1.Understanding the current macro environment:

There has been a significant shift in the underlying logic of the global economy, transitioning from balanced systems to unbalanced systems, and from stability to discrete fragmentation.

In the economic system post-World War II, people often overlooked short-term disturbances and described macro characteristics using averages. Even in the presence of structural breakpoints, it was believed that the system would correct itself and return to its original equilibrium trajectory. The economic frameworks of most investors were built on the background of peace and development, characterized by path dependency and linear thinking.

However, with economic development, especially after the 2008 financial crisis, the increasing imbalance in the development of major countries' political and economic interests became more apparent, breaking the equilibrium of the system.

In 2012, the world entered a new round of political cycles, with China, the United States, France, Russia, Mexico, South Korea, Spain, Mongolia, and others entering election years, as is the case this year as well. The superstructure began to interact with the economic base, and the demands for re-balancing interests became more apparent. This stage often sees outliers, with some "low probability" events occurring frequently.

The imbalance in the global economic and political development has brought about conflicts and contradictions, sometimes resolved through trade mechanisms and sometimes through war. For example, the trade war between China and the United States has been ongoing for six years, and the Russia-Ukraine war has lasted for over two years, with no signs of either ending.

It is difficult for the global economic system to return to its original equilibrium state. An uncertain and complex world has become the new norm, where the discrete state of the system renders our predictions of the entire macro economy essentially ineffective, making it difficult to foresee the future. Instead, we can only observe the unstable spatial structure of the system over a longer period under the industry's major trends and grasp the long-term trends.

Finally, there is the rebuilding of trade barriers. An important premise of trade barriers is a unified market. Once two regions establish a unified market, tariffs can serve as barriers in between. However, once these barriers begin to hinder the unified market, there is a need for a mechanism to address the issue.

Han Jun, Senior Vice President of Research and Development Department at CITIC Securities

02How to analyze the impact of geopolitical conflicts?

Russia-Ukraine Conflict

The Russia-Ukraine conflict primarily affects the global economy through two accounts: the current account and the capital account.

During the Russia-Ukraine conflict, EU countries abandoned the low-cost energy provided by Russia, leading to high inflation in the EU. High inflation has a significant impact on manufacturing, as it not only faces higher costs for electricity, labor, and energy but also experiences a decline in competitiveness. Furthermore, high inflation affects monetary policy, leading to interest rate hikes.

Against the backdrop of high inflation, manufacturing is shifting globally due to high costs in Europe. For example, why can China's domestic automotive industry enter various global markets? There are two factors: firstly, Europe faces higher manufacturing costs, leading to a decline in automotive production; secondly, supply chain issues make Europe's manufacturing system relatively fragile.

Moreover, in the context of high interest rates, Western countries are generally raising interest rates. In contrast, China does not face such high inflation pressure, and interest rates remain relatively low, leading to a widening gap between China and the US. This situation results in capital outflows from China, which in turn affects the stock market and the capital account. However, for the current account (trade account), our country's manufacturing competitiveness makes our export share increase, especially in overseas countries experiencing high inflation.

Israeli-Palestinian Conflict

The Israeli-Palestinian conflict has led to a significant decrease in transit traffic data, especially on the Far East to Europe route, where 90% of ships choose to detour around the Cape of Good Hope. This detouring method is very effective in absorbing and digesting shipping capacity because adding 15 to 20 days to transportation time can absorb 7% to 8% of the total global shipping capacity. Although current freight volumes cannot fully support high demand, the tightening of supply or the decrease in effective shipping capacity has led to increased freight rates on European routes.

The Israeli-Palestinian conflict also affects prices on the US East Coast route. The drought in the Panama Canal is a natural disaster, while the Suez Canal crisis is a man-made disaster. The two most important trade routes in the world are basically in dire straits. During the drought in the Panama Canal, 30% to 40% of the capacity of the US East Coast route also goes through the Suez Canal, leading to a detour around the Cape of Good Hope.

The Israeli-Palestinian conflict also affects the global supply chain. Taking car carriers as an example, Chinese cars have been exported to various countries around the world, including South America, Europe, and some Middle Eastern countries. However, car carriers may now be unable to safely pass through the Suez Canal and can only detour around the Cape of Good Hope, leading to increased demand for car carriers. From the data, the rental rates for car carriers have remained at $110,000 per day since October 2022, showing no signs of decline.

Source: CITIC Securities

03 Where are we in the current cycle?

From the perspective of the capital market, everything is cyclical. Currently, we are in the phase of the Kitchin cycle's recession and the beginning of acceleration of the overseas Juglar cycle.

Kitchin Cycle

The Kitchin cycle, also known as the inventory cycle. Based on historical data, the Kitchin cycle generally lasts for 40 to 45 months, with an average expansion period of 26 months and an average contraction period of 17 months. We are currently in the tail end of the global inventory cycle recession, and the next phase should be the upswing of a new inventory cycle.

One of the reasons for the economic downturn in recent years is the destocking in the United States. According to the cyclical pattern, we will gradually enter a new phase of restocking from this year. The growth rate of this cycle will not be as steep as before, but more gradual. However, at least the situation of China's exports to Europe and the United States this year should be better than last year.

Source: CITIC Securities

Overseas Juglar Cycle

The overseas Juglar cycle began in the second half of 2020 and is expected to continue until 2030. The period from the second half of 2020 to 2025-2026 will be the prosperity period of the overseas Juglar cycle. The overseas Juglar cycle will have a strong positive impact on China's machinery and equipment industry.

Currently, overseas equipment upgrades are underway, with improvements in equipment export growth rates seen in countries such as Japan and Germany. However, whether it is automobiles or construction machinery, from a cyclical perspective, the prosperity period should peak around 2025-2026. Therefore, from 2024 to 2025, it will be a year of resonance between the inventory cycle and the overseas Juglar cycle, making it a very favorable time frame.

04 How to understand the current global supply chain development trends?

Firstly, end-to-end. Currently, companies providing end-to-end services mainly fall into two categories:

One model is represented by traditional freight forwarding companies, exemplified by DSV, transforming into light-asset logistics service providers (mainly dominated by freight forwarding companies). DSV's globally integrated end-to-end service network outsources the trunk transportation segment from port to port, selects different ocean and air freight service providers to obtain the most comprehensive trunk network and the most favorable prices, directly operates on both ends, and, combined with excellent last-mile delivery and warehousing service capabilities, provides customers with end-to-end, high-quality, cost-effective logistics services.

The other model, represented by companies like Maersk, gradually shifts towards end-to-end business as capacity service providers (mainly dominated by shipping companies), with strong actual shipping control capabilities, extending services at both ends of the route, and integrating upstream and downstream segments, thereby possessing unique advantages. However, as a trunk capacity supplier, selecting the right landing points is extremely challenging. From Maersk's financial reports, it can be seen that its logistics business has not performed well enough, with acquisition target valuations being relatively high, and it also faces larger issues such as separating from MSC. During the transition period, Maersk may need to address issues such as network density, network coverage, and last-mile logistics.

These two models represent two different business models, primarily differing in whether they directly own or control the port-to-port trunk transportation network and the last-mile logistics network. From the historical development process, the light-asset business model represented by DSV has already achieved success, while the heavy-asset business model represented by Maersk is still in the process of development and exploration.

An indication of optimization in the industry's competitive landscape is the tiering of product and service prices. From industry trends, competitive strategies have shifted from single-price-driven market share to value creation, from single carriers to comprehensive logistics solution service providers, and from delivery time to schedule reliability. End-to-end business is an important means of smoothing operational risks, expanding profit channels, and building high-quality services, and it is also an effective way to create value for customers.

Secondly, digitization.

The wave of digital innovation has risen, with enhancing customer experience and reducing operating costs being two important drivers. The essence of digitization is to improve efficiency and reduce costs, rather than generating revenue. Many times, companies aim to enhance competitiveness through digitization, but digitization can only improve customer experience and reduce operating costs, while whether customers are willing to pay is another matter. Therefore, companies need to compare and balance the cost of investment in digitization with customers' willingness to pay. Digitization only addresses the middle and backend and is an indirect process, which cannot solve the long-term growth issues of companies.

Moreover, the development of numerous disruptive technologies has completely changed every step of the supply chain management process, such as shifting to cloud-based systems and utilizing the Internet of Things to improve the flexibility and efficiency of cargo management; the use of robotics and automation brings more effective solutions, etc.

Thirdly, decarbonization.

The IMO's emission reduction strategy has set an important milestone of "achieving net zero greenhouse gas emissions around 2050", which represents a significant step forward compared to the initial strategy of "gradually eliminating emissions during this century." According to Clarkson data, it is estimated that 62% of container ships will be limited in speed to meet EEXI requirements, and by 2023, 30% of container ships are expected to be rated as E and D grades. It is projected that 27% of container ships will be speed-limited to meet EEXI requirements, and it is expected that by 2023, vessels rated D and E in the CII assessment will account for approximately 30% of tanker capacity.

05 Industry Development Trends from the Perspective of DSV

Both shipping companies and traditional freight forwarders can learn valuable lessons from DSV's development path.

DSV's development path is essentially an acquisition trajectory, breaking through its development bottlenecks through various acquisitions. There are mainly two types of acquisition methods: economies of scale and economies of scope. Economies of scale are achieved by acquiring peers to gain economies of scale, and then improving efficiency through digitization. Economies of scope involve acquiring leading companies in specific sectors such as fast-moving consumer goods, automotive, and chemicals, where DSV lacks capabilities.

DSV's business model is to create value in the supply chain through end-to-end, digitization, and decarbonization.

Source: CITIC Securities

Firstly, end-to-end. DSV is essentially a B2B platform for global cross-border supply chains, achieving the establishment of an end-to-end business network. It is positioned to provide customers with high value-added, customized end-to-end supply chain services rather than just a certain link in the supply chain. In its annual reports, DSV always mentions its core competencies, including people, IT systems, industry know-how, global standardized processes, carrier relationships, global networks, and localization of manpower. Whether it's providing global logistics solutions, traditional freight forwarding, or extending into other networks, these elements are essential.

Carrier relationships: Ensuring access to carrier capacity at any time, any place, at any price, or even lower prices;

Localization: Whether an enterprise can have localized, last-mile logistics networks to support customer connections;

Industry know-how: Often, companies need to differentiate their business, for example, shipping companies find it difficult to possess industry know-how. Shipping companies excel at container transportation, but to do logistics, they must be scenario-based because the logistics needs of each category are different. Therefore, the biggest obstacle for shipping companies is how to acquire industry know-how capabilities and whether they are willing to invest in these scenarios;

Digitization: After acquiring a company, how to generate economies of scale through digitization and achieve synergies?

Through these elements, DSV has built its own end-to-end logistics system architecture and divided different industry know-hows. In different specific industry vertical service areas, if there is no capability, it will acquire leading companies in that segment.

Secondly, digitization. DSV adopts newer technologies in all of its services, aiming to achieve a 100% digital platform. Currently, it is innovating in areas such as end-to-end visibility, warehouse automation, e-commerce logistics, supply chain digitization, and sustainability.

Lastly, decarbonization. DSV's decarbonization goal is to reduce the carbon emissions of its entire owned fleet by 50% by 2030 and reduce the emissions of its transport operations by 30%. DSV is a customer of many shipping companies and airline capacities, so its future focus will be on whether methanol ships are being used.

In this situation, the future competition in the industry will involve product tiering. Enterprises that want to outperform need to engage in product tiering. Currently, the world is no longer in the era of total economic growth, and the continuous growth of the industry will reach its limit. What truly differentiates companies is always tiering, including structural tiering, customer tiering, and product tiering.