Incheon International Airport FTZ : A True World-Class Logistics Hub Information Memorandum May 13, 2008, issued by: IIAC
Table of Contents 1 Purpose of the Information Memorandum 1 2 Introduction of Incheon International Airport 2 2.1 Excellent Geographical Location & Network 2 2.2 Incheon Int l Airport Free Trade Zone 6 2.3 Airport LogisPark(ALP) 10 2.4 Cargo Terminal Area (CTA) 15 3 Incentives 16 4 Response Form 4 5 Contact Information 19 Appendices 1. Current & Future Market Analysis 21 2. Voice of the Airlines 4
New Air Cargo Service to ICN 1. Purpose of this Information Memorandum The purpose of this Information Memorandum is to provide you the information about Incheon Int l Airport Free Trade Zone, which gives the most convenient and competitive business environment to you. Airport LogisPark (ALP) Disclaimer This Information Memorandum is issued solely for information and planning purposes and does not constitute a formal invitation to bid, nor is it binding on either party. Responses to the RFEOI will not be returned. Please note that IIAC cannot reimburse any expenses incurred in responding to this RFEOI. 1
2. Introduction to Incheon International Airport 2.1 Excellent Geographical Location and Network Incheon International Airport(hereinafter, ICN) is the gateway of Northeast Asia, located in the Republic of Korea. Strategically located between China and Japan, ICN lies at the center of a giant market that has 1.5 billion people and 61 cities with population over a million people within 3 hours flight from ICN. Furthermore, the Northeast Asian region accounts for 20% of world GDP and 27% of the world logistics volume. Korea s economy has a prominent role in the region, with a GDP which is currently 12 th largest in the world. Free Trade Agreement (FTA) between the USA and Korea, concluded in April 2007, will eliminate tariffs and other barriers to trade, promote economic growth, and strengthen economic ties between the two countries. Ties with EU market will also be fortified with additional FTA between EU and Korea, which is under negotiation now. World s 2 nd largest cargo airport 2005, 2006 & 2007 s winner of the ACI Service Excellence Award as The Best Airport Worldwide The Best Connectivity in North Asia : 70 airlines Connect 167 cities Non-stop service to North America Key Gateway to & from China with high service and labor quality guaranteed Bridge between North Asia & South Asia Figure 1: A potential market of 1.5 billion people (Source: IIAC) 2
Although it only began operations in 2001, ICN has experienced rapid growth: passenger and cargo volume have increased with a cumulative annual growth rate of 8% and 9% respectively, while aircraft movements have seen an average annual growth of 16%. It offers currently the best global network in Asia, connecting 169 cities including Latin America with 69 airlines.(as of August 2008) Europe 26 cities China 35 cities North America 24 Cities Africa 2 Cities Middle East 8 Cities Asia 32 cities Japan 26 cities Austrailia 5 Cities Figure 2: ICN global network (Passenger and cargo flights) (Source: IIAC, Dec. 2007) 180 160 140 120 100 80 60 40 20 0 35 26 34 24 49 36 9 10 11 58 17 12 4 9 79 41 17 11 9 28 ICN HKG SIN PVG China Japan Europe North America Others Figure 3: Number of Cities served(compared with Hong Kong/Singapore/Shanghai Airport) 3
There are 25 dedicated cargo airlines such as FedEx Express, UPS, DHL, Polar and Atlas Air serving at ICN. Figure 4: Major cargo airlines operating at ICN. ICN the 2 nd largest international cargo airport by tonnage. ICN s cargo transshipment rate has steadily increased and currently reached 50.6%. Its facilities rank 1 st in terms of service levels, winning ACI Service Excellence Award as The Best Airport Worldwide for 3 subsequent years ; 2005, 2006 and 2007. 2005 Best Airport Worldwide in ASQ Servey by ACI Best Airport Worldwide Best Airport over 25 million passengers Best Airport Asia Pacific Most Improved Airport Best Airport Worldwide in ASQ 2006 World Best Airport by Global Travel Magazine Award of Excellence by ATRS Readers Travel Choice Awards by Time Magazine Airport of the Year by CAPA (Center for Asia Pacific Aviation) 2007 Best Airport Worldwide in ASQ (3 consecutive yrs) World Best Airport by OAG (Official Airline Guide) World Best Airport by Global Travel Magazine 2008 Eagle Award by IATA Best Airport Worldwide in ASQ (4 consecutive yrs) 4
Korea has Open Sky agreements with 28 countries including China, Japan, India, USA, Germany, Vietnam and Malaysia and bilateral agreements with many others. Korea also plans to reach liberalization with the EU, Russia, Philippines and other countries with sufficient air transport demands in order to secure the status that benefits the world s 8 th largest air transport country. Figure 5: ICN has the best connectivity to Japan and China Table 1 : Cargo Capacity of ICN 5
Traffic Statistics International Passengers and Cargo, World No.10 and No.2 (2007) 31 million int l PAX, 2.6 million tons of int l Cargo 211 thousand int l flights operations Highest transshipment rate in the region (50.1%) Operating Free Trade Zone comprised of Cargo Terminal and Airport LogisPark 80 60 40 20 Number of airlines Operating at ICN 6 3 5 9 5 2 5 3 5 5 47 69 7 1 PAX(X10,000) 3500 3000 2500 2000 1500 1000 500 PAX & Cargo PAX Cargo 0 2001 2002 2003 2004 2005 2006 2007 2008 0 2001 2002 2003 2004 2005 2006 2007 Cargo (X1,000 tons) 2.2 ICN Free Trade Zone IIAC is operating Free Trade Zone, which consists of Cargo Terminal Area(CTA) and Airport Logispark(ALP). Total area of FTZ is 2.1 million m2. IIAC wants to invite promising value added companies in the manufacturing and logistics industries to FTZ. With the state-of-the-art facilities and networks, IIAC is ready to support the dynamic needs of companies and to enhance competitiveness, quality and customer service level and to reduce cost. Figure 6: ICN Free Trade Zone consists of Cargo Terminal Area (CTA) and Airport LogisPark (ALP) Figure 3: Airport layout (Source: IIAC) Occupied Unoccupied 6
2.2.1 Advantages of Airport Logispark (ALP) Fast & Easy Customs Clearance ICN customs office operates a 24 hour customs clearance system called UNI-PASS. This system can handle all types of customs clearance procedure automatically in a singe window. It takes less than one hour to clear imported goods. This system is the fastest among 169 members of the World Customs Organization. Figure 7 : The fastest customs clearance system among the 169 members of the World Customs Organization Table 2 : Customs Clearance Systems od Major Countries Simplified Int l to Int l Re-export Customs Procedure The required time for customs clearance for by-passing cargoes is considerably short for the manufacture s hub operation. Bill of Lading (B/L) split & mergence for re-export, especially required for Bonded Warehouse Transaction, are removed, and improved for 3PLs to paperless clear the goods to be re-exported followed by Use and Consumption Declaration As-Was Inventory Repackaging B/L (1) B/L (2) a b A B C Order (a, A, B) Split & Combine B/Ls B/L (3) a A B Re-export Declaration (Document Submission & inspection) Load & Ship Time Taken Approx. 4 hrs As-Is Inventory Use/Consumption Declaration a b A B C Order (a, A, B) Repackaging B/L a A B Re-export Declaration (paperless) + Load & Ship Time Taken 1.5 hrs 7
Comprehensive multimodal transport system ICN is the center of the comprehensive multimodal transportation system. ICN is able to provide intermodal transportation system between China and Korea, such as Sea& Air and Air& Sea with the combination of Incheon Port. In case of China, cargo from and to ICN can be delivered via Road Feeder Service (RFS) Capable of providing two-way service between Korea-China, China-Korea. Reasonable Operating Cost Truck Transportation Load truck & car ferry Move to Destination Airport Truck Transportation Incheon Airport provides the lowest operating charges. USD 35,000 30,000 25,000 20,000 19,085 22,145 4,791 26,141 8,892 29,343 6,043 15,000 10,000 11,834 12,198 4,266 6,043 9,126 17,354 17,249 23,300 5,000 7,568 6,155 9,959 6156 0 ICN PEK (3) NRT HKG (4) KIX PVG Ground Handling Fee (1) Airport Usage Fee (2) (1) Based on 1 full cycle processing (unload terminal processing load) of 100 tons of cargo (2) Total charge paid by airlines for a 3 hour turn-around flight of B747-400 (3) Assumption that airport usage fee is equivalent to Shanghai; data unavailable for Beijing (4) Ground handling fee includes USD 15,000 that is transferred to the shipper Source: Booz Allen Hamilton (Ground Handling Fee), IATA (Airport and Air Navigation Charges), IIAC (Airport Usage Fee, 2007), Asahi newspaper Figure 8 : Operating costsat Major Airports 8
Figure 9 : Operating Costs at Airport LogisPark Ground Rental Fee for Transfer Cargo ICN PVG SIN HKG Ground Rental Cost USD 7 USD 8 USD 15.97 N/A (/sqm/year) Distance to Airport Process Efficiency Inside 28km the to PVG Inside N/A the High Low High High Air Transport Charge(Direct Flight to LA) ICN PVG SIN HKG Costs in case of 5,000m 2, 30,000 tons during slack season for a year * Assumption that ICN s air tansport charge is USD 3 for 1 kg. (thousand :Air Transport Charge : Ground Rental 13,000 112,520 11,000 97,200+ 9,000 90,0 Estimate To LA 100 140 N/A 113 To Frankfurt 100 132 125 127 100 * Assuming Incheon as 100 in 2007. * No direct flight from SIN to LA. 0 5 54 80 ICN PVG SIN HKG Excellent workforce and supporting IT infrastructure Korea s workforce is highly productive, highly educated (97% possesses college education or vocational training background) and very job-committed, more skilled than China and more cost competitive than Japan. In addition, Korea is backed by a superior telecommunication and IT infrastructure which has become a global benchmark. Firm vision,mission and commitment of central government and ICN Incheon Airport established a long-term logistics roadmap to develop into a true world- class logistics hub, bolstered by strong determination of government. -Thomas Held, former CEO of Schenker 9
2.3 Airport Logispark (ALP) Figure 11 : Airport LogisPark G4 G5 G6 G7 G3 G2 G1 Public Facilities A2 A2-1 A1 B1 F1 F2 F3 F4 D2 D3 D1 D4 B9 D5 D5 D6 (16,368) (9,640) E2 E3 C1 C2 (16,743) (19,246) (5,363) (6,711) E1 (16,604) C3 C4 (9,545) (6,986 C5 ) C7 C6 (6,685) (16,322) (13,799) C8 Lot No. Size (m 2 ) Company A2,A2-1 25,303 Pantos A3 38,347 Korean Duty-Free Association B1 79,083 Incheon Int l Logistics Center B2 8,892 Samsung Logitec B3 9,052 K.W.E. Korea C1 5,363 Britestone C4 6,986 Hyundai Logistics D1~D6 52,695 Neo Semitech F1~F4 65,706 AMB Property G1,G7 21,608 Daewoo Logistics B3 A3 B2 Leased out To be leased G2 6,973 Haewoo Logistics G3 10,000 Schenker Korea G4 6,531 Hanaro T.N.S. G5 9,580 Incheon Air Cargo Center G6 9,464 Baekma Cargo Total 355,583 (Occupancy ratio: 76%) ALP was established and started operating in March 2006. It is located in the FTZ, on the east side of the two runways and cargo terminal area. Total area of ALP is 992,000 m 2 and 636,417 m 2 is to be leased out. IIAC owns and lease the land to companies for their business implementation. Currently, the occupied rate of ALP is 76% (355,583m 2 ). Table 3 : Airport LogisPark Leasing Specification 10
IIAC Warehouse Space: 8,907sqm Height: 14.5m Located at Terminal Area A M B A M B AMB : Global top 3 Investment and Leasing Company Space: 36,000sqm Height: 12.4m K W E K W E Kintetsu World Express Space : 8,877 sqm (F1~F2) Schenker Schenker : Global top 2 Air Logistics Company Space: 19,946 sqm (B1~4FL) Height: over 10m Pantos Pantos : Korea s Top Air Logistics Company Space: 7,162sqm Height: 15m Table 4 : Warehouse Facilities in Airport LogisPark 2.3.1 Business Models for the investors (logistics companies) With the exemplified businesses below, right in the heart of the emerging Northeast Asia economy, you can create new values and revenues in response to customer s needs, which enables you to enhance business competitiveness and customer service level in terms of cost, quality and speed. Logistics business Global sourcing center : You can optimize your supply chain and by establishing global sourcing center at ICN along with competitive multi-vendor, for instance, sourcing general parts from China, and cutting-edge parts from Korea & Japan. In case of this, you can also reduce the cost and add value by using the advantages of FTA. Global distribution center : Transport whole products from production site (located in China, Vietnam etc.) to ICN global distribution center, perform total inventory management and distribute to overseas dealer at the point of order, without any loss that can be generated from quick price change. 11
Value-added logistics : You can perform item sorting, light assembling, labeling, packaging and other value-adding activities in addition to traditional distribution activities. Manufacturing business Postponed manufacturing : In order to reduce inventory cost and improve efficiency of total supply chain, you can postpone production or distribution at ICN, corresponding to an instant demand and need, with ICN s minute transportation network, swift customs clearance and customized logistics system. Light Manufacturing : Airport is the best place for products which demand quick distribution. You can perform light manufacturing (eg. assemble modules to end product)at ICN and transport in/out Korea in no time. Additional heavy manufacturing, however, is also possible as long as swift distribution is required. Convergence of IT, BT, NT : With backgrounds of Korea s diversified industries, high-educated work force and world best IT power, you can develop convergence of your cutting-edge technologies with other brand-new IT, BT, NTs. Point-working by partnership : In Korea, as home of corporate giants, you can easily find your business partners with least efforts and interchange high technologies backed by thorough protection of intellectual property. Case Study ) ASML s Asia Distribution Center in Incheon About ASML Headquartered in Veldhoven, the Netherlands, ASML is the world s leading provider of lithography systems for the semiconductor industry, manufacturing complex machines that are critical to the production of integrated circuits or microchips. Hub Operation Plan Currently, ASML s spare parts warehouses are situated in Singapore and Taiwan. However, they have planed to operate a kind of consolidation warehouse and surveyed to seek a right place in the Asia since August, 2007. - Candidate Countries: ROK, Singapore, Hong Kong, Taiwan, China 12
Requirements of Hubbing Operation v Existence of big customers in Korea v Existence of global 3PLs in Korea (or Incheon FTZ) v Excellent aviation connectivity (for minimizing lead time) v Accessibility to ASML s customers Incheon Airport v Customs procedures for Int l to Int l trade - Item (peaces)-based clearance - A bulk license of Compliance Program for strategic goods v Non-taxation on a DC operating firm under foreign jurisdiction who uses 3PLs in Korea Ⅹ Ⅹ ASML s requirement was like above. Incheon has big customers like Sansung and Hynix, and Global 3PLs in the Airport Logispark. And Incheon was at the center of Giant Northeast Asian semi conductor market. Below is the distance analysis of ASML Product Transport Route Figure 10 : Total Distances from each airports in Asia - Destination : Incheon, Shanghai, Beijing, Taipei, Tokyo, Kuala Lumpur Incheon (INC) Beijing (PEK) 946km Arithmetic Average Transport-weighted Average Shanghai (PVG) 851km Tokyo (TYO) 1,190km 7,000 6,000 6,198 5,784 Kuala Lumpur (KUL) 4,590km Taipei (TPE) 1,470km 5,000 4,000 3,000 2,000 3,421 3,521 3,401 3,422 3,691 4,178 3,759 4,038 1,000 : Customer Place Note : Supply form HQ is not considered in this case. - ICN PVG TPE HKG SIN 13
Incheon met almost every requirement of ASML but failed to meet 2 conditions. First, it needed shorter customs clearance time and simplified procedures for the int l to Int l re-export. So Incheon Airport Corporation s dediated team negotiated with the National Customs Authority and finally removed Bill of Lading (B/L) split & mergence for re-export, especially required for Bonded Warehouse Transaction. As-Was Inventory Repackaging B/L (1) B/L (2) a b A B C Order (a, A, B) Split & Combine B/Ls B/L (3) a A B Re-export Declaration (Document Submission & inspection) Load & Ship Time Taken Approx. 4 hrs As-Is Inventory Use/Consumption Declaration a b A B C Order (a, A, B) Repackaging B/L a A B Re-export Declaration (paperless) + Load & Ship Time Taken 1.5 hrs ASML s second requirement was Non taxation on DC operating firm under foreign jurisdiction who uses 3PL in Korea. So Incheon Airport team met Ministry of Strategy and Finance to solve this problem and finally got the progressive ruling by MOSF As - Was üwas a taxpayer as regarded their 3PL warehouse as their fixed business facility. üno taxation bilateral agreement between ROK and HK cooperation with National Tax Service, etc. As - Is ünot a taxpayer if they uses 3PLs in Korea only for simple warehousing,repackaging, and delivering the goods they have imported and exported. 14
2.4 Cargo Terminal Area (CTA) The CTA is located in the FTZ, east of the 3 runways. It consists of 5 cargo terminals and provides ample space with 36 cargo aprons. It currently covers a total land area of 1.10 million m 2 (to be expanded to 2.15 km 2 by 2015. Table 4 : Cargo Terminal Area specifications Company Size (m 2 ) Capacity (ton) Korean Air Cargo 54,600 1,200,000 Asiana Cargo 50,400 1,110,000 Foreign airlines 77,700 780,000 AACT(Atlas Air Cargo Terminal) 11,250 200,000 International Post 29,724 350,000 American Army Post 1,516 20,000 DHL 9,454 220,000 Air cargo warehouse 16,180 120,000 Total 250,824 4,000,000 The CTA provide logistics companies with an excellent environment to operate in: Superior cargo handling service level: in order to provide the fastest and most predictable cargo handling service, ICN introduced a continuous service improvement program, ensuring a better service quality than those of other leading airports. Table5: Cargo Performance Index 15
3. Incentive Programs a) Tax Incentives If you invest over USD 10 million as a manufacturing-based company or over USD 5 million as a logistics / SOC company, the following incentives will be granted. b) Land lease incentives Below are the prevailing land lease incentives based upon investment capital: c) Others - Goods can be used or consumed in the FTZ without having to pay customs duty - Supply of goods or services within the FTZ is exempted from imposition of value-added tax 16
4. Response format Those who received this Information Memorandum are invited to submit an expression of interest (EOI) for: Leasing of the unoccupied land plot(s) at the ALP, as indicated in Figure 6, stating the land plot number(s) or the ground surface area they would like to lease as well as the desired land use period. And/or Leasing of the unoccupied building property owned by AMB, including the desired property use period. In addition, you are requested to submit EOI materials that illustrate your company s strength, competence, and experience in the manufacturing, assembly or logistics industry. All EOIs will be received by Incheon International Airport Corporation(IIAC) and IIAC will respond with all the support for companies to start business at ICN. It is recommended to make a site visit before submitting the EOI. IIAC could offer a site invitation at the stage of finalizing the lease agreement. 17
Table 6 : Example of response format General information Company Industry Revenue Name Title Division Address: City: State/Province: Country: ZIP: Tel Fax E-mail address Expression of interest Degree of interest We are considering on long-term basis. We are comparing with other candidates. We want to start business now. Planned business Manufacturing Whole Sale/Retail Logistics Others Planned activities Global sourcing center Global distribution center Investment type Investment amount Land plot number (*in case of land lease) Integrated service hub Postponed manufacturing (if others, describe activities please) Land lease (construction of your own facility) Building lease (use of AMB owned property) Use of logistics tenants in Free Trade Zone Others Value-added logistics Light manufacturing Use period 18
5. Contact Information Responses to this Information Memorandum are to be submitted, either by e-mail or post, to: Gene Kim Logistics Team/Hub Strategy Division 2850 Unseo-dong, Jung-gu, Incheon 400-700, Republic of Korea TEL +82 32 741 2277 FAX +82 32 741 2329 e-mail catontheroof@hanmail.net 19
Appendices 20
1. Current & Future Market Analysis Figure 8 depicts the worldwide cargo traffic growth rates for 2005-2025. Growth of cargo traffic from and to Asia outstrips growth of cargo flows between other regions. Obviously, China plays an important role in realizing this growth in cargo traffic. ICN is located right next to this enormous market and offers more connections to China than any other airport. (Hong Kong International Airport has the largest number of connections, but does not have the advantage of connecting to China for non- Chinese airlines due to absence of cabotage). As such, ICN can serve as a consolidating point for traffic in the Asian region, thereby neutralizing the imbalance in inbound and outbound traffic volume. 5.0% 7.1% Asia - North America 3.8% Intra North America 5.4% Europe - North America North America - 5.6% Latin America Europe Intra 5.3% Europe Africa Europe- Asia 6.9% ICN Intra Asia 8.6% Figure 11: Average worldwide annual air cargo traffic growth rate for 2005-2025 (Source: Boeing Air Cargo Market Forecast 2006-2007) 21
ICN as a consolidating point for air cargo China ICN Europe US Intra Asia Hub Rationale for Northeast Asia Consolidating Point Cargo flow to/from secondary regions in China will continue to grow at around 20~30% May be inefficient to serve secondary regions directly from the US/EU and intra Asia hubs Today Chinese logistics operations lack infrastructure and reliable operations practices Chinese regions prefer to ship outside of China, rather than via points within China Advantages Using consolidating point can neutralize significant imbalance in inbound and outbound flow of air freight volume Can increase flight frequency and load factor Figure 12: ICN as a consolidating point for air cargo The growth in cargo volume has been mainly driven by steady increase of both imports into Korea as well as transit cargo (see also appendix II.c). Main transit cargo regions are the Americas (30.5%) and China (22.7%). Although exports have slightly decreased in 2006, Korea itself provides plenty of backhaul market opportunities as an exporter of high value products such as semiconductors, flat-panel TV screens and cell phones. Europe 13.4% Other Oceania 1.5% 1.2% Japan 12.9% China 22.7% Americas 30.5% Southeast Asia 17.7% Figure 4: Transit cargo volume specified by region for 2006. 22
2. Voice of Logistics Companies Most industry observers agree that Asia will continue to outpace the rest of the world in the growth of new air cargo traffic. Incheon is a critical hub for transpacific and intra-asian air cargo traffic, and it is a frequent gateway of [Atlas sister] Polar Air Cargo and other air carriers for air cargo service to Hong Kong, Shanghai and Beijing. William Flynn,President and CEO Atlas Holdings. June 2007 Our commitment to South Korea is largely driven by customer needs arising from a steady flow of trade volumes into and out of South Korea. We are confident that our robust network infrastructure, as well as our upgraded facilities, will not only serve the increasingly sophisticated needs of our customers, but will enable us to actively enhance our role as a trade facilitator to improve trade links between South Korea and the rest of the world. Scott Price,CEO DHL Express Asia Pacific. November 2006 The dynamics [in this region] will continue to provide good demand for widebody introduction, William Flynn,President and CEO Atlas Holdings. June 2007 "The decision to add new frequencies is evidence of our commitment to the Korean market and demonstrates our confidence in a revival of the Korea economy. FedEx will continue to provide the most reliable and fastest express service to our customers in Korea." David L. Cunningham, President FedEx Asia Pacific. January 2004 Our new nonstop flight to Seoul will expand Delta s service to Asia and support the establishment of Incheon as one of Asia s premier hub airports. The added freight capacity to and from the U.S. will also benefit freight forwarders and cargo shippers around the world. Glen Hauenstein,Executive Vice President of Network and Revenue Management Delta Airlines. June 2007 Shanghai is full. Seoul is a better option for regional hub status. As a hub, Korea definitely plays an important role, [ ] pointing to the presence of strong air and ocean carriers, a well-developed infrastructure and its location. We use Korea very much as a hub. We have a lot of cargo from Southeast Asia going through Incheon." Charles Kaufmann,Director DHL Global Forwarding North Asia. April 2006 23