Asia Logistics Wrap

Korea Logistics Report 1

When it comes to supply chain management, there are many days when I feel like Koreans are more innovative, or at least more ambitious in driving supply chain innovation, compared to Japanese in the logistics industry. Mostly, however, I feel Korea suffers from many of the same problems as Japan--primarily in that the logistics industries in both countries have traditionally been isolated from global competition and thus innovation has happened at each their own pace, or in ways very unique to the market--in other words, typically slower than in the West and not applicable outside the country.

Of course this is changing rapidly in both countries with deregulation, gradual consolidation, the introduction of new technologies and via the impact of increasing links with China's rapidly growing economy. When I travel to Korea for 4 days from this Saturday, I plan to inquire on some of the "on-the-ground" trends taking place on the peninsula and look forward to sharing some insights here next week.

In the meantime, I will also be translating a couple articles from the online logistics press in Korea related to logistics investment and also the creation of an investment fund targeting the logistics industry.

Until then, I want to point out an absolutely incredible and excellent collection of links on the Korea-US Free Trade Agreement over at Ben Muse. This FTA, if approved by both countries' congresses, will have a definite impact on the supply chain industry on the Korean peninsula, which I expect to ripple across all industries--even the ones that remain protected.

Revisiting the Kaesong Industrial Park

Over the past few months, I have admittedly neglected wrapping up my case study on the Kaesong Industrial Complex (KIC), and although I intend to return to the topic by the end of the year, I will more than likely have to update my previous case study pieces. Remaining for me to touch on are the political, security and people pieces related to the KIC.

But I was fortunate just now to have browsed The Financial Times Online, as it has a journal written by FT columnist Anna Fifield, who has recently visited the KIC for the seventh time over the past 2 years. Since most of the development at Kaesong has occured over the past 2 years, the author's perspective on the KIC's progress is interesting and, I feel, trustworthy.

It is worth reading the entire column, but I will focus on the reflections on progress. The author early on quotes a North Korean presenter, Ryu Jin-mi, at the complex:

Here in a high-tech presentation suite in the South Korean-built Kaesong industrial complex in North Korea, the 22-year-old graduate of the Pyongyang University of Foreign Studies explains the merits of this capitalist zone to potential investors from the US, Japan and Switzerland.

"Kaesong will be the logistics hub of north-east Asia,” Ms Ryu says, using a phrase spoken every day in the South. "This will help North Korean companies overcome their economic difficulties."

Those who have delved into my case study will understand the hub vision regarding the KIC, so I won't go into that in detail here. After Ms. Fifield sorts through the difficulties so far in getting North Korea to open up, she offers her own assessment of the KIC, supporting it with what she sees as evidence of progress in the right direction:

"...despite the obvious moral dubiousness of paying money to a regime that lets its people starve while all the while developing nuclear weapons, the positives of Kaesong still outweigh the negatives...Indeed, there is plenty of evidence to suggest that engagement is making a difference.

"The trip to Kaesong marked my seventh visit to North Korea in the last two years. Even in that short time it has become apparent to me that economic links are having an impact in this most closed and communist of societies.

"I have haggled with the managers of a state-run art gallery as they jacked up their prices by 20 per cent in six months, and I have sat in on joint venture discussions between a Chinese businessman and the men who run the Pyongyang soap factory, discussions that taught the North Koreans about remittances and guarantees.

"These anecdotes might represent only a baby step towards marketisation, but in a country like North Korea, which has barely changed in the last five decades, they represent significant steps."

In regards to workers on the floor, Ms. Fifield indicates that interaction with outsiders at the KIC takes on huge significance given its rarity anywhere else in the world, perhaps except the area on the China-North Korea border: 

"The 9,500 North Koreans now working at the Kaesong complex every day see how much taller, healthier and wealthier South Koreans are. If even 10 per cent of them go home and talk about their Southern colleagues, or about the foreigners who intermittently visit this park, that will have a profound effect. This will only be amplified if Kaesong develops according to plans. It is projected to employ 500,000 North Koreans when it is completed in 2012.

"South Korea knows this. "We never talk about this but the real reason behind engagement is to show the North Koreans that their system is based on lies," one senior government official confides. "This will destroy the ideas that sustain their system. They can’t keep out these ideas of freedom and prosperity. It’s what is invisible that is most important.""

For those managing operations at the KIC on a daily basis, it seems there is gradually evidence of the desired effect:

"Indeed, Hong Heung-joo, the South Korean executive director of the Kaesong Industrial District Management Committee, says he has already noticed significant attitude changes since the complex opened.

""The most important change is that North Koreans have realised the importance of production. Under the North Korean system there is no sense of profit, but here North Korean workers are working to targets and asking for extra hours. That means they are becoming aware of market economics.""

Of course the nature of people flows is still strictly enforced:

"Personal contact does remain limited – the two sides eat lunch separately and conversation rarely strays outside work-related matters. Indeed, the tip sheet given to visitors by Southern authorities advises that North Koreans are "generally simple, naïve and emotional."

"Visitors should refrain from commenting on “the economic situation of either the North or the South, liberal democracy, the superiority of the market economy, unification-related matters, the North Korean leadership, education systems, human rights and/or other potentially sensitive issues," the sheet says.

"And the complex is not free of ideology. Indeed, the South Korean-made model of the completed development that Ms Ryu used features an illuminated statue of Kim Il-sung, the nation’s founder and father of the current leader."

Ah, there is no place in North Korea where the Kim brand is not marketed for the populace to see. But in the end, Ms. Fifield sees hope behind the prominence of controls, ideology and symbols:

"...there can be no doubt that engagement is having a psychological impact. I sat with Ms Ryu while we watched a promotional video shown to potential investors showing a Kaesong industrial park of glittering glass high rises, parks and fountains right here in North Korea.

""Can you imagine this place ever looking like that?" I asked her as the video was running.

""Yes," she replied immediately. "Three years ago this whole area was just fields. I couldn’t imagine then that it would like this even now.""

One of course has to be skeptical of those interviewed in this column--most seem deeply involved in the project and thus could have a predisposed bias towards seeing progress and a successful outcome. None of those interviewed are workers themselves. The key question is whether such a project is appropriate at this stage of North Korean leadership, or would be better initiated later after the current regime either changes or undertakes a significant transformation in trade and foreign policy.

DHL Moves to Strengthen Korea Hub

Nicci Pugh, from Logistics Business Review, covers a new investment by DHL in South Korea:

Global express and logistics group DHL plans to invest $50 million in South Korea for capacity expansion and service capability enhancement. Since 2001, DHL has increased its investments in the country by almost 280%, from $18 million to $68 million, following the company's latest investment.

The bulk of DHL's latest investment will go into expanding its current DHL Express facility at Incheon Airport. The company also plans to upgrade and expand its service centers, introducing more than 100 new vehicles.

As I have touched on in the past, South Korea's government maintains its vision of establishing the country as a key logistics hub, if not the most advanced logistics hub, in the East Asia region. As a result, this investment is in line with encouraging private investment that supports this vision:

DHL's investment plan complements the South Korean government's vision of establishing Incheon as a preferred logistics hub to serve the region. According to the Ministry of Construction and Transportation, the volume of air cargo between South Korea and the neighboring region has shown a significant increase over the last five years, particularly the freight movement between South Korea and China.

"Our commitment to South Korea is largely driven by customer needs arising from a steady flow of trade volumes into and out of South Korea," said Scott Price, CEO, DHL Express - Asia Pacific. "We are confident that our robust network infrastructure, as well as our upgraded facilities, will not only serve the increasingly sophisticated needs of our customers, but will enable us to actively enhance our role as a trade facilitator to improve trade links between South Korea and the rest of the world."

I like the statement by Mr. Price in the last paragraph, because it pretty effortlessly zooms out from the ground-level infrastructural investments to the 30,000 foot level, big-picture view of DHL's influence in the region, and particularly in its established position in South Korea.

Korea Air Partners with Sinotrans

In a September 20 article from the Financial Times, author Andrew Yeh out of Beijing covers news of a new partnership between Korean Air and Sinotrans to form a new air cargo line:

Under the deal finalised in Beijing on Tuesday, Korean Air, the world’s largest commercial air cargo company, and a subsidiary of Sinotrans would invest $65m to launch a new cargo airline. The new venture will give Korean Air an important presence in the rapidly growing market following the collapse of its talks to take a large stake in Chinese start-up Okay Airways.

Despite a number of other deals occuring in the attractive Chinese market, Mr. Yeh notes that there are still risks in the still unsettled market environment:

It is not all plain sailing for overseas operators. A joint venture carrier set up by Singapore Airlines and local partner China Great Wall Industry halted flights in August after two months when Great Wall was hit with US sanctions for allegedly supplying missile parts to Iran.

For my previous posts on the air cargo market in China, take a look at this post titled "China Places Priority on Air Cargo."

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!

Pusan Port Feeling the Heat

This is officially my 100th post, but I won't be doing any lengthy writing to celebrate. Rather, I want to highlight an article that complements some of my earlier posts on ports and logistics hubs.

Considering that South Korea is very intent on strengthening its logistics infrastructure so as to be a high-value supply chain hub in Northeast Asia, the following article from Cargo News Asia shows this effort will face unrelenting competition:

China is dominating the maritime logistics business in East Asia and endangering Korean ports, officials at the Maritime Ministry and Korea Institute of Maritime and Fisheries Technology warned.

The officials noted that in Busan, 1 million TEUs were processed in April, a drop of over 3 percent from the same figure last year. The aggregate amount of containers processed at Busan Port in the first quarter of this year was 3.9 million TEU, a 1 percent increase from the same period last year.

The three new berths at Busan New Port were almost empty. The new port opened almost two months ago, but only 37,000 TEUs have visited the port, far less than was predicted.

In China, however, the Port of Shanghai, processed 1.8 million 20-foot containers in May, a 19.6 percent increase over that of the same month last year. The new Yangshan Port, which has five berths for ships and is only six months old, processed 230,000 TEUs creating an aggregate of 8.2 million TEUs just this year. It was a 17.1 percent increase over the previous winter.

The winners and losers of this battle will be determined by which hubs provide the greatest customer value:

"As Shanghai's port improves in terms of service and business processes, it is 'stealing' freight from Busan," an institute official said.

The last sentence in the article refers back to the announcment I posted on previously:

The official said the situation is serious, and that they would think of ways to make Busan more competitive in terms of infrastructure or high value-added logistics, not scale of freight.

What would be interesting is a survey specifically identifying why port users switch business from Pusan to Shanghai. Is it more location-driven? Is it more of a services-driven decision? Is it based more on port users' customer requirements? If there is a strong correlation to location-based factors, then there isn't too much South Korea can do. But if it is truly operating a sophisticated logistics hub, it will have "feeler surveys" in place periodically to not only identify reasons port users have switched, but also help catch and resolve current customer concerns that could lead to additional defections.

Korea Ramps Incentives to Reach Hub Goal

In previous posts, I have touched on South Korea's aim to model the country into a logistics hub for Northeast Asia. These posts include:

The Kaesong Series

Korea Logistics Brief 2006

Air Cargo Hub Strategy in East Asia

To maintain momentum with its marketing efforts and towards executing its strategy, South Korea is making moves to further open its economy for the changes necessary. A brief article in Asia Times, via Asia Pulse/Yonhap news services, touches on these moves. In essence:

"South Korea plans to modernize its port facilities and streamline their operations in an effort to attract more foreign shipping lines and become a logistics hub of Northeast Asia, officials said.

"The plan is designed to promote a profitable logistics industry, a turnaround from simply competing with Japan and China for bigger amounts of cargo in Northeast Asia," said Woo Ye-jong, a senior official at the Ministry of Maritime Affairs & Fisheries.

What this means is that South Korea hopes to increase its value-added services versus focusing only on throughput levels--how can we handle goods/services better versus how can we handle more goods/services? For anyone in the supply chain management field, value-added services are what drives profitability, and so that is where I make the link. A simple example is of a warehouse that not only stores product but repackages an international product for local market specifications.

The article outlines some of these value-added services the Korean government plans to put in place:

"Under the plan, the government will revamp ports' infrastructure by setting up an automated operation system, enhancing security standards and lifting a ban on nighttime operations."

The government will also spearhead initiatives for attracting additional investment activity:

"To spur Chinese and Japanese investments in the domestic logistics industry, the government will move to ease regulations on hiring foreign stevedores and to complete clearing sites for cargo terminals in the ports of Busan and Gwangyang ahead of schedule.

"The government will also establish a system on financial aid for mergers and acquisitions among local port operators and try to nurture internationally-renowned logistics firms like Hong Kong's Hutchison Whampoa Ltd. and the Middle East's Dubai Ports World."

As already evident in my posting on the publication of the Northeast Asia report on logistics collaboration:

"Efforts will also be made to hold ministerial-level talks on logistics among South Korea, Japan and China regularly to boost cooperation among the countries. The first round is slated for September this year.

"The ministry said the government will also seek the participation of Russia and the Association of Southeast Asian Nations."

I have a couple articles on hand that discuss in more detail the future of the Korean logistics industry and also the educational system being developed for producing more logistics professionals. These I will be translating from Korean over the next few days and hope to post within the month.

Korea Logistics Brief 2006

After browsing the website of Korea Logistics News, I found a short article summarizing a seminar it held on February 10 in Seoul titled "2005/2006 Logistics Market Retrospective and Outlook Seminar." The site is all in Korean, so I have translated the bulk of the article below for my readers. The portion on Japan by Mr. Cho is included even though I have covered Japan logistics extensively elsewhere on this blog. The reason for this is not only to highlight the fact this seminar considers Japan important, but also to show the angle of the Korean perspective.

This seminar hosted a few prominent speakers to discuss specific topics:

• Hyong-ho Kim, President of UPS-SCS
  “2006 International Logistics Market Trends and Key Words”
• Cheol-hwi Cho, President of K&G Global Consulting
  “Japan’s 2005/2006 Logistics Market Retrospective and Outlook”
• Jeong-ho Kang, President of Sagawa Express
  “e-Market Growth Concerns and 2006 Outlook”
• Gyeong-ho Goh, Manager at EXE Consulting
  “Domestic/Foreign 3PL Market Direction and Plan for Capacity Strengthening”
• Jeong-wu Son, Writer for Logistics News
  “Domestic Door-to-Door Market: 2005 Retrospective and 2006 Outlook”
• Wi-shik Yoon, Board Member of Buy-Yes Korea
  “Logistics Companies’ Facility and IT Investment Outlook and Trends”
• Mu-ik Park, Logistics Policy Team Leader at Ministry of Construction and Transportation
  “Main Logistics Policy Issues for 2006”

Dilemma for Foreign 3PLs in Korea's Domestic Market

Mr. Kim from UPS-SCS pointed out that although the domestic 3PL market is quickly expanding, there are many bottlenecks in the way of foreign firms making advancements. As a result, from the perspective foreign firms, many are focusing on advancing the forwarding market centered on the air cargo segment.

Privatization Era & Attention to Friendship Repairing Process

Mr. Cho, while introducing the recent Japanese logistics market centering on "key words," explained that it is necessary to pay attention to Japan’s “Comprehensive Logistics Policy” which was newly established in 2005. He foresees the principle issue being the nexus where such things as environmental logistics and the repairing of friendship with Japan crosses logistics industry reforms and the privatization "era," where the securing of logistics-expert personnel and the thrusting M&A activity are the biggest influences.

Domestic e-Market Expected to Grow by 20%

Mr. Kang of Sagawa Express expressed his expectation that the domestic e-Market will maintain approximately 20% growth owing to the emphasis on internet shopping and fast-pace growth of the open market. He said that if one looks at the product distribution conditions for each year of the e-Market, while the usage rate of home-delivery from internet shopping mall firms, etc. has risen more than 10% compared with 2002, his own firm’s delivery rate has dropped more than 10% from 29% to 18.2%. For this year as well, he anticipates that the usage of home delivery will quickly expand.

Small to Medium Firms: Possible for “*Nut-Cracker” High

Mr. Goh foresees that, compared to the previous year, the entire domestic logistics industry will grow by 1.6% this year with contract logistics sub-industry growing 14.2%. The total logistics industry base value is approximately $92 billion with the contract logistics sub-industry at approximately $37 billion. While saying that the set-up for selection of a customer’s 3PL contract-logistics firm is expected to be revised again towards centering on a comprehensive logistics certification, he analyzed that depending on both enforcement of certification in the initial period and also any excesses in certification there is a high possibility that larger firms will benefit most due to such things as price drops and confusion in providing services. If there is no segregated capacity planning in the case of small to medium firms, then there also exists the possibility for a “*Nut-Cracker”-type situation.

(Nut-Cracker refers to the conditions where components of the Korean economy are under extreme pressures due to gaps in technology, competition, and pricing versus more advanced or advantaged countries. This term began to be used during the time of the 1997 IMF crisis when the American consulting firm, Booz-Allen, described Korea being in a "nut-cracker" where it was being pressed by Japan's advanced technology and China's low prices. If not remedied, it was said that the only thing left is to "crack" under this pressure. In the above situation, Mr. Goh illustrates that small to medium-sized logistics firms could be squeezed in this way if the systems in place to certify 3PLs advantage larger firms with more scale and better resources).

Competition will be Fierce from Second Half

With this year’s domestic home-delivery market logistics volume estimated to climb to approximately 644 million items, Mr. Son foresees that sales will exceed $2.2 billion. He anticipates that with large based investment picking up at each firm into the second-half of the year, the stage will be set for fierce competition.

System Integration Capabilities in Demand

Mr. Yoon described that, in relation to the IT investment outlook for logistics firms, while the key issue of being able to get new corporate investment has not existed for a long time, it is necessary to pay attention to the appearance of new issues driving recent investment, such as BPM and RFID. In this regard, he expressed the necessity for constructive marketing policies. He also stated that with an expansion of differences in the IT requirements between small/medium firms and large firms, between export businesses and domestic-targeted business, and between manufacturing and service businesses, his firm sought to investigate ways to balance IT for the customer. What stood out was the demand for a system integration capability that could pursue a wide range of customer requirements—a sort of dynamic scalability. (my own words in italics)

Strong Promotion of Northeast Asia Logistics Centralization Issues

Speaking last, Mr. Park explained this year’s main logistics policy issues. Within the objective of creating a “Northeast Asia logistics hub where goods, information and people gather,” he stated that issues are divided into both a hardware strategy for such things as the Northeast Asia hub transformation at Incheon International Airport and also a software side related to the activation of third-party logistics. In this way, he clarified this is the policy in place to kick-start the realization of the Ministry’s vision.

On the hardware issues, Mr. Park described the focus on specifically the Incheon International Airport hub transformation and the rail line that will serve as a regularly running logistics artery. In addition, such things as expansion of the road system and configuration of a national logistics center network are being promoted. On the software side, he stated that such things as establishing a comprehensive logistics firm certification system, activating a logistics information network, and advancing the goods transport market are being promoted.

COMMENTARY: Korea has one of the better websites in Asia for logistics news in its Korea Logistics News site. But because it is entirely in Korean, and my Korean is only at an intermediate level, it takes a bit longer to digest all the great articles. For the articles with topics I am interested in, I use Yahoo Japan to translate the Korean into Japanese, then translate the Japanese to English while proofing the Japanese against the Korean original. But it is all good, because the information can't be found anywhere else publicly accessible (as far as I know). I also improve my Korean and thus the process should only get easier. Fortunately, information on China is readily abundant in English.

There is a section on Korea that I am pursuing for which I have both English and Korean resources. That will probably come along starting later this week in the form of a short series of posts. In the meantime, I hope this brief is helpful.

North Korea Opens Rail Sector (UPDATED)

In FTB Asia, an article from January 12 and written by Paul French based in Shanghai briefly discusses the relationship between North Korea and China in regards to railways.

Many readers are probably aware that Kim Jong-Il makes trips to China and Russia by rail. The most recent trip touring several sectors of China caught a lot of attention in the Japanese press, although it was officially classified until Kim returned to Pyongyang.

The Korean Central News Agency, in an article titled "Kim Jong Il's China Visit Hailed," opened its praise of the China trip with the following paragraph:

"Newspapers here today come out with editorials saying that spectacular successes and immortal feats registered by leader Kim Jong Il during his visit to China will shine long along with the history of the DPRK-China friendship. Rodong Sinmun says that Kim Jong Il's recent China visit offered a momentous occasion as it provided a new landmark in boosting the unbreakable friendship and solidarity and developing the sincere and comradely cooperation between the parties and peoples of the two countries despite the whirlpool of the turbulent 21st century."

Unfortunately, Kim hasn't been able to perform any "immortal feats" or "spectacular successes" in his country's rail sector, as Paul French states:

In a desparate attempt to try and reverse decades of decline and to enhance cooperation with its largest trading partner, North Korea (DPRK) is to open its rail sector to Chinese rail companies and organizations. A consortium of Chinese railway companies and the North Korean Ministry of Railways have agreed to open all railway lines in North Korea to Chinese corporations.

The details illustrate the one-sided nature of this deal, a real call for help from the North Koreans:

As well as freight, the trade includes consignments of humanitarian aid from China to prop up the DPRK's ailing economy and precarious food situation. The joint railway venture will initially buy 200 used trains from North Korea to initiate trade with a long-term plan of purchasing an additional 500 to 1000 trains. These will most likely be Chineses given the lack of available trains in the North and the generally run-down state of its train building facilities.

Despite their weak position, the North Koreans still drive a hard bargain:

However, discussions have bogged down over differences in user charges.

COMMENT: Actually, I am very interested in this story even given its brevity and lack of attention elsewhere. One of my hopes in the long-term future is to work in a position where I can be engaged in any efforts to bring North Korea into full-fledged economic cooperation with the rest of the globalized world, perhaps in the mold of modern China. Just as in China currently, there will be a significant need for logistics expertise in rebuilding infrastructure and the links to trade. This news illustrates that this process is in its most infantile state, but nevertheless a start in the right direction.

UPDATE: The Korea Liberator points out that North Korea has taken a new approach to opening up its rail sector. The country has shot itself in the foot so many times, it is only standing on the "prosthetics" slipped to it via China. When will China graduate from this nonsense?

Prologis Makes Move into South Korea

As I mentioned in an earlier post on Yellow Roadway's China plans, one of the best ways to begin market research on a particular region is to look into what industry leaders are and aren't doing in that region.

I first discovered Prologis during my logistics training. One of its distribution facilities in Tokyo sits right along the freeway near Tokyo Bay. After visiting its website, I realized that Prologis is:

"a leading provider of distribution facilities and services with 371.9 million square feet (34.6 million square meters) in more than 2,300 distribution facilities owned, managed and under development in 75 markets in North America, Europe and Asia, as of Sept. 30, 2005. ProLogis continues to expand the industry's first and largest global network of distribution facilities with the objective of building shareholder value. The company expects to achieve this through the ProLogis Operating System(R) and its commitment to be 'The Global Distribution Solution' for its customers, providing exceptional facilities and services to meet their expansion and reconfiguration needs."

In a press release from January 17, Prologis announces its move into South Korea through the set-up of a "state-of-the-art facility designed to serve the growing demand for well-situated, high-quality industrial space from transport, logistics and other companies operating in Korea (see map)."

To put this move into the context of Prologis' global business and strategy, Jeffrey H. Schwartz, Prologis' CEO was quoted in the press release as saying:

"Over the last few years, ProLogis has enjoyed tremendous success in Asia following the establishment of business operations in both China and Japan. Launching development in South Korea, one of Asia's most important and dynamic growth markets, is a logical next step -- one that we believe will create real value both for our investors and our global customer base. We have built a core team of skilled and experienced professionals in South Korea to manage our development work and look forward to forging strong new relationships with Korean customers."

Leading that core team is Prologis' first VP and country manager of South Korea, Richard Bae, who elaborates further on the CEO's comments:

"ProLogis Park Yongin (a major city of Gyoenggi) will allow us to serve leading participants in the Korean logistics industry, close to 70 percent of which is located in Gyeonggi Province. We believe this facility will help establish ProLogis as a primary provider of industrial space to the Korean market, enabling us to leverage our global presence, industry-leading experience and strong reputation for customer service."

What makes Yongin ideal? The press release offers the following rationale:

"ProLogis Park Yongin will be situated on Korea National Road-17, also known as the "R-17 Corridor." It will feature cross-docking -- uncommon in Korea -- and offer easy access to main transit arteries as well as Incheon International Airport, Incheon Sea Port and Pyungtaek Sea Port. ProLogis recently acquired the land for the facility, and construction is expected to be completed in the second half of 2006."

The company has paralleled this initiative with development of its business in Incheon's Free Economic Zone, which is competing with port-based economic zones in China for logistics-related investments. This project markets its investment environment in the following way:

"The international business center to be established in New Songdo City has a comparative edge in transportation and convenience over its foreign competitors because of its close proximity to the Incheon International Airport and Incheon Port. It will, therefore, easily transform itself into a key facility in international exchange. With the opening of the international airport, Incheon has become a key transportation point that can be easily reached from 51 nearby cities with more than 1 million population within 3.5 hours. With such a good condition, the city now has a good opportunity to develop into a global hub city."

For the Zone to succeed, it will definitely need the commitment of investment from leading firms such as Prologis. At the same time, Prologis can benefit from the incentives while increasing its distribution and port flexibility in servicing customers doing business in Northeast Asia.