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REPORT OF THE BUSNESS UNITS Kuehne Nagel Powered By Docstoc
					Reports of the Business Units:   Contents    67

Reports of the
Business Units

        68        International Forwarding
        80        Contract Logistics
        84        Insurance Broker

Seafreight   |
                 Above average growth strengthens global market leadership
In seafreight, declines in margins and adverse currency effects were compensated through
substantial volume growth. The total of 1.25 million TEU handled exceeded the previous year’s
high level by 25 per cent and extended the company’s leading position.

                                  Container market and rate structure
                                  The global container market grew by 7.1 per cent in 2003, with China’s booming
                                  trade in particular generating the highest demand. Resulting capacity bottlenecks
                                  plus increasing transport volumes in other regions in the second half of 2003
                                  pushed up seafreight rates on virtually all shipping routes, with a particularly
                                  strong increase on Asia–Europe and Europe–USA trade lanes. Only in export
                                  traffic to South America vessels ran at half capacity, which initially led to reduc-
                                  tions in the rate structure.

                                  Rapid increase in Kuehne & Nagel transport volumes
                                  The boom in container traffic in Asia, especially China, was decisive for
                                  Kuehne & Nagel’s above average growth. In Far East to Europe operations, the
                                  company realised an increase in handled volumes of 40 per cent, far higher
                                  than the 13 per cent market average.
                                  In transatlantic and transpacific business, Kuehne & Nagel gained further market
                                  shares and raised volumes by 12 and 18 per cent respectively. Moreover, the
                                  year under review saw the results from efforts to expand intra-Asian operations in
                                  the form of a 42 per cent growth rate. Contrary to the general trend, Kuehne &
                                  Nagel also raised volumes to and from Latin America, a consequence of its
                                  regional network of operationally linked national companies.

                                     Significant productivity increases helped Kuehne & Nagel keep costs
                                  within limits despite the high growth in volume. This had a positive effect on
                                  the operational result.

                                  Investments assure competitive advantages
                                  In the year under review, Kuehne & Nagel invested significantly in the expansion
                                  of its global key account management programme. Major customers in all parts
                                  of the world recognised the benefits of competent industry-specific consulting
                                  and globally coordinated support by the logistics partner. The strategy brought
                                  considerable new business and contract extensions.
International Forwarding:   Seafreight                                             69

    Additionally, Kuehne & Nagel’s investment in expanding the functionality of
its information logistics products proved successful. Global availability of the
order management system, which supports detailed consignment tracking to item
level and therefore control and management possibilities across the entire supply
chain, met with interest from key accounts from all targeted industries and also
contributed to the conclusion of new contracts.

Specialisation in niche products
In order to meet specific customer demands, Kuehne & Nagel has been concen-
trating on various niche products and in 2003 intensified sales on a worldwide
In the shipment of forestry products (paper, cellulose and wood), high growth
rates could be achieved above all in Germany. An increase of almost 50 per
cent confirmed Kuehne & Nagel’s specific know-how in the segment of reefer
container traffic.

     PERFORMANCE SEAFREIGHT                                                                                    Variance
     CHF million                                       2003        per cent        2002         per cent       per cent

     Turnover                                       4,492.5        100.0        4,028.5         100.0             11.5
     Gross profit                                     632.9          14.1         588.8           14.6              7.5
     EBITA                                            152.8           3.4         131.8            3.3            15.9
     Number of operational staff                      4,006              –        3,740               –             7.1

                                   Special knowledge and services are also required in the wine and spirits niche
                                   sector, in which Kuehne & Nagel has engaged since 2002 and is represented
                                   with specialists in the principal markets Australia, South America, USA and
                                   Europe. By taking over Seabrook & Smith, a worldwide provider of logistics
                                   services for wine, beer and spirits importers, Kuehne & Nagel boosted its activi-
                                   ties in Great Britain in 2003, and exceeded volume expectations by far.

                                   LCL business
                                   Tough competitive conditions and the dynamic growth of FCL (full container
                                   load) shipments had adverse effects on the global LCL (less than container load)
                                   market. Nevertheless, due to product and process optimisations and its global
                                   organisational network, Kuehne & Nagel was able to register a 20 per cent volume
                                   growth in its LCL business. “Multi Country Consolidation”, which guarantees fast
                                   and secure shipment of LCL freight, will lead to further growth in this field of
                                   activity in the current year.

                                   River shipping
                                   Kuehne & Nagel is well positioned in the European river shipping market. In
                                   spite of a six-month low water phase the result could be held at the previous
                                   year’s level. This was largely due to Kuehne & Nagel’s river shipping network and
                                   presence at important traffic hubs, which opened opportunities for development
                                   of alternative solutions, such as intermodal operations. Thus all contracts could
                                   be punctually fulfilled.

                                   Aid and relief logistics
                                   Once again Kuehne & Nagel supported the activities of reputable international
                                   relief organisations and private companies across various crisis regions in 2003.
                                   Large volumes of aid and relief goods were shipped by sea, air and overland
                                   to their destinations under the guidance of Kuehne & Nagel. Faced with most
                                   difficult conditions, the specialist team ensured that all goods reached their
                                   destinations safely, undamaged and on time.
                                   In the year under review, these special services were concentrated in crisis
                                   regions spanning the Middle East, East Africa and Central Asia. As with the
                                   reconstruction of Afghanistan, Kuehne & Nagel’s logistics capabilities and
                                   expertise are proving extremely valuable in Iraq too.
International Forwarding:   Seafreight                                              71

    Prior to the war, Kuehne & Nagel was involved in the “Food for Oil” program-
me through the company’s organisations in the ports of Jordan, Kuwait, Turkey,
Syria and in Baghdad. At the end of the war, global aid and relief organisations
were quickly able to draw upon Kuehne & Nagel’s infrastructure and services.

Oil, energy and project services
In these fields of activity, Kuehne & Nagel trebled its incoming orders in 2003.
New large-scale projects were started in the Middle East, in New Caledonia, on
Sakhalin, in South Africa and Central Asia.

    On Sakhalin, for example, the contract for supplying an offshore oil rig was
continued in the second year with a substantial rise in turnover, and new major
logistics projects started around the exploitation of oil and gas fields. In New
Caledonia, South Pacific, Kuehne & Nagel was selected to provide logistics
support for a comprehensive nickel mining project. In South Africa and Central
Asia as well, renowned companies in the oil and energy industry chose Kuehne &
Nagel as logistics partner. Particularly worth mentioning here is the complex
transport of pipeline deliveries from the Caspian to the Black Sea.

    The reconstruction of Iraq demands know-how and proven expertise in several
segments, including oil, energy and project services, in addition to global sourc-
ing processes. Kuehne & Nagel’s industry competence and extensive network
make it very well positioned to logistically support the reconstruction of Iraq. On
the basis of major contracts, the company has already taken on complex projects
and the transport of heavy goods components, which involve great challenges
with respect to infrastructure and safety of people and cargo.

Ambitious targets
According to forecasts, the global container market will grow by between 8 and
10 per cent in 2004. Kuehne & Nagel’s goal is to realise a growth in volume far
higher than the market average. Thanks to close partnerships with leading global
carriers, the company is in a position to guarantee freight capacities through
contractual agreements and adapt to growing trade volumes.

    Particular attention for the current year will be paid on providing a further
increase in value to customers. Satisfied customers, benefiting from IT-supported
process optimisation and value added services, are the guarantee for sustained
growth in Kuehne & Nagel’s seafreight business field in the future.

Airfreight   |
                 Profitable growth
In a continuing volatile and highly competitive environment, Kuehne & Nagel was able to
enlarge its market share and achieve excellent results. Overall tonnage rose by 13 per cent over the
previous year, therefore meeting the target of almost 500,000 tonnes. The operational result of
CHF 95.6 million illustrates a significant increase in profitability by 23.2 per cent.
International Forwarding:   Airfreight                                             73

Business development
After a moderate start, virtually all regions reported strong growth in the second
half of 2003. Stronger industry-specific support to global key accounts led to
new contracts, especially in the automotive, retail and pharmaceutical sectors.
Effective cost management and improved productivity were responsible for the
remarkable increase in profitability in this business field.

    Asia and especially China proved to be the growth engine for Kuehne &
Nagel’s airfreight operations as well, achieving a 35 per cent increase in cargo
handling in this region. The high volumes Kuehne & Nagel had to manage
could only be flown out by using additional dedicated charters. Good performance
was also seen in the transpacific business, especially in exports from the USA
to Asia.

    In Europe, the national companies in Benelux and the United Kingdom
registered significant rises in volume.
The German airfreight business was particularly successful, with a further
12 per cent increase in exports over the previous year’s high level. Responsible
for the significantly higher returns were improved productivity, stringent cost
control and intensified hub activities in the new airfreight terminal at Frankfurt’s
CargoCity South.

Charter activities
Charter activities in the year under review were further extended by the imple-
mentation of dedicated charter flights into crisis areas and to overcome capacity
bottlenecks in Asia Pacific.

    In addition to the far more than 500 dedicated charters, in the fourth quarter
Kuehne & Nagel established a charter service from Shanghai to Europe and back,
which met with high market acceptance.

Strategic partnership with Kintetsu World Express in Latin and Central America
Since October 2003 Kuehne & Nagel has been cooperating with Kintetsu World
Express in Brazil, Peru, Venezuela and Mexico. The partnership offers favourable
conditions for expanding the customer base and developing additional business

     PERFORMANCE AIRFREIGHT                                                                                    Variance
     CHF million                                        2003       per cent          2002        per cent      per cent

     Turnover                                       2,092.9         100.0         2,098.6        100.0            (0,3)
     Gross profit                                    415.2            19.8         392.3           18.7           5.8
     EBITA                                              95.6           4.6          77.6            3.7          23.2
     Number of operational staff                     2,633               –         2,474               –          6.4

                                   GF-X participation
                                   Kuehne & Nagel belongs to the group of airfreight forwarders that has supported
                                   the GF-X electronic reservation portal from the beginning. This commitment was
                                   underlined by the purchase of an equity stake in 2003. The company sees the
                                   GF-X system as a leading solution for the air cargo industry and efficient link
                                   between forwarders and carriers.

                                   Cargo 2000 implemented
                                   Following Kuehne & Nagel’s status in becoming the first logistics provider to be
                                   awarded certification for Phase 2 of the Cargo 2000 programme in the year
                                   2002, the new IT-supported process handling has been rolled out worldwide.

                                      Cargo 2000 functionality enables Kuehne & Nagel to manage and monitor the
                                   approximately 90,000 monthly consignments across the entire door-to-door pro-
                                   cess chain. In the event of any deviation from the route map proactive measures
                                   can be taken to ensure delivery as agreed. Through process streamlining and
                                   transparency this system creates added value in customers’ supply chains. At the
                                   same time, it forms the basis for the development of new, time-defined products
                                   that will contribute to further growth.

                                   Niche products: aviation and hotel logistics
                                   In the past year, the results of the niche product aviation logistics, which pro-
                                   vides highly specialised transport solutions for the aviation industry, improved
                                   again and additional customers were attracted. Kuehne & Nagel has 39 so-called
                                   aviation gateways and supports around 70 customers in the industry. New
                                   markets in the Middle East are being targeted for the product in the current
                                   business year.
International Forwarding:   Airfreight                                            75

    In hotel logistics, the positive business development continued as well.
Successful handling of logistics projects relating to the opening of new hotels in
the Middle East resulted in an increase in market shares and higher awareness of
this niche product. The strategy of meeting the individual and comprehensive
logistics needs of renowned hotel chains with tailor-made solutions will also
prove successful in 2004 and lead to more contracts in this innovative field of

Close cooperation with airlines
In the year 2003, close strategic cooperations were upheld with all major airlines,
a key element of Kuehne & Nagel’s airfreight strategy.

Recovering airfreight business
According to a market study, in 2004 the global airfreight market will again
achieve growth rates experienced in the late nineties. Reasons for a forecasted
6 per cent rise in volume are continued strong growth in the Asian markets
and the economic recovery in North America.
For the current year Kuehne & Nagel plans an increase in tonnage far above the
market average. The more efficient handling of freight as a result of the Cargo
2000 system and new products will contribute to this objective as much as the
intensive sales support to customers in all target industries.

Overland transport   |
                         Strategy implementation
Kuehne & Nagel can look back on a successful year in regard to its overland transportation
activities, which show a positive development in results. At the same time, further expansion of
this business field in Germany proceeded with the acquisition of Pracht Spedition + Logistik
GmbH located in Haiger/Hesse, and a stake in the WM Group, Bocholt, as of January 2004.
                              International Forwarding:   Overland Transport                                      77

PERFORMANCE INTERNATIONAL OVERLAND TRANSPORT                                                               Variance
CHF million                                         2003        per cent        2002       per cent        per cent

Turnover                                           749.8         100.0         514.3       100.0             45.8
Gross profit                                       127.1          17.0          86.7         16.9            46.6
EBITA                                               15.2           2.0          12.5          2.4            21.6
Number of operational staff                          904              –         868              –            4.1

                              The European market for road transport was characterised more than ever by
                              fierce competition and significant pressure on margins. Nevertheless, Kuehne &
                              Nagel was able to assert its position, extending profitable businesses and
                              winning new customers.

                                  In particular, the national companies in Benelux, Germany and Switzerland
                              contributed to the favourable business development. Their offer of tailor-made
                              cross-border solutions met with high acceptance amongst customers. In the
                              Northern European countries, the deterioration in margins was countered by cost
                              reductions and restructuring measures.

                                  In order to integrate overland transportation more strongly in complex logis-
                              tics and supply chain management solutions, access to a system-driven groupage
                              network is essential. In this respect, the acquisition of Pracht Spedition +
                              Logistik GmbH and a 40 per cent stake in WM Cargonet GmbH & Co. KG, both
                              members of Germany’s leading groupage network, IDS, will give Kuehne & Nagel
                              access to a successful overland transport concept. Furthermore, the membership
                              of both companies in ELIX European Logistix GmbH and ILS Gesellschaft für
                              Osteuropa-Verkehre mbH links Kuehne & Nagel to a pan-European groupage

                                  Kuehne & Nagel will concentrate on exploiting synergy potential in Germany
                              as well as creating and optimising interfaces to its traditional business. Thus the
                              company has already begun pursuing the realisation of its ambitious development
                              programme in European overland transportation.

Rail   |
           Expansion of rail logistics structures
The Kuehne & Nagel Group is pushing usage of rail transportation through its wholly owned
subsidiary Ferroviasped. Turnover improved by 11.3 per cent. However, high start-up costs for a
new product affected the operational result.

                                             Network expansion
                                             In 2003, rail logistics structures were particularly developed in the Nordic
                                             countries. A national company in Sweden, as well as agencies in Finland and
                                             Denmark, will be on hand in future to expand rail transportation in this region.

                                             New major orders
                                             In addition to supplying numerous major customers with raw materials by rail,
                                             especially the distribution of finished products via rail-connected logistics
                                             warehouses was expanded, using rail as the sole mode of transport from the
                                             production site to the warehouse. In this way, 5,000 full truckloads to Germany
                                             could be avoided for Italian customers. In project logistics, emphasis was placed
                                             on block train traffic with car spares to the CIS, as well as the loading of
                                             300 rail vehicles.

                                             Growing intermodal transport
                                             In the year under review, intermodal traffic was successfully further developed,
                                             especially on trans-Alpine and Eastern European routes.

                                             KN Nordic Rail
                                             Start-up costs for the new product, KN Nordic Rail, offering transport activities
                                             from Finland to Central and Southern Europe via Travemünde, Germany, using
                                             the railship system, turned out far higher than anticipated. Restructuring meas-
                                             ures are now being implemented to improve the product and raise efficiency.

               PERFORMANCE RAIL                                                                                             Variance
               CHF million                                         2003      per cent         2002         per cent          per cent

               Turnover                                           277.0       100.0         248.9          100.0               11.3
               Gross profit                                        24.5         8.8           24.6            9.9              (0.4)
               EBITA                                                3.9         1.4            8.9            3.6             (56.2)
               Number of operational staff                         215             –          220                –             (2.3)
International Forwarding:   Rail                                                  79

Business potential
Eastward enlargement of the European Union will significantly boost demand for
logistics and transportation services in this economic area. Greater transport dis-
tances and, in comparison with roads, the well developed rail infrastructure in
Central and Eastern European countries present new market opportunities for the
coming years. In addition, Ferroviasped will concentrate on intermodal activities
in cooperation with the Kuehne & Nagel Group and extending logistics services
for the automotive sector.

Contract Logistics   |
                         Operational result improved by 34.5 per cent
Contributing significantly to the positive development of results in 2003 were the turnaround
in North America, stringent cost management and the standardisation of processes and IT
Reports of the Business Units:   Contract Logistics                                 81

Rising customer requirements
Increasingly companies are outsourcing processes to logistics service providers
within the supply chain that go far beyond traditional warehousing and distribution
functions. Their needs range from logistics consulting, material flow optimisation,
inventory and order management, through to final assembly, quality control and
returns management. The search for a financially sound logistics provider with
genuine global capability, who can offer a complete range of services from a single
source, accompanies the growing complexity of customers’ requirements.

   Kuehne & Nagel continually adapts its contract logistics offering to market
trends. In the past year, the breadth of services was further increased, regional
capacities extended and the development of industry-specific and value added
services intensified. This resulted both in contract extensions and new business
gains. Stringent cost management and productivity increases raised the profit
margin from 2.0 to 2.6 per cent.

Regional developments
In the year 2003, Kuehne & Nagel invested primarily in the expansion of its
logistics facilities in Europe, with new distribution centres opening in Milan,
Munich and Paris and extensions being undertaken at existing sites in Duisburg,
Hamburg, Zagreb and Kiev.

   Comprehensive restructuring measures in North America led to a stabilisation
of results. The low inventory levels during the first three quarters, a consequence
of the economic situation, were countered by a reduction of both empty space and
the number of sites, as well as the integration of USCO activities in Canada and
Mexico into the respective Kuehne & Nagel national companies.

   In Asia Pacific, Kuehne & Nagel successfully established value added services
for the retail industry, for which the company installed dedicated logistics centres
in Shanghai, Xiamen and Yantian as ideal platforms for future growth. Additionally,
together with the company’s strategic partner, SembCorp Logistics, comprehensive
distribution services are offered in China.

Process standardisation
In 2003, Kuehne & Nagel globally continued to drive the standardisation of
processes for new customer implementation, as well as for operational and organ-
isational structures in its logistics centres, with particular focus on activities in
the USA and a number of European countries. The process improvements and

     PERFORMANCE CONTRACT LOGISTICS                                                                            Variance
     CHF million                                       2003        per cent         2002        per cent       per cent

     Turnover                                      1,167.1         100.0        1,157.2          100.0             0.9
     Gross profit                                    778.2           66.7         715.0           61.8             8.8
     EBITA                                            30.8            2.6          22.9            2.0           34.5
     Number of operational staff                     6,306                –       5,756               –            9.6

                                   modifications achieved led to productivity increases and cost reductions, creating
                                   higher value and benefiting customers and Kuehne & Nagel equally.
                                   For new multinational projects a team of logistics specialists ensures smooth and
                                   rapid implementation. Furthermore, operational audits are conducted at regular
                                   intervals on a local, regional and global scale, in order to assure high and consist-
                                   ent quality around the world.

                                   Global standardisation of IT systems
                                   Progress was also made in the standardisation of contract logistics applications.
                                   Logistics centres on all continents have been equipped with a modern standard
                                   warehouse management system. The functional scope of the system facilitates
                                   paperless processes, automated retrieval, the operation of vendor hubs and ulti-
                                   mately wireless data transmission. In the current year, the standardised warehouse
                                   management system will be implemented in further locations, especially in the
                                   Asia Pacific region and Central America.

                                      In the area of transportation management applications, Kuehne & Nagel has
                                   also opted for global standardisation. In 2003 pilot projects were begun in the USA
                                   and Belgium, and for the current year further projects are planned in several
                                   European countries. The objective is for all local or national solutions to have been
                                   replaced by a standardised application within the next three years.

                                      Kuehne & Nagel has also invested in providing global transparency of orders,
                                   consignments, inventory movements, and deliveries across the entire supply chain.
                                   In the year under review, the integration of information systems for contract logis-
                                   tics and international forwarding was accelerated. With respect to their logistics
                                   processes, customers can thus be provided with complete transparency at any time
                                   via one worldwide-integrated system.
Reports of the Business Units:   Contract Logistics                               83

Extension of service offering
The Kuehne & Nagel offering was supplemented by further services in the areas
of transportation management, reverse logistics, final assembly and product
completion. As lead logistics provider, the company consolidates and optimises
freight volumes for key accounts, reducing costs, avoiding dead freight and,
not least, reducing the impact on the environment.

   In a number of European countries, Kuehne & Nagel assumed management of
product returns for customers in the high-tech and electronics sector. Due to tight-
ening regulations for manufacturers, especially in the European Union, further
business growth is expected in this field.

   The need to reduce capital employed and increase responsiveness to demand
fluctuations increasingly prompts companies to seek product integration and
country-specific final assembly by the logistics provider before distribution to the
end customer. Kuehne & Nagel has been particularly successful in securing
new business in these fields of activity and is investing to expand its capabilities
for the high-tech industry.

Exploit business potential
Currently Kuehne & Nagel is one of the top 10 global players in the contract
logistics market, which is worth an estimated 510 billion US dollars worldwide.
The company is well positioned and ready to benefit from business opportunities
arising from continued globalisation and the anticipated economic upswing.
The short-term goal is to raise the profit margin and achieve organic growth in
China, Eastern Europe and the United States. Moreover, possibilities are being
examined to accelerate growth in specific industry segments through selective

Insurance Broker    |
                        Specialisation creates sustained growth
The globally operating Nacora Group achieved excellent results in 2003. Continued network
expansion and focus on the area of cargo insurance have proved successful. Above all, customers
value the high service level of Nacora insurance brokers.

                                          Insurance markets in the year 2003 were characterised by selective approaches
                                          to risks and high premiums. It was only in the second half that a trend reversal
                                          could be identified, as a consequence of which competition amongst insurance
                                          companies intensified.

                                          Expansion of network
                                          The opening of sales offices in Buenos Aires and Shenzhen, China, marked an
                                          extension of the Nacora Group’s geographic reach. It is now represented in
                                          22 countries with a total of 25 offices in the world’s most important trade and
                                          finance centres. All branches are staffed by small specialist teams with industry
                                          expertise and well acquainted with local and global rules and regulations.

                                          Specialisation in cargo insurance
                                          Representing Nacora’s traditional core area of competence, cargo insurance is
                                          at the centre of business activities. In 2003, the highest growth was recorded
                                          by this division, notably in the highly specialised field of logistics solutions and
                                          projects. Additionally, Nacora develops integrated insurance solutions for cus-
                                          tomers in trade and industry. Smaller to mid-sized companies with international
                                          business activities in particular take advantage of Nacora’s consulting and
                                          brokerage competence.

            PERFORMANCE INSURANCE BROKER                                                                               Variance
            CHF million                                       2003         per cent         2002         per cent       per cent

            Turnover                                          86.2         100.0           68.2          100.0            26.4
            Gross profit                                      29.8            34.6         26.9            39.4           10.8
            EBITA                                             15.4            17.9         13.7            20.1           12.4
            Number of operational staff                       131                –          124                –           5.6
Reports of the Business Units:   Insurance Broker                                85

High service level guaranteed
Risk management and tailor-made customer solutions are in the foreground of
Nacora’s service. Customers are accompanied and proficiently supported, from
requirements’ analyses to realisation through to claims’ handling. Substantial
investment in the service component was undertaken in 2003, amongst others
through taking on more qualified personnel and sales staff in the national

   For 2004, further expansion of the international network and the gain of
additional market shares are intended.

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