From Crisis Comes Opportunity - Supply Chain & Logistics Tech is on the Rise

The aftermath of COVID, the world’s ongoing shift to e-commerce, the war in Ukraine, China’s position on Taiwan, and the drive to build more sustainable and digitised supply chains - not to mention a range of other factors - have all coalesced to create challenges for logistics providers around the world.

This rampant disruption is proving a silver lining for technology entrepreneurs, and it’s bringing a wave of new investment into the Supply Chain & Logistics sector.

While industry revenues were fairly stable from 2018, until a small reversal in 2020, the strong growth from 2021 has continued into this year.

Business statistics aggregator Statistica says that the sector was worth just under US$8.6 trillion in 2021 - representing a jump of nearly 47 per cent over 2020. With 2022 on track to provide another year of strong growth, analysts estimate the sector will be worth US$10.6 trillion this year, and almost US$14 trillion by 2027.

Growth drivers

Growth is being driven by a number of long-term megatrends such as continuing population growth, the expansion of the middle class around the world, and the secular shift to e-commerce. 

In its Global Logistics outlook last year, Cushman and Wakefield identified a number of key growth drivers.

“At the ground level, ongoing population growth and economic expansion will drive the global middle class to almost double over the next decade. This increased level of consumption, together with the accelerated shift to e-commerce, will fundamentally drive the need for stronger, more resilient and more diverse supply chains. Ongoing development of transport infrastructure will be critical to ensure market connectivity.”

The Cushman and Wakefield report also noted how labour shortages and a sharper focus on Environmental, Social and Governance (ESG) priorities drove investments in technology, as companies sought to capture efficiencies and transparency.  

“Similarly, the use of third-party logistics (3PL) operators will continue to grow as they provide corporations with opportunities for greater nimbleness and flexibility in meeting consumer demand.”

And finally, the report flagged the impact of geopolitics, saying it would continue to shape the global trade environment. They can’t have known how right they would be as the report was published before the Ukraine War broke out…

E-commerce

Perhaps the most compelling of the factors identified by Cushman and Wakefield is the rise in the popularity of e-commerce. This rise in “mass individuality” has in turn led to greater demand for logistics services, especially to the last mile.

E-commerce has been rising steadily for two decades, with the pandemic acting as an accelerant. Digital Commerce 360, for instance, estimates that the pandemic added US$210 billion to US e-commerce sales in 2020 and 2021.

In many developed markets around the world, there was no alternative but to embrace e-commerce, with most commercial centres closed for extended periods during the early days of COVID. 

When shops finally reopened, people may have happily headed back to the mall for a while - but their new spending behaviours were to some extent now baked in (although there remains conjecture about to what extent, and certainly some categories that were directly related to life at home during the pandemic such as Peloton sales or flat screen TVs have been returning with a thud to pre-pandemic levels). 

E-commerce also fuelled the rise of digital giants such as Amazon and Alibaba, which have themselves now contributed to the transformation of the logistics sector. They do this both through the sheer weight of their market presence, and directly through their respective logistics arms.

Amazon for instance has doubled the size of its fulfilment network; its logistics business is scaling to the stage where it will be able to challenge incumbents such as FedEx and UPS.

Amazon is also a master of the other big drivers of logistics transformation - digitisation. 

Digitisation

The pandemic exposed the limitations of supply chains that were hyper-optimised for cost, rather than resiliency. With borders closed, or shipping delayed due to COVID induced staff shortages on the docks, companies were forced to reassess strategic sourcing options and operational processes. 

COVID also highlighted the criticality of data analytics to decision-making, and exposed the limitations of some existing solutions.

For instance, Nestle’s Oceania’s Head of Supply Chain, Maria Clara Esguerra, was quoted in the media saying the effectiveness of forecasting tools was impacted by the huge changes in behaviour that COVID disruption created.

“The forecasting that we thought was going to work in COVID, forget about, it didn't work. We have automation and we use different companies to help us to do all the forecast, it didn't help.”

Even the changes in consumption patterns between the first and second waves were enough to throw the models out, making it hard to build learning into the process, she said.

Opportunity knocks

The global stress test of the pandemic and more recently the Ukraine war also exposed other weaknesses in supply chains, and digital entrepreneurs stepped up to plug the gaps.

According to McKinsey and Company, funding for logistics startups almost doubled in 2021. And the pattern continued into 2022 with one company, Flexport, securing US$935 million in January this year. The funding, led by Andreessen Horowitz and MSD Partners, also included participation from Shopify, as well as some existing partners.

Flexport announced at the time that it would apply the cash raised to accelerate development of its global logistics technology platform, and to invest in new supply chain startups.

McKinsey’s study, which analysed a sample of more than 500 startups accounting for more than US$80 billion in funding, revealed not only strong capital inflows into the sector’s startup and scale up community, but also a noticeable shift in the types of companies securing the funds.

Three segments out of nine they studied took the lion’s share of the funding;

· On demand last mile delivery platforms

· Road freight marketplaces and solutions

· And new last-mile parcel networks

The report’s authors note, “on-demand (immediate) delivery for groceries, among other products, has emerged as an investor favourite, resulting in massive flows of venture funding into the category.”

They add that investors have also shown a preference for businesses that help fill the gaps that global express incumbents have been unable or unwilling to address, especially in emerging economies, backing delivery startups such as J&T Express in Southeast Asia and Delhivery in India.