A&A Cat Logistics China Site Visit 7-2005

Caterpillar Logistics Plans for Comprehensive Mainland China Operations

Shanghai, China

July 19, 2005

Evan Armstrong

In a recent visit to Shanghai, China we had the opportunity to spend some time with David Brady, Caterpillar Logistics Services CEO & President for Asian Pacific operations. Brady who was integral in setting up Cat Logistics joint venture with Lei Shing Hong Limited in 2003, detailed his vision for Cat Logistics mainland China operations.

According to Brady, Cat Logistics has taken a calculated approach to developing its mainland China operations involving intense marketing and operations planning. On August 21st of 2005 Cat Logistics will be opening phase I of its warehousing and distribution operations in Lingang New City, Shanghai, China. The initial facility will be 236,808 square feet (22,000 m2) located in the new ProLogis Park Lingang. Initial Cat Logistics operations will include service parts distribution for Caterpillar. The Park will act as Cat Logistics China Hub for import/export activities and will also perform multiple value-added services including: painting, kitting, remanufacturing and subassembly.

ProLogis Park Lingang is being developed through a joint venture between Lingang Group and ProLogis. Phase I of will consist of eight facilities totaling nearly 1.1 million square feet (98,172 m2). The Park has the potential to support 10-15 million square feet (900,000-1.4 million m2) of distribution space. The Shanghai government is planning to spend approximately $12 billion to develop Lingang’s Yangshan deep ocean port into the largest port in the world with over 50 berths and an annual capacity of 25 million TEUs. By comparison, the largest volume port in the world today is Hong Kong with an annual capacity of 20.5 million TEUs. ProLogis Park Lingang will be located adjacent to the Lingang Expressway, which leads from Yangshan Port to Shanghai's central business district and merges with major roads to the rest of China. Additionally, the Park will have a new rail terminal with intermodal capabilities.

As part of Cat Logistics strategy, Brady has developed a logistics distribution plan that is not completely reliant upon any one transportation mode. Cat Logistics is looking to contractually build a mainland Chinese transportation and warehousing network incorporating rail and truck transportation from coastal areas west into Quinghai province and from Guangdong province north to Shanxi province. Cat Logistics strategy is to not only focus on traditional export/import business, but also to build a network that can support the growing domestic Chinese market for goods.

Brady also sees reverse logistics and recycling as strong potential growth areas. According to Brady, “Recycling is a huge reverse logistics problem. The Chinese government is asking how do we recycle engines, cars, plastics, phones and computer products and Cat Logistics is working to help provide them with a solid logistics solution.”

Another challenge for China revolves around “Low cost country sourcing”, according to Brady. Quality control on specialized manufactured products is an issue. Total transportation costs need to come down through increased supply chain network efficiencies.

Through its growth strategy, Brady anticipates Cat Logistics mainland China operations to develop at an annual growth rate over 100%. Currently Asian Pacific operations account for approximately 10% of Cat Logistics total revenues; Brady estimates that they will garner 1/3 of its total revenues by 2010.

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