Blockchain in logistics — a real investment opportunity

Last weekend saw a major development in the transformation of the logistics industry and of how global supply chains will be managed. Three global heavyweights — IBM, PSA International, and Pacific International Lines — announced the successful test of a blockchain-based platform for tracking cargo. The platform, using blockchain’s underlying secure and immutable characteristics, provides participants both transparency and trust in logistics management. This news is notable for two reasons.

Photo by Ana Rahal, from Wikimedia Commons

First, it validates the very serious interest in and applications for blockchain technologies in logistics.

There is, no doubt, substantial hype around blockchain. Nonetheless, the involvement of major industry players validates there is real potential too. Nor is this an isolated example — in December, UPS joined the Blockchain in Transport Alliance (BiTA), which has over 60 members. Indeed, in a recent conversation at the WEF in Davos, Accenture’s lead blockchain expert suggested that logistics may be one of the first industries to see meaningful adoption of blockchain technology.

That will make investments in related technologies attractive. Indeed, logistics transparency is one of the top-5 largest near-term spending — and investment — opportunities in digital transformation. IDC’s 2018 IoT Spending Guide forecasts the transportation industry will attract $85bn in spending through 2021, with a full two-thirds of that going to freight monitoring.

Second, this news is noteworthy because it is a cautionary tale for startups such as ShipChain looking to build blockchain based (or generic) supply chain management platforms.

This news suggests, however, that the incumbents wish to build the underlying infrastructure themselves and prefer to do so with global IT service providers. And IBM has taken a lead role working with Walmart, the Dubai Port Authority, JD.com and Maersk. Companies such as IBM and Microsoft can play the role of market maker and bring the necessary bench strength and credibility to deal with complex organizations.

This is a familiar story that has already played out in other areas. Last year, for instance, there were upwards of 450 IoT platforms. But while a few years ago one could make the case that a new IoT platform with unique capabilities (e.g. edge architecture, blockchain integration, higher levels of security) may see meaningful industry adoption, device growth has lagged even as end-customers have aggregated to a few providers. Simultaneously, incumbent IT services firms that had no IoT platform capabilities to speak of rapidly ramped up their teams and products to rival — or even exceed — the capabilities of startups.

In this new world you are either already a meaningfully large startup (e.g. C3IoT), are an incumbent (e.g. IBM), or are positioning yourself for an exit to (e.g.) a mid-sized system integrator. If not, you are likely to experience a slow, painful demise as companies pilot and learn on your platform but deploy at scale on an IBM or Microsoft platform when they are ready. Something similar will likely happen in the fast evolving world of blockchain-based logistics platforms.

This does not mean that external startup-led innovation is dead or that investing in this space is doomed to failure. Quite the contrary, this news validates the immense size of the market and the disruptive potential of blockchain in logistics (one of two areas we are mapping actively). It also provides the framework within which one may invest time and money into industrial startups, in order to exploit the available window of opportunity.

First, look for real pain and spending within specific quarters. While a full end-to-end transformation of the supply chain is certainly possible, gaining traction in that business model requires the simultaneous participation of multiple value-chain partners. Getting them aligned is challenging at best, impossible at worst — especially if one does not have the resources of an IBM. Equally, being a platform is fraught with the need to ensure that the network effect works in your favor — yet, an IBM or Microsoft is much more capable of investing the marketing dollars needed to tilt the balance in theirs. Look for startups that provide a solution, not mere enablement.

Second, establish and invest incrementally against a timeline. Customer needs are evolving fast, as companies discover the possibilities from new technology. Thus, every innovative startup that is offering a product, is forced to also do a significant amount of consulting and customer education. Companies that can acquire the most customer experience, contracts, and data first will be the ones that can survive or exit successfully. The time when IoT platforms were acquired for their technology is long past — acquisitions are now increasingly based on the number of customers, devices, or data points available on a platform. Expect a similar shakeout and dynamic in other verticals.

Finally, actively support growth against that timeline. Whether you are a customer or an investor, you want your chosen solution to become (an) industry standard. Yet, most growth-stage companies lack the depth of experience or resources in their team for true international expansion or meaningful engagement with the likes of Maersk. It is the responsibility of investors and customers to ensure their selected provider can scale — or to let it go.

Blockchain, for all its faults, has potential. And its many quirks and constraints — notably of scalability and transaction cost — are being worked on by some of the brightest minds. Thus, it is only a question of time before it can be applied at scale wherever transactions happen. That is a significant investment opportunity and one that is based on actual use, making it less speculative that its cryptocurrency brethren.