Nurturing Domestic Logistics Industry

The government strives to shift to a green logistics paradigm

The government is putting forth its utmost efforts to raise the added value of the logistics industry and ramp up companies’ competitiveness so that logistics firms can expand overseas markets and grow into world-class companies.
It is also striving to ensure the sustainable growth of the domestic logistics industry by encouraging firms to shift to a green logistics regime and reduce greenhouse gas emissions on a voluntary basis. The following are excerpts of an interview Kim Kwang-jae, director general for logistics policy at the Ministry of Land, Transport and Maritime Affairs (MLTM), had with Newsworld on the occasion of Logistics Day. He touched on policies designed to promote the Korean logistics industry.
Question: Will you tell our readers about the current status of the Korean logistics industry?
Answer: The domestic logistics market shows signs of constant rise. The value of the market was estimated at 106 trillion won in 2006, accounting for about 7.7 percent of the nation’s gross domestic product (GDP). The added value of logistics activities is on the rise every year, as the relevant figure surged from 59 trillion won in 2004 to 65 trillion won in 2006, and this trend is forecast to continue in the years to come. The percentage of shipper companies’ utilization of third-party logistics companies was 46.3 percent in 2008, still lower than 70 percent to 85 percent for advanced countries, including the United States and Japan. Korean companies’ ratio of logistics costs out of sales was 9.5 percent in 2007, higher than 4.8 percent for Japan.
The local logistics industry faces a stark reality: there are approximately 170,000 logistics companies, but they are small-scale compared to other industries since they post an annual average of 450 million won in sales. The industry has a 4.4 percent share in terms of sales out of the total sales of all industries, a 4.54 percent share in terms of the number of companies and a 3.6 percent share in terms of the number of employees. Transportation tops the list of logistics companies with a 91.6 percent share and an annual average of 440 million won in sales, followed by logistics facility operation businesses with an annual average of 3.4 billion won in sales and logistics service businesses with an annual average of 590 million won in sales.
Generally speaking, Korean logistics companies have a less sufficient competitive edge in such areas as corporate size and service coverage than global players. The top-three Korean logistics players, including Glovis and Korea Express, posted 4.8 trillion won in combined sales in 2007, accounting for a paltry 6 percent of the turnout of the world’s No. 1 logistics company, Germany’s DPWN, which amounted to 81.5 trillion won. Korean logistics firms are striving to ramp up their capacity through M&As with global logistics players and to accelerate their bids to enter the Northeast Asian logistics market. Korea badly needs to help shipper companies to expand their logistics consignment volumes and nurture the local logistics industry as a new growth engine behind the creation of national wealth so that they can compete with global players.
Q: What steps will the government implement to improve Korean logistics firms’ competitiveness?
A: In an effort to develop local logistics firms into specialized and integrated logistics powerhouses, the government has been putting in place such steps as the certification of integrated logistics companies and providing support for expanding third-party logistics consignments and offering specialized education to logistics personnel.
Under the certification system, the MLTM issues integrated logistics company certificates to logistics providers that offer such integrated services as freight transportation, logistics facility operation, and logistics services as well as commissioned or agency logistics services for shipper companies for a given period of time in return for fees. Currently, 31 business groups have been issued integrated logistics company certificates. Certified integrated logistics providers are entitled to such incentives as priority in moving into logistics facilities, supporting funds, reducing electricity charges and tax benefits. The certification system is expected to be overhauled in the future in a way to assist integrated logistics providers in securing a global competitive edge.
In a bid to boost the third-party logistics business, the government provides a 3 percent tax exemption for an increase in logistics costs to shipper companies that pay more than half of their logistics costs to third-party logistics providers. Only 223 logistics providers benefit from the third-party logistics system. The government is considering eliminating the key precondition of becoming a beneficiary of the tax exemption ― paying more than half of their logistics costs to third-party logistics providers ― in order to help all logistics providers receive the tax benefit. The government also provides support to consulting costs for helping companies shift from their own or second party logistics to third-party logistics services. Due to the support system, 10 shipper companies and logistics firms signed agreements on a combined 72 billion won worth of third-party logistics in 2008 and nine shipper companies and logistics partners reached agreements on 90 billion won worth of third-party logistics. The government plans to expand the system in the years to come.
The ministry offers expertise training programs tailored to the logistics process so that logistics companies can step up their specialized capability. It also supports on-the-job training for working-level officials and education at a logistics graduate school for cultivating specialized logistics manpower.
These policies are designed to raise the added value of the logistics industry and ramp up logistics companies’ competitiveness. The government needs to concentrate its support on facilitating logistics firms’ overseas entry and cultivating world-class companies.
Q: Will you elaborate on the direction of the government’s policies to nurture supersized global logistics providers?
A: Such global logistics players as DPWN and Schenker are expanding their service scope and market control through M&As. They are diversifying their business portfolios by providing such integrated services as IT, financing and insurance on top of the conventional functions, which include transportation and storage.
On the other hand, domestic logistics firms lag behind in terms of size, globalization and service quality. For instance, Korea Express, one of the nation’s biggest logistics companies, posted 1.2 trillion won in sales with five overseas centers, accounting for 3 percent and 2 percent of DPWN’s sales amounting to 42 trillion won and 220 overseas businesses, respectively.
The global logistics market has the potential for an annual growth rate of 4.5 percent. As the Asia-Pacific region emerges as one of the world’s biggest markets, the government plans to take diverse support steps to nurture world-class logistics providers with a global competitive edge.
First, the International Logistics Fund, amounting to about 1.4 trillion won, will be made available to provide financial support for domestic companies wanting to acquire foreign concerns. Diverse support steps will be taken in the case of expanding size through M&As among domestic firms, including financial support and tax exemptions. A global logistics consultative body will be formed to explore global markets so that global shipper companies, airlines and logistics firms can forge strategic alliances to explore overseas markets and redouble efforts to strengthen their presence in the global markets.
Korean manufacturing firms and logistics companies will be encouraged to join forces in penetrating foreign markets, and the government plans to provide support for shipper companies and logistics firms’ joint entry into overseas markets by providing necessary information. Overseas consultative bodies in Shanghai and Qingtao will be formed to build relations with local concerns, and they will be expanded to cover Vietnam and other Southeast Asian countries.
Amid the government’s bid to concentrate its capacity on securing resources in foreign countries, logistics on the related resources will be handled by Korean logistics firms as part of efforts to enter the global logistics market. Domestic logistics firms with a competitive edge will be encouraged to make a foray into overseas markets though aggressive government support.
Q: The government recently announced a plan to reduce Korea’s greenhouse gas emissions. What steps are in store to cope with it?
A: Green growth is a paradigm for sustainable growth in the future, so the logistics industry plans to aggressively embrace that paradigm. The government plans to form a government-civilian consultative body, tentatively named “Green Logistics Partnership” designed to help shipper companies, logistics firms and related organizations to encourage their participation in a shift to a green logistics regime. Such steps as the development of greenhouse gas reduction projects, the payment of subsidies and tax reductions will be put in place. This past October, the MLTM, KORAIL and four shipper companies ― POSCO, Samsung Electronics, LG Electronics and Hyundai Motor ― signed an MOU on facilitating railway logistics, setting up a foundation for an environmentally-friendly logistics regime, a good example of the low-carbon, green growth paradigm. Logistics companies aggressively pursuing such environmentally-friendly logistics activities as modal shift, greenhouse gas emission reduction and joint transportation and distribution projects will be issued green logistics company certificates, and certified firms will be given such support as subsidizing costs for a shift into green logistics, priority in moving into logistics facilities and the exemption of corporate tax.
The government plans to provide support for the development of green technologies, including the localization of outbound engine and next-generation sea traffic control systems so environmentally-friendly logistics activities can be invigorated.
The government is striving to ensure the sustainable growth of the domestic logistics industry by encouraging firms to participate in a shift to a green logistics regime and reducing greenhouse gas emissions on a voluntary basis. nw

Kim Kwang-jae, director general for logistics policy at the Ministry of Land, Transport and Maritime Affairs (MLTM)