INVESTMENT OPPORTUNITIES IN KOREA

Transcription

1 KOTRA 자료 INVESTMENT OPPORTUNITIES IN KOREA LOGISTICS

2 Contents 04 Industry Overview Definition of the Industry Status of the Industry Competitiveness of the Industry Prospect for the Industry 16 Locational Competitiveness Locational Status Locational Conditions and Benefits 21 Government Policies and Regulations 26 Cost Government Policies and Incentives Regulations Applicable to Logistics Investment Cost and Labor Profitability 30 Success Cases of Foreign Investment 34 Related Companies and Associations Most figures in this report are converted from KRW into USD based on yearly average exchange rates. But growth rates (e.g. CAGR and YoY growth rate) are calculated based on KRW to prevent any distortion caused by changes in exchange rates.

3 Global Link to Success, Invest KOREA INVESTMENT OPPORTUNITIES IN KOREA LOGISTICS

4 LOGISTICS 4 01 INDUSTRY OVERVIEW

5 5 INDUSTRY OVERVIEW Definition of the Industry Definition An industry that involves the transportation, storage, unloading, and packaging of goods, and the provision of other related services for consideration on the demand of shippers (Article 2.2 of the Framework Act on Logistics Policies). By business segment, the industry can be divided into procurement logistics, production logistics, in-house logistics, sales logistics, and reverse logistics (return logistics, recovery logistics, and waste logistics). By function, the industry can be divided into transportation and shipment logistics, unloading logistics, warehousing and storage logistics, packaging logistics, and logistics information. Classification In the Korean Standard Industrial Classification, the logistics industry falls under the Transportation and Storage category. The category is further divided into the freight transport business, the logistics facility operation business, and the logistics service business. Statistics Korea uses a special classification for the logistics industry, which was designed to provide a tool for the inter-industry analysis and cost-benefit analysis of logistics activities related to freight transport but not categorized under the Korean Standard Industry Classification. Based on the definition of the logistics industry under the Framework Act on Logistics Policies and the Restriction of Special Taxation Act, Statistics Korea includes various activities such as freight transport, the operation and lease of transportation support facilities, transport-related services, and the manufacturing of transport equipment. Logistics providers can be divided into asset-based providers which focus on freight transport and logistics facility operation, and non-asset based providers. Relations with Other Industries The logistics industry is one of the key drivers of economic growth. It is a crucial factor affecting national, regional, and industrial competitiveness. The logistics industry is primarily a back-end industry that supports the production of other industries. Its impacts on the supply chain are greater than its production inducement effects. Any damage in the logistics industry may spill over to other areas such as manufacturing, international trade, and distribution.

6 LOGISTICS 6 The logistics industry was traditionally regarded as a secondary industry that supports distribution or manufacturing businesses. However, the industry is now considered a new value-added industry thanks to growing investments in the logistics infrastructure and the development of logistics services that cater to various customers' needs. The Classification of the Logistics Industry Category Subcategory Businesses Freight Transport Logistics Facilities Operation Freight Transport Services Logistics Equipment Rental Logistics Equipment Manufacture Land Transport, Pipeline Transport Water Transport Air Freight Transport Commercial Document Delivery Small Freight Transport Warehousing and Storage Freight Terminal Facilities Operation Freight Handling Freight Transport Arrangement Customs Clearance Highways and Related Facilities Operation Other Freight Transport Services Logistics Information System Development and Integration Services Logistics Consulting Other Transport Equipment Rental Other Industrial Machinery and Equipment Rental Transportation Container, Freight Vehicle, and Handling Equipment Manufacturing Steel Ship Building Aircraft, Spacecraft, and Auxiliary Equipment Manufacturing Rail transport, road transport, general freight trucking, specialized freight trucking. Oceangoing freight transport, coastal freight transport, inland water freight transport, other inland water freight transport. Scheduled air transport, non-scheduled air transport. Air document delivery (domestic and international delivery). Parcel/courier service, local delivery and messenger service ( quick service ). General warehousing, refrigerated warehousing, agricultural product warehousing, dangerous goods storage, other warehousing and storage. General freight terminal facilities, marine terminal facilities, intermodal freight terminal facilities, freight vehicle terminal facilities, Inland Container Depot(ICD), Container Freight Station(CFS), collection and shipping complexes, distribution complexes. Land/air/water freight handling (value-added logistics businesses including packaging, simple processing, assembly, labeling, and quality inspection). Intermodal freight transport arrangement, land transport arrangement, water transport arrangement, air transport arrangement. Operation on toll-roads, highway, tunnels, and bridges. Freight transport brokerage, agency, and related services; freight packaging, inspection, and weighing. Database construction, software development/operation, Application Service Provider(ASP), Electronic Data Interchange(EDI) / Value Added Network(VAN) service provision, computer programming services, consulting and construction services related to computer system integration. Consulting on the improvement of logistics work processes. Consulting on the introduction of automated warehouses and logistics automation facilities. Consulting on the introduction of Enterprise Resource Planning(ERP), Transportation Management System(TMS), Warehouse Management System(WMS), Point of Sale(POS) or other solutions. Logistics equipment (freight truck, freight ship, and freight aircraft) rental, container rental, transportation/stacking/loading/unloading equipment rental, palette rental. Transportation container, palette, handling equipment (cranes and other unloading equipment) rental. Transportation container manufacture, freight vehicle and trailer manufacture, freight vehicle, and other special-purpose vehicles manufacture. Freight vessel manufacturing. Freight aircraft manufacturing.

7 7 INDUSTRY OVERVIEW Status of the Industry Global Market The global logistics market is expected to continue its growth in the coming years, as the globalization of sales and production as well as the expansion of FTA deals scale up international trade and investment. Major countries are scrambling to transform their logistics industries to high value-added ones and ultimately become a logistics hub. According to a 2009 survey of 300 global firms with sales revenues of USD 1 billion or more, many of them were relying on overseas operation (51% of their parts production, 47% final assembly, 46% warehousing, 43% customer services and 39% production development). Datamonitor estimated that the global logistics market in 2013 was worth USD 3.3 trillion and will reach USD 8.1 trillion by Roland Berger projected that the global logistics market will grow by 3% on an annual basis by World Trade Outlook ( ) (USD billion, CAGR) 1,378 2,475 from Asia (5%) from Asia 864 1,306 (4%) (3%) 3,702 10,763 (9%) from (11%) Africa 204 1,159 (16%) USD billion (CAGR) from N. America 462 1,110 (7%) 4,479 7,171 (4%) from Asia Legend from 998 2,247 Europe (7%) from Asia from S&C Americas from Asia (14%) 137 1,574 (23%) (18%) (11%) North America South and Central America Europe Africa Asia Source: Global Insight, Oliver Wyman analysis. Trade Reporting Facilities By region, the Asia-Pacific market takes up the largest share of the global market (42.6%), followed by West Europe (18.0%) and the United States (17.7%). By business, land transport and domestic logistics accounts for 56.4% of the global market, followed by contract logistics (15.7%), courier, express, and parcel (CEP) (15.5%), and air/marine forwarding (12.4%). The global third-party logistics (3PL) market grew from USD 56 billion in 2000 to USD 721 billion in The Asia-Pacific market was again the largest of USD billion (38.4%), followed by North America of USD billion (26.4%), and Europe of USD billion (21.4%). (Source: Armstrong & Associates)

8 LOGISTICS 8 Korean Market Korea s logistics industry has steadily grown since the 1990s to become one of the major economic drivers of the country. This was driven by an increase of transported goods and value-added logistics activities, the expansion of logistics outsourcing by businesses, and the government s efforts to establish a premier logistics infrastructure. In 2014, about 587,000 people worked in a total of 191,000 companies in the logistics industry. Their aggregate sales revenues recorded USD billion, showing an annual growth of 5.9% from 2006 to The Growth of Korea s Logistics Industry by Business Category CAGR(%) (06-14) Total 164, , , , , , , , No. of companies (companies) Transport 150, , , , , , , , Logistics facility operation 1,185 1,172 1,356 1,306 1,247 1,173 1,206 1, Logistics service 13,050 13,102 9,940 9,885 10,099 10,600 10,641 10, Total 547, , , , , , , , No. of employees (workers) Transport 458, , , , , , , , Logistics facility operation 11,510 12,749 13,433 13,452 14,174 13,915 13,787 14, Logistics service 78,234 80,193 68,968 69,493 68,360 73,479 75,954 75, Total No. of employees per company Transport Logistics facility operation Logistics service Total Sales Revenue (USD billion) Transport Logistics facility operation Logistics service Total Sales Revenue per company (USD thousand) Transport Logistics facility operation 1, , , , , , , , Logistics service , , Source: Statistics Korea (2016), 2014 Report on the Transportation Survey Note: Passenger transport businesses (urban railways, urban buses, inter-urban buses, express buses, etc.) are not included, following the classification of the logistics industry under the Enforcement Decree of the Framework Act on Logistics Policies

9 9 INDUSTRY OVERVIEW Korean Logistics Industry by Year (no. of companies, employees, USD billion) No. of Companies No. of Employees Revenue 195, , , , , , , , , , , , , , , , , , , , , , , , Source: Statistics Korea (2016), 2014 Report on the Transportation Survey Among Korean industries, the logistics industry ranked 9th in terms of sales revenues. However, its share in the national economy decreased for three consecutive years, from 2013 to Logistics companies account for about 5% of the entire Korean market, but their sales revenues take up only 2.57%, showing that sales revenues per company are comparatively low. The gross added value of the Korean logistics industry declined from 3.44% of the total GDP to 3.41% in The logistics industry accounted for 5.43% in employment in 2015, which is a decrease from 5.64% in The Share of the Logistics Industry in Korea (2014) (no. of companies, employees, USD billion, %) Category All Industries (A) Logistics Industry (B) Share (%, B/A) No. of companies 3,812, , No. of employees 19,899, , Sales Revenue (USD billion) 3, Source: Statistics Korea (2016), 2014 Report on the Transportation Survey Note: 1) The numbers of companies and employees are based on the data from the National Business Survey (Statistics Korea). The aggregate sales revenue of all industries is based on the Business Management Analysis (Bank of Korea) 2) The sales revenues of the logistics industry were individually calculated based on the data from the 2014 Report on Transportation Survey (Statistics Korea) By business, freight transport takes up the biggest share (80% 90%), followed by logistics service (6% 12%) and logistics facilities operation (4% 6%). Despite a huge gap between the land transport business and other businesses including marine transport, air transport, warehousing and transport services in terms of the number of companies and employees, their sales revenues are not proportionally high. This shows the vast majority of land transport businesses are self-owned and small in size. Korea s logistics market is likely to continue growth, as shippers are increasingly relying on outsourcing their logistics operations. The share of 3PL (third-party logistics) is on the rise in Korea, from 38.8% of the entire logistics operations in 2006 to 52.1% in 2010 and 66.4% in However, their share is still low compared to advanced countries such as Europe (80%), the United States (79%) and Japan (70%).

10 LOGISTICS 10 The Services Production Index below indicates the sales revenues of each business segment of Korea s logistics industry. All segments, except for marine transport, are on the rise since the base year of 2010 (100). The prolonged low performances of the marine transport segment were due to the greater supply of ships and falling fares of bulk/container vessels. Services Production Index of Korea s Logistics Industry by Business Freight transport via roads Small freight transport Marine transport Scheduled air transport Warehousing and storage Other transport services (2010=100) Source: Statistics Korea Foreign Direct Investment (FDI) FDI flows are affected by the economic conditions at home and abroad as well as the FDI performances of neighboring countries. Overall FDI flows in Korea show a similar trajectory to the global trend. FDI inflows in Korea reached a record high in 2015: USD billion was reported, and the actual amount of investment was USD billion. The recent increase of FDI inflows in Korea was mainly led by the services sector including complex resorts, content and logistics, on the back of the rising demand for tourism (driven by the Korean Wave) and logistics services (by FTA). About 70.4% of the inward FDI (USD billion, reported) was made in the services sector as of FDI inflows into the logistics industry (transport and warehousing) has dramatically risen from USD million in 2011 to million in 2015, accounting for 4.9% of inward FDIs in the services sector. Investments in the logistics industry are often linked with investments in the manufacturing and distribution industries. The total amount of investments made in the logistics and distribution industries in 2015 was USD 1.91 billion, taking up 12.9% of inward FDIs in the services sector. Most of the FDI inflows into the logistics industry were greenfield investments (94.6%).

11 11 INDUSTRY OVERVIEW FDI Inflows in Korea s Logistics Industry (Transport/Warehousing) Category Total Total Less than USD 1 million No. of investments USD 1 10 million USD million Investment size USD 100 million or higher Total ,462 Less than USD 1 million Amount USD 1 10 million Investment type No. of investments Amount USD million USD 100 million or higher ,000 1,480 M & A Greenfield ,384 M & A Greenfield ,384 Source: Ministry of Trade, Industry and Energy, Foreign Investment Statistics Note : based on notification From 2011 to 2015, the US made the largest amount of investments (reported) in the Korean logistics industry (USD 788 million), followed by Singapore (USD million), Hong Kong (USD 75.0 million), Japan (USD 68.5 million), and the Netherlands (USD 58.6 million). FDIs in the Korean Logistics Industry by Country (no. of investments, USD thousand) Year Classification United States Canada Japan Hong Kong Singapore Netherlands Germany Total No. of investments amount 4, ,738 14,621 48,165 40,818 1,014 No. of investments amount 1, ,108 7,655 14, No. of investments amount ,700 11,428 2,430 12,364 2,200 2,212 No. of investments amount 256, ,872 2,343 9, No. of investments amount 524,889 30,000 13,417 47,994 44,623 14, No. of investments amount 788,071 42,180 68,563 75, ,427 58,670 3,317 Source: Ministry of Trade, Industry and Energy, Foreign Investment Statistics Note: based on notification

12 LOGISTICS 12 FDI Flows in Korea by Country Hong Kong 6.44% Japan 5.89% Canada 3.62% singapore 11.03% FDI Flows United States 67.67% Others 0.03% Germany 0.28% Netherlands 5.04% Source: Ministry of Trade, Industry and Energy, Foreign Investment Statistics Competitiveness of the Industry Characteristics The Korean logistics industry has steadily grown since the late 1980s when its export transport volumes started to dramatically increase. The growth continued into the 1990s and the 2000s, largely supported by the government s efforts to improve its traffic and logistics infrastructure (e.g. expressways, the Incheon International Airport, the Busan New Port, intermodal freight terminals, etc.) through continued investments. Korea has seen a significant increase in the volume of transported goods, mainly from China, which led to the industry s growth. The industry continues to prosper thanks to companies efforts to outsource their logistics operations to improve competitiveness, an increase of value-added logistics activities, as well as a variety of government policies to nurture the industry. As for individual businesses, most logistics firms in Korea fall behind their global competitors in terms of size and capability to carry out intermodal transport operations. On the other hand, Korean marine transport companies and airlines provide highly competitive international transport services. The challenges facing Korea s logistics industry include the low proportion of outsourcing in logistics operation, the industrial structure that solely focuses on the domestic market, and a high percentage of road transport (80% out of the overall freight transport). As the logistics industry has strong impacts on a wide range of industries including manufacturing, Korea needs to ramp up support for its manufacturing and import and export shipping businesses. In addition, the

13 13 INDUSTRY OVERVIEW government should transform the logistics industry into a high value-added one to ultimately enhance its competitiveness on the global stage. Standing on the World's Logistics Industry The World Bank released the Logistics Performance Index (LPI), which compares 160 countries around the world in terms of logistics competitiveness. The LPI is the weighted average of six components - 1) efficiency of the clearance process including customs 2) logistics infrastructure 3) international shipments 4) logistics competence 5) logistics tracking and tracing and 6) timeliness. Korea ranked 25th (3.52 points) in 2007, 23rd (3.64) in 2010, 21st (3.70) in 2012 and 21st (3.67) in 2014, narrowing its gap with advanced countries in the logistics market. Korea ranked relatively higher in logistics infrastructure, tracing, and timeliness than other components, thanks to its strength on IT. Korea s Standing on the World Bank LPI Year Overall Customs Logistics Infrastructure International shipment Logistics Competence Logistics tracing Timeliness Rank Rating Rank Rating Rank Rating Rank Rating Rank Rating Rank Rating Rank Rating Source: World Bank, Logistics Performance Index, Cross-country Comparison of the World Bank LPI (2016) Korea Germany Japan China Hong Kong, China Taiwan Overall 5 Timeliness 4 Customs 3 Tracking & tracing Infrastructure Logistics competence Source: World Bank, Logistics Performance Index, International shipments

14 LOGISTICS 14 Prospect for the Industry Global Market DHL, a global logistics service provider, projected that the Asia-Pacific region s share in the global trade market will grow in the coming years, accounting for more than 50% of global trade by China is expected to lead global trade by 2030, capitalizing on its multiple international trade channels throughout Asia and beyond. China and some Southeast Asian countries plan to form a new cluster in the region. International trade among emerging markets and among African countries is also likely to increase. (source : Roland Berger, Global Logistics Market 2014) The logistics industry will experience seismic shifts caused by significant changes in the overall industries, economic conditions, trade patterns and global value chains, as well as the technological innovation. Some experts predict that the rapid deployment of IoT technologies will fuel the competition for on-demand shipping rather than shipping prices. Courier services and cold chain logistics are the most promising sectors. A surge in the use of e-commerce and food delivery will drive the growth of respective sectors. The combined market is expected to grow by 7% annually, from USD billion in 2015 to USD billion in (Source: Market and Markets) The share of the cold chain market in the overall logistics industry is the highest in North America, followed by Europe and Asia. The Asian market is growing rapidly. In addition, the prosperous global e-commerce market has completely changed the dynamics of the distribution and logistics industry. The global B2C e-commerce market is expected to grow into a USD 3.4 trillion market by 2020, and transborder e-commerce businesses will account for 29% of the overall market. (Source: McKinsey, Digital Globalization, 2016) Korean Market To survive in the rapidly changing global market, Korea needs to nurture global logistics companies that offer affordable and highly efficient logistics services that meet new customer demands, by integrating its infrastructure (hardware) and logistics systems (software). In addition, smartphones and mobile telecommunications technologies have expanded the transborder e-commerce and online shopping platforms, which led to the rapid growth of delivery businesses. This trend is likely to continue.

15 15 INDUSTRY OVERVIEW The volume of shipped items in Korea rose at an annual rate of 17.1% from 200 million in 2001 to 1.8 billion in The Korean cold chain industry has massive growth potential with the development of an e-commerce logistics infrastructure (e.g. joint logistics centers) and advanced small/medium logistics complexes in urban areas, as well as the expansion of the cold chain market. Growing interests and investments in the global courier services market may bring about opportunities for Korean logistics companies. In 2014, the number of goods imported to Korea through overseas express delivery reached a record high of 2.2 million (worth USD 15.9 billion). Its annual growth rate is over 20%. Future Industry Trends The future trends of the logistics industry can be broken down into social, business and technological trends. A fast-paced increase of on-demand shipments, smart (or energy-efficient) logistics and tube logistics will be key components of future social and business trends for the industry. Technological trends will be about wearable devices, self-driving cars, smart sensor tags and bio-statistics. Future Trends of the Logistics Industry High High Super grid logistics Self-driving cars / 3D Logistics market 3-D printers Batch size one Predictive logistics lot UAV Robotics and automation Social and business trends Shared economy logistics Smart energy logistics Gray power logistics Fair and socially responsible logistics Relief of supply chain stress On-demand shipment Omni-channel logistics Convenience logistics Big data Cloud logistics Low-cost sensor technology Augmented reality Self-learning system Bioengineering augmentation Technology trends Multi-purpose network Digital identifier Tube logistics In five years Low After 5 years or further Low Source: DHL (2016), Logistics Trend Radar

16 LOGISTICS LOCATIONAL COMPETITIVENESS

17 17 LOCATIONAL COMPETITIVENESS Locational Status Distribution of Korean Logistics Businesses Most Korean logistics firms are located in the capital area including Seoul (25.2%) and Gyeonggi-do (20.9%). Busan has the next largest number of logistics companies (7.8%), followed by Daegu (5.8%) and Gyeongsangnam-do (5.2%). Korean Logistics Companies by Region in 2014 (no. of companies, %) Area Freight Transport Logistics Facility Operation Freight Transport Services Total Percentage National 349,371 1,522 16, , Seoul 88, ,855 92, Busan 25, ,924 28, Daegu 20, , Incheon 20, , Gwangju 9, , Daejeon 10, , Ulsan 6, , Sejong Gyeonggi-do 74, ,533 76, Gangwon-do 9, , Chungcheongbuk-do 10, , Chungcheongnam-do 11, , Jeollabuk-do 11, , Jeollanam-do 9, , Gyeongsangbuk-do 16, , Gyeongsangnam-do 17, ,123 19, Jeju 6, , Source: Rearranged from Statistics Korea, Report on Transportation Survey (2014) Free Trade Zones To develop the Korean economy, Korea introduced free trade zones (FTZ) in the 1970s and initially called them Free Export Zones as part of an industry policy to directly attract capital investments. In response to the opening of the global economy and internationalization, Korean free trade zones reinvented themselves as comprehensive free trade zones, expanding their focus beyond manufacturing to include logistics and trade.

18 LOGISTICS 18 Regional authorities have the discretion to operate free trade zones with a focus on production, trade or a combination of both, according to regional conditions. Free trade zones are instrumental to the promotion of regional industries and regional development, contributing to the balanced development of the nation. Free trade zones help Korean businesses connect to global companies and improve their competitiveness. The integration of the logistics/distribution functions and processing/manufacturing functions in the FTZs will also boost international trade. Korean FTZs can be the gateway to China for global companies from advanced economies. The government is gearing up efforts to promote Korea s proximity to the Chinese market and attract foreign investments. Free Economic Zones Free economic zones (FEZ) can be defined as areas designed to create better conditions for foreign investors to do business and more. Free economic zones combine various functions that go beyond manufacturing and logistics to include manufacturing, trade, logistics, finance, and research. Electronic auto parts manufacture and logistics/distribution (Chungbuk Free Economic Zone), logistics/business hub (East Coast Free Economic Zone), auto parts manufacturing complex, electronic/chemical/value-added logistics (Yellow Sea Free Economic Zone), international logistics complex (Gwangyang Bay Free Economic Zone), logistics hub port (Busan Jinhae Free Economic Zone), air, logistics, leisure (Incheon Free Economic Zone), etc. FEZs and FTZs Complex-type FTZ Airport-/port-type FTZ Incheon Free Economic Zone East Cost Free Economic Zone Incheon International Airport Incheon Port Donghae Yellow Sea Free Economic Zone Saemangeum Gunsan Free Economic Zone Chungbuk Free Economic Zone Gwangyang Bay Area Free Economic Zone FEZ Daegu Gyeongbuk Free Economic Zone Busan Jinhae Free Economic Zone Pyeongtaek Dangjin Port Gunsan Gimje Daebul Masan Yulchon Gwangyang Port FTZ Pohang Port Ulsan Busan Port Source: Free Economic Zone and Free Trade Zone Office

19 19 LOCATIONAL COMPETITIVENESS Foreign Investment Zones A Foreign Investment Zone (FIZ) is designated under the Foreign Investment Promotion Act for the purpose of promoting investments from foreigners with advanced technologies, leasing lands to residential companies at a reduced tax rate, and revitalizing the local economy. FIZs are divided into complex-type zones, standalone-type zones, and service-type zones. Logistics companies are mostly located in standalone-type zones. Locational Conditions and Benefits Korea as a Logistics Location Neighboring logistics giants, such as China and Japan, and connected with various Asia-Pacific, Eurasian, and American countries by sea, Korea is located at the heart of the world s logistics industry. Korea also boasts a world-class logistics infrastructure. Its aviation/marine transport industries are the 5th and 6th largest in the world, and the country is home to internationally recognized logistics hubs like Incheon International Airport (no. 2 among all international cargo airports) and the Busan Port (no. 5 among all container ports). The country s highly advanced ports and airports offer fast connection to various cities and countries across the world. The number of international routes is on the rise, particularly routes to China, Southeast Asia, and Japan. Korea also offers first-class IT capabilities and infrastructure, as evidenced by its high position in the IT development index and the national competitiveness index for the ICT sector. International Air Routes Operating in Korea (no. of air routes) 300 Korean Airlines Foreign Airlines Source: Statistics Korea

20 LOGISTICS 20 Incentives for foreign investments in the logistics industry Korea operates special economic zones FEZs, FTZs, FIZs to build industrial clusters and carry out local development projects through foreign investments. Although the specifics vary across different types of zones, special economic zones offer administrative incentives (streamlined approval procedures, deregulation, etc.), as well as financial incentives (infrastructure, residential environments, support for development projects, tax reductions, etc.). The incentives are provided under the Foreign Investment Promotion Act and the Restriction of Special Taxation Act, depending on the size of investment, the location of the office, and the number of jobs created. FEZs offer a wide range of benefits including lower lease fees, tax reduction, a combination of production and logistics/distribution functions, and one-stop services at administrative agencies. Small-scale investors are also eligible for the incentives as long as they meet the applicable requirements. In this regard, FEZs are suitable for attracting foreign investors in advanced industries. When a company decides to base its operations in a FEZ, the Most Favored Status is applied under the Special Act on the Designation and Operation of Free Economic Zones. The status comes with various incentives related to tax reduction, business environment, residential environment, and development projects. Incentives for Foreign Investors in Special Economic Zones Incentive Type FEZ Complex-Type FIZ Standalone-Type FTZ Legal basis Special Act on the Designation and Operation of Free Economic Zones. Foreign Investment Promotion Act. Special Act on the Designation and Operation of Free Economic Zones. Requirements Foreign capital invested company. Manufacturing, logistics, health care, education, broadcasting, financial institution, etc. Share of foreign investor: 30% or higher. Invested amount: KRW 100 million or higher. Share of foreign investor: 10% or higher Invested amount: KRW 100 million or higher Korean/foreign company engaged in export business. Foreign capital invested company. Wholesaler/intermodal logistics company whose main business is international trade. Tax reduction Corporate tax / income tax Tariffs Three years (100%) + two years (50%) Tax reduction for investments in logistics: USD 5 million. Three years (100%) + two years (50%) Tax reduction for investments in logistics: USD 5 million. Tax exemption for imported capital goods: Five years from the report date. Local tax Prescribed by local ordinances, within 15 years. Five years (100%) + two years (50%) Tax reduction for residency in economic zones USD 10 million. Complex-type: Same as the standalone-type. Tariff reservation Site purchase/ lease support Source: Ministry of Trade, Industry and Energy Low rent (around 1%) Lease (land purchased by the local government then leased at 1%). Assistance with land purchase / rent reduction for stateowned lands (100%). Lease (land purchased by the local government then leased at 1%).

21 21 GOVERNMENT POLICIES AND REGULATIONS 03 GOVERNMENT POLICIES AND REGULATIONS

22 LOGISTICS 22 Government Policies and Incentives Logistics Policies in Korea As part of its efforts to develop the logistics industry, the Korean government has established various policies since the early 2000s to promote Korea as the logistics center of Northeast Asia (2002), to foster logistics companies (2006), to establish the basic plan for the logistics industry (2001, 2011) and to bring the Korean logistics industry in line with advanced markets ( ). In the early stage, logistics policies were focused on the expansion of logistics infrastructure and the development of a talent pool specializing in logistics. Recently, the focus of the industry promotion policy has shifted to promoting third-party logistics, fostering global logistics companies and the sophistication of the logistics industry. The Korean government announced measures to promote investments in the seven promising service industries, including logistics, through institutional and regulatory reforms. Regarding the logistics industry, the focus is on enhancing logistics infrastructure, fostering the logistics industry and other goals, including creating more logistics complexes based on the characteristics of regional demand, enhancing the role of Incheon International Airport as a logistics hub and boosting the sophistication of the courier service industry. National Logistics Master Plan ( ) The National Logistics Master Plan guides the government s policies across various sections of the logistics industry. The plan defines the general direction and strategies for the industry, and provides measures regarding the establishment of logistics facilities, infrastructure and international logistics network, the informatization and technological development of the industry, the promotion of green logistics and logistics security, and the training of logistics experts. The plan was revised for the period, and proposes a direction for Korea s logistics policies in the future based on the current progress, logistics environments in Korea and overseas, and projections for the industry.

23 23 GOVERNMENT POLICIES AND REGULATIONS Classification Old paradigm New paradigm Main player Goal Format Role Dependent on government supports, government-led logistics. Logistics for import/export to spur economic growth. Standalone, isolated logistics by different ministries/industries. Logistics led by the manufacturing/ distribution industries. Private-led logistics to promote creative services. Logistics for people s daily lives (B2C, C2C, M2C, etc.). Convergence logistics to promote sharing and cooperation. Logistics leading the manufacturing/ distribution industries. Scope Localized logistics based on domestic networks. Source: Ministry of Land, Infrastructure and Transport, National Logistics Master Plan ( ) Globally expanded logistics for unified Korea and the growth of Eurasia. The plan set out a number of targets for achieving the vision, becoming a logistics superpower through logistics innovation and new businesses." The goals are 700,000 new jobs in the industry; 10th-highest international logistics competitiveness; and an aggregate revenue of KRW 150 trillion (USD 125 billion) by the year The plan also set up four key strategies to achieve the goals: 1 develop high value-added logistics businesses in response to the changes in industrial trends, 2 help logistics companies adapt to the changes in the global logistics landscape and expand their operations overseas, 3 develop and spread smart logistics technologies, and 4 develop a sustainable business environment for the logistics industry. Logistics Facilities Policy In order to prevent redundant or excessive investments in logistics facilities and find ways to build efficient logistics networks, the Korean government set up the Comprehensive Plan for Logistics Facilities Development ( ). The vision set out by the plan is to develop a sustainable logistics facilities system to improve national competitiveness and contribute to the nation s wealth. The plan defined the following goals: to build high-efficiency, high-quality logistics facilities in order to boost the competitiveness of the industry and local economies; to build logistics facilities for low-carbon green growth; and to build multi-purpose logistics facilities that provide the basis for creating new economic values. The strategies under the plan include the following: encourage the development of demand-producing joint logistics facilities; expand the provision of urban logistics facilities; promote local-friendly, future-oriented logistics facilities; expand the provision of facilities by improving the efficiency of the existing facilities; and secure complex logistics facilities.

24 LOGISTICS 24 Regulations Applicable to Logistics Investment Related Laws on Foreign Investments The Foreign Investment Promotion Act aims to promote foreign investment in Korea by providing support and benefits for foreign investors. The act sets legal frameworks for foreign investment. Foreign currency exchanges and transactions related to foreign investment are subject to the Foreign Exchange Transaction Act, unless otherwise designated under the Foreign Investment Promotion Act. Tax cuts for foreign investment are subject to the Restriction of Special Taxation Act, its Enforcement Decree and Enforcement Rules and Tax Reduction for Foreign Investment Rules. Meanwhile, foreign-invested companies are domestic entities established under Korean law, and therefore are subject to Korean regulations applicable to related industries. For example, if there are approval and license requirements under individual laws, companies should meet the requirements accordingly. Laws related to foreign investments include the Act on Designation and Management of Free Trade Zones and Act on Designation and Management of Free Economic Zones. In the logistics industry, laws related to foreign investments include the Basic Logistics Policy Act, Distribution Facilities Development and Operation Act, Distribution Industry Development Act, Port Act, and Aviation Act. Framework Act on Logistics Policies As a law forming the foundation for the government s logistics policies, the Framework Act on Logistics Policies defines the responsibilities of the state and local governments to develop and implement logistics policies and plans. The Private and Public Joint Logistics Support Center (Article 56) helps Korean logistics companies to enter overseas markets and attracts foreign logistics companies to Korea. The government may engage in investment inducement activities in collaboration with managers of logistics facilities as well as relevant agencies or organizations (Article 62). The government, if necessary, may evaluate the activities done by the managers of logistics facilities to attract foreign-invested companies and transshipped cargos (Article 63).

25 25 GOVERNMENT POLICIES AND REGULATIONS Restrictions on Logistics Investment In the coastal water passenger and cargo transportation sectors, where foreign investment is restricted, foreign investment is allowed in the inter-korean passenger and cargo transport businesses only when the investment is made in partnership with South Korean companies and the foreign equity ratio is less than 50%. If a foreign provider intends to provide marine passenger transportation services between Korean and foreign ports, the provider should obtain approval from the Minister of Oceans and Fisheries. To establish a branch office in Korea, the provider should file a report to the Minister of Oceans and Fisheries (Articles 6 and 7 of the Marine Transportation Act). In the air transportation segment, international, domestic and small air transport are open to foreign investment when the foreign equity ratio is less than 50%.

26 LOGISTICS COST

27 27 COST Cost and Labor National Logistics Cost The aggregate logistics cost worldwide is estimated to USD 8 trillion and billion as of 2015, taking up 11.7% of the global GDP. By country, the United States spent USD 1,473.5 billion (8.2% of its GDP); Germany, USD billion (8.8%); Japan, USD billion (8.5%); and China, USD 2,048.4 billion (18.0%). (Source: Armstrong and Associates) The Korea Transport Institute estimated that Korea s logistics cost as of 2014 amounted to USD billion (or USD billion if international freights included), which is a 5.5% increase compared to the previous year (or 1.4% if international freights included). Korea s logistics cost accounted for 10.96% of its GDP, a 0.32% increase compared to the previous year. Changes in Korea s Logistics Cost (USD billion, %) Category Domestic Logistics Cost Including International Freights GDP Percentage against GDP (%) Domestic Including international freights , , , , , , , CAGR Nominal Real Nominal YoY Real Source: The Korea Transport Institute In 2014, Korea s logistics costs increased across all categories, except for inventory maintenance (-3.6%). The transportation cost increased by 5.89%; logistics information management by 3.18%; packaging by 2.96%; and unloading by 0.87%. The share of each business segment in the total logistics cost (including international freights) was 75.6% for transportation, 17.9% for inventory maintenance, 3.1% for logistics information management, 1.8% for packaging, and 1.6% for unloading.

28 LOGISTICS 28 Composition of Logistics Cost by Year (%) Logistics infomation Unloading Pakaging Inventory maintenance Transportation Source: The Korea Transport Institute Logistics Cost per Ton Logistics cost per ton is the economic cost of handling a ton of goods. It is determined by dividing the spending for each category by the total tonnage of freight transport. In 2014, the logistics cost per ton was USD 70.6 (+0.57% YoY). The logistics cost per ton started to increase in 2005 due to various factors including increased oil prices. It has declined since 2012, owing to falling oil and material prices, labor costs, and other overheads. Transport cost per ton-kilometer is the economic cost of transporting a ton of goods for a kilometer. It is determined by dividing the transport cost of each category by the tons/kilometers of freight transport of a category. In 2014, the transport cost per ton-kilometer was USD 0.58 (+3.07% YoY). Logistics and Transportation Cost per Unit (USD, %) Category Logistics Cost per ton Logistics Cost per Ton-Kilometer CAGR (06-14) YoY (13-14) Source: The Korea Transport Institute * From 2013 to 2014, both logistics cost per ton and transport cost per ton-kilometer increased in KRW by 0.57% and 3.07%, respectively. The figures in the table indicate otherwise due to exchange rates. CAGR and YoY are calculated based on KRW

29 29 COST Training and Supply of Logistics Workforce Working-level operators, foreign experts and technical experts are most needed in the current Korean logistics industry. The demand for technical experts is mostly for freight transport, administrative work, warehousing and unloading management. Most of the logistics workforce in Korea are trained in four-year universities and graduate schools. Korea produces around 2,500 technical experts and managers every year. Seven institutions across the country are running the re-training courses in the form of industrial-academic collaboration for those currently working in the field. The training institutes of Busan and Incheon Port Authorities, and the Comprehensive Logistics Management Technology Support Center provide educational programs for technical experts. Profitability Performances of Logistics Companies According to the publicly released analysis of 130 logistics companies in Korea, the overall sales of Korean logistics companies increased by 4.2% in 2015 compared to the previous year. While their operating profits rose by 6.3%, net income slightly decreased by 1.1% and liabilities grew by 5.2%. The average sales revenues amounted to KRW billion (USD million). The average operating profit was KRW 10.7 billion (USD 9.1 million), and the average net income was KRW 7.1 billion (USD 6.1 million). Performances of Korean Logistics Companies (2014 to 2015) Average of 130 companies Sales revenue: KRW billion Operating Profit: KRW billion Net income: KRW 7.18 billion 4.2% 6.3% -1.1% 5.2% KRW 37,244 billion KRW 38,818 billion KRW 1,318 billion KRW 1,402 billion KRW 944 billion KRW 933 billion KRW 15,532 billion KRW 16,350 billion Sales revenues Operating profits Net income Liabilities Source: Korea Logistics News (

30 LOGISTICS SUCCESS CASES OF FOREIGN INVESTMENT

31 31 SUCCESS CASES OF FOREIGN INVESTMENT Overview Foreign investment in the Korean logistics market is concentrated in international logistics brokerage, port operation, international express delivery and logistics real estate development. According to a 2008 study of the Korea International Trade Association, the majority of foreign capital-invested logistics companies in Korea were in the form of a corporation sole. The first foreign investment in Korea s logistics market was made in A 2013 Korea Chamber of Commerce & Industry report showed that global logistics companies in Korea focus on multimodal transport (freight forwarder) (42.7%), cargo transportation (overland, sea, air) (40.7%), warehousing and storage (7.3%), terminal operation (4.7%) and comprehensive logistics service (3.3%). All of the global top four courier companies have entered the international express delivery market in Korea, with DHL taking the lead (1977), followed by TNT (1983), FedEx (1988), and UPS (1988). Foreign-invested real estate funds specializing in real estate investments, not logistics services, increasingly invest in the establishment of logistics centers in Korea. There are about 30 foreign-invested companies in the Korean logistics real estate market, including Mapletree, Prologis and Ascendas. Management Status of Foreign Capital Invested Logistics Companies In 2013, the Korea Chamber of Commerce and Industry surveyed 220 global logistics companies in Korea on their current management conditions in the Korean market. When asked about the market outlook, foreigninvested companies expected market growth, albeit at a slower pace due to intensifying competition with neighboring countries. Regarding management conditions in the Korean logistics market, 55.3% of the respondents said they were "somehow satisfied." More than 50% of the global logistics companies, including DHL and FedEx, said they were planning aggressive growth strategies such as a capex increase. Such strategies are considered a plan to increase their dominance and form a comprehensive logistics market in the Northeast Asian region, considering the growing importance of logistics due to the country s expanding FTA platform. When asked about the reason for their successful entry into the Korean logistics market, the respondents named a competitive advantage in global networks (51.4%), the large quantity of transported goods via joint-entry with global shippers (21.1%), successful cooperation with Korean partners (12.1%) and full financial support by parent companies (9.3%). Foreign logistics companies called for systematic support from the Korean government, as investment sentiment among foreign-invested companies has weakened due to the slow recovery of the Korean logistics market, destructive competition among market players and lack of productivity. According to the respondents, policy tasks to improve logistics market conditions and attract global investment include greater incentives such as tax

32 LOGISTICS 32 reductions and financial support (31.0%), regulatory reform and streamlined administrative procedures (24.7%), logistic service information systems and automation (12.2%), and the establishment of inland logistics bases and complexes (7.3%). In 2015, KOTRA found that most of the foreign capital invested companies were either satisfied (42.7%) or "somehow satisfied"(40.7%) with the management conditions of Korean logistics firms. Meanwhile, about 6.8% of them answered they were dissatisfied with the business environment. Among them, firms that have parent companies in Europe reported higher levels of satisfaction with Korea s logistics business environment, while Japanese companies reported extremely low levels of satisfaction. The difficulties they encountered include traffic congestion (41.2%), high transport cost, and "high storage cost". Nippon Express Nippon Express is a comprehensive logistics company founded in It is the largest logistics company in Japan and the fourth largest in the world. It employs 35,717 workers, operates in 257 cities across 42 countries, and holds 610 logistics networks. Its main businesses include road/rail/air/ship transport, storage, customs clearance, and other relevant businesses. Its target sales revenue for 2016 is JPY 1.8 trillion (USD 1,543 billion). Nippon Express established a corporation in Korea and is operating offices and warehouses at seven locations including Seoul, Busan, and Incheon. In April 2016, the company launched the Nex Busan Global Logistics Center (Nex BGLC) inside the Hinterland Logistics Complex (HLC) of Woong-dong at Busan New Port (Free Trade Zone). The center was built exclusively with the investment made by Nippon Express. In August 2015, Nex BGLC received an investment from the Japanese company and completed a two-story comprehensive warehousing facility (total floor area: m 2 ) equipped with room-temperature and refrigerated warehouses. Nippon Express seeks to make the center a focal point for intermediary trade in East Asia. It plans to gather, store and process consumer goods imported from China, ASEAN countries, and the United States, as well as Korean auto parts, altogether in Busan New Port and export them to Japan. The company is also pursuing a strategy called "Multi-Country Consolidation, through which it seeks to gather Japanese local goods in the Busan New Port and export them to 42 countries across the world. In August 2006, the Busan Port Authority (BPA) opened a delegate office in Japan to hold investment seminars on a regular basis and attract Japanese businesses to create a logistics hub in Korea. The seminars were mainly about the promotion of Busan New Port and its cost reduction effects. In 2014, Nippon Express conducted a feasibility study on logistics hubs in Asia. Busan received positive comments with regards to the location for handling Japanese logistics, operation costs, the provision of various related services, and communication.

33 33 SUCCESS CASES OF FOREIGN INVESTMENT The Nex BGLC is expected to generate USD 28.3 million and more than 100 new jobs. The investment of Nippon Express is likely to attract additional investments from other multinational or Japanese logistics corporations to create a logistics hub in Northeast Asia. Jcet STATS ChipPAC Korea STATS ChipPAC Korea is a foreign capital invested company created through the acquisition of the semiconductor department of Hyundai Electronics by STATS Chip. STATS Chip is a global semiconductor test and assembly solutions company. It was created by a merger between Singapore s STATS and ChipPAC. Jcet STATS ChipPAC Korea is a new corporation founded in December Jcet, China s leading semiconductor post-processing company, acquired 100% shares of STATS ChipPAC Korea. STATS ChipPAC has its headquarters in China, and operates advanced technology development centers in California and Arizona in the United States, and Korea. The company built a total supply chain solution that delivers excellent customer service. It has strategic production bases in Singapore, China and the United States, and operates customer support centers in the United States, Europe and Asia. Before the merger in 2015, STATS ChipPAC Korea had a 110,117 m 2 of production facility in the Incheon Airport Logistics Complex. Once completed in 2017, the plant is expected to generate USD 4.67 billion in economic value (an annual revenue of USD 2.08 billion, 4,000 tons of goods transported by air and 2,000 jobs). The plant, along with the Incheon Free Economic Zone and neighboring semiconductor and logistics companies, will make one of the finest semiconductor post-processing centers in the world. Jcet STATS ChipPAC Korea is the first foreign capital invested company to invest in the Yeongjongdo Free Trade Zone in the Incheon Free Economic Zone. It invested USD 133 million, created 317 jobs, and received an R&D investment of USD million. The income generated from its manufacturing facilities will be subject to the corporate tax reduction. The reduction rate is 100% for the first five years and 50% for the next two years. In recognition of its contribution to the semiconductor post-processing industry in Korea, Jcet STATS ChipPAC Korea received the Silver Pagoda Industry Medal from the Korean government in 2016.

34 LOGISTICS RELATED COMPANIES AND ASSOCIATIONS