By Wendy Lim
QINGDAO, China, Sept 30 (Reuters) - COSCO Pacific Ltd, a port operator and the world's fifth-largest container leasing firm, sees a business opportunity in China's need to improve industrial efficiency as it takes a bigger role in the global supply chain.
Spending on managing the storage and flow of goods and services from origin to consumption, known as logistics, accounts for about 20 percent of China's gross domestic product, compared with nearly 11 percent in the United States and almost nine percent in Japan, the company says.
"China's logistics are inefficient and there is a lot of fat," said Michael Chan, an analyst at BOCI Research. "If a provider can shorten the supply chain and boost efficiency, it can reap economic benefits."
COSCO is busy expanding its storage and flow management services as China braces for more market discipline.
The Beijing-backed firm that recently joined Hong Kong's blue chip Hang Seng Index last week agreed to buy 49 percent of its parent's logistics arm for 1.18 billion yuan (US$142.5 million).
COSCO Logistics is involved in shipping agency services, freight forwarding, selling goods and storage management services to buyers and sellers, or third-party logistics (3PL), and other services. The largest contributor to profits is a shipping agency but selling logistics services is now COSCO's main focus.
That business was worth about 60 billion yuan in China in 2002 and is expected to grow at 25 percent per year between 2000 to 2005, according to COSCO.
"These figures suggest there is a tremendous opportunity in the third-party logistics business," said Ye Weilong, managing director of COSCO Logistics.
A SWITCH IN FOCUS
In Qingdao, a northeastern port city better known as the home of Tsingtao beer, COSCO Logistics operates from a warehouse adjacent to that of its customer Hisense Group Inc, China's sixth-largest electronics maker.
Under a deal signed in May, COSCO provides logistics services to Hisense including packaging, storage, and transport.
"We have shifted from what we can do to what the customer needs," said Cao Dong, deputy managing director at COSCO Logistics. The company sees similar opportunities to serve white goods manufacturers, as well as companies in the energy, petrochemicals and automotive sectors.
Other clients in China include the Chinese operations of South Korea's largest auto maker, Hyundai Motor Co , and the big Guangdong chemical plant operated by China's CNOOC Ltd and Royal Dutch/Shell .
Selling logistics is a potentially high-return business if providers exploit economies of scale and offer services that add value on top of warehousing and transport, analysts said.
For now, Chinese logistics companies are targeting multinationals in China and big Chinese enterprises.
"These big clients add kudos and contribute revenue, but their contracts are hotly contested, which may not be very profitable," said Geoffrey Cheng, analyst at Core Pacific Yamaichi International (H.K.) Ltd.
That partly explains why profit at COSCO Logistics, a leading player in China, is still relatively small. It recorded a net profit of 183.8 million yuan for the year ended 2002.
Some analysts prefer larger rival Chinese freight forwarder Sinotrans Ltd because of its express parcel business, which generates stable earnings amid declining profit margins in shipping agency and freight forwarding.
Sinotrans posted a net profit of 572.2 million yuan in 2002.
(US$=8.28 yuan)