Already in 2021 PeakSpan a blog entry entitled “What Billy Beane Can Teach Us About E-Commerce Logistics”. We used the baseball analytics example to illustrate the importance of pinning down every node in the supply chain and ensuring that brands remain in control of their customer relationships in the Amazon.com era.
While we remain bullish on e-commerce logistics — we expect online sales to reach $6 trillion in 2023, accounting for 22% of total retail sales — we’re zooming out this year to to make a big bet on the digitization of international freight. And the sports analogy we chose is basketball.
Born in St. Cloud, Minnesota and described as a cross between “basketball, ice skating and beer,” baskiceball is an extremely violent sport. It is often said that there are no rules and that the competitors simply “accuse” each other.
For the logistics industry, the comparison certainly resonates. The general consensus today: “Uncertainty is the new normal for international freight transport.” Throw away the predictions, rulebooks and playbooks; As with baseball, all you can do is get out there and compete.
Technology offers endless opportunities to optimize and fine-tune the supply chain. That is the main reason why we rely on international freight: the complexity is high and the volatility and variability are even greater. We see this as a recipe for technology to step in.
However, the use of digitization and technology in the industry is currently still extremely low. Despite $26 billion invested in logistics as of 2019, paper is still widely used as part of the sourcing, sales and operational processes in international freight transportation.
Below are our top ten themes that we believe drive further investment and digitization in the international freight technology sector.
Market size: a $2 trillion+ opportunity. Freightos estimates a $1.5 trillion market opportunity in ocean and air freight alone. Add in the revenue from ports, intermodal rail, and rolling stock and you quickly have a $2 trillion market. From a technology perspective, even a modest 2% spent on technology represents a $40 billion software opportunity. However, we would argue that this represents a $100 billion technological opportunity over time.
Volume and speed: an optimization dream. On average, cargo changes hands 20 times and touches 20 different businesses before reaching the recipient’s doorstop. One trucker told us they often do a million loads a year – nearly 20,000 a week – across 40 locations. To keep this volume moving, this particular carrier had a team of 40 procurement professionals working solely on the logistics. Given that much of this activity is done manually, it’s a frightening reality for most.
High fragmentation with multiple stakeholders to sell to. The international logistics landscape is highly fragmented with 400,000 shippers and more than 100,000 freight forwarders or non-shipping carriers. These numbers can be further broken down by shipping method, specialty shipping requirements, and trade routes. There are also thousands of trolley companies, railroads and port operators who all need software.
The infrastructure is also highly fragmented. Around 55,000 merchant vessels operate internationally, including 15,000 for general cargo, 12,000 for bulk cargo, 7,000 for crude oil, 7,000 for roll-on/roll-off vehicles, 6,000 for chemicals, 5,000 for containerized cargo and 2,000 for LNG carriers. There are 835 active ports around the world and more than 360 commercial ports in the US alone. These fragmented ecosystem participants are all in dire need of software specifically designed for their role in international logistics. While all players are investing heavily in technology, many are stuck with siled solutions that operate independently. What is needed to make supply chains more efficient is an investment in systems that communicate with each other – and in the people who plan everything. Unfortunately we are woefully behind where we need to be and most expect that it will be several years before we are able to build more and bigger ports. Once again, there is a chance that technology will intervene.
Most supply chains involve international travel. 95 percent of world trade is transported in sea containers. You can’t provide a great and transparent customer journey if you don’t know exactly where the goods are, when they will arrive and if there may be disruptions or delays.
Shippers are changing their strategies to control more of their supply chains. Amid massive waves of disruption, technological advancements and a desire to provide a better customer experience, many shippers are pushing to adopt more of their international supply chain strategy. They turn to freight forwarders to complete the tactical movement of goods, leaving the overall strategy to their own supply chain teams. With so much inefficiency plaguing international freight transportation, you can expect these components to challenge each other to achieve more margin and savings.
Disturbances, disturbances and more disturbances. As the events of the last three years have shown, supply chain disruptions are unpredictable. We are pessimistic if humanity learns to foresee these events anytime soon, but optimistic about the role technology can play in helping shippers navigate choppy waters.
New Year’s Resolution: Get rid of the newspaper! An average package of shipping documents consists of 50 sheets of physical paper and can sometimes be exchanged between as many as 30 parties. These documents contain freight, financing and licensing details. These include bills of lading, carrier and government certificates, import/export licenses and ship-sharing agreements. For BOLs alone, the Digital Container Shipping Association estimates that at least 16 million original documents are issued each year, costing the industry around $11 billion. And only 1% of those documents are electronic today.
A massive payment option. In a recent logistics podcast: A freight forwarder and a freight forwarder discussed invoice accuracy. The carrier complained about excessive fees. The airline has been defensive, claiming it was “almost” spot on with its billing. When the shipper reported that the bills were down an average of 14%, the carrier replied, “We’re only down 10%.” If overcharging by 10% is considered acceptable practice, we can say with certainty that that there is still a lot to do in the area of freight payments.
The global freight verification market alone is expected to reach $30 billion by 2030, and that is just a sub-sector of freight payments. There are so many ways to leverage this space, including simply digitizing B2B payments between shippers and carriers/carriers or between carriers and carriers – processes that are still quite manual. Another angle is fintech, which expands the overall addressable market beyond the value of the cargo itself. Projections are that the global trade finance market will reach $11 trillion by 2026.
The Forgotten Middle Child: Drayage. We include shutters in our “big bet on international freight” and see this segment of the supply chain as another area poised for further digitization and disruption. Early applications focused on connecting supply and demand given the highly fragmented nature of trolley transportation. However, we also see many Software-as-a-Service (SaaS) applications that could target carriers or the ports themselves. Whether you are a shipper or a freight forwarder, container handover from port to chassis can be one of the trickiest and most inefficient processes. We still see this market in its infancy as it requires a lot of digitization and collaboration between multiple constituents including ports, freight forwarders, shippers and customs authorities.
The size and importance of the international freight market is not a newly discovered phenomenon and we must recognize the disruptive nature of 2021 and 2022. Do supply chain leaders need to keep improving their basketball skills in 2023? Or can technology help make things better? We sense that the tide is turning: the time is ripe to accelerate the digitization of international freight traffic.
Jack Freeman is a partner of PeakSpan Capital.
