November 1, 2012

Study: Economic uncertainty reshaping outlook for logistics service industry

Annual Northeastern University third-party logistics survey finds economic conditions have created both problems and opportunities for 3PLs worldwide.

By Toby Gooley

With Europe's economy in a tailspin, the Middle East in turmoil, and costs rising everywhere, it comes as no surprise that CEOs of third-party logistics service providers (3PLs) worldwide have scaled back their expectations for growth.

Despite that somber outlook, the respondents to an annual survey of third-party CEOs in North America, Europe, and Asia-Pacific also plan to strengthen their chances of survival by revising their traditional operating models and services to reflect their economically battered customers' changing requirements.

The 19th Annual Survey of Third-Party Logistics Providers was conducted by Dr. Robert C. Lieb of Northeastern University and Dr. Kristin Lieb of Emerson College and is sponsored by Penske Logistics. The 31 respondents represented some of the world's largest 3PLs, collectively generating some $45 billion in revenues in 2011.

For the first time in the survey's history, the CEOs didn't project industry growth in the double digits for any of the three regions. Respondents in North America forecast average growth of 8.3 percent for the next three years, slightly higher than the 8 percent growth predicted in 2011. CEOs in Asia-Pacific forecast 8 percent growth over the next three years, down from last year's prediction of 10.3 percent.

Those projections seem upbeat compared to the European CEOs' projection of 5.1 percent growth, down from an already low 6.3 percent. One reason for the subdued global outlook is that economic woes have cut exports between the regions, causing "a ripple effect" worldwide, said Northeastern's Robert Lieb in an interview.

Individually, more than one-third of the participating companies failed to meet their own revenue-growth projections in 2011, although only three—two in Europe and one in Asia-Pacific—were unprofitable.

The CEOs reported industry dynamics common to all three regions. Increasing cost pressures on customers and continuing economic uncertainty mean less pricing power and lower margins for 3PLs worldwide, thus raising the risk of further industry consolidation.

However, only North American respondents cited tightening capacity and unpredictable fuel costs as having major impacts on their businesses. Europeans often mentioned the economy and a resulting decline in demand for 3PL services. In Asia-Pacific, respondents said growing domestic consumption in China, increasing competition from "local" 3PLs, and slower growth in China and India were important industry dynamics.

In response, 3PLs made some significant changes over the past year. Many entered new industry verticals, most notably health care, and providers tended to expand through alliances rather than by direct investment in new assets. In Asia-Pacific, 3PLs responded to the slowdown in exports and the growth of domestic consumption by increasing their involvement in domestic transportation and intra-Asian business.

In Europe, meanwhile, some 3PLs changed business models because customers wanted more flexible relationships in uncertain times. Providers also had to cope with lower, erratic volumes, and the economic slowdown led to overcapacity and poor asset utilization. In response, some 3PLs have been consolidating their European operations.

The CEOs say they are seeking ways to take advantage of changing economic conditions. For example, 3PLs in all three regions plan to provide more services to higher-growth international markets. They also see opportunities as more manufacturing shifts closer to consuming markets. An increase in "nearshoring"—a trend that's emerging worldwide, not just in North America—could have a huge impact on the way 3PLs serve their customers, said Joe Gallick, senior vice president, sales for Penske Logistics.

"Providers would need the ability to be agile and flexible to adjust to changes in customers' supply chain requirements," he said in an interview. "For example, nearshoring can mean not just geographic change but also a change in customers' replenishment strategies, and different warehouse locations may become more important."

Regionally, North American 3PLs said they would increase the breadth of their service offerings, support further integration of customers' supply chains, and develop more collaborative relationships with key customers. Opportunities in Asia-Pacific focus on domestic consumption and supporting the region's rapidly growing e-commerce and e-fulfillment activities.

In Europe, CEOs plan to follow a pragmatic course: In addition to servicing new industry verticals and expanding business with existing customers by bundling services, they also are targeting companies that are trying to shed assets and people and trying to gain business as other 3PLs fail.

Even as they adopt those strategies, 3PLs will have to contend with persistent problems. At the top of every list was the difficulty of attracting and retaining qualified management and operational talent. The CEOs also included economic uncertainty, difficulty in managing demand and capacity, and inadequate technology and infrastructure in developing markets among their most persistent problems.

All of these developments point to "a rather unsettling period" for the 3PL industry in 2013 that "could be worse than anticipated," the researchers said. Traditional forecasting methods are being challenged by global economic uncertainty, making it more difficult to plan capacity and market expansion, they noted.

The researchers warned that all the innovation 3PLs can muster may not keep them all in business if macro-economic conditions remain subpar.

"If global economic activity fails to improve," the professors warned, "3PL earnings and stock prices will likely fall, making a wave of failures and acquisitions very probable."

To hear Dr. Robert Lieb's analysis of the findings of the 19th Annual Survey of 3PL Providers, go to Penske Logistics' YouTube channel.

More articles by Toby Gooley

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