Transportation & Logistics 2030
/The report from PricewaterhouseCoopers and EBS Business School Supply Chain Management Institute was downloaded 05MAY2011 from http://www.pwc.com/gx/en/transportation-logistics/tl2030/emerging-markets/for...
Highlights:
Thanks to the strong development of emerging markets, completely new logistics passageways will appear on our world map: passages between Asia and Africa, between Asia and South America and within Asia... He, who already has the landslide of the global logistical topography on his display, can take advantage of this megatrend at the right moment: namely now.
Preparation is everything. The better the strategic market and corporate foresight, the safer and greater the subsequent success of logistics service providers and emerging countries. This study operates along these lines of strategic foresight. It gives an overview of the status of emerging markets, as far as what regulation and liberalisation concerns. It describes the new trade corridors, the new flows of goods, the predicted market development for individual logistics products and services and the progress of the competition...
One important step towards developed market structures can be seen in the move from state-owned enterprises to private companies... Emerging markets are evolving towards more transparency, so there will still be a strong need for governments to regulate and provide process assurance.
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. It‘s also an area where changes in demographics and consumer behaviours could have the most significant impact. Logistics providers with a service portfolio characterised by low-cost and low-service will have to improve the scope of services in order to maintain competitiveness.
...multinationals will not only operate in emerging markets for advantages in international trade, they will also engage and operate in the domestic logistics markets. The number of logistics service providers in BRIC countries already exceeds the tens of thousands mark. The spread ranges from one-man businesses to large companies with several thousand employees, with the resulting differences in competitiveness, financial resources and offered services. The larger and financially-better equipped logistics companies will target growth by looking for suitable mergers and acquisitions (M&A).
Most importantly, though, logistics 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. This may mean adapting their service portfolio not once, but many times, as demand patterns change and emerging markets develop.
Emerging nations are also reaching outwards. In recent years, foreign direct investment outflows from emerging market multinational enterprises (firms investing in both industrialised and emerging economies) have shown dynamic growth rates of roughly 82% on average since 2003. The largest share of outward foreign direct investments (40%) came from the BRIC countries. China and some other emerging countriesoutside of BRIC are increasingly making investments within other emerging markets. In contrast Brazil, India and recently also Russia have shown a preference towards investing in developed countries, in particular in the US and Western Europe.
The Delphi panel also evaluated whether the T&L industry would become a focus area for (foreign direct) investment in the emerging markets in 2030, a trend they see as very likely. They point out that as logistics costs, as a proportion of total costs, continue to rise, investments in improving efficiency will continue to gain momentum.
According to the Logistics Performance Index (LPI), an index capturing the most important aspects of the current logistics environment compiled by the World Bank, the BRIC countries and other more advanced emerging markets like Mexico still lack efficient means of law enforcement, such as effective customs offices and procedures, compared to their industrialised counterparts (World Bank, 2010, "Connecting to Compete - Trade Logistics in the Global Economy").
World Bank’s ‘Logistics Performance Index’ (LPI) which summarises the performance of countries in six areas that capture the most important aspects of the current logistics environment: Customs, Infrastructure, International shipments, Logistics competence, Tracking & Tracing and Timeliness. The LPI uses standard statistical techniques to aggregate data from interviews with nearly 1,000 logistics professionals from international logistics companies into a single indicator.
Insufficient transparency in the border process is also a major concern due to missing or inefficient collaboration among all border management agencies. The introduction of modern approaches to regulatory compliance will be especially important to improve the situation. Surveys among logistics operators found out that they have little confidence of an independent review of decisions made by a customs officer in some countries. Further, emerging markets lack staff for public enforcement of regulation designed to enhance the security of shipments.
Emerging markets are not the only ones facing corruption; the Bribe Payers Index found out that corruption also occurs in industrialised countries, those which have effective law enforcement and long traditions of integrity in public services. However, the occurrence of bribery in emerging markets with indifferent law enforcement and long traditions of corrupt bureaucracies is dramatically higher (Transparency International, 2008, Transparency International Bribery Payers Survey 2008")... Corporate players are also likely to institute programmes to prevent and detect corrupt practices, as legislative, regulatory and law enforcement bodies demand greater accountability.
One important step towards developed market structures can be seen in the move from state-owned enterprises (SOE) to private companies... There is no set path followed by privatisation around the world; different sub-sectors are affected in each country. In many cases, though, transformation in the T&L industry begins with the privatisation of transport infrastructure and the postal sector... Emerging markets are evolving towards more transparency, so there will still be a strong need for governments to regulate and provide process assurance, effectively shifting their role to one of monitoring market players‘ compliance, instead of participating actively in the market...
Many logistics 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. Logistics 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.
Barter describes the direct exchange of goods and services, or both, between two parties without a cash transaction. It is one form of ‘counter trade’ which also covers the exchange of obligations or time-deferred purchase of a specific good. Sources argue between 8% and 20% of world trade is bartered. Some advocates suggest that a return to barter system would mean that goods and services are exchanged like for like, rather than on inflated or biased monetary ‘valuations’. Many barter organisations like the Barter Systems Inc. or Canadian Barter System even claim their systems ease trade and make it far easier to create and maintain a customer base.
According to their own statements, the largest multinational logistics companies as DHL, FedEx, UPS or TNT operate in approximately 200-220 countries worldwide, including virtually every emerging market... In the first half of 2009, the Financial Times Stock Exchange (FTSE) ‘International Emerging Markets Index’ - providing an overview about the performance of more than 7000 stocks from emerging markets - was up 41.1%, whereas the FTSE ‘All World Developed Markets Index’ was up only 7.2%.36 This impressive performance underlines the attractiveness and market opportunities offered by emerging markets. As a result, some medium-sized logistics service providers also entered these markets, setting aside their concerns about market and financial instability as well as economic uncertainty.
...multinationals entering and operating in emerging markets also need to adapt their businesses models and organisations to domestic market players and other stakeholders, such as the government. Partnerships, collaborations or joint ventures with domestic logistics companies are seen as one way to approach regional requirements... The Delphi panellists further discuss appropriate modes of market entry and highlight the relevance of joint ventures and other collaborative forms. 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 logistics service providers will benefit from technology transfer and expertise brought into their market.
...socio-political instabilities in some emerging countries may complicate consolidation activities and state-owned companies have powerful positions in a number of emerging countries and may leverage their powerful position to decelerate consolidation waves... A strong local presence and the development of customised logistics business models, rather than simply transferring established standard procedures, are a necessity for success in upcoming markets.
While logistics service providers in emerging markets frequently have limited their range of products to basic services like conventional transport in the past, suppliers of such a constricted service portfolio may find it increasingly difficult to satisfy future customer demands. Manufacturing companies in emerging markets will seek new opportunities to increase margins, become more efficient and to focus on core competencies. As a result, the demand for value-added logistics and third party logistics (3PL) services is expected to increase.
...emerging countries will increasingly aim to benefit from advancements in technology and IT and thus move from low-tech to high tech services. Instead of searching for low-tech and lowcost logistics services, customers in developed markets have a strong preference for ‘high-tech’ logistics services and they seek for more advanced and innovative products... Some experts even argue that only those logistics service providers who offer high-tech logistics services will survive in the long-term.
Countries such as Thailand, the Philippines or Malaysia are also positioning themselves to become future logistics hubs by investing strongly in their transport infrastructure capacities. Thailand, Malaysia and the Philippines are allocating intensive resources to upgrade their infrastructure, enhance their competencies and attract international integrated logistics service providers. Likewise, Taiwan has provided a blueprint for how to develop into a global logistics centre.
We chose seven emerging markets: Brazil, Russia, India, China, Mexico, Turkey and South Africa. The first four, often referred to as the BRIC countries, represent the largest emerging economies and are foreseen to overtake some of today’s leading industrialised economies over the coming decades. Their importance for the global logistics industry today and in future is beyond question. Mexico, Turkey and South Africa likewise are among the group of well-advanced emerging countries. In terms of international trade and exchange of goods, each of them represents an important link between different regions of the world: Mexico links North and South America, Turkey bridges Europe and the Middle East and South Africa is a key point of entry to the African continent, especially from Asia and the Americas.
As noted, many foreign investors rank the T&L industry in emerging markets high on their agendas... A strong, well-functioning regulatory environment that considers the long term nature of infrastructure projects and incorporated risks of such investments is one critical success factor necessary to attract foreign investment to the transportation and logistics sector in Brazil... Logistics service providers will profit from the upcoming mega-events and the increased investment flows in the short and medium term. In order to sustain Brazil’s growth rates until 2030, a reliable regulatory framework will need to be implemented. If achieved, such stability would likely trigger massive foreign investments in the T&L industry, lowering logistics cost and fuelling growth.
Mexico, one of the most advanced emerging countries in hosting multinational logistics companies. Indeed, there is a strong level of interest in Mexico from multinationals across industry sectors. According to a survey conducted by the UN, Mexico is the 6th most attractive location worldwide for multinationals.
Mexico’s logistics market is split into two distinct segments: the export economy that relies on cross-border logistics for 95% of its traffic and the domestic economy. The logistics market servicing Mexico’s exporters is sophisticated and relatively mature with consolidation of suppliers ongoing. Three hundred multinationals are responsible for 90% of Mexico’s exports. Cross border logistics in Mexico have achieved their efficiency levels thanks to the investments by players like UPS, FedEx and DHL as well as YRC, Kühne+Nagel, Panalpina and others. Their technology and global best practices have been essential in raising competitiveness.
The country’s domestic express market experienced dynamic growth during the global economic crisis, when demand in most other regions dropped sharply. Mexico’s free trade policy in recent years has further supported its export-oriented economy. More than 90% of Mexican trade is under free trade agreements with more than 40 countries and regions, including the European Union, Japan, Israel and much of Central and South America.
Mexico has a number of competitive advantages which relate to logistics. The close geographic proximity to the US means that logistics costs for US-headquartered companies are generally quite low. Mexico also has a good functioning network of feeder plants serving the manufacturing industry. Its logistics service companies will need to build upon these advantages and continue to drive technological advances in their service offerings in order to stay competitive.
Mexico faces a number of these hurdles. The Global Competitiveness Report of the World Economic Forum points out that “Mexico’s inefficiencies of public institutions, together with high insecurity due to spiralling and widespread violence and crime, are reasons for concern” (World Economic Forum, 2010, "The Global Competitiveness Report 2009-2010").
Over the past few years, the Mexican government has addressed the criticism raised in the Global Competitiveness Report and has made good progress in reforming its regulatory policies and institutions for the T&L sectors. These attempts have also been supported by the US government and enhanced cooperation with US law enforcement agencies. By means of the Merida Initiative, the US and Mexico are working together to break the power and impunity of criminal organisations, strengthen border, air and maritime controls and improve the capacity of justice systems in the region to conduct investigations and prosecutions (U.S. Department of State, http://www.state.gov/p/inl/rls/fs/114078.htm). Further efforts concentrate on the strengthening of institutional and infrastructure capabilities of law enforcement and judicial sectors, with a strong focus on counter-drugs and security along the US and Mexican land border zone.
Due to the strong dependence on the US as the main export destination, an underperforming export sector has significant negative implications for Mexico’s trade balance and its economy. The cancellation of the cross-border trucking programme in March 2009 provides a huge challenge for Mexican trucking companies. The programme, which allowed Mexican trucks to operate freely on US roads, was introduced by the US Congress in September 2007 before being withdrawn in March 2009. Calls by Mexico’s government to reinstate the agreement have so far fallen on deaf ears. Consequently, rapid improvements in law enforcement are needed and would create a double return for the country.