The China Route: Perspectives on Opportunities in Transportation and Logistics

Harris Williams & Co. professionals from the firm’s Transportation & Logistics (T&L) Group recently spent several days meeting with executives from leading global T&L companies based in China. In this report you will gain their insights on:

  • What today’s Chinese T&L companies are looking for from the West
  • Specific areas of greatest interest to Chinese entrepreneurs
  • Impacts of Chinese and U.S. government actions on M&A dynamics

Looking to the West for Innovation

Many of today’s leading Chinese entrepreneurs are Western-educated and English-speaking: “There are now a huge number of young executives and entrepreneurs who have a global mindset, speak fluent English, and are tech savvy,” says Daniel Wang, a managing director leading the firm’s efforts in Asia.

The difference can be traced to an emerging interest in expansion beyond China’s borders, whether within Asia or further afield. “The Chinese market is opening up, foreign companies are coming in, domestic growth is tapering, and competition is intensifying,” says Wang. “All of these trends are leading executives to think strategically beyond their borders.”

Wang adds, “The Chinese are hungry for innovation and proving to be quick studies, catching up with countries like Korea and Japan which have been doing business with the Western world for decades longer.”

Yet while the pull of the West is strong, the Chinese domestic market still provides plenty of low-hanging fruit for this new generation of entrepreneurs. The specific opportunity: getting global brands into the hands of newly affluent and Western-minded Chinese consumers.

“It seemed like Prada, Audi, Tiffany, Starbucks and other globally-celebrated brands were literally everywhere,” observes Jason Bass, a managing director in the firm’s Transportation & Logistics Group.

Wang concurs: “There are sizable opportunities within logistics and consumer, particularly with food and beverage. There’s strong demand in China for international brands such as Pepsi, Coke, Cadbury, plus well-known Asian and Chinese brands.”

With a host of sophisticated Chinese logistics companies already in place and in possession of strong market share, the opportunity for Western players is less about providing services and more about supplying innovative approaches and technologies that improve service levels, efficiency and performance.

As explained by Jeff Burkett, a director in the firm’s Transportation & Logistics Group, “They don’t need the basic building blocks. What they’re seeking via M&A is game-changing technology or intellectual property that has been developed and proven in more mature markets.”

Surging E-commerce Setting Priorities

This desire for innovative approaches is amplified by the rapid rise of e-commerce as a channel for key consumer goods. Those goods include products sourced from Europe and America, particularly personal care items, luxury apparel, and infant nutrition. For each category, the perceived quality of Western brands is an important factor driving consumption. “It used to be all about getting products from China to the rest of the world,” says Burkett. “Now it’s becoming a two-way street.”

The sheer size of China’s population is one factor making e-commerce especially important, notes Wang: “When even a seemingly small percentage of the population buys everything from luxury products to everyday essentials online, it drives incredible scale and rapid growth in e-commerce logistics.”

China’s urban density is another factor, allowing e-commerce delivery services to work better than they do in places where there is more sprawl. “The density is such that e-commerce companies can forward-stock the most relevant, frequently-purchased items and deliver them within an hour,” says Bass.

With e-commerce on the rise, Chinese executives are looking for ways to cut costs, congestion and pollution. “One of the first topics Chinese logistics companies want to talk about is autonomous vehicles,” says Bass. “They’re looking for ways to send driverless vehicles out for the delivery of products in suburban areas as well as in densely-populated metropolitan areas.”

Bass notes that drone delivery is another trending topic: “All of these e-commerce related businesses are very focused on the last mile, just as we are here in the U.S.  And because of the density there, last mile can be very profitable. But the leading players are already thinking about what’s next. They're thinking about ways to leapfrog over-the-road vehicles with drones.”

Chinese companies and investors also have a strong and growing interest in global logistics, particularly with regard to perishable goods. “Several companies and financial buyers asked about global cold-chain logistics,” explains Bass. “They were very interested in moving fresh goods into and out of China, and around the world. And that requires expertise related to food safety, counterfeiting and tampering, and chain of custody.”

Burkett points out that the storage and delivery of pharmaceuticals has the potential to rival food delivery in terms of growth, because “with 1.4 billion people, quickly and safely moving pharmaceuticals from manufacturers through the warehouse and various distribution channels to the ultimate consumer is extremely important.”

And, in some instances, the growing popularity of Western goods spurs investment in manufacturers themselves. Wang describes a dairy company that “spent a significant sum buying a business in Israel, not because they want to access the Israeli market, but because they want to buy know-how on how to create the best quality yogurt. The Chinese want these types of products they can’t generate in-house.”

Government Actions Shaping the M&A Environment

Chinese government policies are also encouraging investment in innovative transportation-related technologies, particularly electric vehicles, says Wang: “The government has a huge push for China to transition into electric vehicles and cleaner energy, which also creates interest in related technologies, including sensors, batteries and other parts.”

Government clearly plays an important role in the Chinese business environment, perhaps most notably in the form of the “One Belt, One Road” initiative. This government-backed plan aims to connect Asia, Europe, the Middle East and Africa to China with a vast logistics and transportation network, and is encouraging related investments by Chinese businesses. The plan is also supported by significant government funds.

Bass says, “The executives we met with in China were particularly interested in transportation and logistics businesses in Europe and Africa because of this program.”

Chinese investors remain interested in participating in the U.S. economy, but did have questions for the Harris Williams & Co. team regarding the Council on Foreign Investment in the U.S. (CFIUS), President Trump’s new tariff regime, and related obstacles to transactions.

“I think it's on the mind of decision makers, and those that are setting global M&A strategy as it relates to acquiring a U.S. business,” says Bass.  “I think there's also a willingness to find a way. And when there's an opportunity, a technology, or a service that is important to their strategic plan, they're not going to allow that to deter them.”

Conclusion

The vast and growing Chinese economy is home to a host of sophisticated transportation and logistics companies, increasingly looking to the West for innovative approaches and technology.

More specifically, China’s urban density and growing demand for Western goods is driving interest in autonomous vehicles, drones, clean energy, cold-chain logistics and other businesses related to e-commerce.

In terms of government actions, China’s One Belt, One Road initiative is spurring global investments in transportation, logistics and infrastructure, while CFIUS and tariff-related developments are raising questions about U.S. investments.

For more information, please contact Jason Bass, Daniel Wang, or Jeff Burkett.

Published April 2018