The largest logistics operators in the world—including integrators like FedEx, DHL and UPS and freight forwarders such as K&N, Panalpina, DB Schenker and C.H. Robinson—all pride themselves on their vast arsenal of transport assets and massive headcounts. But the era of vertical integration will soon come to an end in logistics, as it has in so many industries, all as inefficient business models come under attack by well-financed disruptive technologies.
In Latin America, the proliferation of disruptive start-ups has begun to sting the reputations and profit margins of legacy logistics operators. What appear as pin-pricks today will grow into more threatening blows to an industry that has enjoyed two decades of consolidation and profit growth from 1995-2015.
Latin American logistics start-ups are focused on bringing down costs and accelerating service in the most inefficient stages of the Latin American supply chain, identified in the schematic below. They employ three weapons of change: productivity enhancing technology, “uberization” of labor-intensive activities and the use of marketplaces to level the playing field for hungry competitors. All three approaches drive down costs.
To survive the disruption revolution, logistics operators will be forced to shed unproductive assets, lower head counts and focus on commanding the customer tower with superior service and compelling intellectual property. Owning the customer ensures revenue while the strategic deployment of technology ensures profitability. Big and heavy is out. Light and agile is in.
The New Disruptive Forces in Latin American Logistics
#1 Productivity tools: New tools are being developed that dramatically accelerate productivity in logistics, enabling early adopters to compete with large competitors and helping the industry reduce head count. A good example is Logiety, which takes the mystery and manpower out of codifying imported products. As an app on a phone, Logiety can visually scan a product and immediately classify it for customs purposes, label it with the correct national safety codes, HS code, and other compliance norms. A process that once took hundreds of man hours to execute on a mixed container of products now takes a few hours.
#2 Uberization of the first and last mile freight transportation: Uberization is being applied to employ underutilized, usually independent truckers by way of dynamic spot pricing, based upon competitive bids for single transport jobs from point A to point B. Such models help squeeze profits out of the inefficiency of empty back-haul. At the other end of the supply chain, last mile delivery of e-commerce orders is increasingly executed by individuals driving cars, motorbikes and even bicycles through the heavy traffic of Latin American cities, all of them working for themselves. A promising example of this is Chazki, a Peruvian start-up now operating Lima, Arequipa, and Trujillo as well as Buenos Aires.
#3 New marketplaces for established carriers: The establishment of marketplaces filled with traditional carriers brings to cargo transportation what Orbitz brought to airlines. That is the idea behind Gurucargo, which aims to connect customers in the highest volume intercontinental lanes (e.g. Shanghai to São Paulo) to multiple offers from established providers who discount underutilized capacity. Not only does Gurucargo save transport costs, its technology compiles, computes and compares the multiple components of cross-border shipping costs, saving customers hours of painful negotiation. But the concept of a marketplace, today an almost ubiquitous technology, can also be licensed by a 3PL. That enables the 3PL to outsource its own transportation needs (say in a large domestic market like Mexico, Colombia or Brazil) to a community of vetted transport carriers. There is simply no need for a 3PL to ever again own its own trucks.
4 Ways Latin American Legacy Logistics Players Can Best Adapt
The silver lining of industry disruption is that it almost always generates more demand. Thanks to Uber, more people ride taxis. More families go on holiday together thanks to Orbitz, which produced cheaper plane tickets, and Airbnb, which makes accommodation more accessible. Of course, not everyone survives the process of disruption, hence the importance of developing a smart strategy to navigate change. At Americas Market Intelligence (AMI), we see four tactical options ahead of legacy logistics players, the right mix of which can help form a viable strategy.
Buy’em: For companies with a limited footprint in Latin America who want to step into a competitively structured operation and expand it rapidly, purchasing a proven early-stage disruptive operator can be an enticing option. Consider Alibaba, whose unique marketplace brings SME suppliers in direct contact with SME buyers across the globe. What makes their model work is Alibaba’s investments in payments and logistics solutions that provide a failsafe and simple fulfillment of an e-commerce sale. As such, Alibaba would be a natural buyer of a firm like Chazki. Another buyer for Chazki and other last mile uber-like models could be integrators like FedEx or UPS, who have yet to invest significantly in last-mile capabilities in Latin America outside of Mexico.
License’em: For customs brokers trying to remain competitive in the age of high volume/low margin cross-border e-commerce, the opportunity to license a technology like that of Logiety can keep you alive to fight another day. Technology adoption in Latin America tends to lag 1-3 years behind U.S., European and East Asian markets. Latin American logistics players should constantly be on the lookout for emerging technologies that disrupt and accelerate productivity gains. Oftentimes, LatAm markets will be overlooked by these understaffed tech companies, so it is up to the Latin American customer to convince the tech vendor to license them the technology.
Work for ’em: When EnviaYa (another Orbitz-style marketplace, in this case for domestic freight forwarding services) was launched, the large integrators paid it little heed. Today, EnviaYa commands 3% of the package delivery market in Mexico and is growing at 10% per month. Now DHL, FedEx and Estafeta gladly take the customer orders sent their way by EnviaYa. Disrupters like this one come as a mixed blessing. They help fulfillment operators like integrators to sell unused capacity, but they also threaten to commoditize the courier business, the way that air ticket merchants reduced airlines to warehouses of airplane seats.
Compete with ’em: A lot of start-ups come to market with great ideas but lack the managerial prowess or financial muscle to survive. In the aftermath, their core team is out on the street, hungry to try again, armed with invaluable experience and IP knowledge. Savvy legacy operators learn to monitor start-ups, evaluate the worthiness of their value proposition and aggressively poach talent emerging from start-up failures. Start-ups that do succeed eventually leave behind disgruntled early employees who felt neglected when later stage venture capitalists diluted their equity positions. Those disgruntled near-entrepreneurs can be valuable to the competition.
How AMI Can Help
Taking on an external threat like disruption requires some external thinking, unencumbered by company politics. AMI brings an independent, objective and irreverent point of view to a challenge unlike the logistics industry has ever faced. Our consultants are located across the region, and led by our practice Directors, the AMI team can help legacy players evaluate foreign and homegrown disruptive competitors in Latin America and devise new ways of modeling their business going forward. Contact Americas Market Intelligence to find out more about how our market intelligence and management consulting services for Latin America can help your firm handle these logistics tech disrupters in the region.