An increase in business complexity because of shifts in the global economy is leading companies in the logistics industry to reassess their supply chain strategies. The sense of uncertainty was reflected in a McKinsey survey where 86% of responding global executives reported that they believed supply chain risk will increase in the next five years.

The duration of the recession in developed economies has sparked broader concerns about the stability of the financial system among businesses in the logistics industry. Data from greenfield investment monitor fDiMarkets reveals a general bearishness within the industry. Investments into logistics, distribution and transportation activity have significantly dropped over the past year. Between January 2011 and May 2012 there were 689 projects recorded with estimated investments worth $46.6bn, whereas between January 2010 and May 2011 there were 953 projects with capital expenditure worth $77.4bn. 

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Waning appetite

It appears that companies’ reduced appetite for risk is leading them to adjust the way they manage their logistics and supply chain strategies. Furthermore, a growing sense of caution has led many companies to become more adept in exploring and understanding different markets in order to spread their risk and lower their costs.

“There are a number of trends affecting companies’ strategies,” says Stefano Aversa, managing director and co-president at Alix Partners. “The very high volatility that we have seen in the past 18 months, particularly in exchange rates, as well as energy and commodity prices, [and] the inflation of wages in emerging markets, is important.”

Among those affected by growing pressures are manufacturing companies, as rising costs in traditionally cheap sources of production such as China will result in a shift to even cheaper regions of production such as Vietnam and Cambodia, due to factors such as lower labour costs.

The political unrest that occurred in north Africa, coupled with the supply chain disruption caused by the natural disasters in Japan and Thailand in 2011, will result in the long-term repositioning of many players within the logistics industry. “The political unrest [we] saw in north Africa, and the risk of nationalisation that we have seen in Argentina, is obliging the logistics provider to factor in the price of investing and operating in certain countries,” says Mr Aversa. “This [could] cause more consideration of near sourcing, rather than outsourcing and offshoring.”

Emerging players

The way companies are redefining risk is one of the main effects of the shifting patterns in the international economic landscape. Many logistics operators are looking beyond markets in Europe and North America, and it would appear that companies that have positioned themselves in emerging markets are registering robust growth rates.

Tarek Sultan, CEO of Agility Logistics, attributes the company’s success as one of the Middle East’s largest logistics providers to its position with regards to emerging markets. “We did not start as a company in the developed markets,” he says. “We grew from the emerging markets, and that has been important because as we look forward to the future it is going to be dependent on the emerging markets and it is important to develop a skills set that is relevant.”

With roots in Kuwait, part of the success of Agility Logistics has stemmed from its ability to assimilate risk through understanding the challenges and opportunities present in developing countries. “While many countries try to export best practices to emerging markets, we take the opposite approach, and we try to see what works locally in those markets, and then export those [as] global best practices,” says Mr Sultan. “That sort of local innovation requires a high calibre of local management expertise and a willingness to invest in non-traditional solutions to make things happen. We have taken some risks so that our customers can leverage the investments we have [made] in markets that were traditionally considered risky, but which are [now] the ones that will deliver companies’ future profitability.”

Emerging markets have become one of the global economy’s key engines of growth. With continued economic deceleration affecting European and North American countries, large logistics providers are turning to developing markets, and this is resulting in a rise in new trade lanes. “We are seeing changes in the way trade lanes are growing in markets such as Brazil, India and China,” says Mr Sultan. “These trade lanes, [which] did not exist 10 years ago, are now becoming critical trade links to everyone.”

Denmark-based Damco, which is the logistics arm of the AP Moller-Maersk Group, is another example of how operators based in developed economies are expanding their presence in emerging markets in order to mitigate increased uncertainty in their traditional markets.

“Emerging markets will play a key role in Damco’s future success,” says Pyers Tucker, global head of strategy at Damco. “Our strategy includes a strong focus on high-growth markets in Asia, Africa and Latin America. Roughly 65% of the people we employ are in these high-growth markets, [and] Damco is in a strong position to benefit from their increasing economic prosperity, as our position in places such as sub-Saharan Africa, Bangladesh and Indonesia are, relatively speaking, quite strong. The strength of our capabilities in [these] places puts us in a good position when growth in Europe and the US slows.”

Shipping consolidation

Nonetheless, significant investments in the shipping and freight sector reveal that while new trade routes in emerging markets pose increased competition, traditional developed markets are working hard to consolidate their competitive offer in the maritime industry. The development of the Panama Canal is set to become a game-changer in the shipping sector for the Americas region. With $5.25bn-worth of investments made, according to financial and professional services firm Jones Lang LaSalle, the expansion of the canal is expected to rapidly increase traffic flow, particularly to the ports along the US east coast.

Expected to be complete by 2014, the canal will be able to accommodate the next generation of super post-Panamax vessels, which exceed the size limitations of the existing canal systems. With logistics companies, particularly US-based corporations, already weighing up how best to capitalise on larger ships soon to be heading towards the US, the impact of this investment on the logistics sector will be exponential.

“A major trend we are seeing is one of mega vessels,” says Michelle Berman, head of shipping and freight transport at Business Monitor International. “There has been a massive expansion in container lines operating larger vessels on the Asia to Europe trade route. The reason behind the shipping sector’s desire for these larger vessels is economies of scale, and [also] more containers that can be put on the ship, reducing the cost of fuel and labour.” With higher fuel and energy costs driving the need for slow steaming to reduce shipping costs, the increased competition between ports to receive larger ships will result in developed markets retaining their competitive advantage within the maritime sector.

Uncertain global economic conditions are ultimately causing logistics operators to aggressively adapt and reposition themselves to maintain profitability. “Logistics providers are becoming better equipped to handle catastrophes,” says Alix Partners' Mr Aversa. “Logistics operators that are [able] to change routing and configuration, and have a plan B set up in case of disruptions, will do well.”