Monday, November 20, 2017


Omnichannel E-commerce.  The New Selling.  The New Supply Chain that drives its success.

Disruption. Chaos. Change. Transformation. Amazon Effect. Being Amazoned.

The risk of disintermediation for retailers and wholesalers/distributors.

The size of the B2B e-commerce market is larger than B2C.

Global revolution of selling and supply chain management that crosses industries, markets, and borders.

How well are you doing with e-commerce and the supply chain that drives it and meets customer expectations?

Leaders and laggards.


The Haves and Have Nots for Finance

All I ever hear about is Gaps in Finance. This creates our haves and have nots.  There is:
  • The SME funding gap – According to World Bank, more than 50% of SMEs lack access to finance, which hinders their growth.
  • The Infrastructure Shortage gap- Asian Development Banks says Asia needs to invest $26tn by 2030 to resolve a serious infrastructure shortage
  • The Trade Finance Market gap - The Asian Development Bank (ADB) runs a survey that quantifies the market gaps for trade finance and its impact on jobs and growth. They claim that Financial Institutions failed to provide $1.6 trillion in needed capital.
  • And then there’s the US$1.5 trillion trade finance Small Business gap according to Harvard.

What is driving these Gaps?

According to the ADB, there are three forces driving the US$1.5 trillion trade finance gap:
  • High number of rejected trade finance applications from the Asia Pacific (APAC) region
  • High rejection rate of applications from SMEs and midcap organizations
  • Reduced lending by banks to SMEs due to perceived risk (Know-Your-Customer issues) and declining profitability in trade financing
Banks are also cutting the number of correspondent banking relationships due to KYC regulations and the cost of being in compliance in each country. Between 2013 and 2016, the number of correspondent banking relationships declined globally by a large amount, from 360,785 to 223,247, representing a 38% decrease. The second reason relates to Basel costs and the costs of liquidity and restrictions on leverage. Smaller banks and emerging market banks are more challenging to serve under new capital guidelines.  This is evidenced by the Top 4 banks and new capital surcharges for systemically important institutions, the Federal Reserve’s annual bank stress-testing regime, and the enhanced enforcement of anti-money-laundering rules.  Add to this the costs to serve SMEs and their relative high loss rates, and you see why small business lending has declined at big banks.
I am really starting to wonder the potential drag on the economies with all these gaps. And we haven’t even felt the impact from the Fed’s tightening program on banks shrinking their assets, or the impact of rising rates on hurdle rates and therefore approval rates for loans, or the impact of a downturn in the credit cycle.
So yes, these gaps exist and are painful for those that are finding it difficult to access credit.
And while FinTech has started to help – crowdfunding options help raise cash, dynamic discounting from P2P networks, new digital lending options for invoice finance, and of course the small business lending solutions from the likes of Kabbage, OnDeck, Prosper, etc. it is still a very small market.


With all the happenings in logistics and Supply Chain Management--disruption, chaos, change, and transformation--the gap between leaders and laggards is interesting. Why is that? Digitization. Inventory Velocity. Much more.


The Supply part of the e-commerce Supply Chain begins upstream. So why is there so much talk about the downstream Fulfillment and Last Mile?  Think about it.


E-commerce Supply Chain Visibility must be end-to-end. From suppliers through to end-customer. No gaps.

Friday, November 17, 2017


Retailers using stores and store personnel for e-commerce fulfillment. Big risk?  Enough staffing to do both store work and online orders?  Needed Inventory velocity?  Have Supply chain visibility—entire supply chain?  Transformed total supply chain?  What do any “no’s” mean?


B2B e-commerce market is 235% larger than B2C, per Statista. Yet manufacturers have limited supply chain capability to speed the order-velocity cycle. What are they waiting for?


Will digitization create disintermediation for freight forwarders and other logistics providers? This is in addition to the disruption, chaos, and transformation happening with logistics firms from the Amazon Effect, Being Amazoned, and other change drivers.


New E-book. Omnichannel E-commerce and the New Supply Chain.  At


Does e-commerce create the risk of disintermediation for not only wholesalers, but also retailers?

Thursday, November 16, 2017


E-commerce order delivery velocity requires inventory velocity. All are driven by the New Supply Chain.


Missing stat in stories on e-commerce returns . Returns on orders delivered in max of two days, aka Amazon Effect, vs returns on orders taking longer to deliver. Buyer remorse is a factor in longer order delivery times.

Wednesday, November 15, 2017


Logistics providers are Being Amazoned as they are slow to transform for the New Supply Chain that drives aggressive e-commerce.  It opens up market to new providers.


Investment in technology, warehouses, and other elements for e-commerce Supply Chains represent 1) the new selling reality that supply chain management drives success and 2) catching up for the time when needed investments were not made.  SCM

Tuesday, November 14, 2017


Analysis: a more positive quarter for a leaner-looking CEVA Logistics

Ceva warehouse
CEVA Logistics churned out positive core free cash flow (FcF) of $9m in the third quarter, after almost three years of negative FcF, its trading updated revealed today.
This a key milestone on the road to positive FcF generation next year, which “remains the target” for the US-based 3PL owned by Apollo, chief financial officer Peter Waller told The Loadstar in an interview today.
“The third quarter was another good quarter,” Mr. Waller insisted, “with top-line growth, much better working capital management, and much improved cash flows. So, we are pretty pleased.”
This is the first time that core FcF – which can used to pay down debt as well as for other financing and investing activities – was positive since Mr Waller was appointed as chief financial officer in October 2016.
(Note for the reader: FcF is the main value-driver with this corporate story, because as CEVA continues to look for a buyer, it must prove its operations are properly managed and its cash flow profile is sound. As a reference, the last time CEVA reported positive recurring FcF after financing costs and capex, or core free cash flow, was in the fourth quarter of 2014, and that excludes its performance in the fourth quarter last year, which is not comparable on a recurring basis due to the reversal in net working capital, CEVA told us.)
CEVA financial snapshot and free cash flow
CEVA financial snapshot and free cash flow
CEVA cash flow statement
CEVA cash flow statement
On a cash flow basis, its performance was even more remarkable “if you consider the improvement over the past nine months”, which were characterised by a rise in adjusted ebitda and core cash flows, despite challenging market conditions, particularly in air.
“There is pressure on ocean, but much more on air… for the full year, and even more in the third and fourth quarters,” Mr Waller said.  “It’s a very volatile environment, with rates up tremendously due to a shortage of capacity.
“From our perspective, trading conditions in air are difficult, and the fourth quarter will be even more difficult than previous quarters, but our ‘excellence programme’ makes me feel quite optimistic about the period.”
Mr Waller would not disclose the projected target for working capital intensity as a percentage of revenues, but claimed the company could improve it significantly.
“There is more that we can do over the next 12 to 18 months,” he added.
CEVA Chart 2 working capital/others
CEVA working capital/others
While revenues rose in the first nine months, so too did costs of third-party services (labelled in the P&L as “work contracted out”), which outpaced top-line growth by several percentage points, impacting gross profits.
This is a common problem in the freight forwarding industry, but CEVA appears to be coping well while managing to keep a lid on personnel costs and other operating expenses, which fell on a comparable basis, helping the company grow adjusted operating income and, subsequently, core cash flows.
“Operating costs are down $40m in absolute terms, and we have reduced that while growing the business.”
“As you grow contract logistics, for example, you need more people, but we have reduced costs on a like-for-like basis for staff and other expenses.”
CEVA revenues, costs, operating income and others
CEVA revenues, costs, operating income and others
The operational breakdown (see tables four and five below) shows that the freight management (FM) unit grew at a steeper pace than contract logistics (CL) activities, although more profitable volumes remain challenging at the former.
CEVA Freight Management vs Contract Logistics revenues
CEVA Freight Management vs Contract Logistics revenues
CEVA 5 Chart FM vs CL revenues and Ebitda
CEVA FM vs CL revenues and ebitda
Further margin dilution in certain areas (see tables six and seven below) cannot be ruled out on a consolidated level, which again is a problem that all the main players in the freight forwarding industry face through to 2018.
Mr Waller said: “We already had that for the year – peaks can be tough but we are prepared to face continued margin pressure.”
CEVA FM vs CL three-month margins
CEVA FM vs CL three-month margins
CEVA FM vs CL nine-month margins
CEVA FM vs CL nine-month margins
Before certain adjustments, economic losses widened in the third quarter and in the first nine months of the year, but net earnings “do not reflect the actual performance” of CEVA, as there are charges which are one-off and non-cash in nature.
The other aspect worth considering, Mr Waller argues, is that tax considerations also impacted the bottom line, which remains a much less effective metric than ebitda, which is on its way up. In short, for the time being, investors as well as trade buyers should focus on other metrics, such as ebit, ebitda and cash flows.
As far as its weighted average cost of funding is concerned – net debt, defined as total principal debt less cash and cash equivalents, was $2.15bn as at 30 September 2017 (31 December 2016: $1.95bn and 30 September 2016: $2.1bn). Mr Waller noted that an appropriate figure would be between 6% and 7%, so there is an obvious opportunity for would-be suitors after interest rate arbitrage (replacing high-yielding liabilities with cheaper debt) now that, at least operationally, CEVA is on the right path to become a leaner entity.
“First, in any exit strategy, you would reduce the leverage and the total debt, and we just recently extended the US ABL [asset-based lending] facility from December 2018 to August 2020 at the same rate,” which proves CEVA has more cards to play before it is taken over,” Mr Waller said.
“And then if you look at our bond prices, they have strongly improved this year and now trade several percentage points higher than previously, so the yield we would have to pay has come down.”
Under various exit scenarios, a new owner essentially would pay down some of the outstanding debt with new equity, thus securing a much lower cost of funding.
“That is what we are working towards – improving the business, core profits and cash flows to achieve an exit either via a sale or an IPO,” Mr Waller said.


Instead of transforming their Supply Chains and selling for the Amazon Effect, many companies seem to be arranging deck chairs and positioning themselves to Being Amazoned.  Why?  The challenge of change?


E-commerce Customer Expectations are really about service.  Service from the customer perspective.  Delivering the order complete, accurate, and on-time.  Driving the ability to meet those expectations is Supply Chain Management.

Monday, November 13, 2017


View COSCO financially or as a component in China’s Belt Road / Silk Road strategy?  Big difference.

Analysis: with OOCL buy, Cosco is growing, but it's also burning more cash

© Vladimir Serebryanskiy
China’s state-owned Cosco Shipping Holdings will likely reach record revenues of Rmb90bn ($13.5bn) this year, based on a nine-month performance that validates projections for 2017.
But, as it continues to grow the size of its business, so too its net leverage continues to rise.
Cosco record revenues (Source:
Cosco record revenues (Source:
Is that a good or a bad thing? And, what might it lead to?
Pre-OOCL deal
Even excluding the pending consolidation of Orient Overseas International (OOIL) and its container shipping arm, OOCL – which recently received the green light from anti-trust regulators in the US and will be substantially funded by new debt – the pro-forma net leverage of the Chinese group in 2017 is already projected to be over 4x, which will likely rise significantly once the OOCL deal is completed, given the target’s cash flow profile and the limited synergies it offers, one reason being that OOCL is already a very well-run company.
(Note for the reader: net leverage is calculated as net debt divided by adjusted operating cash flows. Anything above 3.5x for up to six quarters in a row should be considered risky at this economic juncture, not just for Cosco, but all the main players in the industry.)
Picking a fight
Cosco is not a beast that can be analysed only by the numbers, because there are so many strategic implications derived from the relentless reshuffling and managing of its corporate tree and subsidiary structures that today’s loss could soon become tomorrow’s gain. On this basis, however, its latest trading update, released on 31 October, was truly encouraging.
Its latest presentation highlighted a “profit of Rmb2.7bn ($405m) during the reporting period”, with earnings per share (EPS) of Rmb0.27, up from a net loss of Rmb0.9 a share one year earlier, on a comparable basis.
Cosco revenues and EPS (Cosco Q3 presentation)
Cosco revenues and EPS (Cosco Q3 presentation)
Its asset base has changed significantly since 2015, and so far this year assets have grown slightly more than liabilities – which, in turn, were outpaced by the rise in equity in the first nine months.
This provides little help in isolation, I admit, but the balance sheet looks in good order – although it is hard to be upbeat about the income statement, and my consideration here would be the same even if Cosco had reported twice the amount of net income and EPS than it has generated so far this year.
Both these metrics, in fact, can be easily manipulated under normal circumstances in terms of corporate activity, and even more so when a corporate restructuring of this size takes place.
Cosco balance sheet (Cosco Q3 presentation)
Cosco balance sheet (Cosco Q3 presentation)
Stock investors are bullish nonetheless, I gather, but it is the cash flow that really matters – and on this basis Cosco is growing; but it is also burning more cash than in the past, with cash balances lower against one year earlier.
Cosco cash flows (Cosco Q3 presentation)
Cosco cash flows (Cosco Q3 presentation)
Nothing to worry about, particularly if you debate these issues with the local analysts.
I have worked with several Chinese analysts boasting equity research expertise during my career and, while they are among the best in the world on the number-crunching side of research, they often tend forget that debt is actually a liability that has to be taken into account when valuing any business.
“I think you are right, but Cosco has plenty of room to raise additional funding,” one sell-side analyst based in Hong Kong told me this week. Another, based in mainland China, argued that its growth rate and “revenue figures were more important than other factors”.
I think they both had a point to prove, which they did in private conversations.
After all, some liabilities can be heavily discounted, or even discarded, when your owner and employer is the Chinese government – all you have to do as an analyst is to acknowledge the liabilities, put them in your model and forget about them until they are no longer problematic.
An associated point to consider (at a time when Cosco’s rivals are also levering up), is that the Chinese are quick learners. In corporate finance terms, this means they can be more aggressive when they deploy new capital in the container shipping industry – in any industry, in fact.
Financial discipline
I previously argued in favour of financial discipline as being the way forward for Cosco, but given latest development in the industry, I am not so sure anymore. I haven’t made up my mind yet about the harm that ballooning leverage can cause, but when the competition, led by the Japanese carriers, time and again proves that, in dealing with cyclical swings, little or no attention is paid to economic returns, you just need to have a plan B if your plan A is destined to fail, for whatever reason.
Cosco is now emerging as a serious threat to European dominance in global container shipping, in a world where certain trades and habits are changing, while the financials of many of its rivals are a bit… well, scary would be an understatement.
Moreover, on this basis it seems Cosco has a clear competitive advantage, which supports the Chinese analysts’ biases.
In this context, the results released by Maersk Line last week point to a bearish view that may apply to the Danish company rather than the entire industry: some analysts’ notes have suggested Maersk is doing great, while others point to market share erosion as a risk that should not be underestimated.
(You’ll have my take next week.)
More debt, come on!
We know little about Geneva-based MSC’s books; its decision to disclose little, if any, financial detail is very smart, by the way. But we do know that lines such as Maersk, CMA CGM and Hapag-Lloyd are stretching their balance sheets to reach ever greater heights of scale.
Either way, I ended up feeling relieved with Cosco’s numbers, and I am willing to speculate beyond what they actually mean – in fact, I am willing to bet that by early 2020 there could be another asset to consolidate for the Chinese powerhouse.
First, the figures
Net cash flow from operating activities was Rmb5.2bn ($780m) in the first nine months, which means it will likely end the year churning out adjusted operating cash flow (AOCF) of about $1.1bn. Before OOCL is consolidated – the stock price of the parent company currently reflects a near-100% probability that the deal will go through – Cosco carries Rmb32bn of net debt ($4.8bn), which implies net leverage of 4.3x, which is well outside our comfort zone, and it will rise much higher with OOCL.
OOIL share price (Source: Financial Times)
OOIL share price (Source: Financial Times)
OOCL key 3Q figures (Source: OOCL)
OOCL key 3Q figures (Source: OOCL)

I will not bore you with the nitty-gritty of the calculations, but based on the main figures in the table above, and assuming constant profitability in line with the past for OOCL activities, the AOCF of a combined Cosco/OOCL entity could rise to $1.7bn, while net debt will likely be as high as $8.8bn. Excluding synergies, the net leverage of the combined entity surges to 5.1x, which is ok only if Cosco acquires another carrier after OOCL, raises new debt and pushes back refinancing risk to late 2020.
On top of that, it also has to hope that the market’s current recovery doesn’t fade away.
CCFI trends (Cosco Q3 presentation)
CCFI trends (Cosco Q3 presentation)
More CCFI trends (Cosco Q3 presentation)
More CCFI trends (Cosco Q3 presentation)
However, even if the momentum vanishes, remember that Cosco and CMA CGM are the key members of the OCEAN Alliance… A takeover of the French carrier would make a lot of sense for both companies at a time when some key investors want out of CMA CGM and an IPO doesn’t seem to be on the horizon.


Logistics providers and Investors are Being Amazoned by the disruption, chaos, and transformation. The risk of uncertainty. The times they are a changing.

Friday, November 10, 2017


Omnichannel e-commerce is more than B2C Consumer Goods. It crosses markets, industries, and borders. Manufacturers need to lead here. Laggards may struggle with surviving. It is about the New Supply Chain that drives e-commerce success.