The Future of Logistics — Part 1: The Fundamentals
Despite supply chain shocks and the narrative about “deglobalization”, the pandemic has demonstrated just how vital logistics have become to our global trading system. We have witnessed massive changes over the last twenty years with the rise of just-in-time supply chains and disruptive e-commerce players changing the logistics industry. Yet the technological possibilities impacting the space right now and the acceleration of e-commerce and shifts in consumer behavior will have an outsized impact going forward.
In this two-part series, we look at the strengths, weaknesses, and opportunities in the logistics space and identify the key drivers that point towards an inflection point and why startups are well positioned to drive innovation forward. This first post focuses on the fundamentals.
From “Canal Mania” to the Ever Given: logistics as both the backbone and Achilles’ heel of the international economy
When the Duke of Bridgewater built a canal to connect his coal mines in Worsley with his merchant operations in Manchester in the 1760s, he not only reduced his costs of coal transport significantly — he also cut the price of his coal by half as well — helping spark the “Canal Mania” in Great Britain, which led to a dense network of canals to transport goods by the early 1800s and a massive reduction in transport costs (90% within few years), helping spur on the first wave of the Industrial Revolution.
Since that time innovation has continued to bring down the costs of logistics and freight transportation. The rise of global trade and falling freight prices went hand in hand with further waves of industrial revolution, from the chemical revolution in the 1890s to the rise of the electronics industry in East Asia beginning in the 1960s. McKinsey has put together an impressive graph on this in their research here:
“Containerization” was the next great innovation in 1956, allowing ports to become more like factories, with cargo moving on and off ships with the ease of a conveyor belt. Since then global shipping has operated on this modular, standardized base — you can put anything into a container and it will get delivered to almost any port relatively quickly. Ships have ballooned in size too — the Algericas is a container ship the length of four football fields and can carry over 24000 containers. It’s cheaper today, on an average cost basis, to move a container from the port of Shanghai to the port of Los Angeles than it is to take that very same container on a truck across the city of Los Angeles to its final destination. Just-in-time supply chain strategies have been enabled by this logistics machine as well, which have further reduced costs. The global logistics market was valued at $7.6 trillion in 2017 and is projected to grow to $13 trillion by 2027. That’s a compound annual growth rate of 6.5% from 2020 to 2027.
Two recent books have taken a closer look at the importance of seaborne freight and the logistics that underpin our world: Gregg Easterbrook’s The Blue Age and Christoper Mim’s Arriving Today.
The last 20 months, however, have demonstrated that the global logistics industry has significant room for improvement. The pandemic shifted consumer behavior toward goods, which put enormous strains on the supply chain. When the container ship Ever Given ran aground in the Suez Canal in March 2021, it was estimated to be blocking $400 million in goods every hour. After six days the final tally was close to $10 billion, with massive knock-on effects some analysts say are still affecting trade flows. The Port of Los Angeles currently has a record number of ships waiting off the coast, due to both record volume, as well as warehousing and personnel shortages. While the global logistics industry may be the backbone of the global economy, it has also proven less resilient than many anticipated and is shaping up to be a real Achilles’ heel.
Our thesis: increasing resilience in logistics will open up new opportunities
This confluence of events has created new opportunities to innovate in the logistics space. Our hypothesis is informed by the insight that decision makers are not just concerned with cutting costs and increasing efficiency, but also enhancing resilience to handle disruptions and external shocks within the logistics industry.
Traditionally, the industry faces 7 key challenges:
● Low digitization: Heavy use of manual processes (“pen and paper”), manual labor at crucial chokepoints (such as ports) and legacy systems
● Data silos: Large amounts of data generated stored in many different ways and locations
● Fragmentation: Large number of third parties involved throughout the whole value chain
● Complexity: Complex end-to-end processes necessitating manual involvement across many parts of value chain
● Low transparency: Lack of data (such as the lack of EDIs or APIs) and lack of standardization across transport modalities (e.g. pallets, barrels)
● Low visibility: Lack of accurate end-to-end tracking of goods
● Low ROIC & margins: Decreasing logistics costs putting pressure on logistics providers
Over the past decade, e-commerce platforms such as Zalando and Amazon have been some of the main drivers pushing the digitalization of the logistics industry. The primacy these players put on emerging technologies (AI, blockchain, robotics, IoT, etc.) have led to even more possibilities to increase efficiency and cut costs in the long-term.
Yet many segments within the space, especially in transportation, represent a huge and largely fragmented total addressable market, which lowers barriers to entry and creates opportunities for startups. Other segments, however, especially emerging ones without a clear structure, are characterized by fierce competition and the potential for winner-takes-all markets.
The Landscape: Market dynamics and funding
Venture funding into “LogTech” began to take off in 2015 with roughly $26bn of capital flowing into the space over the next four years, significantly outpacing venture funding in any other segment in that timeframe. Yet, the investments in this sector are very top-heavy with the top 10 startups receiving 46% of overall funding. More than 50% of funding was allocated to last-mile delivery models and freight platforms. With regards to venture funding in logistics (as percentage of overall funding), Europe lags behind other major regions, such as North America or Asia Pacific.
Looking at the competitive landscape and segmentation, logistics comprises the entire value chain from manufacturing to consumption. Categories such as enterprise resource planning, procurement and manufacturing are not within our scope, as we do not consider them to be core logistics functions. A core part of our analysis is software within the fields of transportation, warehousing, delivery, and analytics. We’ve developed the following landscape as a guide:
We also spoke with Hauke Hansen, Holger Hengstler, and Martin Enderle, industry experts and angels in our btov Private Investor Network. Their backgrounds in logistics at companies such as Amazon, Delivery Hero, and countless startups was enormously helpful to developing btov’s view on logistics. Their key takeaway was that there is a clear trend towards bundling and “one-stop-shop” solutions, while last-mile logistics is already very crowded — the need for more efficiency and a lower cost structure will lead to consolidation in the space. Perhaps more importantly, they see logistics as moving away from being a purely „hygiene factor“ that answers the basic question “how do I get it?” to becoming a “motivator” that answers the question “why should I get it from X?”. That means logistics used to be all about cost and time optimization and is now becoming more and more a customer satisfaction factor, where classic “marketing” issues such as customer experience and engagement come to the fore. Startups are seizing this opportunity and are positioning logistics as sales-supporting services making them able to charge premium prices for it. (For more on this framework see Herzberg’s two-factor theory).
We thank Hauke, Holger and Martin for their input on this series. You can find some of their thoughts here.
Part II will be coming out early next year and we’ll dive deeper into the Future of Logistics.
