Invest KOREA

Korea is in a better position than ever to revamp logistics centers focusing on the refrigerated and frozen storage industry

What is cold chain?

The term “cold chain”, the latest business buzzword of the logistics industry, has been widely circulating in the media in recent years. In a nutshell, it is a lowtemperature distribution system that ensures the quality and safety of temperaturesensitive products dealing with agriculture, livestock, other food items and medicine with tight temperature control throughout the whole process—from production and storage, to transport, sale and consumption.

Temperature standard by cold chain cargos

Current state of the global cold chain industry with a focus on China and Japan

Cold-chain container cargo posted a compound annual growth rate (CAGR) of around 10 percent since 2010, outpacing the growth of regular container cargo. Drewry, a global shipping consultancy in the UK, predicted in 2014 that demand for cold chain containers will record a CAGR of 22 percent or higher for the next five years. 

The rise of the cold-chain segment is driven by global shipping companies such as Maersk, MSC and CMA CGM. It is also attributable to the increasing demand for medicine and tropical fruits. In particular, cargo throughput in the Asian region posted remarkable growth, with China accounting for 38.7 percent of it.

What explains the rapid growth in the Asian logistics market? The first factor is the presence of China, a mega market. The potential value of the Chinese cold chain market is expected to increase from USD 526.4 billion in 2013 to USD 1.2 trillion in 2020, when assuming all food items go through a cold chain system.

Second, with the increasing living standard, the size of the middle class has grown in major Chinese cities in coastal areas, driving up demand for imports, especially when it comes to fruits and meat. The income level strongly affects dietary habits. 

Korea’s cold chain market has expanded, for example, since its GDP per capita exceeded USD 20,000, stimulating demand for premium-grade (organic) meat, fish, fruits, fresh pressed juice, coffee and other finished products. China’s middle class is estimated to more than double from 120 million persons in 2014 to 280 million persons in 2020. The sheer expansion of China’s middle class will undoubtedly cause the cold chain market to grow.

The third factor is a structural change in China’s trade with its neighboring countries, including Korea. For instance, the bilateral trade between China and Korea used to be characterized by China’s Korea-bound exports of low-priced agricultural and fishery products. However, Korea’s China-bound exports of high value-added processed agricultural and fishery products are reporting a sharp increase. In particular, Korea’s China-bound exports of other processed agricultural products experienced a 2006-2011 CAGR of 189 percent.

The problem is that despite such strong demand for cold chain logistics, the lack of refrigerated and frozen storage warehouses and shipping methods, along with the underdeveloped state of cold-chain management (i.e. information control, specialization in refrigerated transport, logistics and management techniques) have caused a high disposal of perishable food cargos, which should have been shipped at a given temperature. For instance, the in-transit cargo damage ratio reaches up to 40 percent in China. Following the release of Farm Produce Cold Chain Logistics Development Planning by the National Development and Reform Commission (NDRC) in 2010, China’s cold-chain logistics and facility industries are making progress, but they still have a long way to go.

Moving on, let’s take a look at Japan, another big market in Northeast Asia. The Japanese cold chain market faced a temporary setback in the wake of the Tohoku Earthquake in 2011. Nevertheless, the country’s domestic sales volume of the cold chain sector stood at 114.69 million tons in 2012, remaining an attractive source of demand. In particular, Japan is among the top consumers in the global coffee market, while its coffee market is the fourth largest in the world.

The country, however, is facing a number of challenges in the cold chain market. First, it is struggling with slowing growth momentum in the refrigerated and frozen storage warehouse sector, with its storage capacity having increased at a CAGR of a meager 1 percent since the collapse of the economic bubble in the mid-1990s, paling in comparison with China’s 14.5 percent.

In addition, the average size of refrigerated and frozen storage warehouses in Japan is too small to accommodate the steadily rising volume in cargo. On this note, Japan’s refrigerated and frozen storage warehouses were measured at 10,000 m3 on average in 2010, which is only one third of that of China.

The second challenge is aging and warehouses. According to the Japan Association of Refrigerated Warehouses, about 80 percent of refrigerated and frozen storage warehouses in Tokyo are over 30 years old. In addition to the aging of such warehouses, energy and environmental issues and cost saving are the main challenges facing the food manufacturing industry; as such, countermeasures such as inventory reduction are expected to be devised.

The third issue is labor shortage. Due to Japan’s aging population, young transport workers are in short supply. With the revision of the Road Traffic Law in 2007, truck drivers are required to hold a license for operating midsize vehicles, and tests to obtain such a license has become more difficult than ever In addition, truck drivers are subject to limited hours of service. As labor expenses account for as much as 40 percent of total cost in the Japanese shipping business, regulations on the labor market environment have led to wage cuts, creating a vicious cycle.

Establishment of Cold Chain in Northeast Asia

As previously mentioned, China’s imports of agricultural and livestock products and medicine (i.e. food, coffee, medical supplies and chemicals) are fast expanding to serve increasingly demanding consumers. For instance, China’s food industry is expanding at a CAGR of 24 percent since 2005*. The Chinese agricultural and fishery markets posted total imports of USD 92.1 billion in 2012. Given this, China’s cold chain market is expected to demonstrate strong growth momentum. 

* Korea’s exports to China posted a five-year CAGR of 26% since 2010. In 2020, China is expected to overtake Japan as Korea’s largest export destination. Despite explosive growth in demand, China’s logistics environment such as storage and distribution is still in poor shape**. Accordingly, Korea can be considered as an alternative logistics center.

**1) Supply chain partners such as refrigerated and frozen storage warehouse operators and distributors do not provide auxiliary services such as packaging and separation, which adds unnecessary steps to the logistics chain.

2) Lack of standardization & higher labor input leads to an imbalance between shipping expense and pricing Korea’s strength as a high value-added logistics hub (VAL) Korea is in a more advantageous position to build logistics centers than its neighbors thanks to its superb warehouse management capabilities, leveraging IT technologies, availability of value added services, a streamlined procedure and a significantly low container cost compared to other countries.

Korea’s strength as a high value-added logistics hub (VAL)

Korea is in a more advantageous position to build logistics centers than its neighbors thanks to its superb warehouse management capabilities, leveraging IT technologies, availability of value added services, a streamlined procedure and a significantly low container cost compared to other countries.

Global peer comparison of import, export logistics: Korea vs. China & Japan

Global peer comparison of logistics cost

Fourth, the conclusion of the Korea-China FTA should create a favorable environment for Korea to serve as a logistics hub for cold supply, especially with the establishment of a new center for processed goods.

Furthermore, Incheon New Port’s Cold Cluster seeks to serve as a transshipment center for cold chain cargo, as it is instrumental in helping Korea emerge as a key link in the global cold chain network (for more information on Incheon’s Cold Cluster, see ‘Zone’ section).

GHANG, Namhoon

Director of Logistics & Retail Industries, Invest Korea

damon_ghang@kotra.or.kr