Third-party logistics is a key element of a U.S. economy that is the primary bright spot in the long tunnel of the global economic recovery. In particular, the truck-related components of domestic third-party logistics have prospered during the current economic expansion.
The driver shortage has created an uneven seller’s market in trucking, increasing shipper willingness to buy dedicated contract carriage. DCC has the advantage of guaranteeing capacity.
The leading dedicated contract carriers increased their number of trucks 6.8 percent in 2014 from 2013. Current hours-of-service requirements have lowered productivity by 3.4 percent, increasing the capacity crunch. J.B. Hunt Transport Services is expected to have increased DCC revenue by 12 percent for 2014. Other major truckload carriers are expected to report similar positive results in DCC. We estimate DCC net revenue grew to $12.5 billion in 2014.
Domestic transportation management is another segment of third-party logistics benefiting from the search for truck capacity. DTM includes traditional freight brokerage and information systems-based transportation management. For domestic transportation management companies such as Echo Global Logistics, this divides into transactional and large enterprise components. Transplace is a good example of a 3PL with a large customer, systems-based approach optimizing each day’s shipments. Transplace is expanding its traditional load-by-load brokerage, but it is a minority of its business.
Echo, Coyote Logistics, TQL, and Mode Transportation are thriving with double-digit growth in the expanding DTM sector. Domestic transportation management gross and net revenues for 2014 are estimated at $53.9 billion and $7.7 billion, respectively.
C.H. Robinson is still the largest company by far in this segment with $14 billion in gross revenue and $2.1 billion in net revenue, including its recent acquisition of Freightquote. Freightquote is a survivor of the dot.com era whose addition will bring C.H. Robinson’s less-than-truckload business to $1.7 billion a year.
Another important DTM acquisition was Coyote’s purchase of Access America Transport. A less publicized, but important consolidation move in this space was Transplace’s acquisition of Logistics Management Solutions, which will help the Frisco, Texas-based 3PL expand its chemical industry activity.
Given slow growth rates for global GDP (2.8 percent) and trade (3.1 percent) for 2014, international transportation management growth was muted. Expeditors International, the market leader, had a 6 percent gross revenue increase. Air freight and ocean freight were up 4 percent, based on estimates from financial analyst Baird. Expeditors handled more than 950,000 20-foot-equivalent units of containerized cargo and 795,000 metric tons of air freight. Asia- North America lanes accounted for about 80 percent of Expeditors’ business.
Kuehne + Nagel’s gross and net revenues were flat unless one does constant currency calculations and adjustments, although its EBIT improved by 8.2 percent. Kuehne + Nagel’s containerized ocean volumes increased 8 percent, to 3.6 million TEUs, and air freight increased 5 percent to nearly 1.2 million metric tons.
Panalpina, DHL, UTi, APL and other international transportation management companies had lackluster results. The biggest stories outside the U.S. are in the Asia-Pacific region. Kerry Logistics purchased forwarder Lead Logistics for more Australia-New Zealand coverage, and is looking for North America prospects.
Interesting changes are occurring for 3PLs owned by container lines. Singapore’s Neptune Orient Lines is looking to spin off its APL Logistics subsidiary, with final bidders being KKR & Co., CJ Korea Express and XPO Logistics.
A similarly motivated Asia-Pacific deal was Li & Fung’s purchase of China Container Line last March, and Maersk Group could spin off its Damco logistics subsidiary.
UTi Worldwide, which has struggled with IT modernization, also has been on the block. Negotiations with Danish logistics and trucking company DSV broke down in December when Bloomberg published news of a potential deal, and UTi’s stock price jumped.
Major ongoing operational issues for ITM companies were port congestion and container ship route modifications. Transit times for containerized cargo from Shanghai to Chicago ran 25 to 30 days, and congestion crippled many West Coast ports, with delays at Los Angeles-Long Beach reaching 10 to 12 days — or more — as ships lined up offshore.
Value-added warehousing and distribution grew modestly but steadily. Excess building capacity has fallen in key markets and there is some new growth. The most hyped value-added warehousing and distribution stories involve e-commerce expansions. With adjustments, e-commerce takes up 10 percent of the U.S. retail market. Major 3PLs such as Genco and Menlo Logistics already are engaged heavily in — and well-prepared for — e-commerce and multichannel warehousing. Labor management and transparent IT are key capabilities for e-commerce providers. Most value-added warehousing and distribution companies now have key long-term partners, with some, including Kenco, emphasizing cost-plus arrangements.
A significant growth area for 3PLs has been cross-border traffic with Mexico, where there are now 28 automotive assembly plants. Monterrey is home to extensive industrial manufacturing, and Guadalajara is a hub for high-tech and electronics. All told, 80 percent of Mexico’s exports move to the U.S., with the primary products being cars, computers, televisions and parts. The U.S. sends parts, machinery and plastics south.
DHL, APL and Ryder have extensive operations. APL has a joint venture, VASCOR, with a Toyota affiliate that handles extensive parts movements southbound and cars northbound. 3PL operations in Mexico are on a par with those in the U.S. Major Mexican-owned dedicated contract carrier and value-added warehousing and distribution operations are well-run. Value-added warehousing and distribution locations include pick lines, radio-frequency identification and other modern features. Larger dedicated contract carrier operations have strict safety and driver controls. FEMSA Logistica drivers, for example, all have cell phones, and their tractors are tracked by GPS. Each tractor also has an emergency signaling system. Press the button and central dispatch knows the driver is in trouble and his location.
FEMSA also has a freight brokerage operation. In line with recent operating authority grants to 13 Mexican trucking companies, it’s logical that a $20 billion company such as FEMSA could consider expanding in the U.S.
Solid Mexican carriers such as Laredo, Texas-based Super Transport International and Chihuahua, Mexico-based GCC Transporte have strong safety programs. Granting them full operating authority is a step in the right direction toward eliminating the messy, two-step process in place for border crossing.
Estimated 3PL gross revenues in Mexico were $13.4 billion last year. Armstrong & Associates’ 2013 analysis of cross-border truck traffic shows that the average truckload value is $52,900, with three-fourths of truckloads having carloads valued at less than $80,000. Freight to the U.S. is worth $2.36 a pound, according to the U.S. Department of Transportation.
Unlike North America, Europe continues to fluctuate in and out of recession, which, combined with economic austerity, is hurting its output. Based on 2014 regional revenue, Armstrong & Associates estimates 3PLs operating in the Europe region have penetrated 24 percent of the total potential market. Consequently, the trend to outsource logistics functions to 3PLs continues to provide for growth over and above the overall economy. The best European-based 3PLs have made acquisitions to globalize their operations and participate in developing markets with higher rates of growth. Trucking in Europe has grown dramatically through the addition of smaller owner-operators, particularly in Poland.
North America has benefited from an improving U.S. economy with increasing manufacturing levels, the near-shoring of some manufacturing to Mexico and the impact of oil and natural gas surpluses.
When we look at regions, Asia-Pacific is the largest at $272.7 billion. We expect Asia-Pacific 3PL revenues to grow by a compound annual growth rate of about 6 percent over the next few years, led by India at 8.8 percent and Greater China at 8.1 percent.
The impact of third-party logistics in major developing countries continues to grow as they modernize. As Frank Lange of Alder Creek Consulting points out, global 3PLs continue to have the strongest overall operations in post-industrial countries. In developing countries, global 3PLs must be very good at integrating local expertise to match cultures to profitable business. DHL, for example, has done an excellent job in Brazil, and UPS has moved strongly in China.
Hot topics this year should be increased IT impact from smartphones, expanded visibility to freight and inventories, supply chains disrupted by container lines, practices, congested ports, railroad malaise about intermodal, and tight truck capacity. In short, there’s plenty to keep 3PLs, transportation companies and customers busy.
It also looks like a year of good financial results for 3PLs in the U.S. and Asia. The challenge won’t be slow GDP growth in these locations, but how well the 3PLs can control costs and innovate.
Richard Armstrong is chairman of Armstrong & Associates, a Wisconsin-based consulting firm for logistics companies, motor carriers and shippers. Contact him at dick@3plogistics.com.