You know us, but you don’t know us,” was how CEVA’s CEO Charlie Jing described his company to the world when it formed in December 2006. Though a young company in name, CEVA is actually a re-branded merger between contract logistics firm TNT Logistics and freight management business EGL. Thus, CEVA’s heritage in China extends back to 1988.
With this dual operational approach, CEVA’s China business stake runs nearly the whole length of the supply chain, with 6,000 employees in 70 locations across the country. Jing talked with CHINA ECONOMIC REVIEW about how China’s rise up the value chain affects the logistics business and the prospect of industry consolidation.
Q: How has your client mix evolved over the years?
A: [Our client mix is] about 45% contract logistics, 45% freight management, which includes international air and ocean, and a final 10% in domestic services. Most of our clients are multinational companies (MNCs), but that doesn’t mean that they are foreign companies. We have [Chinese MNCs] as well, and these are the group of customers who have reached a scale that they are more than happy to outsource their headaches to third-party logistics (3PL) companies. More and more companies will differentiate themselves by their core competencies rather than trying to do everything by themselves. So, today we are focusing on six key sectors and counting, and when we started, we really only had automotive.
Q: What joint ventures does CEVA currently have?
A: We have two. Our largest is with Shanghai Automotive Industry Corporation (SAIC), which we formed in 2002, called Anji-TNT. With SAIC, we do automotive logistics, which is one of the most complex operations in the industry because, today, nearly every car is customized in some way. We provide contract logistics and some international freight business for SAIC’s key customers like Shanghai Volkswagen. It’s the largest automotive logistics company in China. The other JV is with [passenger and freight transport firm] Shanghai JY Group, which provides a line haul business. We use our own trucks that, basically, run a shuttle between key cities in China, doing milk runs. We also outsource the local delivery to smaller cities, which creates a hub-and-spoke of coverage.
Q: What trends have you seen among your 3PL competition?
A: We’re basically competing with a group of foreign players in China and also competing with locals, so it requires us to differentiate ourselves. I think competition will get fiercer among both groups. When you look at the hundreds of thousands of logistics companies registered in China, you realize it’s a highly fragmented industry. You really have to make a decision between competing on price or on value. If you try to be everything for everyone, you may not succeed.
Q: What is the consolidation outlook for the industry?
A: Even though the market is very big, with lots of potential, it just can’t afford to have hundreds of thousands of logistics companies. So I predict increased business alliances, joint ventures, and mergers and acquisitions in the coming years. One way foreign brands can enter China quickly is by buying a local company. All you have to do is re-brand it, drive some efficiency into its operation and build up your customer base. Fortunately for us, we have been in China for a long time.
Q: How does operating in China differ from other places?
A: People have said this in other industries as well, but you really need to come in with a long-term commitment. Even though the country’s development began 30 years ago, I think China is still at an early stage. Also, companies must be willing to make asset investments here and not go “light.” The strategy to just set up something like a brokerage works in well-developed economies, but in China, the sub-contracting [environment] is not very stable and there are changes to regulations. If you don’t have your own assets under your direct control but rely on someone else’s assets under contract, you may come up against challenges.
Q: What are the remaining holes in China’s logistics infrastructure?
A: First, I think the whole world recognizes the speed with which China has built this infrastructure in the last 10-15 years. However, for instance, you have this highway system that is connected, but it is controlled by each individual province. And making sure you are in compliance in each province causes delays. Also, there is seaport and airport capacity. Because China exports more than it imports, you almost have to send empty containers in, so airlines and shipping companies have their own trouble optimizing this container space. And we, as a service provider in the middle, are in charge of booking that space.
Q: What kind of effect will the new Ministry of Transport have on such bureaucracy?
A: It’s a little early to see how the new ministry will break down these old barriers, but I think the concept is good. Rather than having someone in charge of air transit, railroad, roads and water [separately], you would assume that there will be more coordination across them and more standardization in terms of policies, safety and licensing regulations. Hopefully, there will be more consistency. If so, this would be a tremendous benefit to logistics companies.
Q: What are your biggest costs?
A: Certainly, fuel costs are a big part, and everyone faces that. The second cost that is important, particularly for freight forwarding and domestic services, is labor. Inflation and talent shortages can drive up this cost quite significantly. Also, there are many general costs dealing with regulations and licenses that you have to have in place, that [operating in] developed countries, you may not have to face.
Q: What kinds of value-added services is there high demand for?
A: [Demand] is increasing in, for instance, GPS security measures, track and trace, vehicle inspection, kitting, re-packaging and labeling. In some cases, we offer basic repair or exchange services. For instance, if I’m a cell phone manufacturer, rather than hiring a group of people to fix broken cell phones, I can have a 3PL company do that for me, which I just pay a fee for. Then I can focus my attention on my core competency, designing new cell phones.