Third Symposium(Keynote)

○Keynote Lecture
　“The Changing Shape of World Logistics Industry
And Implications for Ports in Asia”
Presenter:Simon Millington
　　　　　　President of the International Propeller Club of Japan
Date:21 November 2000

Good morning ladies and gentlemen,
It is my great pleasure to have the honour of addressing you today at this distinguished international symposium. I regret to say that I will not be speaking to you in Japanese, for which I have no one to blame but myself, but I hope that together with the benefit of simultaneous translation, we can do a reasonable job in two languages.
Well over twenty years ago I began my career in liner shipping, so I am always pleased to have the opportunity to spend time with members of the maritime community. For the last twelve years I have been in what we used to call the forwarding industry, with an emphasis on air, rather than ocean freight. A few years ago some of the larger global players in the forwarding industry mutated into what we then referred to as logistics management companies and what we now call supply chain management specialists. Along the way my company; MSAS Global Logistics, together with many of our major international competitors have taken on responsibility for the provision of ever more complex services on behalf of our customers. We no longer just cut a house airwaybill or bill of lading, deliver the freight into the air or ocean carrier and wave goodbye as the aircraft or vessel disappears into the blue beyond. I know some of the carriers think this is all we do even today, but in truth our role has changed dramatically together with the words which we use to describe what it is that we do. Today our responsibilities are infinitely more extensive than even a decade ago and particularly for our large, multinational manufacturing customers, we are responsible for managing many of the critical links in their global supply chains and for providing them with total visibility on the whereabouts of their inventory at all stages of the process. In other words, managing the movement of data and information is now as important as the physical movement of freight.
It is really on this activity and sector of the transportation industry that I will focus today and if at times this may appear to be a little remote from port operations, then I apologise, but would ask you to bear in mind the obvious point that both sea and airports have critical roles to play as the interfaces between different modes of transport and as such they are very important parts of the process of managing supply chains.
When I was first asked to speak at this conference I was also asked to try and make the speech somewhat controversial, to stir-up some debate. As I started to write the speech I realised that the significance of what I wanted to say was not that it is controversial but that if what I am saying is correct, and I make no great claims for originality, then it is actually an issue of some importance to the participants in the logistics and transportation industry in Japan.
This will have no immediate impact on the members of the International Network of Affiliated Ports, but over the longer-term I think the key issue for you as port operators is understanding the implications of the big changes currently taking place in the structure of the supply chain management industry and how this will have an impact on your own future strategies.
What I will talk about is the rapidly changing structure of the global logistics and freight transportation industry and what I believe is the huge difference in the rate of consolidation taking place among international players outside of Japan by comparison with what is happening, or rather what is not happening, within the industry in Japan.
This difference in the speed of industry consolidation is rapidly turning into a major strategic problem for the leading national forwarders in particular, and it is my contention that unless these major players develop a coherent response to these global developments they are doomed to becoming internationally marginalised as "Japan only" players.
So why does this matter? It matters because improved management of extended global supply chains and efficient logistics are now widely recognised as being important sources of competitive advantage for manufacturing and trading companies. And truly multinational companies now recognise that the global solutions they need to meet their logistical requirements can only be provided by specialist service providers which are themselves global operators possessing both the systems and capabilities to manage complex worldwide supply chains. To give you an example of what I mean, my company does significant business somewhere in the world with:
all of the top 20 global technology manufacturers
18 of the top 20 global consumer companies
All of the top 19 global healthcare companies
All of the top 8 global automotive manufacturers
13 of the top quoted retailers

These companies recognise that they need to work with service providers which possess global capabilities. As the trend towards globalisation accelerates in all industries, in transportation, regional players without in-depth global capabilities in all major geographies will simply not be able to meet the needs of multinational customers and will be left behind only handling business in and out of Japan. This in turn is not good for Japanese manufacturing companies because they will miss out on the innovations in the fields of logistics and supply chain management which global consolidation is driving. This will have a negative impact on their own global competitiveness. This is ironic because the demand-pull logistics model now being implemented globally in industry after industry is essentially the international version of the domestic Japanese model pioneered by Toyota and other leading manufacturing companies in the 1960s. Quite why it has taken so long for this model to be adopted by other industries and on an international scale, is in itself, surprising.
This negative impact on the competitiveness of Japanese manufacturers is important. Over the last few years there has been a growing consensus among economists and informed commentators that a major reason why the Japanese economy has been in crisis for nearly a decade now is that at the micro-economic level, both companies and consumers have not made the change away from the behaviours and ways of thinking appropriate in a rapidly growing economy, to the behaviours appropriate in a more mature economy, which quite obviously, Japan now is.
For example, an appropriate measure of competitive success for a manufacturing company in a high growth environment is increase in market share. Whereas, in a more mature economic environment a more suitable measure of success is profitability or return on equity.

Now I think it is uncontroversial to state that it is a well documented fact that even the most successful Japanese manufacturing companies consistently achieve lower rates of financial return than their Western competitors. For example, according to the Nikkei newspaper, the average return on equity of publicly quoted companies in the Dow Jones index in the USA was 24.8% in 1999, whereas the same figure for publicly quoted companies in the Nikkei 225 in Japan was 1.7%; a startling difference. It is my contention that one (but by no means the only) reason for this poor average rate of return is because of the generally over-regulated inefficiency and high cost of the domestic logistics and freight transportation industry. You can see from the accompanying chart how the cost of using Narita airport compares with other international airports, extra costs which are passed on to users, including shippers of freight.
It is surely no coincidence that the Ministry of Tranport was, in a survey conducted by the Management Co-ordination Agency in 1997, found to be the Ministry with the second highest number of regulations of all Government ministries. It ranked even higher than the ministry of Finance! When combined with the convoy mentality which prevails among the many players in what is a very conservative industry, this does not create an environment in which vigorous competition drives innovation and encourages the best companies to embrace the challenges posed by globalisation.
Outside of Japan and in North America and Europe in particular, the transportation industry has been dramatically deregulated in a process which began nearly two decades ago. While there have been some small moves towards deregulation in transportation here in Japan, there remain in place many licences and regulations covering operations in the ports (air and sea), road transport, warehousing and customs brokerage which serve little useful purpose but which add significantly to costs. Which incidentally, is one of the reasons why recently there has been a huge increase in the number of containers moving through smaller and more cost effective Japanese ports via feeder services to connect with major liner ports in other Asian countries such as Pusan in Korea.
Outside of Japan it is in this free, deregulated environment that the modern global logistics industry has entered what looks like the first stage of a period of great change during which both the current boundaries of the industry and the size, ownership and specialisations of the players within it are going to be completely redrawn.
Right now it is still too early to see the final shape which both the industry and the companies participating in it will take, but the next two to three years will be crucial in determining the direction for the longer term. We can expect to see interesting combinations of carriers, forwarders, contract distribution companies, consultancies, IT specialists, etc., etc.
The force driving this change is the radical redesign of global supply chains by our customers. As I have already said, companies increasingly view the improved management and simplification of their supply chains as a potentially huge opportunity for reducing costs, improving service delivery to their end customers and thus providing them with a source of competitive advantage.
This process of redesign is in turn being driven and made possible by developments in information technology and in particular by the rapid move towards e-commerce.

Behind all this is the immense competitive pressure felt by all firms in all industries as they are forced to come to terms with the brutal economic realities of life in a global marketplace.
Last but not least, companies must also operate in an environment where they have to deliver the growth in profits and improvements in rates of financial return demanded by increasingly vocal investors. If they don't, they will not survive.
This latter source of pressure is very important, because the global forces driving change in the logistics industry are to date, having little or no apparent impact on the logistics industry here in Japan.
This is without question partly a cultural issue. For example; the mergers and acquisitions which facilitate the rapid restructuring of the industry elsewhere in the world are only just (and very reluctantly) becoming adopted here in Japan as strategic business tools rather than as emotive matters of honour and face - with the potential acquirer being regarded as rude and aggressive and the seller considered as a failure. Things are changing however and in the last two years there has been a huge increase in the number of M&A deals done locally. However if we look for example at the acquisition of Japanese companies by foreign companies, by international standards it is still small. In 1998 inward Foreign Direct Investment into Japan reached an equivalent of 0.27% of GDP, which is the lowest level of any OECD country. In the rest of the OECD countries 80% of all FDI is in the form of M&A.
Over the last three to four years there have been some spectacular international deals done as part of the consolidation and restructuring of the logistics industry worldwide. These deals mean that there are now some very strong players in a position to offer genuinely global solutions to multinational customers seeking to redesign their supply chains.

For example, the liner shipping industry has been transformed through consolidations and mergers. In the forwarding and 3PL sector, the biggest sequence of deals put together so far has been by Deutsche Post, which has acquired two global network forwarders, Danzas and AEI, to which it has recently added a majority stake in express parcels company, DHL. This has created the largest logistics company in the world.
My own parent company, UK based Ocean Group PLC., merged with another UK owned company, Exel PLC earlier this year to create another pure logistics colossus: A company which now has over 50,000 employees and 1,300 offices and facilities worldwide in 123 countries. And in spite of being British owned, the merged company's revenues are geographically diverse. Pre-merger, the UK only accounted for a small percentage of MSAS's revenues, this is now much larger because Exel had some very large operations in the UK. The latest industry development has been the acquisition of US network forwarder Circle Airfreight by US domestic forwarder, Eagle Logistics, to create a new worldwide airfreight giant. And last week, FEDEX announced it is to acquire American Freightways, a huge US road haulage company.
Clearly there are going to be other dramatic moves in this sector and it is unlikely that several famous names in the worldwide forwarding and transportation industry will survive in independent form beyond the next two years. There will be very big players and small, niche operators. There will be very little room for the middle sized or regional players.
Here in Japan, the greatest efforts at consolidation and reform in the transportation industry have been made by the shipping companies, as they have struggled (with some success I should add) to make themselves internationally competitive. Elsewhere, there have been no moves towards consolidation in the rest of the transportation and logistics industry in spite of the generally very poor financial performance of most of the major players. In the forwarding and 3PL sector in particular, there has so far been no consolidation whatsoever.
Because the national companies in this sector have also not been participating in the global restructuring of the industry outside of Japan, their future international position is in doubt and they are in danger of becoming marginalised as "Japan only" players. In the era of globalisation, this is not a good place to be.
The way I describe the international developments to my staff is to say that outside of Japan the industry is like a jungle, where the animals are all eating each other and some of the animals are now very large indeed. Here in Japan it's not a jungle, it's a zoo, where all of the animals are in cages, waiting for someone to come along and unlock the doors to the cages.
At some point in the not too distant future, a consequence of the impact of deregulation in the financial sector will be that the cages in the zoo will be unlocked and then restructuring, principally through M&A, will begin to take place in the same way as in the rest of the world. This is because the effects of financial deregulation ripple out through the rest of the economy and a key impact is that the presssure on companies in all industries to generate adequate financial returns becomes greater than it has ever been before. This forces rationalisation and consolidation to generate improved returns. Improved returns support rising share prices, which are equally important indicators of successful companies. The accompanying slides show some shipping companies share performance relative to the Topix, some distribution and forwarding companies performance and then by way of contrast, Exel's performance vs the Financial Times 100 Index in the UK.

There is another important issue for companies within the forwarding and 3PL sector to address if they are to become internationally competitive. A recent book co-authored by Harvard professor and strategy guru Michael Porter, together with Takeuchi Hirotaka-san and Sakakibara Mariko-san entitled; "Can Japan Compete" contends that a major issue for the majority of Japanese companies is the way that they choose to compete.
Without going into this in too much detail here, Professor Porter and his co-authors' key point is that Japanese companies rarely have effective strategies for differentiating themselves from their competitors and instead limit their concept of competition to competing solely on the basis of what is called operational effectiveness.
The problem with this approach is that the exclusive focus on operational effectiveness leads to competitive convergance - where all companies are alike - are all operationally effective and only short-lived comparative advantage is possible for one firm over others.
This convergance leads directly to increasing pressure on prices, because the only differentiator between companies is price.
Competing on the basis of strategy produces the complete opposite effect to competition on the basis of operational effectiveness, because strategy is all about finding ways to differentiate the firm from competitors. Within industry sectors this leads to divergance among competitors as opposed to convergance. This (divergance) produces dramatic movements in market share as companies compete vigorously, now one firm, now another, gaining advantage over competitors. In uncompetitive classic convoy mentality industries where there is nothing to differentiate the players, market shares tend to be stable. If you look at the accompanying graph charting export weight market shares in the airfreight industry since 1993, you will see a textbook example of an industry where there is no differentiation taking place or competition on the basis of strategy.
Japanese companies focus on operational effectiveness as the basis of competition was spectacularly successful during the 1970s and the 1980s, with the incremental improvements obtained in the cost and quality of manufactured goods enabling Japanese companies to compete against their Western rivals with devastating effect.

Unfortunately, by the early 1990s Western firms had learnt the same tricks and using a much broader definition of competition, one which includes the use of strategy to differentiate themselves from competitors, were able to move ahead of their Japanese rivals in sector after sector. This is precisely what is happening in the global logistics and transportation industry. However, none of this is inevitable and as Professor Porter and his co-authors point out in "Can Japan Compete" there are many leading companies already changing the way they choose to compete and no doubt this is also possible in this industry given the will and the determination of the players to succeed globally. I certainly hope that this will be the case.
So, in summary we are in a period of very rapid global change and unless the national players begin to develop unique strategies to meet the global competitive challenges they now face, their continued existence as independent entities is at stake.
If anyone is in any doubt about this they should study another global industry such as the automotive industry where the number of independent national players is reducing faster than anyone could have predicted even two to three years ago.
I hope this overview has given you a glimpse of what is happening as the transportation industry wrestles with the challenges posed by globalisation. I have no doubt that in a slightly different form, you will all be dealing with same issue for your own businesses. What is certain is that seaborne and airborne world trade is going to continue to grow and it is the responsibility of all of us engaged in the transportation sector to support and foster this growth through innovation, improved efficiency and lower cost! Which should keep us all busy for a long time to come.

Thank you.