Transportation and logistics on the move

The world’s supply chains are changing. New trade corridors are already becoming visible, and those companies and countries able to capitalize on them will benefit most from the evolution of global trade. Trade corridors between Asia and Africa, Asia and South America, and within Asia are already shifting the relative weight of the flow of goods between the continents. The transportation & logistics (T&L) industry forms the backbone of our global supply chain. T&L leaders are especially optimistic about their prospects in the coming years as they look to emerging markets as a strategy and centerpiece for growth and opportunity. The better the strategic market and corporate foresight, the safer and greater the subsequent success T&L service providers will experience in emerging markets.

As emerging markets continue to grow, there will be a host of opportunities for service providers of all sizes. Most important, these companies will need to develop or fine-tune their own specific strategies for operating in diverse emerging markets. They will need to understand how government regulation in each market affects them, be it changing customs procedures, the establishment of free trade zones, incentives for foreign direct investment or new sustainability requirements.

Changing government involvement in industry is helping to change the T&L industry. For example, privatization has already helped fire up China’s economic growth. Between 1996 and 2003, the number of state-owned enterprises in the industrial sector of China declined to around one-third of the number present in 1996.¹ Half of the decline is credited to privatization. Other countries such as Turkey are also looking to benefit from increased efficiency and better access to capital by promoting wider share ownership. And in many cases, transformation in the T&L industry begins with the privatization of transport infrastructure and the postal sector. The courier, express and parcel (CEP) market is one of the strongest-growing sectors of the T&L industry in a number of emerging markets including Turkey.

Changing consumer behaviors (such as lower levels of reliance on the national postal service), growing e-commerce, urbanization and a young population should drive significant growth levels in CEP. The Turkish textile and clothing industry already relies heavily on international CEP services. As a result of these services, samples of ready-to-wear items and new designs can be delivered quickly to potential customers in Europe, avoiding delays in the race against competitors. However, to be successful in the long term, T&L service providers characterized by low cost and low service levels will have to improve their scope of services. They will also need to observe changing customer needs carefully and provide the required products and services in order to maintain competitiveness.

The trend of moving from state-owned enterprises to private companies is also encouraged by the requirements of the International Monetary Fund and the World Bank. Both organizations require emerging markets to undergo structural adjustment, including privatization, as a condition of receiving new loans. In some of these countries the government’s role will undergo a major shift, from active market player to watchdog.

This oversight functionality will remain vital to establishing fair and sustainable competition, though. Emerging markets are evolving toward more transparency, so there will still be a strong need for governments to regulate and provide process assurance.

Liberalized conditions for cross-border trade, as signaled by free trade agreements, have been an important factor in the development of international trade flows. According to the World Trade Institute, since the first of its kind was agreed upon, 570 free trade arrangements have now been signed worldwide, of which 370 were still in force in 2007. In 2010 China and the Association of Southeast Asian Nations (ASEAN) established the world’s third-largest freetrade area after the European Union (EU) and the North American Free Trade Agreement (NAFTA). When the ASEAN-China Free Trade Agreement (ACFTA) comes into effect, it will cover 1.9 billion consumers and an estimated trade volume of $1.2 trillion, with a combined GDP of $6 trillion.²

Such agreements are critical; however, within regions, additional measures have also proven to be important in encouraging cross-border trade and capital flows. For many emerging markets, free trade zones will help spur economic growth and logistics service providers will need to adjust their service offerings accordingly.

The main objective of free trade zones is to attract foreign direct investments by facilitating market entry for foreign investors. Foreign direct investment inflows may provide capital either directly or through other related enterprises. Those investments will also affect T&L efficiency. Governments typically subsidize companies that relocate inside these zones, making them particularly attractive for manufacturing and exporting companies.³ Companies who move to free trade zones are rewarded with tax and customs exemptions and in some cases with streamlined procedures that reduce red tape. Some free trade zones are also specifically designed to serve the needs of particular industries, such as chemicals or pharmaceuticals. Often such areas create economies of scale in terms of transport, as the presence of multiple producers facilitates better capacity utilization. Free trade zones may also feature superior infrastructure, such as excellent connections to export facilities and ports.

Thanks to the strong development of emerging markets and customer needs, there is an ongoing shift in global supply chains. For instance, China is now Brazil’s largest trading partner and is a significant market for many of its emerging Asian neighbors such as Malaysia and Indonesia, and annual trade from South and Central America to Africa and vice versa has risen by more than 20%.⁴

Global trade flows have shifted such that the establishment of new transportation corridors between emerging countries and least-developed countries is highly probable. As a consequence, many of the new trade flows will bypass developed countries. T&L companies are looking to respond to the development of new transport corridors; however, the sheer geographic size of emerging markets and the multitude of cultures, attitudes and languages require a significant investment. Further, companies must be willing to adapt to the local markets where they wish to expand.

T&L service providers will need to take a targeted approach, which will require taking an active part in the design process of new transport corridors, developing adequate structures and pricing systems, and initiating and building logistics clusters. T&L companies in developed markets need foresight to leverage the enormous potential of this trend. But the time is now to take advantage of this megatrend.

Along with the obvious opportunities, doing business in emerging markets represents a unique set of business challenges. By utilizing certain strategies, such as partnerships, collaborations or joint ventures with domestic companies, the multinational T&L firms can gain a foothold in and across emerging markets more quickly. Foreign companies that aim to enter these markets may find that making personal contacts still carries enormous weight in some regions. They might consider contacting a social network broker (SNB) and sharing their ideas on future business plans in an emerging market country. In turn, SNBs can arrange and initiate the first contact between the new market entrants and relevant individuals in the emerging country. Appreciable growth potential in rural areas of emerging markets also looks likely. Service providers that extend their activities to those areas and establish effective distribution networks within them could realize first-mover advantages. Another strategy could be to forgo investing in new and cutting-edge technologies in an emerging market in favor of second-hand technologies that would enable services to be established at a lower initial cost. Building on this, using established and widely used technologies, such as mobile phones, would lessen the requirement to install cost-intensive tracking and tracing systems. For example, truck drivers could be tracked by their mobile phones, which would give information about the location of transported goods and products.

Emerging market players are unlikely to dominate developed markets; instead, they will build competencies and market share in more attractive home and neighboring emerging markets. After all, these markets are generally very far from saturated and growing at double-digit rates. However, the rise of emerging markets has not gone unnoticed by multinational companies in developed countries. The first moves to emerging markets were generally seen after individual countries underwent liberalization or opened their markets to foreign investors. According to their own statements, the largest multinational logistics companies— such as DHL, FedEx, UPS and TNT—operate in approximately 200 to 220 countries worldwide, including virtually every emerging market. These multinationals are not only looking to operate in emerging markets for advantages in international trade, they are also engaging and operating in the domestic logistics market in emerging countries.

Multinationals entering the domestic T&L markets in emerging countries will accelerate the increase in professionalism of the industry in those countries. Through cooperation and joint ventures or by following the lead of competitors who have established such practices, logistics service providers in emerging markets will increase their level of automation and help to move toward implementation of a broader range of value-added services. In China, for example, DHL, FedEx, UPS and TNT have chosen to cooperate with domestic companies in order to penetrate the sector. Such partnerships are often beneficial for both multinationals as well as domestic companies in emerging markets. In this win-win situation, multinationals profit from accessing valuable knowledge from their local partners, while domestic service providers will benefit from technology transfer and experience brought into their market, increasing industry efficiency and professionalism.

The larger and financially better-equipped companies will target growth by looking for suitable mergers and acquisitions. Consolidation of the markets in emerging countries will be the consequence and is also a natural part of the process of industry maturation.⁵

As emerging markets continue to grow, there will be a host of opportunities for T&L service providers of all sizes. Some of these will stem from the sharing of a whole range of good practices that are commonly used in developed markets, but not yet fully implemented in many emerging markets. These practices include strategies for managing people, such as diversity management, managerial accounting systems including the use of key performance indicators, sharing lessons learned during past liberalization processes, and developing robust corporate social responsibility practices and reporting. Others may involve emerging markets providers who are able to act as advisors to those entering their marketplace—to help scout out suitable acquisition targets, as just one example. They will need to understand how government regulation in each market affects them, how trade flows are changing, the rise of new competitors or actions by existing ones and numerous other factors. This may mean adapting their service portfolio not once, but many times, as demand patterns change and emerging markets develop. The rise of emerging markets is changing the face of the planet’s business environment and will continue to do so for the foreseeable future—and the T&L industry will clearly be right in the middle of it all.

Read more about T&L in the next 20 years and take a closer look at seven specific emerging markets—Brazil, China, India, Mexico, Russia, South African and Turkey—in our latest publication Transportation & Logistics 2030, Volume 3: Emerging Markets—New Hubs, New Spokes, New Industry Leaders.

1. Ross Garnaut, Ligang Song, Stoyan Tenev and Yang Yao, China’s Ownership Transformation (2005).
2. Liz Gooch, “In Southeast Asia, Unease Over Free Trade Zone,” The International Herald Tribune. (2009).
3. Kaz F. Miyagiwa. “A Reconsideration of the Welfare Economics of a Free Trade Zone,” Journal of International Economics 21 (1986): 337-350.
4. WTO, International Trade Statistics 2009, PwC Analysis.
5. AMEinfo, “Consolidation to Continue as Logistics Market Grows,” retrieved October 9, 2010. (2007). http://www.ameinfo.com/130942.html