Despite significant progress in recent years, trucking is still not as efficient as it could be. Paper-based processes have been reduced but not eliminated and, on average, 25% of the trucks on the road are still empty. In addition, the vast majority of equipment is dependent on internal combustion engines and human operators.
It shouldn't be a surprise, then, that innovators and entrepreneurs see an opportunity to target the industry and exploit these inefficiencies. Management consultancy McKinsey & Company reported earlier this year that venture capital funding in logistics startups had grown at a 76% compound annual rate between 2014 and 2019. Most of this funding was directed toward the last mile and digital freight platforms.
Some may see this investment in start-ups as a threat to major contract logistics and transportation providers serving the market. In fact, the level of fundamental disruption in the industry has been relatively low. We see that logistics providers are positioning to become the beneficiaries rather than the victims of disruptive innovation and that the highest level of penetration is coming from new players who are partnering with established players. In these cases, 3PLs are already offering the necessary scale – both in terms of volumes and networks – to realize the efficiency gains that new technologies are offering, while also bringing valuable insights into customer behavior and real-world operational experience that can help to refine the technology. For their part, an increasing number of start-ups are offering solutions that can be adopted in a modular way into customer operations, which positions them with more appeal as partners to 3PLs.
In road transportation, we see growing opportunities for partnership-based solutions in two areas that have historically been seen as disruptive over the mid- to long-term.
The first is digital freight marketplaces, which promise to improve utilization and optimize pricing by connecting demand and supply in the market in real-time. While marketplaces have not yet been able to muscle their way fully into the long-term relationships between carriers, transportation providers and brokers, some are achieving significant traction. Certain digital freight marketplaces, for example, have now begun to partner with 3PLs in a way that integrates their platform into the 3PL’s managed transport offering and provides customers with a real-time price-definite alternative to the spot market. This is usually achieved through complex machine learning that caters to the smaller transportation providers by rewarding use of the tool with favorable lanes and “get back home” type freight functionality. Ultimately, it achieves increased capacity at competitive rates, which makes the overall market more efficient.
The second is autonomous vehicles, which have the potential to substantially increase productivity, strengthen safety and help address the long-term driver shortage in the industry. The technology is still seen as a longer-term proposition, particularly as it relies on the use of very advanced AI and, more significantly, still needs to win the approval of regulators and the social acceptance of society at large. At the same time, there are companies who are taking a realistic approach, targeting specific pieces of the overall transportation puzzle. This is reflected in the approach of Ike, which is focused on enabling Class 8 trucks to operate without drivers on highways, before handing over to a manually operated truck when it leaves the freeway. They are solving for an easier, less complex part of the equation – longhaul highway driving – while also targeting a more challenging area to hire drivers. Their solution recognizes that drivers will continue to play a significant role in the future – particularly in the more complex last-mile delivery area. It will also contribute to a more attractive working environment for many drivers by keeping them closer to home. Just as importantly, Ike is specifically targeting the opportunity through partnerships with established carriers, rather than attempting to compete with a dedicated fleet.
While the coronavirus pandemic has been a net negative for the trucking industry, one of the few positives we can take from it is that it has helped to strengthen the case for innovation and accelerate digitalization in transportation. New features such as contactless delivery are likely to remain a standard in the future, while everyone has been challenged to identify ways of making their operations more flexible and responsive to a fast-changing market. In most cases, the solutions will lie in new technologies and innovation. While there is no silver bullet that will address all the inefficiencies of the market, it is increasingly becoming clear that the answer lies in partnerships. More collaboration and integration between 3PLs, carriers and tech startups will both characterize and drive the post-pandemic trucking industry of the future.