Logistics Services Industry Environment & Trend Analysis

1. Logistics Services Industry Environment & Trend Analysis

2. Table of Contents • Executive Summary • Market Size & Growth • Global • China • Service Demand • Global Trends • China Trends • Competitive Environment • Global • China • Regulatory Environment • Information Technology • Appendix

3. Executive Summary

4. Our definition of the logistics services industry Structuring and managing, on behalf of cargo owners, solutions involving some combination of parts of the supply chain (i.e. transportation, warehousing, (de)consolidation, etc.)

5. The logistics service industry represent a tremendous growth opportunity, both globally and in China Market Characteristic Conclusion The global logistics services market reached an estimated US$ 190 Bn in 2000. The China market is still small at US$ 0.61 Bn, but will be growing rapidly at CAGR 35% over the next five years Market Size & Growth Service Demand Customers are increasingly demanding high value logistics service solutions, requiring global reach and advanced supply chain management capabilities Increasing demand for global reach and capabilities fuels consolidation as large full service providers are positioning themselves for success Competitive Environment China’s entry into WTO is expected to have two main implications - the logistics market will grow rapidly, and competitive intensity will dramatically increase Regulatory Environment Strong IT capabilities is becoming a core capability of logistics services providers and is critical to building a logistics services business Information Technology

6. The China logistics industry will be shaped by China’s entry into the WTO and the subsequent opening of the market to foreign competition WTO Entry • The logistics market will grow rapidly • Competitive intensity will dramatically increase Mergers, Acquisitions and Alliances • Rapid increase in M&A activities • Key alliances formed within the next 2-3 years Technology Industry Scenario 2006 • Implementation of e-commerce initiatives and increasing dependence on IT network Global Competitors • Rapid expansion of global players offering sophisticated end-to-end solution, including logistics, transportation and IT

7. 1. Market Size & Growth

8. The global logistics services market reached an estimated US$ 190 Bn in 2000 • The global logistics outsourcing market is estimated to US$ 190 Bn in 2000 • The transportation and related expenditures market reached an estimated US$ 3.8 Trillion in 2000, and is expected to grow at an annual rate of 2.3% over the next 5 years • The Asian logistics outsourcing market is estimated to reach US$ 31 Bn in 2001 and is expected to grow at CAGR 39% over the next five years • The greatest opportunities for outsourcing are in transport, warehousing, and transport management • The growth of the global logistics services industry is mainly driven by shippers’ propensity to outsource logistics services and organic transportation market growth • Customer electronics, automotive and apparel represent the most attractive opportunities for logistics services in China

9. The China market is still small at US$ 0.61 Bn, but will be growing rapidly at CAGR 35% over the next five years • The China logistics services market is still small at US$ 0.61 Bn, but will be growing rapidly over the next 5 years • The logistics services industry is still at an early stage of evolution in China • The transportation and related expenditures are proportionately higher in China than in most developed countries and NIEs - indicating a major improvement opportunity • In Coastal China, demand for logistics services is expected to be strong in Guangdong and Shanghai • In Inland China, the largest demand potential is in Sichuan and the Hubei/Yangtze river region • Growth in the logistics services industry in China will mainly be driven by continued macro economic growth and increased propensity to outsource logistics • Favorable macro economic outlook • Public policy and spending • Increasing interest in outsourcing for logistics needs • Growing IT and E-business

10. Market Size & Growth - Global

11. The global logistics outsourcing market is estimated to US$ 190 Bn in 2000 Global Transportation and Logistics Market Size (2000) US$ 3,800 Bn Transportation and related activities handled by manufacturers, wholesalers, retailers themselves(e.g. private fleet, private warehousing) Outsourced Discrete sets of transportation and related services outsourced by manufacturers, wholesalers, retailers (e.g. public warehousing etc.) US$190 Bn Combination of “transportation and related services” provisioned by 3rd party logistics service providers Global transportation and related expenditures Global outsourced transportation and related services Global logistics outsourcing market Source: Chinainfobank, CSFB, A.T. Kearney

12. CAGR=2.3% CAGR=2.8% The transportation and related expenditures market reached an estimated US$ 3.8 Trillion in 2000, and is expected to grow at an annual rate of 2.3% over the next 5 years Transportation and Related Expenditures by Function (2000) Transportation and Related Expenditures by Region (2000) US$ Bn US$ Bn Shipper-Related$20 Bn Admin$152 Bn Others$55 Bn CAGR 2000-2006 4,389 Warehousing$304 Bn 3,837 Others: -1.4% 3,424 Asia(1): 2.2% Transport$2,204 Bn Inventory$1,102 Bn Europe: 2.6% North America: 4.0% Total = US$ 3,837 Bn Note: (1) Asia includes Japan, Hong Kong, Korea, Singapore and Taiwan Source: Bowersox and Calantone; CSFB; BAnalysis

13. The Asian logistics outsourcing market is estimated to reach US$ 31 Bn in 2001 and is expected to grow at CAGR 39% over the next five years Logistics Outsourcing Market in Asia - Gross Revenue (US$ Bn) CAGR (01-06) = 39% CAGR (99-01) = 38% Note: Asia includes China, Japan, Honk Kong, Korea, Singapore and Taiwan Source: Bowersox and Calantone; CSFB; BAnalysis

14. The greatest opportunities for outsourcing are in transport, warehousing, and transport management Outsourcing by Function Resource require- ments 76% Transport 85% 39% Warehousing 48% TransportManagement 40% 47% 20% IT 30% SupplementaryLogistic Services 16% 23% Purchase OrderManagement 5% 13% % of respondents outsourcing 1998 % of respondents planed outsourcing 2003 LogisticsManagement 2% Complexity 8% Note: The percentage may not add up to 100% due to rounding Source: Based on several Bstudies, including: • Worldwide study comprising 280 participants (automotive 19%, electronics 25%, retail 27%, chemicals 29%) • European study comprising 500 participants (retail 26%, food & beverage 26%, commodities 22%, machinery 12%, automotive 7%, electronics & high-tech 4%)

15. The growth of the global logistics services industry is mainly driven by shippers’ propensity to outsource logistics services and organic transportation market growth Growth Drivers Details • Increased complexity of global supply chains • Recognition by many shippers that supply chain strategy may be a key competitive advantage • Willingness to outsource when logistics not seen as core competency • Development of superior logistics capability by a few 3PLs 1 Outsourcing of non-core business activities Growth in Logistics Services 2 Organic growth of transportation markets • Growth in demand for transportation services expands with international trade growth • Globalization of many industries means goods need to move over longer distances at faster speeds with higher reliability Source: UBS Warburg, IDC

16. Consumer Electronics • Highly market-oriented, need quick response to consumer feedback • Manufacturers have to to improve operation efficiency continuously due to intense competition • Relatively high product value and less price sensitive Apparel • High requirement for timing and reliability of liners • High gross margin industry, production cost and logistics account for less percentage of sales • Prefer timely feedback from destination ports, i.e.trade consulting services Automotive • Automotive supplies involve over 30,000 parts, which need consolidating suppliers to handle logistics • Intense competition drives companies to reduce cost, current inefficiency in self-handling leads companies to consider outsourcing services actively Machinery • High value products, not very price sensitive, but sometimes decisions are made overseas • Packing requirement involves technical difficulties, unwilling to outsource logistics services Tobacco & Liquor • High profit industry, not very price sensitive • High quality requirement for dry, no smell, no leaking containers, hence containerized in factory • Clearance of cigarettes needs to be done by professional I/E companies or manufactures Furniture • Large and special shape, therefore the way to put them into containers can impact the number of containers to be used, which directly related to cost - usually done in-house • Cost sensitive, firms usually choose less busy season to get cheaper prices Primary Goods • Frozen products and fresh products need to be handled fast with care • Other products are low-value and need no special services Chemicals&Materials • Low value products, highly price sensitive • Lower quality requirement, usually containerized at ports Add market and trends analysis by industry Consumer electronics, automotive and apparel represent the most attractive opportunities for logistics services in China Industry Remarks Opportunity Assessment by Industry High Automotive Consumer Electronics Growth (2001-2006) Apparel Furniture Machinery Tobacco, Liquor Primary Goods Chemicals &Materials Low Low High Outsourcing Propensity Note: 1. Size of circle relative to segment size in 2000 2. Analysis is indicative only Source: Bfield interviews and research

17. Market Size & Growth - China

18. The China logistics services market is still small at US$ 0.61 Bn, but will be growing rapidly over the next 5 years China Logistics Service Market (US$, Bn) Logistics Outsourcing Market - Gross Revenue (2000, US$ Bn) CAGR=35% 190 23 0.61 Note: Asia includes China, Japan, Hong Kong, Singapore and Taiwan Source: Bowersox and Calantone; CSFB; BEstimates

19. The logistics services industry is still at an early stage of evolution in China China Today World Leading (US) Emergence Growth Penetration Globalization Stage • Emerging demand for outsourced logistics services • Low value added services such as transport and warehousing are the major type of services outsourced • Traditional in-house behaviour being impacted • Fast growth of logistics user base and higher requirement for broader services • Large number of services providers competing for customers and human resources • Most high value added services are free and provided as selling points • Logistics outsourcing becomes common practice and an important lever for competition • Consolidated service market with a few established market leaders • Logistics penetrate in supply chain and replace traditional business models • Global logistics integrators provide one-stop solution worldwide • Specialization and close cooperation among global logistics service providers • Optimized allocation and integration of resources along the supply chain Characteristics Source: B

20. China Logistics Services The logistics services industry is still at an early stage of evolution in China (continued) Warehousing and Distribution Logistics Center and Freight Forwarding • The domestic warehousing market is currently small and over-supplied with basic warehouses providing virtually no value-added services • Some consolidation just started among the large warehousing companies Customs Brokerage • Many customs clearing brokerage firms and considerable confusion about roles • Customs clearing procedures took at least ½ - 1 day previously but expected to be shortened to1 hour • Government has established 15 Free Trade Zones and some logistics centers are set up there • Inland transportation is handled by domestic freight forwarder who is usually sub-contracted by the international freight forwarder Courier • Limited Presence of Foreign Firms As JV E.G. DHL Sinotrans • Regional Segregation in Operation Shipping • River transportation has declined • Most vessels are characterized by low speed and high energy costs Rail Freight • Although Heavily Used, Railway Freight Has Long Transit Times and Service Reliability Is Poor • Railway Containers Are Not Compatible With Shipping Company Containers Trucking • Trucking companies are only allowed to operate in restricted regions Airline • Seven domestic airlines dominate regional operations • Designated foreign carriers are given a maximum entitlement of 50 tonnes per week Source: BAnalysis

21. Transportation and related expenditures are proportionately higher in China than in most developed countries and NIEs – indicating a major improvement opportunity Total Transportation and Related Expenditures and % of GDP (2000) China Transportation and Related Expenditures Breakdown by Function (2000) US$ Bn US$ Bn (2) (1) Total = US$ 248 Bn Note: (1) VAS: Value-added-services (2) Including packaging, admin, information services, ect. Source: Bowersox and Calantone, CSFB, IMF 1997 study; Chinainfobank; BAnalysis

22. In Coastal China, demand for logistics services is expected to be strong in Guangdong and Shanghai Logistics Demand – Selected Provinces in Coastal China Province Demand Size Demand Growth Remarks Guangdong 5 • Major exports are processing of lower value-added products  no special requirement for logistics quality; • Road transportation is convenient, often containerized in factory to reduce cost  less need for warehousing/ consolidation • Electronics industry is booming in Dongguan, which has some leading companies like Huawei  potential large profitable customers Shanghai (Jiangsu, Zhejiang) 5 • Shanghai is the fast growing economic/ financial center in China, which has some major MNCs such as SGM, Acer, Philips, etc. They are matured customers of logistics services and less price sensitive. On the other hand, to get the deals from them usually needs to involve high level negociation • Large companies in Shanghai and nearby areas are mainly JVs of automobile and consumer electronics industry, which have high product value and lower price sensitivity Shandong (Qingdao) 4 • Qingdao has several famous local companies, such as Haier, HiSense, Aukma and Qingdao Beer. They are more quality oriented and less price sensitive • Frozen products account for 15-20% of the volume. Quality requirements for frozen products are very high in terms of timing and handling care. Hence, frozen products shippers tend to be less price sensitive and more quality concerned • Footwear and garments account for significant portion. Some large customers such as Payless Shoes (No. 1 customer of A in volume) requires accurate shipping time and full range of sophisticated 3PL services from P/O management, trade consulting to space booking, warehousing and transportation Hebei, Beijing, Tianjin 4 • Beijing is the No. 1 air cargo center in China. In addition, Beijing’s hi-tech industry, which needs a lot of air transportation, is developing very fast • Over 80% of the volume through Tianjin port are agricultural products, furniture, metal hardware and raw materials, all being low value products. In addition, most shippers are in poor financial conditions and are very price sensitive Strong Weak High Low Source: Bfield interviews and analysis

23. In inland China, the largest demand potential is in Sichuan and the Hubei/Yangtze river region Logistics Demand – Selected Provinces in Inland China Province Demand Size Demand Growth Remarks Sichuan (Chengdu) 3 • Have the 3rd largest distribution center in China, the largest population, and important heavy industry base • The logistics industry there has already attracted interest of foreign large shippers like Ikea and investors including Hutchison Whampoa • Located in mountain areas, road transport infrastructure is inconvenient, so highly relying on rail transport Hubei, Yangtze River Region 3 • Exports are low-value products including tobacco, cotton, chemicals and steel materials • Many imports are material for JVs (e.g. Citreon and Dongfeng Cummins), of which decisions are usually made overseas • Market is very fragmented and shippers generally have small scale/volume • No warehouses/piling centers with modern container handling capacity and advanced IT structure are available, can be a potential development area Yunnan 2 • Most important export industry is tobacco, which has high profit margin, high quality requirement for logistics services, and not very price sensitive • Exports for wood, wooden materials and furniture, which accounted for over 30% of export volume before, are largely reduced due to newly imposed government sanction on cutting trees Chongqing 2 • Agricultural products, metal products and motor cycles, which totally account for over 80% of the export volume, are all low-value products, price sensitive and have flat growth • Underdeveloped infrastructure, esp. road and rail transportation have limited foreign investments in this region. Cargoes usually transported by barges, which is the cheapest mode Strong Weak High Low Source: Bfield interviews and analysis

24. Growth in the logistics services industry in China will mainly be driven by continued macro economic growth and increased propensity to outsource logistics Growth Driver Implication The Chinese economy is expected to grow at CAGR 7% over the next five years. Increased international and domestic trade will drive demand for logistics services Favorable Macro Economic Outlook 1 Favorable Growth Outlook for the China Logistics Services Industry Public policy and spending supports improvements in China’s logistics infrastructure, providing opportunities for further expansion of logistics service providers. Capable foreign service providers are limited in business scope by regulation, and their full entry after WTO will drive the industry toward international best practices 2 Public Policy and Spending 3 Increasing Interest in Outsourcing for Logistics Needs There is increasing interest among China-based enterprises in outsourcing for logistics services. Overseas businesses are extending their supply chains deeper into China 4 Growing IT and E-Business The fast growing market in online B2B transactions provides an additional market segment for logistics services Source: BAnalysis

25. The Chinese economy is expected to grow at CAGR 7% over the next five years 1 Favorable Macro Economic Outlook Projection of China’s GDP Growth and Structure (RMB, Bn) Remarks • Continuous growth in GDP indicates a robust and fast growing macro economy, providing opportunities for sophisticated logistics service providers • The economic structure will be continuously optimized and upgraded • Logistics is directly correlated with the manufacturing industry, therefore growth of secondary industries will lead to the growth of logistics services • Improved services industries will also have a positive impact on the logistics sector • Improved supportive services such as legal, accounting, etc. • Improved telecommunication capabilities CAGR (01-06) Total: 7% 13,367 9,560 Tertiary: 9% Secondary: 7% Primary: 3% Source: Chinainfobank, BAnalysis

26. Demand for logistics services comes from both international and domestic trade 1 Favorable Macro Economic Outlook More International Trade More Domestic Trade • International trade • International trade has sustained the global economic fluctuation and kept fast growing in the past 5 years • It is projected to grow at a CAGR of 7.5%, with total trade value reaching US$ 680 Bn in 2005 • Exports • Expected to rise by an additional 2.4% per year over the first five years of WTO entry • Share as world exports is projected to rise from current 3.5% to 7.3% in 2005 • Imports • Projected rise of US$ 21.3 Bn after WTO • Projected annual growth rate will be marginally faster than export • Domestic Trade • CAGR of retail sales of consumer goods in the “Ninth 5 Year” was 11% • Positive outlook due tocontinuously growing purchasing power • Development of chain stores • Sales revenue of chain store corporations has experience double digit rise from 1997 • Multinational chain stores have been aggressively improving their presence in China market • Inter-city trade • Currently more than 50% of the foreign industrial and retail firms distributed their products in more than 50 cities • Inter-city trade will be frequent after WTO Demand for Logistics Services Source: Hong Kong Trade Development Council Research; Chinainfobank

27. The State Economic and Trade Commission has established a master plan for developing logistics services in China State Economic and Trade Commission Logistics Industry Trade Plan 30 Pilot Centers Select suitable enterprises in various key cities to establish 30 pilot logistics and distribution centers 10 National Enterprises About 10 specialized key enterprises with national logistics and distribution networks will be developed 2 Public Policy and Spending Inter-regional Networks Realign assets to form inter-regional, inter-sector and inter-ownership logistics and distribution networks Efforts will be made to explore the possibility of using 3PL and distribution enterprises to build supply chain systems, and to bring facilities and services of logistics companies closer to advanced international standards Supply Chain Systems Source: Business Alert – China at www.tdctrade.com

28. A wide array of government supported logistics infrastructure development programs are under way across China Examples of Government Initiatives to Improve Logistics Infrastructure Inland Areas - Road/Railway Shanghai Commercial Logistics Center New railways, electric railways, highways, expressways are in phase: • Modern third party logistics and distribution base • Its main body will be linked to 7 railways and hundreds of railway transit points • Expected to serve for the dispatch of over 90% of daily necessities in the city • Also serve eastern China and the whole country 2 Public Policy and Spending • High way density will grow to about 1650 km/10000sq.km in year 2005 • Invest RMB 270 Bn to upgrade railway infrastructure Coastal Large Cities - Logistics Center A number of national logistics centers are under construction, with reasonable size, standardized operation, and modern facilities Source: Chinainfobank

29. Interviews with SOEs and foreign invested enterprises in China indicate a relatively strong interest in outsourcing logistics services % of Respondents with Interest in Outsourcing Logistics Services (2001) Remarks • SOEs usually have own warehouses and trucking divisions, therefore, they demand less warehousing, transportation and other related value-added services. However, in face of increased competition, SOEs have a growing interest in outsourcing logistics • Foreign invested enterprises have the highest requirement for logistics services in terms of range and quality. These companies are extending their supply chains into China - replacing middle men who used to get China origin cargo to the port. MNCs will be looking for logistics services companies in China to help them fill the void • Import/export companies have the least demand for logistics services providers, because most of these companies also provide transportation, customs clearance services, etc. 3 Increasing Interest in Outsourcing for Logistics Needs Source: Bfield interviews and research

30. China-based companies have a positive attitude towards purchasing advanced logistics services and quality, speed, and price are the most important purchasing criteria Logistics Services Purchasing Criteria - China Interest in Logistics Services – Survey Results (2000) Relative Importance Low High Looking for modern logistics companies 0.93 Service Quality 75% Hope that new logistics providers will provide comprehensive logistics services 0.91 Service Speed 64% Hire third party agents Price 0.91 52% Looking for new logistics agents Professionalism 0.88 3 Increasing Interest in Outsourcing for Logistics Needs 44% Prefer trunk line services Info Tracking 0.81 29% Reputation 0.79 Use general logistics agents 26% 0.77 Documentation Prefer transportation companies Avg. = 0.82 22% Network 0.68 Looking for distribution services 7% Note: (1) Survey by the China Warehouse Association (2000) Attitudes and preferences for distribution of 450 large and medium-sized enterprises (2) The responding enterprises deal in electrical home appliances, electronics, foodstuffs and chemicals for daily use Source: Chinainfobank, China Warehouse Associate, Bfiled interviews and research

31. Online transactions provides an additional source of growth for logistics services Growth of Online Transaction in China (US$, Bn) Current Industry Initiatives • Industry - Public information platform • Reducing cost and overlap in investment, information share • Customers/shippers • Standard bar coding system, easier for outsourcing • Better facilities to communicate with service providers, easier to manage and supervise • Service providers - Intranet • Cost reduction from higher efficiency • Better service quality, because of internet/intranet enabled real-time cargo tracking, etc. • Broader service range, e.g. trade consulting CAGR (00-04) B2B: 53% B2C: 167% B to B (US$, Bn) B to C (US$, Bn) 4 Growing IT and E-Business Source: Research Report of China E-Business Association and Network Evaluation Center, Apl. 2001

32. 2. Service Demand

33. Customers are increasingly demanding high value logistics service solutions, requiring global reach and advanced supply chain management capabilities Service Demand - Global Trends • Traditionally, cost reduction has been the main reason for companies to outsource logistics • Today, customers are increasingly demanding more advanced services and end-to-end solutions • “Demand-Pull” logistics requires the logistics service providers to be flexible and to ‘control’ a large part or the entire supply chain • Leading logistics service providers are developing logistics one-stop-shops - from raw material sourcing to delivery of finished goods • Customers are increasingly interested in contracts with both fixed and variable pricing schemes - based on risk sharing • The opportunity for risk-sharing contracts is considered to be greatest in transportation and inventory management Service Demand - China Trends • In the China market, logistics demand is still composed of basic services, such as transportation and warehousing • Going forward, demand for logistics services in China will mainly come from Transportation/Distribution, Warehousing/Consolidation as well as Customs Brokerage and Forwarding • The quality of logistics services offered in China are not good – as indicated by poor performance on on-time delivery, cargo loss and document accuracy • However, satisfaction levels for logistics services in China are relatively high, possibly indicating low expectations

34. Service Demand - Global Trends

35. Traditionally, cost reduction has been the main reason for companies to outsource logistics Top-ten Reasons Companies Outsource Logistics Area Estimated Cost Saving 1. Reduce and control operating costs 2. Improve company focus 3. Gain access to world-class capabilities 4. Free internal resources for other purposes 5. Resources are not available internally 6. Accelerate reengineering benefits 7. Function difficult to manage/out of control 8. Make capital funds available 9. Share risks 10. Cash infusion 15% – 25% 15% 10% – 15% 6% – 8% 3% – 5% 4% – 6% 20% – 28% 10% – 15% 10% – 12% 7% – 10% 10% – 13% Hard Savings (mainly transportation) • Dynamic consolidation • Dedicated operations • Mode conversion • Cube utilization(1) • Carrier optimization • Rate management • Inbound(2) Soft Savings (mainly warehousing) • Reverse logistics • Location study • Inventory • Distribution design system Note: (1) Use of 53-foot equipment (2) Consolidation, scheduling and mode selection Source: CSFB

36. Today, customers are increasingly demanding more advanced services and end-to-end solutions, such as supply chain integration Expected Future Service Demand Past Service Demand Current Service Demand Labor Cost Savings Transportation Cost Savings Access to Skills Freedom to Focus on Core Competencies Capital Asset Flexibility Balance Sheet Relief Project Management and Start Up Improved Customer Service Inventory Cost Reduction Access to Information Systems Systems Integration Cycle Time Reduction Global Access Supply Chain Integration Facilitation Supply Chain Integration Implementation Freedom From Regulation Other 95 87 60 100 80 66 80 100 66 73 95 73 73 84 53 66 74 46 66 100 66 66 100 66 53 100 73 53 100 66 53 95 66 47 89 53 33 53 100 33 74 93 33 63 93 33 42 33 7 32 20 % Respondents % Respondents % Respondents Source: B1998 Logistics Survey

37. “Demand-Pull” logistics requires the logistics service providers to be flexible and to “control” a large part or the entire supply chain “Supply-push” Logistics Chain Demand indirectly drives manufacturing volume through forecasts • The rate of supply was set by the manufacturer in advance, based on expected demand • It was the role of the logistics providers to ensure a just-in-time supply of components Suppliers Manufacturing Warehouse Wholesale/Retail “Demand-pull” Logistics Chain Manufacturing driven by actual demand • The rate of manufacture is determined on a real-time basis by the rate of demand • While this model is more efficient, it requires perfect integration of all logistics operations within one process Suppliers B2B Exchange Direct Delivery Manufacturing Source: Lehman Brothers, BAnalysis

38. Leading logistics service providers are developing logistics one-stop-shops - from raw material sourcing to delivery of finished goods Key Capabilities Full Service Provisioning Production Planning Financing • Finance materials • Finance production • Arrange payment for transportation Raw Materials Sourcing Factory Sourcing Sourcing • Purchase raw materials: fabric and trim • Select factories with the required skills, specialty or capacity Order Placement Manufacturing Control Logistics Services • Coordinate production transportation • Consolidate and ship goods to customers • Prepare import/export documentation • Provide shipment tracking Receipt of Finished Goods Quality Assurance Supply Chain Management • Arrange and schedule materials delivery • Create and manage production schedules • Ensure quality • Provide tracking Shipping Export Documentation Source: A.T. Kearney

39. Customers are increasingly interested in contracts with both fixed and variable pricing schemes - based on risk sharing Type of Pricing Schemes in Logistics Contracts (1) - Global Trend in Pricing Schemes Percent ofRespondents Others Cost-Plus Mixture of Fixed/ Variable Transaction Transaction Note: (1) 17 respondents Source: B1998 3PL survey

40. Small Opportunity No Opinion Large Opportunity Medium Opportunity The opportunity for risk-sharing contracts is considered to be greatest in transportation and inventory management Risk-sharing Opportunity Main Hurdles for Risk-sharing Contracts Identifying Baseline/Benchmarks Enforcement/ Commitment/ Willingness on Part of Customer Selecting Metrics and Measures Concern about Out-Years Agreeing on Targets and When They Are Met Scope Limit or Expansion Source: B1998 3PL survey

41. Service Demand - China Trends

42. In the China market, logistics demand is still composed of basic services, such as transportation and warehousing Logistics Services Outsourced by Manufacturers (2000) Logistics Services Outsourced by Distributors (2000) Note: (1) Survey by the China Warehouse Association (2000 and 2001) Attitudes and preferences for distribution of 450 large and medium-sized enterprises (2) The responding enterprises deal in electrical home appliances, electronics, foodstuffs and chemicals for daily use Source: Chinainfobank, China Warehouse Associate

43. Going forward, demand for logistics services in China will mainly come from Transportation/Distribution, Warehousing/Consolidation… Service Type Interest Level Service Providers Remarks Purchasing /Manufacturing • Purchase order management • Vendor screening and management 1 • In-house • Purchase order management and vendor screening are the least demanded services with less than 5% interviewees indicating interest. Manufacturers generally don't feel comfortable allowing outside service providers to get involved in key decisions like purchasing, sourcing, etc. • Truck • Container towing • Rail • Barge 3 • Truck companies • MOR • A • China Post • Railway is largely MOR monopoly, and some large companies like A and Sinotrans have unit trains which have lower prices better service levels • Trucking market, including container towing, is very fragmented. Current supply exceeds demand, resulting in price competition and the trend of decreasing prices • It might be more cost effective to have long-term relationships with 2 to 3 trucking companies than to have own trucks Transportation/ Distribution • Storage • Inventory control • Sorting/Labeling • Packaging/ Unpacking • Consolidation/ Deconsolidation 3 • Port bureaus • Haier, TCL • Maersk, APL, P&O • In-house • Traditionally, large manufacturers have own warehouses, therefore they don’t need to outsource. But the quality of those warehouses is usually outdated and value-add services are limited • Warehouses/ CYs at ports are owned and managed by port bureaus • For logistics services providers, lack of modern warehouses/distribution-centers is one of the bottlenecks • In coastal areas, Maersk and P&O have provided warehousing related new value added services for MNCs, esp. footwear companies Warehousing/ Consolidation Source: Bfield interviews and analysis

44. … as well as Customs Brokerage and Forwarding Service Type Interest Level Service Providers Remarks Customs Brokerage • Customs clearance and duty payment • BOL and other document management 5 • Port bureaus • Freight agents • Professional brokerage houses • Shippers usually outsource customs clearance to 3rd party, or like to have the service providers’ consulting/support on that • On top of the traditional document services, increasing demand comes for more client-centered service, such as the delivery service of BoL, and with better quality • Space booking with linehaul carrier • Cargo tracking • Trade consulting 4 • A, Penavico • Sinotrans • Maersk • Emerging requirement for more value added services such as trade consulting on contract term, L/C (esp. for small to middle sized local companies) and destination market information feedback (esp. for demand sensitive products such as apparel, furniture, etc.) • Cargo tracking is one of the gaps between Chinese companies and those global leading companies with GPS Forwarding • Door-to-door services 2 • Maersk • P&O • A • Demand for door-to-door services and ex-works (EXW) terms is increasing, in order to reduce damage rate during transportation, guarantee quality of cargo/delivery services, and improve shippers’ perception among customers • These requirements are usually from contracts signed overseas, therefore sales efforts should cooperate with group HQ and overseas companies D-to-D Source: Bfield interviews and analysis

45. The quality of logistics services offered in China are not good – as indicated by poor performance on on-time delivery, cargo loss and document accuracy On Time Delivery Ratio (>90%) Cargo Loss Ratio (<2%) Document Accuracy Ratio (<2%) Note: (1) Survey by the China Warehouse Association (2000 and 2001) Attitudes and preferences for distribution of 450 large and medium-sized enterprises (2) The responding enterprises deal in electrical home appliances, electronics, foodstuffs and chemicals for daily use Source: Chinainfobank, China Warehouse Associate

46. However, satisfaction levels for logistics services in China are relatively high, possibly indicating low expectations Satisfaction of Logistics Services Indicated by Manufacturers (2000) Satisfaction of Logistics Services Indicated by Distributors (2000) Note: (1) Survey by the China Warehouse Association (2000) Attitudes and preferences for distribution of 450 large and medium-sized enterprises (2) The responding enterprises deal in electrical home appliances, electronics, foodstuffs and chemicals for daily use Source: Chinainfobank, China Warehouse Associate

47. 3. Competitive Environment

48. Increasing demand for global reach and capabilities fuels consolidation as large logistics service providers are positioning themselves for success Competitive Environment - Global • The logistics services industry is composed of a number of different types of players • Four factors are shaping the competitive environment in logistics services and drives the accelerating pace of consolidation in the industry - Economics of scale, demand-pull logistics, new capabilities & global reach, and “one-stop-shops” • The importance of scale has become evident as only large players can capture the high value end of the business that is emerging in large, complex and long-term contracts • Thus, M&A activity has surged dramatically in the last couple of years • Going forward, Asia is likely to experience increased M&A activity - especially as China enters the WTO • Container shipping companies are aggressively developing logistics capabilities and APL, Maersk, Hapag-Lloyd and NYK line have built separate business units to focus on the market for value-added logistics services: • Case study - Maersk Logistics strategy • Case study - APL Logistics strategy • Global players are positioning themselves for success: • Case study - UPS Logistics • Case study - FedEx Logistics • Case study - C.H. Robinson • A new type of internet-based logistics service provider has recently emerged • Internet-based logistics services companies are offering a multitude of value-added services, e.g. automated tracking and tracing

49. Increasing demand for global reach and capabilities fuels consolidation as large logistics service providers are positioning themselves for success (cont’d) Competitive Environment - China • In China, the transportation and forwarding sectors are dominated by domestic, mainly state-owned, companies • Six types of service providers are competing - transportation companies, China Post, manufacturing enterprises, domestic logistics companies, foreign logistics companies and e-commerce provider • Case study - SinoTrans • Case study - China Post • Case study - Maersk Logistics • Case study - PG Logistics • Case study - Haier • Case study - www.56net.com • Currently foreign companies have limited presence outside China’s free trade zones. This is largely due to current restrictions on foreign participation • The logistics business of major global service providers is expanding aggressively in China and will represent a significant threat to domestic players

50. Competitive Environment - Global