionals that handle this business know how to speak the same language as the customers. Required as well is the knowledge of what our client’s need on an I.T. basis. We have teams of people that focus on an I.T. basis how to best serve a particular industry providing useful information.

"Each particular vertical has its own set of specialized requirements and requires professionals that understand the business of that vertical. Whether Hi-Tech, Retails, Automotive, and so forth, clients within those groups have very distinct needs."

On the Japanese market, and whether the market is changing and whether K&N's service portfolio is acceptable to Japanese firms:

"Both. The Japanese market has changed a great deal since the bubble times. During the bubble with all companies and markets doing so well, there was little incentive for Japanese companies to look for better ways of doing things and that was understandable at the time. One read of the invincibility of the Japanese system everywhere. Only when times turned more difficult and seeking out alternative solutions to increase efficiencies at all levels within the Japanese marketplace did companies like Kuehne + Nagel, as well as some of our foreign competitors, start to flourish. In this sense, the weakness of the Japanese economy was a strengthening event for KN.

"At the same time Japanese companies, as they have become more global especially as manufacturing has moved offshore – and the automotive industry is an excellent example -  increasingly look to global companies that can best help them achieve their goals on a worldwide basis. There are still many Japanese companies that will work only with Japanese logistics companies, but the trend clearly is that all global companies regardless of their roots now look to logistics providers that offer them solutions that best suit their needs. Referring back to the automotive industry, one can only say whether a car is sold by a certain company. However, who really manufactures the automobile is questionable with production lines shared not to mention where the actual product is assembled. Different nations manufacture different components and those are then brought to the assembly lines. Naturally, all companies with the complications of internationalization of their products now base logistics providers on their merits and not their nationalities."

"This is exactly why Kuehne + Nagel’s Global Network is appealing to Japanese companies. We are everywhere and in most cases have strong working infrastructures ready to step in at any given time. With standardized I.T. packages, we are able to integrate with suppliers’ and manufacturers’ ERP systems consistently. We have worldwide Implementation Teams that plan the integration of a client’s product movements along with the I.T. integration in measurable steps. Therefore, clients have the necessary transparency in our handling of business prior to the actual implementation." 

On investment plans for Japan:

"We hire additional staff every month and this will continue in the foreseeable future. As our business has grown, our infrastructure to handle the same has as well. We constantly look for the right people to handle specific positions whether we find them in Japan or bring them in from overseas.

"Recently, we leased over 11,000 square meters in a Narita facility and are now filling many positions to fully staff it. We anticipate leasing more and more facilities on our own as our Contract Logistics business has experienced excellent organic growth. What has been outsourced in the past will now be handled by us directly and this will increase our staff numbers a great deal in a relatively short time. That’s not to say our warehousing partners have not done a great job for us, but rather we have attained and employed the necessary expertise as well as reaching the necessary critical mass to run our own operations for the most part.

"In 2007 we will open 3 more offices in Yokohama and Kobe primarily for handling our extensive customs clearance business, which we consider as a core business, as well as a Nagoya sea freight office, which will increase our office total to nine."

On managing risk:

"All investment decisions made are done so after careful evaluation between the risks vs the rewards. While our outlook is longer than short term, we always have clear analysis of what we think certain investments will bring to our business in a defined period of time. Whether we open an office or a warehousing facility, our eyes are fully open and very rarely are surprised, except on the upside, with the results.

"I.T., as mentioned previously, is centralized within the KN Global Network, which act as a strength to the entire company. Our global teams responsible for its development listen carefully to the individual business units on what the market is requiring and how KN can keep it’s comparative advantage over competitors in terms of standardization and global transparency of data and its integration with other systems. Standardization leads to greater product enhancement at the greatest efficiencies of manpower which translate into cost and benefits to the market.

"Kuehne + Nagel is a well- structured, leanly managed (in terms of quantity and layers) organization. Our corporate structure leads to ideas filtering up quickly without many layers of management in between changing the message. The lean management allows us to adapt and change accordingly to what we perceive to be client needs and industry trends. Cooperation between business units is expected and required. We have always been perceived as a “no nonsense” type of company and that really is true. With continuous improvement expected in terms of growth and profitability, we remained focused on, and only on, how to achieve the same."

This site will continue to seek out information that provides additional insight into the Asian logistics market and its players.

Intel Tackles the Chinese Frontier (UPDATED)

Another great article from Cargonews Asia that I wanted to go through is titled "Intel picks up 'Go West' gauntlet" and written by Lily Su out of Shanghai.

Intel has always been a deep interest of mine since 2003 when I was recruited for their summer internship program out of Michigan State's MBA program. Although Intel didn't end up having any projects available for our prospective interns that summer, including myself, the blessing in disguise was that I was then able to venture off to Japan and South Korea to do a great deal of independent research and study. Throughout my research of Intel during the recruiting period and while I was in Tokyo and Seoul, I had the chance to communicate with several Intel employees working with their market base in Asia.

If you look at their geographical revenue breakdown from their most recent annual report, 50% of Intel's business base is in the Asia Pacific with another 10% driven by Japan. As the leader in their industry and with so much of their business aggregated in the Asia Pacific + Japan, it is very insightful to look at aspects of their vision and investments in China within that context.

The "Go West" policy of China was adopted in 2000. A brief summary of this policy comes from a 2002 OECD report on the policy's influence regarding the energy sector:

The "Grand Western Development" Project encompasses two million square miles and 300 million people spread across eleven provinces and autonomous regions: Guangxi Zhuang, Xinjiang Uyghur, Ningxia Muslim, Tibet Autonomous Regions, and Yunnan, Sichuan, Shaanxi, Guizhou, Gansu, and Qinghai provinces, as well as Chongqing Municipality in the west. President Jiang declared the development plan crucial to China's stability and development/ According to government sources, the so-called China's second opening to the outside world calls for building 35,000 kilometres of new roads, including a Sichuan-to-Guangxi expressway, and 4,000 kilometres of new railway over the next decade. The project also includes construction of a US$14 bn pipeline linking Xinjiang's natural gas fields to Shanghai.

The government was expected to provide US$45.5 bn in 2000 to develop the West, US$8.4 billion from Treasury bond to boost infrastructure and US$37.1 bn in subsidies for local governments. At the same time, a large part of the central government’s efforts lies in cajoling better-off provinces, and state banks, to help with its western plans. Chinese domestic banks have been asked to ensure that much of their portfolios also go to borrowers in the hinterland.

The Industrial and Commercial Bank of China, one of the four first tier banks in China, hasalready responded by increasing the proportion of its loans to western provinces. However,domestic finance and technology will not suffice to undertake such a colossal task. Foreign investors and even banks are now actively being courted.

Of the more than US$400 bn in foreign direct investment that China has drawn since 1978, only a small proportion had gone into the west. With the western development plan, the government is now offering low taxes and land-use fees to lure Chinese and foreign companies that invest. The government also said that it would set up four western special economic zones that will give investors the same preferential treatment, as do similar zones on the coast.

Additional context is provided by this 2003 article in the Christian Science Monitor titled "Go west: China looks to transform its frontier:"

Like America's western expansion, China's push acts partly as a "safety valve" for the eastern unemployed. As with the US West, there are local populations, mainly ethnic Uighurs of Turkic Muslim origin, not yet reconciled to the march by the ethnic Han into their world. The Uighurs dominated Xinjiang for centuries; in 1949 they made up 90 percent of the population. Today, they are 45 to 50 percent, estimates Chien-peng Chung, at Nanyang Technological University in Singapore.

China has slowly pushed west for years. But during the mid-1990s, after the Soviet Union breakup created new fledgling states in Central Asia, the strategic importance of China's west increased. Ethnic tensions were sharply rising among Uighurs, including separatists, who felt their identity to be in jeopardy.

Some groups are violent. The spreading influence of a stricter Islam was also in evidence in Central Asia. Collectively, these changes concerned Beijing enough to initiate a Central Asian grouping, the Shanghai Cooperation Organization, designed to give Beijing a more formal tie to states on its western border, particularly to Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan. Just this week in Beijing, the five-year-old group moved past a concept to a formal structure, with funding and an antiterrorism center to be built in Uzbekistan.

At the same time, the west appeared to Chinese leaders as a cornucopia of untapped zinc, gold, coal, oil, energy, and land. China had spent the previous decade turning its east coast into a manufacturing mecca, a place to "get rich," in the words of paramount reformer Deng Xiaopeng.

With strategic, internal, and cross-border issues at stake, Beijing deemed it time to initiate a "Great Western Development" policy. "First develop the east, then shift to the west," as Party Secretary Wang says.

The above context is important when putting the economic considerations of this policy into consideration as a business operating in China, especially a foreign business. As I have illustrated before, the assessment of security, people, and political flows must be combined with an assessment of economic flows to understand more completely the environment within which one intends to do business.

With this in mind, lets move to the present and the article at hand. The author opens with a simplified assessment of the current state of the "Go West" policy:

China's plea to foreign companies to "Go West'', away from the popular trade centres of the Pearl River Delta, Yangtze River Delta and Bohai Rim, seems to have fallen on deaf ears. Companies have complained of the poor infrastructure, such as road and airport facilities, which result in higher logistics costs as some of the reasons for not setting up operations in the West.

Obviously, this is an article about Intel going west, and it is interesting how much research was involved in doing so:

One company, however, heeded the government's call and unperturbed by the challenges of moving to the West, decided to go ahead and set up its operations in Chengdu, capital of Sichuan Province. Although it took US computer giant Intel three and a half years of intensive research before making the move to Chengdu in 2004, the company is pleased with its decision and since then has started expanding its facilities.

As an industry leader, it doesn't seem unreasonable to do this much research and groundwork towards establishing a foothold in a relatively untested China west. I believe many project planners out there would agree with me that such a human capital intensive investment in advance ensures that future investments in physical infrastructure and capital will be more sound and in line with an entity's overall strategy.

The article goes on to outline Intel's primary investments:

Intel started with a microprocessor testing and assembly factory in December 2005 and is to set up a second facility currently under construction next to the present one, which will begin operations in 2007. The company's investment in the Chengdu facilities adds up to US$450 million. Intel's move has attracted other major foreign companies to set up operations in Chengdu.

Of particular interest to me are Intel's peripheral investments:

Intel has made an effort to enhance Chengdu's logistics infrastructure and efficiency. For example, Intel worked with the Chengdu Shuangliu Airport authority to improve facilities, upgrade security measures and enhance ground handling.

Chengdu is what could be called an "island of connectivity," a term I have used in previous posts.  Intel's investments above are the perfect example of my comments below:

Thus, the difficulty we face in ensuring the above islands of connectivity are malignant is not only because their proximate infrastructure is so bad, it is because we are in reality having to ramp-up the whole region's dilapidated supply chain infrastructure that happens to parallel a dilapidated security infrastructure. This is due to the fact that the physical, informational, financial, relational and innovational supply chain architectures that feed into an "island" must go through at least one if not several Gap states or networks that are equally poor if not worse in terms of cost, quality, speed, and safety.

The article quotes an Intel representative on the biggest barrier:

"The biggest challenge in Chengdu is still the Customs,'' said Joshua Wu, Intel's Greater Asia region logistics transport manager. "Compared with Shanghai, Chengdu Customs is more laid back and not accustomed to dealing with large quantities of fast moving, high-valued products.'' But they are ready to learn and know now what is required by a high-tech company, said Wu. Intel sponsored the Customs staff from Chengdu to visit Beijing and Shanghai to learn and improve their service.

The following comment by Wu validates my comments above and illustrates why momentum in building an island of connectivity into a long-term, outward connectivity driver is critical:

Intel hopes more multinational corporations will move to Chengdu which could help reduce logistics costs. "Bring more friends and there will be less costs,'' said Wu.

Other similar businesses, including Semiconductor Manufacturing International Corporation of China, MPS of the United States, Unisem of Malaysia and PSI Technology of the Philippines, have set up assembly and testing facilities in Chengdu. And telecom companies such as Motorola and Nokia set up R&D labs and technology centres in Chengdu even earlier than Intel.

As I stated in my earlier post regarding China's focus on building air cargo capacity, having the air logistics piece in place will allow firms to more feasibly venture west while the ground infrastructure catches up. This article mentions some air cargo firms building up that air logistics piece:

International carriers are flying into the West as well. Last year, Lufthansa made Chengdu its new freighter destination, and this year, Air France-KLM will connect Chengdu with Amsterdam. DHL is also considering setting up an operation centre at Chengdu airport.

Again, Intel has been a driver in raising the level of supply chain logistics plugging into Chengdu:

Wu said Intel played an important role in the European carriers' decision to operate out of Chengdu, but convincing them was hard work. "The airlines need to see a common value to fly in there,'' he said. "Chengdu has not been so convincing as a cargo airport in the past, and we had to show them the growth potential of the place."

Maintaining an island of connectivity while trying to extend that connectivity further is hard work. As the article further articulates, not all companies are interested in that challenge, or perhaps even fit for the challenge, and of course need to make considerations based on their particular industry:

Maurice Herschtal, area sales manager of TimCal Group, said, "I will not go to Chengdu.'' A manufacturer of graphite products, the company is based in Beijing, with a factory in Changzhou, which is close to Shanghai. Herschtal explained that to benefit from operations in an inland province, the company must either find raw materials available there, or have high value-added products that make the logistics cost minimal. "And we don't see any of that in Chengdu. "Intel can go to the end of the world if they like,'' said Herschtal. "But for us, producers of low-value goods, the logistics cost can add up to 10 percent in the final product price. We cannot take the same strategy as the IT industry.''

The above type firm will move into an "island" like Chengdu when the regional logistics network has reached a certain standard level. In this case, it is probably wise for a smaller firm to let a big investor like Intel take the lead in bringing the regional logistics infrastructure up to acceptable standards, but observing the development process closely as it moves forward and entering the market a few months prior to the point when the overall benefits can be reasonably forecasted to outweigh the costs.

The article gives a couple more examples that suggest this is the approach to take for going West:

George Zhao, vice-president, supply chain, of B&Q, was of the same opinion. B&Q, a home improvement retailer, has opened stores in Chongqing and Chengdu, but Zhao said they are not making money in the two largest Western cities. "Unlike Intel, we have to meet different tastes of local customers, which make our logistics more complicated, and our product is also not of high value,'' he explained. "Logistics cost is a huge deal to us, and the cost to deliver to the West is simply too high.''

Andrew Corporation, a manufacturer of communications equipment such as antennas, also marked Western China as "negative''. David Liu, the company's general manager in logistics and distribution, Asia Pacific, said Andrew carried out an evaluation last year on whether to set up factories in Western China. "The answer was 'don't go','' he said. But Liu expected things could change in a few years, by which time Andrew will re-evaluate the possibility of going West.

Of course, its too narrow of a perspective to say that logistics costs alone will make or break a deal to go West. A business must consider all the key drivers towards successfully executing the desired strategy. Via its initial round of research, Intel has done that:

Wu from Intel acknowledged the numerous logistics challenges in moving westwards, and said setting up plants in Chengdu does not really save much on logistics costs, compared to setting up base in Shanghai, Beijing or Hong Kong. But he said there were other incentives such as tax breaks and favourable regulations that made the total cost attractive to them.

The Sichuan government expanded the duty-free trade development zone to accommodate the Intel plant, and also removed the quotas that apply to the level of borrowings of companies with foreign investment.

The manner in which Intel links the logistics hubs in the East with its location in Chengdu is illustrative of the air/ground trade-offs and difficulties companies will have to expect over the short- to mid-term:

Currently, Intel does consolidation work in Shanghai's Waigaoqiao Free Trade Zone, and then moves the materials from Waigaoqiao to Chengdu using air freight or truck transport depending on the quantity of goods.

Bonded air transport is still a "'muddy'' situation, said Wu, when describing the current status of their intra-China distribution. As for the road to the West, many of the sections are still narrow mountain roads which cannot support container trucks, so Intel uses one-tonne or five-tonne trucks. Intel is also considering using new tracking technology as there were too many GPS (Global Positioning System) blind spots for trucks on their way to Chengdu.

Wu said as an emerging economy, the Western area is definitely more expensive in terms of logistics costs. "Every logistics service provider will charge you a premium to go there,'' he said. "But prices will get cheaper once the market starts to adopt the industry. There is always going to be a no-cheapness phase.'' For its factory in Chengdu, Intel is now using more than 10 logistics service suppliers, because they are unable to find a good 3PL there.

Of course, where there are inefficiencies, there are business opportunities. Mr. Wu goes on to provide some basic advice:

Wu advised companies to abandon the "one size fits all'' mindset if they want to set up multiple sites in China. "Maturity level and motivation differs from province to province, and so do the interpretation and understanding of the regulations,'' he said.

He pointed out that apart from enabling an existing model to meet the basic logistics requirements, it is most important to exert external influences to stimulate the local area's logistics adoption, such as what Intel did with Chengdu Airport and the carriers.

"Be patient - we took five years,'' he stressed. "But if I re-did the selection process all over again, I would still select Chengdu.''

Businesses interested in areas like Chengdu should regularly track milestones in the improvement of key logistics infrastructure such as below:

In April, Chengdu Airport began the construction of a $25.6 million cargo terminal which is expected to be complete in October. The new cargo terminal will have an annual capacity of 400,000 tonnes, and will be five times larger than the current cargo facilities.

For more on Chengdu:

• Coincidentally, today the AFP via Yahoo News has an article on additional aspects of Chengdu that are attracting an increasing amount of business investment.
• Fellow TBird Richard Brubaker (based in Shanghai) at the blog All Roads Lead to China has this post on Chengdu, to which he has himself visited.
• Also the China Law Blog has a number of related posts regarding second-tier cities in China.

UPDATE: China Law Blog takes a look at a recent Wall Street Journal interview with Ian Yang, Intel's Beijing-based co-general manager of Asia-Pacific. This is very complementary to the above information on Intel.

China Places Priority on Air Cargo

It is finally the weekend and time for me to catch up on some blogging. There are a few articles I plan to run through, some of which are just random stories on events in the Asia logistics world, and others more broad in nature.

The first story is via Cargonews Asia, written by Raymond Duan out of Beijing, and titled "China gives top priority to cargo traffic growth." Moving cargo by air is obviously one way China can temporarily adapt to the reality that building up efficient ground infrastructure takes a significant amount of time, and when driving forward with current initiatives aimed at opening "the West," air cargo can literally "carry the load" while ground catches up.

As Mr. Duan leads off:

China will take a phase-by-phase approach to opening its aviation market further in the next few years, with top priority being given to air freight, government officials said at a recent air cargo summit in Beijing. The minimum aircraft requirement for air cargo operators may be reduced to just one freighter and carriers with foreign investment would be allowed to apply for international flights.

That second line I highlighted is very interesting to me, as I believe such a move could create a more competitive yet fragmented industry. Capacity may increase substantially as the barriers to entry are lowered dramatically, but this could come at the price of logistics efficiency. It will at least be interesting to see how this plays out.

Quoting Chinese officials:

Liu Shaocheng, policy department director of the Civil Aviation Authority of China (CAAC), said China would set a ceiling for cargo rates as well as encourage airports to lower freight charges. "Both foreign and private airlines, in particular all-cargo carriers, will be encouraged to boost freight transport,'' said Liu.

It seems that setting a ceiling for cargo rates is aimed at increasing access to air freight services by those who, until know, have not been able to always afford it. At least air cargo firms will need to focus on reducing costs or adding peripheral, value-add services as a way of increasing margins versus raising prices. In this sense, it may force air cargo firms to seek new efficiencies, but hopefully not at the sacrifice of quality.

An example of entry into the international air cargo market is then covered:

Great Wall Airlines, based at Shanghai's Pudong airport, was the first foreign and domestic venture to take off with its launch on June 22. Great Wall Airlines is a joint venture between China Great Wall Industry Corporation, Singapore Airlines Cargo and Dahlia Investments, a wholly owned subsidiary of Singapore's Temasek Holdings. A joint venture between Shenzhen airport, Lufthansa Cargo and a German investment company, is expected to be launched next month. Several more ventures are in the pipeline.

China is not just thinking planes, but entire logistics networks:

"Priority will be given to the opening of the international air cargo transport market," Liu stressed. Air cargo operators will be encouraged to strengthen their service network, distribution centres, information systems, fleets and ground facilities.

Foreign firms have dominated, and will continue to be wooed by the government:

Sha Hongjiang, deputy director of the planning development and financial department of the general administration of CAAC, told the summit China would upgrade its airlines and airports and open its skies to more foreign airlines, particularly all-cargo carriers. Foreign carriers already account for majority of China's international cargo traffic. In 2005, foreign carriers, including Hong Kong and Macau operators, accounted for 76 percent of China's international cargo volume.

But like I mentioned above in regards to competition and margins, a Mr. Zhang concurs:

Zhang Zhifeng, cargo president of China Southern Airlines and general manager of Guangzhou Air Cargo Terminals, was optimistic of growth in international air cargo, estimating it to rise by 14 percent annually by 2010, but expressed concern about the number of carriers entering the international air cargo arena. "It will definitely arouse drastic competition and further thin profit margins,'' he said.

Clients may become more choosy and prefer "delivered as promised" operators instead of "flown as booked" ones, while shippers may increasingly outsource consignments to third or fourth party logistic providers, he warned.

Basically, Mr. Zhang is saying not only will he have to compete at higher service levels--"delivered as promised" vs. "flown as booked"--but also perhaps witness decreasing margins as logistics services are run through integrators such as 3PL and 4PL firms. This is a reality in Japan and South Korea as well and will gradually force increasing consolidation/partnership to improve profitability via added scale efficiencies and service offering diversification.

And that is just what Mr. Zhang has in mind:

Zhang said China Southern will expand its freighter fleet and enrich its cargo products on international routes. "China Southern will join the Skyteam Alliance to strengthen co-operation with foreign airlines," he added.

With ground inefficiencies as they are, there is also inefficient consolidation of cargo in the air prompting many of the above initiatives:

Wang Boxue, deputy institute director of the Aviation Industry Development Research Centre of China, told the summit that a shortage of freighters was forcing mainland carriers to rely too much on bellyhold cargo carried on passenger flights and limited China's air cargo growth. Freighters only handle 26 percent of total cargo and mail in the country, he said. "There is an urgent need for exclusive air cargo carriers, including those that carry oversized or heavy products," Wang said.

For a look at air cargo hubs that provide links into and out of China, please see one of my earlier posts.

North Korea's "Bookend" Trade (UPDATED)

With North Korea suddenly in the spotlight again due to its recent missle tests, activity at its borders with China and South Korea naturally receive greater attention. I have updated an earlier post on the China-North Korea rail sector noting that standards of business are nearly non-existent with an obviously desperate North Korea trying to get everything it can, any way it can.

Non-rail business seems to push forward as long as there is a buck to be made. Yonhap News reports on the China-North Korea trade and the impact the current "missle crisis" is having on the local economies:

Cross-border trade in China's northeast region bordering North Korea went on as usual Saturday amid lingering tension abroad over the North's missile launches this week, ethnic Koreans said. A Japanese daily reported the same day that China appeared to begin restricting trade with North Korea as a punitive action against the North's missile firings on Wednesday.

In the quote below, a witness of the ongoing trade requests anonymity--likely because a lot of the trade between China and North Korea is not of the legal variety:

"We don't feel much that there is a particular change here after the missile launches," an ethnic Korean living in the border city of Dandong said, requesting anonymity. "Even yesterday, I saw trucks and cars come and go across the Sino-Korean Friendship Bridge," he said, referring to the bridge over the Amnok River, also called Yalu in Chinese, which defines the territory of the two sides. Dandong serves as the main trade gate between the two ideological allies, and is bustling with logistics trucks that transport industrial goods to the North's Sinuiju from Monday through Friday.

Curiously, Japan's media reports the opposite:

Japan's Yomiuri Shimbun said in a dispatch from Dandong earlier in the day that cargo trucks traveling there via the river bridge have virtually vanished. The report suggested China has frozen trade with the North as a punitive action over its missile launches.

More anonymous (and probably not very reliable) sources counter that seasonality is a factor and nothing has changed in terms of the China-North Korea relationship:

Korean-Chinese businesspeople and North Korean workers, however, denied that China imposed sanctions on the North and said the seemingly reduced trade was a seasonal factor. "Usually in summer there's less trade. If the trading goods and personnel have reduced over the bridge, it's more likely from the seasonal influence. It is a far-fetched idea if they think it was that China began controlling the trade after the missile launches," an ethnic Korean businessman said, also asking not to be named.

Eventually, the article gets to the real reason why trade is likely still occuring despite the above Japanese reports:

"We cannot even think of the Chinese government blocking private-level trade with Pyongyang. And I've not even heard that China was controlling the transportation of goods going into North Korea," another businessman said.

In China these days, there is much more autonomy in terms of business exchanges and trade at the provincial level then those who have never been to China could imagine. There is a sense in the media in the West that China controls events across its provinces with the flip of a switch at Communist headquarters, but I believe this mostly occurs (in obviously more complexity than switch-flipping) at the more macro-levels of trade and business dealings. Many smaller business dealings don't register on Beijing's radar, and the messy border with North Korea around Dandong, I believe, would qualify as an area of smaller business dealings (non-military) mostly ignored by Beijing in the public arena. However, there are likely a number of "spies" lurking around to keep tabs as necessary on the happenings of the area.

The fact of the matter is that there is little enough business there already that no one is going to really hamper any illegal trade that might provide people there with whatever standard of living they can obtain. I have watched a few documentary reports on Japanese TV that interviewed North Koreans who escaped to China only to be put into prostitution and hiding or forced marriage. Many local Chinese or ethnic Koreans understand they can get away with this exploitation because the North Korean escapees will still rather risk exploitation than get deported back to North Korea. Someday I hope to make it to Dandong for a week or so, but right now is perhaps not the best time.

On the other side of North Korea, where trade has occured the past couple years between North and South Korean in an effort to boost the Kaesong Industrial Park development, there is some new reporting from Greg Hitt of the Wall Street Journal on Kaesong and the proposed US-S. Korea FTA in the context of the current missle crisis:

Titled "North Korea Complicates Trade Talks," the article starts off with pointing out that Kaesong remains the sticking point in resolving the FTA talks:

Despite North Korea's missile tests, talks between South Korea and the U.S. on a free-trade agreement are to resume today in Seoul. One sensitive issue: South Korea wants the pact to cover goods originating at its joint-venture Kaesong industrial complex in North Korea.

Hitt next provides a nice summary of Kaesong, which can be studied in much more detail via my in-process case study on the industrial complex:

The joint venture, launched in 2003 and located just north of the demilitarized zone that divides the Korean peninsula, combines South Korean capital with North Korean labor. It employs about 7,000 North Koreans who produce goods such as appliances and plastic containers for cosmetics. While the value of goods made at the venture is small, representing about one-third of the $1 billion in annual trade between North and South Korea, its potential is big. By the time the complex is in full operation in 2012, it could employ more than 750,000 North Koreans.

At odds between the U.S. and South Korea is the approach to North Korea, and with the missle crisis the distinction is highlighted further:

Kaesong illustrates a fundamental difference between the U.S. and South Korea. The U.S. sees North Korea as a threat to global stability and is seeking ways to force the country to abandon its nuclear ambitions. But South Korea sees a potentially peaceful neighbor and is looking for ways to promote dialogue and spread capitalism, with reunification the ultimate aim.

"It's a long-term goal that we'd like to achieve during...negotiations," says Ahn Chong Ghee, economic counselor at South Korea's embassy in Washington. Mr. Ahn says North Korea's missile testing hadn't damped the South's eagerness to include Kaesong in any pact.

The benefits of implementing an FTA between the U.S. and South Korea would be significant and very real:

The free-trade pact would be the U.S.'s largest pact since the North American Free Trade Agreement passed Congress more than a decade ago. Annual trade between the U.S. and Korea stands at $70 billion, and a business coalition including U.S. auto makers, financial-services firms and drug manufacturers sees important market-access gains to be had. In South Korea, there is concern about protecting domestic rice farmers from U.S. competition, but Seoul also hopes a trade pact would solidify the country's role as an Asian economic hub, giving Korean producers an edge over Asian rivals in access to the U.S. market.

However, with North Korea not doing itself any favors by launching its missles towards neighboring countries, countries it considers ememies, South Korea's relatively little leverage in the long-term standoff will do little to alleviate any U.S. concerns in including Kaesong in an FTA, let alone change the nature of the overall U.S. policy towards North Korea:

The Kaesong proposal would puncture economic sanctions imposed by the U.S. on North Korea and runs counter to the White House's strategy of isolating North Korea. It would almost certainly force a larger debate on Capitol Hill, shifting attention from improved trade ties with Seoul to North Korea's nuclear ambitions and its record of labor and human-rights abuses.

The U.S. and South Korea hope to agree on the trade deal by year's end, so it could go to Congress before President Bush's authority to negotiate trade pacts expires at midyear 2007. Under that authority, Congress can vote "yes" or "no" on trade pacts but can't alter them. Even before the missile test, U.S. officials were leery of making an overture toward North Korea, insisting that any trade pact simply be "an agreement between our two countries," as a spokesman for the office of U.S. Trade Representative put it.

The following part of the article also hints that Kaesong should at the most be a consideration much further down the road while other possible FTA-damaging issues are worked out:

Even without Kaesong, a fight over the South Korea pact likely looms on Capitol Hill. American textile producers are worried about increased competition, and the AFL-CIO has expressed "grave concerns" about labor rights. Adding Kaesong "has the potential to sink" any deal, inviting the pact to be debated on geopolitical grounds, warns Montana Sen. Max Baucus, the top-ranking Democrat on the Senate Finance Committee.

My feeling is that South Korea is in a rush for the high-risk Kaesong project to be deemed an inter-Korea success via endorsements like an inclusion in the FTA before it is even a true, sustainable economic success based on actual, on-the-ground results. The U.S. would be making a mistake to endorse Kaesong via an FTA when it is so early in its infancy, and in the context of the fragility and irrationality of the North Korean state. However, at the same time, the U.S. should not just ignore Kaesong but leverage it as another avenue for monitoring North Korean activities to gain further insight into the regime and prepare logistically for future trade activities should North Korea collapse. There is nothing that says that, because Kaesong is a politically and diplomatically unendorsable project, it shouldn't be studied closely.

UPDATE: This issue is further mentioned at Ben Muse, which I noticed has mentioned this site previously and at The Asia Pages. For very frequent posting on Korean peninsula relations and politics, The Korea Liberator is a must as well!

Resiliency Lessons from China: A Look at Carrefour

It is pretty fun when I can post here on a topic with which I have had some personal experience. During my first trip to China, doing an internship in Beijing during the summer of 2004, I had the chance to experience Carrefour, the hypermarket giant that is #2 in the world behind Wal-Mart. There was one near my office in Zhongguancun and also near my dormitory in the Fengtai district and the number of people swarming in to shop was always incredible--my feeling was the Chinese had energetically latched onto the superstore shopping experience.

Fast forward to today, and there is a very cool interview in the McKinsey Quarterly with the president of Carrefour China. I won't break down the interview in depth here, but it offers several lessons in resiliency learned throughout Carrefour's history in China, and as far back as to their experience in Taiwan that preceded China. There is even a nice little exchange on logistics towards the end which I will reproduce here:

The Quarterly: Given China's size, how have you handled distribution with your suppliers?

Jean-Luc Chéreau: There is really no network yet for logistics systems in China. The highways, the railways, and so on are not very well developed. To receive or to send merchandise from Beijing to Urumqi takes seven days by truck, and it takes four days from Shanghai to Kunming, close to Vietnam. You have to work with local distributors, and the power in this case belongs to them.

So we decided from Day One to use local networks. Some competitors have said, "No, we want to be advanced and construct our own platform and systems." Some of those networks are on sale today. There might not be a direct correlation, but maybe the companies that built them made a mistake and the cost to deliver that kind of platform was too high.

I don't think a national network is the best way to do business. But we are thinking that maybe tomorrow we'll want to organize a platform and a network for large cities like Shanghai, with 10 or 15 stores, but only for those stores. Stores that are 100 or 200 kilometers away would not be connected to a central network.

One of the comments that Mr. Chereau often makes is not to expect successful deployment of Western management methods and systems in places like Europe or the United States to carry over to Asia. In fact, he implies that these could in many cases be completely irrelevant after hitting the ground in Asia. Although I agree with this for the most part, it is also the case that globalization is slowly requiring Asian firms to diversity not only their products but also the ways they manage their organizations and develop their employees. Hybrid systems are becoming increasingly popular where work environments attempt to blend the best of both worlds through a series of trial and error. That is evident in the interview with Mr. Chereau and his emphasis on the ability to adapt through and after setbacks while absorbing lessons learned and improving the firm's constitution post-crisis is a nice illustration of resiliency's importance in being a socially and economically value-adding, lead business.