Conduct a PEST analysis of the case study attached. Guidelines attached along with the case study.
Kerry Logistics — Paving the New Silk Road ASIAN CASE RESEARCH JOURNAL, VOL. 23, ISSUE 1, 153–191 (2019) © 2019 by World Scientific Publishing Co. DOI: 10.1142/S0218927519500068 ACRJ This case was prepared by Dr. Ivy S. N. Chen of Hong Kong Polytechnic Univer- sity, Professor Sherriff T. K. Luk of Emlyon Business School, France, and Dr. Jinghui Tao of Nanjing University of Finance and Economics, as a basis for classroom discussion rather than to illustrate either effec- tive or ineffective handling of an administrative or business situation. Please send all correspon- dence to Dr. Ivy S. N. Chen, Department of Management and Marketing, Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong. E-mail:
[email protected] Kerry Logistics — Paving the New Silk Road China’s third-party logistics (3PL) market was one of the world’s largest, with 3PL revenues reaching US$166.7 billion in 20161. One of the major challenges the Chinese govern- ment faced was how to improve efficiency and achieve sus- tainable economic growth over the next decade. China needed more efficient logistics systems to move production resources quickly and at a reasonable cost. China’s logistics spending was roughly equivalent to 14.5% of GDP, higher than that of other developing countries like India (13%) and South Africa (10.9%) and that of developed countries1. Kerry Logistics wanted a slice of China’s fast growing express market. But as Edwardo Erni, Kerry Logistics’ exec- utive director and managing director of China and North Asia noted, “The situation in the courier market is chaotic, unregulated and in a cut throat price war.” Scale was needed to dominate and express companies recently raced to get as much capital as possible. On another front, China’s “One Belt One Road” has opened up some opportunities that the company had not previously considered. Kerry Logistics was wondering what capabilities were critical to the delivery of customer value proposition and achieving differentiation? How should the company expand and support its clients’ operations in China? S0218927519500068.indd 153 01-07-19 4:30:43 PM A si an C as e R es . J . 2 01 9. 23 :1 53 -1 91 . D ow nl oa de d fr om w w w .w or ld sc ie nt if ic .c om by M O N A SH U N IV E R SI T Y o n 03 /1 7/ 20 . R e- us e an d di st ri bu tio n is s tr ic tly n ot p er m itt ed , e xc ep t f or O pe n A cc es s ar tic le s. http://dx.doi.org/10.1142/S0218927519500068 154 ACRJ OVERVIEW OF THE DEVELOPMENT AND DRIVERS OF CHINA’S LOGISTICS INDUSTRY Statistics showed that the value of logistics in China grew from RMB177 trillion in 2012 to RMB230 trillion in the first 11 months of 2017 (Table 1), spurred by rapid growth in the economy and urbanization. The value of goods per unit logistics cost was also increasing, indicating that more higher value goods were carried and this was somewhat related to the upgrade in consumption and industrial transformation. Table 1. Total Value of Logistics and Growth Rate 2012–2018. Year 2012 2013 2014 2015 2016 2017(11 mths) 2018E Total value of logistics (RMB trillion) 177 198 214 219 230 230 280 Growth rate 26% 12% 8% 3% 5% 7% (est’d) 7% Source: Statista, China Daily (Ref. 2). Growth in logistics demand was driven by a number of factors3: 1) E-commerce volume China was the world’s largest online retail market, with retail sales reaching RMB5,156 billion in 2016. Retail sales of phys- ical goods was RMB4,194 billion, increasing 25.6% YOY, and accounted for 12.6% of total retail sales of consumer goods.4 To compete with e-commerce retailers, traditional retail giants like Gome and Suning had opened their own e-commerce stores and/or established their own logistics platforms. The online market was rapidly expanding from the coastal cities to lower-tier cities and counties in inland areas. Shoppers in lower-tier cities (Tiers 3 and below) spent more than those in higher-tier cities (Tiers 1 and 2). Shoppers in lower-tier cities spent an average RMB5,628 online in 2012, while their counterparts in higher-tier cities (Tiers 1 and 2) S0218927519500068.indd 154 01-07-19 4:30:43 PM A si an C as e R es . J . 2 01 9. 23 :1 53 -1 91 . D ow nl oa de d fr om w w w .w or ld sc ie nt if ic .c om by M O N A SH U N IV E R SI T Y o n 03 /1 7/ 20 . R e- us e an d di st ri bu tio n is s tr ic tly n ot p er m itt ed , e xc ep t f or O pe n A cc es s ar tic le s. KERRY LOGISTICS — PAVING THE NEW SILK ROAD 155 spent RMB4,700 during the same period. There was still tre- mendous potential for e-commerce growth in lower tier cities. Lower-tier cities still had 160 million consumers who used online services but have not yet begun to shop online. That number was nearly the same as the number of shoppers in high-tier cities. Currently, 89% of internet users in high-tier cities already shopped online.5 Post-80s and post-90s con- sumers were the main users of mobile internet. E-shopping festivals like Singles’ Day and popular digital payments like Alipay and WeChat pay have also contributed to high growth in e-commerce. Thus, major e-commerce platforms were investing heavily to acquire customers and to build logistics networks in low-tier cities. Many lower-tier cities and counties were remotely sit- uated across the country, with dispersed populations. For many online retailers, it was costly to extend their distribu- tion networks to lower tier cities. To fulfil orders across the country, online retailers may rely on their own logistics facili- ties and trucking teams to serve key cities and for the remote areas, they would outsource their logistics services to logistics service providers (LSPs) and express delivery companies. Another rapidly developing e-commerce market was cross-border purchases by consumers (“Haitao”, meaning overseas Taobao). According to China Internet Watch, cross- border retail imports market was expected to reach RMB511 billion in 2018, with an increase of over 25% YOY and exceed RMB620 billion in 2019.6 Nearly one-fifth of the digital con- sumers McKinsey surveyed in 2016 purchased some goods from vendors outside China. These shoppers bought items that were either too expensive or too scarce at domestic vendors.5 The buyers entrusted logistics companies to handle the transportation, customs clearance and delivery for them in China. Thus, the rapid growth of the Haitao market, sup- ported by increase in spending power and rise in demand for quality products, led to the rise in demand for reliable logis- tics arrangements for products purchased overseas. As few companies had extensive international and domestic logistics networks and relations with major retailers overseas, this rep- resented a huge market that was up for grabs. S0218927519500068.indd 155 01-07-19 4:30:43 PM A si an C as e R es . J . 2 01 9. 23 :1 53 -1 91 . D ow nl oa de d fr om w w w .w or ld sc ie nt if ic .c om by M O N A SH U N IV E R SI T Y o n 03 /1 7/ 20 . R e- us e an d di st ri bu tio n is s tr ic tly n ot p er m itt ed , e xc ep t f or O pe n A cc es s ar tic le s. 156 ACRJ 2) Manufacturers relocating production, stimulating supply chain services Increasing labour and production costs in key coastal areas (Pearl River Delta and Yangtze River Delta) prompted many manufacturers to relocate their factories to lower-tier cities inland. Enterprises like Foxconn, Flextronics, Dell, HP and Pfizer had established new plants or relocated coastal facili- ties. Manufactured goods now had to be carried over longer distances to reach the ports for export. Hence, demand for integrated logistics management increased. Some manufac- turers who relocated outsourced their logistics activities in lower-tier cities to regional LSPs, which had the local know- how and closer ties with local regulatory authorities and customs. Often, these local LSPs could not provide services up to the manufacturers’ requirements. As such, many manu- facturers scheduled extra buffer times for production and dis- tribution. However, some regional LSPs capable of fulfilling sophisticated production logistics demands had emerged. A number were logistics spin-offs from large-scale manufac- turing groups and these now played an increasingly impor- tant role in the production logistics segment. 3) Increase in companies outsourcing Traditionally, Chinese companies managed their product dis- tribution in-house, mostly due to high volumes (making it cost efficient), the lack of quality LSPs and the underdevel- opment of logistics information systems. However, in recent years, manufacturers and retailers had become increasingly aware of the importance of an efficient logistics network. The increase in competition, driven by e-commerce growth and the rise in demand for timely deliveries, had driven demand for efficient logistics arrangements. The emergence of larger and more professional 3PL companies offering more compre- hensive services made it even more efficient and cost-effective for enterprises to outsource their logistics requirements rather than handling them in-house. It was estimated that 20–30% of the companies in China outsourced their logistics require- ments to 3PL providers.3 S0218927519500068.indd 156 01-07-19 4:30:43 PM A si an C as e R es . J . 2 01 9. 23 :1 53 -1 91 . D ow nl oa de d fr om w w w .w or ld sc ie nt if ic .c om by M O N A SH U N IV E R SI T Y o