Authors1： Mui-Fong Goh Chee Wee Gan Tina Wang Jian Li Ang JinThe Party is Over How Logistics Companies in China Should Respond in the Global Economic Meltdown How Chinese Logistics Companies Should Respond in the Global Economic Meltdown A.T. Kearney (Shanghai) Management Consulting Co., LtdFebruary 2009Copyright 2009 by A.T. KearneyThis document was prepared by A.T. Kearney for use by a joint Client and A.T. Kearney team and may not be used for other purposes, or disclosed to other parties without thewritten permission of A.T. Kearney1PrefaceFor many years, scientists have worried about the possibility of a volcanic eruption in Americas Yellowstone National Park, believing that the devastating effects of the super volcano would reach as far as Russia and Japan and plunge the world into a volcanic winter. In September 2008, many people suddenly realized that the destructive power of homeowners in the US not being able to pay their debts could bring similar devastation, plunging the world into a bitter economic winter. Against the backdrop of increasing globalization leading to the worlds economies becoming inextricably tied, what will be the impact of the global economic meltdown on China, and more specifically, on Chinas logistics industry? How should logistics companies in China weather this financial storm? In this paper, we will summarize the causes of the global economic crisis and its effect on Chinas macro-economy and logistics industry, as well as discuss the issues and implications logistics companies face in this challenging time.How Did the Economic Meltdown Occur? What is the Impact on the Global Economy?As the worlds largest economy and biggest importer, fluctuations in the US economy are guaranteed to have a significant spillover effect on the rest of the world. However, the extent of damage that Wall Streets subprime crisis brought to the world within a few short months still shocked the world. Subprime lending is the practice of lending money, mainly in the form of mortgages, to low income borrowers with troubled credit histories to purchase real estate with little or no down payment. As the price of a typical American house increased 124% between 1997 and 2006, lenders started issuing more and more subprime loans to make housing more affordable for the American consumer. Subprime mortgages quickly rose from 5% of the total mortgage market in 2001 to 30% in 2005. Moreover, 63% of the US$3.12 trillion subprime loan market was securitized and traded in capital markets. When the housing bubble burst in 2007, delinquencies and foreclosures of subprime mortgages forced financial firms around the globe to write down their holdings of subprime related securitiesi.The devastating effects of the financial crisis became prominently visible in September 2008 when Lehman Brothers declared bankruptcy and Bank of America acquired Merrill Lynch, saving the investment bank from collapse. The meltdown of the American financial market soon had a domino effect on the rest of the world, forcing countries like the UK, Japan and Australia to inject hundreds of billions of dollars in hopes of invigorating the financial markets. Despite many governments efforts to stimulate the market, stock prices continue to fall globally. More than US$20 trillion of equity value was wiped out the moment the real economy was impacted by shrinking demand, sending the developed world into recession (See figure 1)ii. 2Figure 12009 Expert Growth Expectations and Official Forecasts Notes: Estimates based on purchasing-power parity. Source:Global Business Policy Council Faculty; IMF January 2009 World Economic Outlook Update; National Statistics BureauWhat is the Extent of the Economic Crisiss Impact on China?Since joining the WTO, China, now ranked as the third largest country in terms of GDP, has become more integrated into the global economy. With exports making up 40% of the countrys GDP, China is heavily dependent on exports for economic growth. Despite the export rate showing signs of slowing down since 2007, the year- on-year export growth rate for the first half of 2008 remained above 20%. However, the export growth rate started to decline dramatically in the second half of 2008. In November, the export growth rate was negative for the first time in seven years, with a year-on-year growth rate of -2.2%iii, dragging 2008 Q4 GDP growth down to 6.7%iv.Alongside the decline in exports is a simultaneous drop in industrial output. The economic crisis will likely lead to social problems, unemployment being perhaps the most dangerous. The number of registered unemployed persons soared over 8.9 million by the end of 2008. To make matters worse, this unemployment statistic does not include the “informal work force,” which is made up of migrant workers who are not qualified to register for unemployment and are usually the first to be laid off. According to recent estimates