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Singapore Supply Chain and Logistics Asia

Economic and Market Analysis
27 August 2008
Supply Chain & Logistics Asia

Global Outlook
US Economic woes will hurt but not derail Asia Has Asia decoupled from the US?

US GDP growth will likely be negative (between 0% and -1%) in Q1 and Q208

Asian stock markets have plunged on bad economic news coming out of the US since Jan 08

write-offs from financial institutions & aggressive Fed rate cutting, which has tended to feed market panic

The USD has weakened against Asian currencies significantly since Jan 08

Fed rate cuts + commodity price rises = inflationary spiral

Effect on US consumer sector yet to come

Multiplier effects of financial crisis (panic due to “mark to market”rule)

Asian exports will be hit to some degree

Nightmare scenario –stagflation (recession + high inflation)

BUT...emerging markets (esp. China, India & Russia) will pick up some of the slack in global growth

Demand Outlook

Asia is so far holding steady, though the worst of the slowdown is yet to come

Asia has accounted for more than half of global GDP growth since 2001

China and India are on track for 8-10% GDP growth in 2008

The IMF expects world growth to slow down but still remain solid at 4.8%, due to the major emerging markets taking over as leading contributors to global growth

Other drivers of growth in Asia –consumer spending,exports to non-US destinations, fixed asset investment, FDI –are mostly on track

Singapore, and to a lesser extent Taiwan and Korea, will be most affected by the US slow-down

Hong Kong is partly cushioned by the currency peg

Fundamentals of Demand Growth
Asia-Pacific growth looks sustainable

Asia-Pacific growth in the past five years has generally not hit the peaks seen in the pre-1997 period, with the notable exception of India

Consumer Demand
Asia-Pacific demand is largely led by domestic consumption…

Consumption is a major driver of growth, as seen in booming markets for homes, cars and mobile phones

In China, retail sales grew >17% in the past few months

In India, it is likely to be ~8%

Exports can swing the growth outlook in only some countries

No major clouds on the horizon

Property bubbles are generally localized to cities like Mumbai, Bangalore and to some extent Shanghai

Asia-Pacific Outlook
…and Retail sales in AP will show continued growth Asia Pacific retail sales

Retail sales in most parts of the Asia-Pacific will see strong growth in 1Q08….

….with China leading the pack with a retail sales growth of 12.8%in 1H08

Only Taiwan, Japan and New Zealand are expected to see slower growth in 2008

Other Demand Drivers
Fixed asset investment –an under-appreciated growth driver

Construction has become a significant growth driver, resulting in tight markets for building materials

China is seeing double digit FAI growth, while more infrastructure investment will be pumped into the West (roads, pipelines) and South (Kunming-Singapore highway)

India’s government will spend US$101 bnon infrastructure in 2008 -2012, not including 300 retail mall projects due to come on-stream in 2008

Malaysia is investing in the IskandarDevelopment Region (~US$20b) and the Northern Corridor Economic Region

Singapore is seeing a construction boom, led by the Integrated Resorts and a rash of new properties

Hong Kong announced a clutch of major infrastructure projects in Oct 07

Australia’s private and public construction is growing at 14%

FDI from US will be hit

FDI is significant contributor to growth in Singapore, China and some of the ASEAN countries but increasingly India

India has drawn US$15 bnin FDI and US$ 12 bnin portfolio investments in 1H 2007

US FDI outflows to Asia may be hit by the softer economy and weaker dollar –affecting China to some extent and Singapore to a greater extent

Intra-Asian FDI may pick up some of the slack - China is now one of the leading investors in Hong Kong, contributing US$163.1 bnin cumulative FDI (31% of total stock) at end-2005

More Asian companies are buying stakes in US firms, a trend that will continue through 2008

Demand Driver
Exports will still grow albeit more slowly

Exports have sustained strong growth in 2007

Exports to China and the EU have been rising

Assembly activities continue to move from ASEAN, Taiwan and Korea to China

There will be weaker US demand for exports due to the softening economy and a weaker US dollar

Much will hinge on the EU, which is slowing (2.1% latest y-o-ygrowth)

Trade liberalization will be a big fillip to exports

Vietnam’s entry into WTO Jan 07

China-ASEAN FTA in a few years time

S Korea-USA FTA

A possible Taiwan-Singapore FTA and direct fights between Taiwan and China

Inflation
The region’s Number One concern

In 2008, inflation could hurt Asian growth (the big exception is Japan)

China’s CPI rose 8.7% for Feb 2008, versus 2.7% for Feb 2007

  • Inflation is being driven by high Asian economic growth, income “tipping points”in China & India, coupled with energy and food scarcity -basic demand-supply imbalances
  • High energy prices will be bad for Asia in general
  • there are few net oil exporters left in Asia
  • rising fuel prices will spark political fission as happened in Indonesia (2006) and Myanmar (2007)

Energy and Commodities
Commodities will drive inflation but benefit some verticals

  • Commodity prices have surged on structural demand-supply imbalances, rising further after the Fed’s rate cuts (recent falls do not affect this fundamental outlook)
  • Oil prices will vary in the band of US$80-120, having surpassed US$100 in Feb 2008
  • This has been driven by a weakening US$ & political tensions in the Middle-East
  • There is a major demand-supply imbalance for oil
  • However oil now makes up a much smaller % of global GDP than in the 1970s, and alternative energy sources are growing
  • Some beneficiaries of high commodity/energy prices:
  • Palm oil and biofuelproducers in Malaysia and Indonesia
  • Extractive industries in Australia and Indonesia
  • Agri-food in Vietnam, Thailand and Australia/New Zealand
  • Producers of extractive industry technology, eg. oil rigs

Currency
The US dollar will weaken a little before it gets stronger towards late 2008

  • A weakened US dollar is here to stay
  • The Fed may continue to cut rates, but less aggressively
  • A weaker US$ will hit some exporters more than others…
  • …especially electronics and automotive exporters in Singapore, Korea and Taiwan
  • But many AP exporting nations are diversified, eg. China exports more to EU than USA
  • Scenario of radical collapse of US dollar highly unlikely

Public Policy Issues
2008: fiscal stimulus and cautious monetary policy

  • Expect more government spending and tax cuts going forward
  • Monetary policy will be cautious in China, India and Japan, but excessive tightening is unlikely
  • China will try for a soft landing with interest rate hikes (already raised many times in 07), reserve floor hikes and export taxes for some industries (eg. steel), but so far these have failed to curb inflation and share speculative bubbles
  • India will push ahead with SEZsin spite of some political set- backs
  • AP corporate taxes fell 2.1 percentage points between 1997 and 2007
  • Seen in Australia, Singapore and Hong Kong in 2007
  • China is the big exception, raising corporate tax on MNCs

2008 –A Political Year
This adds to the uncertainty that will cloud investment planning

  • Asia Pacific elections in late 2007 & 2008:
  • Thailand elections Dec 07v
  • Korean elections Dec 07
  • Taiwan Presidential & legislative elections Jan-Mar 08
  • Malaysia Mar 08
  • PakistanJan 08
  • New Zealand Parliamentary elections –late 08
  • United States Presidential elections –Dec 08
  • Korean Presidential elections –Dec 07
  • Elections tend to provide some stimulus to the economy but also hold out potential for disruptions to business
  • Results of elections in US might be problematic for the economic status

Security
Intra-state instability probably a greater concern than inter-state conflict or terrorism Political hot spots in Asia in 2008:

  • China-Taiwan: China flexing military muscles in space and cyberspace, but no flare-ups likely in election year; new Taiwan President will improve ties
  • Pakistan: economy will take a hit; India-Pakistan relations will be in stalemate
  • Myanmar and North Korea: unlikely to see sudden regime change, but may spark tensions in their respective regions
  • Thailand: return to democracy progressing well
  • Terrorism/security issues not likely to loom large:
  • Terrorist JI network –critically weakened after Nov 2005 and Jun 2007 arrests in Indonesia
  • Progress seen in Indonesian insurgencies (Acehand West Papua)
  • On-going political conflicts where risks loom –terrorism in India and Southern Thailand

Air/Ocean Freight
Growth will continue but at a slower rate compared to 2007

  • Fuelled by strong trans-Pacific and East Asian trade, air and ocean freight volumes have been increasing steadily
  • Air freight demand grew 3.6% in October 2007 compared to the year before, but this is down from the 5.0% y-o-ygrowth recorded in September, and partly reverses the strong pick up of freight growth seen in mid-2007
  • By 2025, 2,990 aircraft will be added to freighter fleets around the world, with three out of four of those planes being converted from passenger jets
  • Double-digit growth in demand for international container shipping services in 2007
  • Prompted operators to go on a buying spree –cape-size ships, the largest type of bulk carrier, have almost tripled in price to US$96 million from 1998

Government Initiatives
ASEAN integrates further into single market

  • The ASEAN logistics market has seen an upward trend for the past3-4 years, and is expected to continue growing strongly over the next five years
  • Under the ASEAN Free Trade Area (Afta), significant progress has been achieved in reducing goods tariffs
  • 99.8 per cent of goods under the Inclusion List for the Asean-6 countries (Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand) are in the tariff range of 0-5 per cent
  • ASEAN governments have also committed themselves to liberalizingtheir nations’ services sectors, the first of which is to establish an ASEAN Open Skies Agreement in 2008
  • China implemented the China-ASEAN Trade in Goods (TIG) Agreement in July 2005
  • The CAFTA-TIG Agreement covers tariff-lines representing more than 95% of China-ASEAN trade, which grew annually by 23% from 1997-2005 to reach US$130.5 billion
  • Trade with ASEAN represented about 9% of China’s total trade in 2005, making ASEAN its fifth largest trading partner following the EU, US, Japan and Hong Kong

New routes to facilitate logistics in Asia

  • China is dealing with its infrastructure shortcomings aggressively and is expected to add 23% more roads over the next five years
  • It will also construct 100,000 km of new rail lines, one-third of that being high-speed passenger lines
  • Plans for a 4-lane highway from Hanoi to Kunming–the construction will add a section to the ambitious Asian Highway program under which 27 Asian countries have pledged to build a 140,000-kilometer network of roads that meet minimum uniform standards
  • Taiwan government enacted legislation in 2003 to increase and develop Free Trade Zones on the island
  • Five were officially inaugurated in January 2006: KaohsiungHarbor, TaichungPort, Taipei Port, KeelungPort, and Taoyuan Airport
  • Two Thai routes are expected to materialize by 2008
  • North-South Economic Corridor, a transport project focusing on a rail system
  • East-West Economic Corridor, a road project
  • Philippines is building the Subic-Clark-Tarlac Expressway in Central Luzon, expected to be finished by November 2007

US$430 million project will put in place all enabling components of the “logistics hub” as part of the Luzon Urban Beltway super regions’ blueprint of President Gloria Macapagal Arroyo

  • India SEZsdevelop routes
  • Highways & Road development projects worth USD12 billion being implemented through National Highway Authority of India (NHAI)
  • Moves to augment rail infrastructure through private sector being brought in place

Emerging Hubs in the Asia Asia-Pacific
AP countries are committed to investing heavily in logistics

  • Singapore is already home to the world’s largest container port, connecting to 123 countries and more than 600 ports
  • Economic Development Board (EDB) has been developing a full range of logistics and supply chain management capabilities
  • Hong Kong is world’s 3rdbusiest container port in 1sthalf of 2007 and has been ranked the busiest airport for international cargo since 1996
  • Handled 9.35 million TEUs, followed by Singapore (11.1 mil) and Shanghai (10.3 mil)
  • In 2006, Hong Kong’s air cargo reached 3.6 million tonnesand express air cargo is expected to grow about 13% annually for the next decade
  • Malaysia’s SenaiAirport Terminal Services aims to invest M$1 billion over the next 10 years to upgrade the airport’s infrastructure
  • Senai Airport, which currently handles 7,000 tons of cargo, plans to increase its throughput to around 328,000 tons
  • Taiwan’slogistics industry saw business revenues of NTD 791.9 billion in2006
  • Government policies have also been revised to streamline trading, customs clearance and shipping procedures, eliminating the need for long and tedious paperwork
  • Korea will provide world-class logistical infrastructure including IncheonInternational Airport (IIA) and Gwangyangand Busanseaports
  • IIA is currently the 4th largest air freight handler worldwide
  • The freight terminal will be expanded from the current 132,000 to 429,000 square meters by 2020
  • Thailand is upgrading logistics facilities and technology infrastructure to increase the nation’s freight handling capacity and assure faster, more efficient cargo movement
  • Construction of a new international airport, expansion of premier deep-sea port, improvements in multi-modal linkages, the proliferation of e-logistics and RFID electronic container and seal systems to achieve paperless Free Zone operations by 2008
  • Vietnam to collaborate with Singapore in the development and integration of port and logistics facilities in Vietnam
  • PSA has formed a Joint Venture with Saigon Port to develop a container terminal in the BaRia-VungTauprovince while NOL Group has a stake in the Vietnam International Container Terminals, the first dedicated container port in Vietnam
  • Between 2004 and 2006, bilateral trade grew by 47% to reach S$11.3 billion

Country Outlooks
While China dominates, India & Vietnam are fast rising & ASEAN is healthy

  • China –strong growth, no disruptive state policy changes till 2009
  • Tibet uprising unlikely to have major impact on economy
  • Some backlash against China-made consumer products will be seen globally, but in the longer-term, this will help push up production standards
  • India –strong growth, some inflation risks, watch for some stock exchange correction and property bubbles in some cities; more attention to 2ndtier cities
  • Vietnam –strong export growth with WTO entry, more liberalization of FDI rules for services going into 2009
  • Indonesia –healthy retail sales and growth, with relative political and currency stability

China and India are seen as the production hubs of the future

  • Spire`s research among 105 international firms in 7 Asia Pacific countries revealed that:
  • China is still seen as the production location of the future, followed surprisingly closely by India and ASEAN (Singapore/Thailand/Malaysia)
  • Singapore, China and Hong Kong will remain the region’s key regional headquarters locations

In Short: The Big Issues

  • Asia Pacific economic growth will still be healthy into 2008, albeit slowing significantly from 2007 thanks to the US slow-down
  • Plenty of Asian domestic demand to go around to cushion against weaker exports
  • The outlook for international trade and logistics is positive –governments in Asia are prepared to invest in transport and logistics infrastructure
  • Inflation, high commodity/energy prices and a weaker US dollar are the biggest worries
  • China, India and parts of ASEAN will be the key production centers of the future, with Singapore and Hong Kong remaining as the key regional HQ locations
  • Trends to look out for in future
  • China-Taiwan trade
  • Exports out of India
  • Reverse logistics
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