China's Winning Warehouses

China is streamlining its shipping process, and here's how your portfolio can benefit.
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The next battle in the economic war called globalization? Warehouses.

Yep. Warehouses.

China and the rest of developing Asia are showing it's possible to cut costs even in the warehousing of goods intended for retail customers in the U.S., Japan and Europe by shipping jobs to China. So of course, that's what retailers from London to Tokyo are doing.

There's still a global logistics crisis. It's not easy -- and it is in many cases beyond the capacity of physical and electronic infrastructure -- to make sure that customers in Ohio and Osaka can tell designers in Taipei and Los Angeles what they want in a product in time for manufacturers in South Carolina and Shanghai to get parts to assemblers in Singapore and Austin in a way that lets retailers in Paris and Hong Kong have enough of the right stuff and none of the wrong stuff on their shelves.

But increasingly, the solutions for moving vast amounts of goods from coast to consumers are coming from China, Singapore, South Korea and Japan. And it's the aging ports and other infrastructure of the U.S. and Europe that are failing the challenge.

The price of the failure of the countries of the developed world to meet this challenge will be paid -- once again -- in the jobs of workers in the U.S. and other advanced economies. So much for warehouse jobs as a safe, if often low-paying, haven from relentless globalization.

The U.S. Won't Roll Over

It looks, however, like the developed world, especially the U.S., is fighting back on this front. New ports under construction should help close the efficiency gap. And the U.S. still has a major edge on China in inland infrastructure -- roads, railroads, etc. China is determined to catch up there, however, and that part of the battle has barely begun.

For investors, that makes for exciting opportunities. First, there's a chance to make money from China's perhaps temporary leading position in global logistics. In this column I'll identify three companies, two based in Hong Kong and one in Japan, that are among the best positioned to profit from China's success in addressing the global logistics crisis.

Second, there's a chance to make money from the developed world's response to China on logistics and from the competition to build out inland infrastructure.It used to be that goods from China's factories would be heaped into massive containers and then loaded on ships in Hong Kong's super-efficient port and shipped to warehouses and distribution centers in Long Beach, Calif. (which, with Los Angeles, makes up the busiest port in the U.S.), or Rotterdam (the Dutch port is Europe's busiest) for sorting and redistribution into yet more warehouses for sorting and delivery to company distribution centers for ultimate delivery, after another sort, to individual stores.

Now, more and more goods are sorted in China, loaded onto pallets in warehouses in Shanghai, shrink-wrapped, loaded onto container ships and then delivered, still shrink-wrapped on the original pallet, directly to a superstore owned by

Wal-Mart Stores

(WMT) - Get Report

in the U.S. or

Tesco

in Europe.

Thanks to increases in the amount of goods sourced from China, the availability of cheap labor to sort and re-sort shipments and improvements in product tagging and in computerized systems that read and track the tags, more and more companies are sorting their goods in Chinese logistics depots for delivery either straight to individual stores or to company distribution centers.

Let's make one thing clear: Though an abundance of cheap labor to work in these distribution centers certainly doesn't hurt, the Chinese edge rests on sophisticated technologies that reach from warehouse to container port to ship. By applying those technologies on the vast scale made possible by China's role as workshop to the world, logistics companies in China can wring immense savings and time out of the distribution system.

For example, Hong Kong, the first port in the world to employ cranes that could lift three containers at once, is the world's most efficient port, but it's now being challenged by new Chinese port facilities in Shanghai, Shenzhen and Guangzhou. In addition, China's deep-water ports are designed to handle the new, larger container ships that can handle up to 10,000 20-foot-long containers.

Two Ways to Win

As an investor, you can profit from this trend in two ways. First, you can buy shares in the companies that show signs of coming to dominate a still very fragmented logistics industry in China.

I'd look at these three:

  • Orient Overseas International, a Hong Kong company with three main businesses: container transport and logistics, ports and terminals and property development. Almost all of the revenue of the company's container subsidiary, Orient Overseas Container Line, comes from Asia and trans-Pacific routes. If you believe the U.S. is headed for an economic slowdown, the stock is certainly pricey right now. But I like the company's cash position: Orient Overseas sold its North American container terminals in 2006 and has said it is considering options to reinvest the proceeds in Chinese ports and in increasing its container fleet. The company has also spent some of that cash on a special dividend and has put an additional special dividend on its list of possible uses for the cash.
  • Kerry Properties, also a Hong Kong company, like Orient Overseas mixes its logistics business with a big dose of real estate in Hong Kong and the rest of China. But unlike Orient Overseas, shares of Kerry don't give investors exposure to ocean shipping or the ups and downs of transoceanic freight rates. Instead, these shares are strongly tied to physical assets such as the warehouses that the company owns and manages in Hong Kong and its portfolio of infrastructure projects that includes tunnel crossings in Hong Kong and a water-treatment project in China's Inner Mongolia Autonomous Region. (So the stock fits into the framework of my infrastructure strategy.) Kerry Properties, despite its strong Hong Kong roots, may actually be the most globally focused of these three companies. The company has offices in Germany, France, Poland, the Czech Republic and Hungary.
  • Nippon Yusen Kabushiki Kaisha is even more diversified, with interests in passenger ships, petrochemicals, information processing and travel. But the core that attracts me to this Japanese company is the combination of the company's NYK Logistics business and its ownership of Japan's largest shipping line. Nippon Yusen should be in a position to earn a good profit from those assets as China and Japan continue to evolve something resembling a unified economic structure that allocates such functions as design and manufacturing across the two countries. For the nine months that ended Dec. 31, 2006, revenue climbed 13%.

Wait, There's More

Remember, this is only half the picture. You can also make money from the response to China. And the response from the developed world to the Chinese challenge -- in this area at least -- has been surprisingly robust, especially in the U.S.

New container terminals are under construction or planned for Houston; Mobile, Ala.; Jacksonville, Fla.; Charleston, S.C.; Wilmington, N.C.; and Norfolk, Va. Voters in Panama have approved a long-delayed expansion of the Panama Canal, scheduled for completion in 2014. Just south and north of the U.S. borders, new ports are under construction or being planned for Lazaro Cardenas, Mexico, and Prince Rupert, British Columbia.

How do you profit from all that activity? By looking at the next stage of the bottleneck. All that container traffic has to get from these ports to stores and warehouses around the U.S. That means railroads and trucks. Especially railroads.

The neatest thing about railroads, in my opinion, is that they aren't making any more of them. With the economy softening, I'm not sure I'd snap up any of the big railroads now, but

Burlington Northern Santa Fe

(BNI)

and

Canadian Pacific Railway

(CP) - Get Report

would be my choices on any weakness.

Warren Buffett's

Berkshire Hathaway

(BRKA)

had bought about 11% of Burlington Northern as of last week. Buffett has been purchasing shares of two other unidentified railroad stocks, too.

Don't think that trucks and roads are too mundane to invest in, though. There's big profit to be made these days in roads and improving the trucks that haul stuff on them. The Chinese and other developing countries are determined to build out their infrastructure in this area. And the U.S. knows that it's always just a traffic jam away from a commerce-crippling bottleneck.

At the time of publication, Jim Jubak did not own or control shares of any of the equities mentioned in this column. He did not own short positions in any stock mentioned in this column.

Jim Jubak is senior markets editor for MSN Money. He is a former senior financial editor at Worth magazine and editor of Venture magazine. Jubak was a Bagehot Business Journalism Fellow at Columbia University and has written two books: "The Worth Guide to Electronic Investing" and "In the Image of the Brain: Breaking the Barrier Between the Human Mind and Intelligent Machines." As an investor, he says he believes the conventional wisdom is always wrong -- but that he will nonetheless go with the herd if he believes there's a profit to be made. He lives in New York. While Jubak cannot provide personalized investment advice or recommendations, he appreciates your feedback;

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