Now is the time to go for global M&A!

Written by Cheol Min, Kim / Young Il Hahn

[CLO] "Most of the world-class logistics firms like DP DHL, FedEx have grown through global M&A. It might have significant implications for the domestic companies looking overseas to break away from home market. Particularly the depreciation of global logistics companies resulted from the financial crisis is now providing Korean companies with the best chance to go for global M&A."

 

Prof. Hun-Koo Ha, who is a dean of Asia Pacific School of Logistics at Inha University and known as a renowned scholar in analysis of Korea's logistics market and in logistics policies, advised that domestic firms should focus on cultivating global taste.

 

That's because the importance of SCM(Supply Chain Management) and export/import logistics for manufacturers and distribution companies is growing bigger along with the increase in FTA and customs union between nations.

 

Prof. Ha explained that moving into an epoch of free trade indicates that the movement of raw materials and products among nations rises. In other words, logistics firms should be well aware of customs clearance in each nation and should have network to secure a wide variety of overseas transport routes.

 

He suggests that domestic logistics firms seriously consider M&A abroad when the world economy is in a bad shape, particularly for small and medium companies in target countries.

 

Prof. Ha gave me an typical example of DP DHL, which is one of the world's largest logistics dinosaurs with annual sales of 78 trillion Korean Won and the number of employees of 436,650.

 

DP DHL has carried out 11 times of M&A abroad since 1999. If you look at the companies acquired by DP DHL, they have a history of from decades to more than a century and have different nationalities like DHL, Airborn(the US), Exel(the UK), Danzas(Switzerland) and Blue Dart Express(India).

 

Especially after taking over India's courier firm 'Blue Dart', DP DHL is leading Indian market. It doesn't necessarily mean, however, that DHL's M&A has succeeded all the time. Last year DHL went so far as to withdraw their business from the courier market in the US.

 

Prof. Ha advised as follows in this regard "When the enterprises advance to the foreign market through M&A, they should not focus only on the synergy effect from the management aspect. You have to drop the vague idea that certain synergy creation and cost reduction would be guaranteed simply by way of joining acquired company and existing enterprise together."

 

The next is a series of questions and answers in an interview with Mr. Ha.

 

Q. What would be the most important issue in the world economy currently undergoing globalization and recession?

Logistics industry would be the first to get a negative impact once the economy slows down. Reversely it tends to be the last to recover at a time of business recovery.

Under these conditions, logistics firms should be able to make an accurate decision in preparation for the recovery in the future. A correct prediction about the change of trend in logistics industry and devising countermeasures would be demanded to make strategic decisions.

The significance of SCM(Supply Chain Management) for enterprises will grow along with IT development, increasing competition between companies and their globalization. Further, this is leading to expansion of global SCM(G-SCM) that accompanies transboundary global sourcing.

Shippers' successful realization of G-SCM will make them stand in an advantageous position in many points. Thus logistics firms will have to respond to the demand for G-SCM under the same conditions as shippers. Pulling out of recession, polarization would become more intensified for both shippers and logistics companies.

 

Q. How do you predict domestic logistics market and the change of government policies ?

First of all, competition between major companies will become fierce. The policy towards logistics firms that the government has pushed for the past few years will probably continue. This policy direction has something to do with the increase in demand for logistics outsourcing, in other words the growth of 3PL(3rd Party Logistics) market.

In the process, the level of competition to elevate monopoly power will get more intensified. The survivors will be able to grow as a global logistics firms and even be able to have 'gain sharing' through collaboration with shippers. I believe that is the situation to be fulfilled by breaking away from the subordinate relationship between logistics companies and shippers.

 

Q. What should be the counterstrategy for small and medium companies going for M&A ?

As for small and medium companies, they will have to seek either growth into major company or specialization in specific areas along with maintaining proper scale.

Once they failed in turning into big companies or in strengthening competitiveness through specialization, they might not be able to bail out of subordinate relationship with shippers and perhaps fall behind in the long term.

Irrespective of enterprise's scale, upgrade of logistics services including informationization, investment on new technology and quality talents in logistics industry will be vital elements to elevate their competitiveness.

 

Q. When it comes to government's policy to promote logistics industry, most of the small and medium companies feel alienated and even conscious of crisis...

Core elements of success in government's policy to promote logistics industry as a growth engine resides in fostering specialized logistics firms that can provide high level services.

The scale of logistics industry in Korea is currently about 10 billion Won, which is ranked 8th after construction, electronics and automobile. Its portion is 3.7% of the entire industry, however, it just takes up 3.4% in terms of number of workers. The position is unreasonably small in the world logistics market of which the scale reaches 2 trillion and 700 billion $.

If large and specialized logistics firms turned up, it would be of help not only to the creation of added value but to strengthening competitiveness of manufacturing industry. Then manufacturers will be able to focus on core competence like technical development whereas logistics companies undertake management of centralized logistics systems by using strategic consulting and information technology. Probably both industries could develop into a strategical business partnerships under such circumstances.

Actually global manufacturers are reinforcing their competitive edge through logistics firms that provide specialized services throughout the whole supply chain. Likewise, global logistics companies are expanding their footholds via strategic partnership or M&A all over the world to meet manufacturers' global demands.

 

Q. How do you assess CJ's taking over Korea Express?

If CJ was able to set up a base to become a logistics giant and to integrate their advanced SCM know-how into global network through the acquisition of Korea Express, it would be easier for them to grow as a specialized logistics firm that can meet the logistics demand for the global manufacturers.

The appearance of such a developed logistics firm will activate 3PL(3rd Party Logistics) market and further lead to the emergence of another global logistics companies.

 

Q. Is there any reason why you have outstanding passion for the policy on logistics industry?

I had worked as a chief of logistics center at the Korea Transport Institute(KOTI) until I moved to Asia Pacific School of Logistics, Inha University in 2004. From the researcher days, I have kept an eye on the logistics industry as a new growth engine and thought that its significance would grow bigger and bigger. Thus I studied various policies to foster logistics industry and presented them.

Even after moving to the university, my concept hasn't changed at all. One of the most important elements to reinforce logistics industry is to cultivate talented specialists in that field. If talented people came to the logistics field, grew the industry and accordingly promoted the added value and job creation, it might be able to build a virtuous cycle structure that makes the talents cluster in the logistics sector.

 

Q. The logistics community believes the related government's policies are drifting....

The government's policies regarding logistics industry have been switched from the construction of logistics facilities such as regional cargo terminals into fostering the industry software since early 2000s. Discovering specialized logistics firms through a validation system and thereby creating added value could be a typical government policy, which I think was really well-timed.

Nonetheless, I feel sorry that the object of the policy designed to foster world-wide logistics firms that may be able to compete against DHL was greatly damaged in the process of legislation owing to opposition by stakeholders. Now the meaning of foregoing validation system has been debased.

It is most significant to reinforce competitiveness of logistics industry to absorb added value created by China, currently regarded as a rival of the U.S. and such a policy should be sustainable before everything else.

With regards to the implementation of the policy, you have to maintain it in a consistent way with long term goals and patience by controlling resistance from the stakeholders properly.

Further, you shouldn't leave out the policy on small and medium companies, for which you have to keep promoting specialization in specific areas. Otherwise the current price competition-oriented market structure will continue and it may not be helpful to the progress of logistics industry.

 

Q. Nevertheless, the temperature that the enterprises feel is low. Tell me the reasons if any.

From the government's standpoint, there are not many policy means that can be exercised by The ministry of Land, Transport and Maritime Affairs(MLTM), which is a government department to supervise logistics policies.

The most important part of the industry policy includes financial support and tax favor, however, these means are under jurisdiction of another departments. Thus it is structurally not easy to adopt the policies as much as the enterprises want.

From the industry's standpoint, the market structure is generally small business-oriented. That's why the companies tend to rely on financial and tax support from the government.

 

Q. 'Logistics' is a rather unfamiliar area for the ordinary people. Perhaps that's why there are not many young talents who are interested in this field. Don't think there should be a success story to attract them?

It is necessary that highfliers should cluster together in the logistics industry to grow it. I really look forward to hearing about a story of someone who has made a great success in logistics market based on the innovation they made.

Personally I wish the graduate from our university could be a hero of that success story.

 

Q. Being affected by the major companies' interest in logistics, more and more office workers are learning about logistics. What is your advice on that?

These days a lot of enterprises are aware of the significance of logistics and SCM and trying to scout professionals. This encourages lots of workers to study logistics. Actually it is found on the growing competition for admission to logistics MBA course at our university.

If you want to be recognized as a logistics specialist, you should have basic knowledge about management, economy, IT and industrial engineering as well as trade. Language skill is getting important too in line with globalization. Particularly the second foreign language other than English is a crucial element to be a logistics specialist for specific regions.

You might be able to grow as a competitive logistics specialist as long as you don't neglect your efforts to have academic knowledge and language skills together with business experience. In my point of view it could be one of the good options to apply for the various programs provided by Asia Pacific School of Logistics, Inha University.

 

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