Why the logistics industry is ripe for disruption
Logistics is broken. Companies operating in the field are facing a new era of unprecedented change as digitization and customer expectations evolve simultaneously. New technologies are enabling efficiency optimizations and new cooperative operating models.
This post aims to give an overview of the core indicators sounding the bell of digital disruption within the logistics sector. A general introduction to logistics is followed by an analysis of the most common patterns of disruption and an overview of the drastically accelerating investment pace in the log-tech industry.
A high level map of the Log-Tech industry
What exactly do we mean by referring to the “logistics industry?
“The process of planning, implementing, and controlling the efficient, cost effective flow and storage of raw materials, in-process inventory, finished goods and related information from point of origin to point of consumption for the purpose of meeting customer requirements.”
The logistics sector and its value chains are fairly complex and not trivial to map out exhaustively. Here is our attempt to create a condensed log-tec-industry map which can be understood as a high level framework in order to give our underlying (investment) hypothesis a structure.
The patterns of disruption
Many of the sub sectors show the typical patterns of disruption we have identified in other industries before. According to Deloitte’s patterns for disruption report , disruption is ahead where
“Markets with underserved customers and a wide range of hard to find, differentiated products cannot be cost-effectively shipped to the customer.”
On a more detailed level: :
- customers are underserved in case quantity, quality or speed of services is not available to a sufficient extent and interests of market stakeholders are not aligned
- Differentiated products are hard to find in very fragmented markets with a low degree of transparency and access to data or information
- Cost efficiency is absent if processes are not digitized / automated or relevant information is not easily accessible to customers
In the following we will elaborate on the core customer pain points the logistics industry suffers from and provide specifics examples as well as selected log-tech-companies addressing the respective problem.
#1 Customer expectations adapt to the digital era
Both enterprise and SMB customers nowadays expect to get shipments delivered faster, more flexible and with a higher degree of transparency at a lower price — like consumers did a decade ago, driving the fundamental digital disruption that has happened to the travel industry.
In Freight & Trucking this hypothesis is supported by the rising digital freight forwarders — e.g. Flexport or Freighthub — which provide a drastically more sophisticated user experience and process efficiency compared to incumbent forwarders. Following some of the trends that transformed the consumer travelling sector since the 1990s such new players:
- Provide transparent fee structures by gathering and processing data which have formerly been stuck in piles of paper, fax machines, e-mails or in closed data silos
- Give quotes for shipments instantaneously and provide a fast and simple booking process
- Communicate efficiently via event-based dashboards and 24/7 track&trace tool
“Assets & Infrastructure” might be the industry vertical being furthest behind given its asset heavy business models and mostly offline operations. But here too, open minded employees and managers ask for more customer centered products bringing their company’s operations to a next level. For example vessel owners ask for digitally streamlined brokerage and communication processes (for example shipamax and vesselbot are working on that problem) or warehouse managers intend to run their operations by using smart robots / drones or acquire new customers and increase capacity utilisation via online channels like Flexe.
Customer expectations in e-commerce are mainly driven by consumers, which is why this subsector sees competition not only from log-tech startups but also from e-commerce giants such as Amazon (secretive drone delivery program), UBER or Zalando expanding into the sector in an attempt to integrate even deeper into the value chain.
#2 High degree of fragmentation
Every industry has unique dynamics and conditions that determine which opportunities for digital innovation arise, how they will be perceived by customers and how incumbents respond. Many segments within the logistics industry are commoditized and have low barriers to entry or exit, leading to a market with a very high degree of fragmentation being typified at the grassroots level by low margins and high competition — e.g. Europe’s freight transport sector as stated in ACEA, European Freight Transport statistics:
“Within Europe it is a highly fragmented sector composed of hundreds of thousands of businesses, varying enormously in size and each year moving billions of consignments of widely varying sizes and weights on a myriad of possible routes. Given the scale and complexity of the freight transport system, it is impossible to analyse and understand it in the absence of large statistical databases.”
#3 Low degree of digitization and highly manual processes
A strong digital DNA is a prerequisite for corporate success in the 21st century. However to date, many incumbent players still work with largely manual processes, relying on phone, fax, spreadsheets and e-mails. Using such “backbone technologies-stack” means that its results are by definition slow, error prone, not exponentially scalable and come at high costs per unit. Future beneficiaries will be those who understand how to exploit technologies such as cloud based services, IoT/sensors, predictive data analytics, blockchain, drones and 3D printing.
#4 Little innovation by incumbent players
We do not expect incumbents in either of the mentioned sub categories to become the driving forces pushing disruptive innovations in logistics for several reasons:
- Lack of digital DNA in incumbent organizations (named as biggest challenge by 50% of PwC surveyed logistics companies with regard to their digital transformation)
- Hesitation to cannibalize existing business by internal product innovation due to conflicting shareholder’s and employee’s interests
- Legacy IT infrastructure and rigid processes that are hard to transform into the cloud-age
Consequently, we expect that the rule of the game is no longer “the big eats the small” but rather changes to “the fast eats the slow”.
Increasing VC activities
After years of linear growth, the venture capital investment pace in logistic technologies has exponentially risen since 2014 — amounting to global VC funding volumes of $ 5.3 bn allocated in 2016 throughout 315 venture deals.
Regarding the break-down by phase, early-stage investment (seed/angel and Series A) accounted for over 60% of deal share and mid-stage deals (Series B and C) accounted for 10% since 2013. Consequently, we are still in the first quartile of the digital transformation cycle, also given that it takes about 5–8 years for early stage startup companies to reach a certain degree of maturity.
At Earlybird we are very excited to be at the pulse of European og-tech and follow the industry’s evolution closely with our dedicated log-tech task force based in Berlin. Please feel free to reach out to us:
Preview: In our next post, we will dive deeper into several sub-categories of Log-Tec and explain which areas and technologies we consider to be the most significant drivers for digital transformation.
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