Despite a string of natural disasters and the global economic malaise, third-party logistics service providers performed well through the first three quarters of 2011, though the fourth quarter was largely flat as the fall peak season for ocean and air freight volumes never materialized.
A major change for 3PLs occurred in the Dedicated Contract Carriage segment. Unlike in the past, DCC companies refrained from adding “speculative” capacity. As a result, capacity stayed tight, with more than 95 percent of equipment assigned to specific accounts. Although there were some modest volume increases, most revenue improvements related to price increases sticking because of disciplined management.
Alternatively, ocean carriers have been adding capacity without a correlating increase in container volume. As a consequence, red ink is spreading among container lines. This creates some opportunities for international transportation managers and freight forwarders, which can get better pricing and maintain margins. Although net revenues compared favorably on a year-over-year basis, gross revenues suffered because of reduced volume.
Quietly, two major resource changes in the United States may help shift the U.S. economy from its doldrums in the next two to three years: the Bakken Shale of North Dakota, which could provide large amounts of light crude petroleum, and the Marcellus Shale of New York and Pennsylvania that could do the same for natural gas.
The Bakken expansion and ethanol production have created a boom. New biodiesel production and the Marcellus Shale natural gas movements also should create a host of opportunities. Tanker transportation capacities already are maxed out in these two major areas. Railcars are almost impossible to find, and they need to be purchased or leased from companies such as GATX. Either way, getting capacity is a long-term project. Tanker trailers for truck operations also are hard to come by, and most are dedicated to large ongoing operations.
Over the next few years, the U.S. should see an increase in its own oil and natural gas production. Coupled with Canadian production and supply, the United States could gain more control over petroleum pricing, significantly aiding its economy. Of course, there needs to be enough level-headed political will to avoid squandering the new opportunities.
Major gains for 3PLs should show up in DCC and transportation management. Specialty 3PLs such as Savage Services and A&R Global Logistics are well-positioned to expand with new energy resource opportunities. Savage has more than 2,000 employees in 100 locations in 30 states and five provinces. A&R is a domestic transportation manager specializing in bulk commodities.
New energy projects and new outsourcing mean 2012 will be a good year for 3PLs to think outside the box. Lean processes contribute mightily to efficiency and some gain-sharing. At the same time, standardization and process improvement can reduce profitability for 3PLs over time.
The non-asset-based transportation management 3PL segments continue to be the most attractive for growth and profitability. C.H. Robinson Worldwide was on pace to generate more than $10 billion in gross revenue last year. Expeditors International of Washington and other forwarders had flat years on gross revenue but maintained net revenue and profitability.
Value-added warehousing and distribution 3PLs, however, continue to be challenged. The challenge is greatest in mature post-industrial countries, while the best opportunities are in developing markets. The paradox for these 3PLs is that the larger the customer, the higher the probability it will outsource to a 3PL, but those customers also will demand open-book arrangements and lower margins. Wal-Mart, for example, is well-known for squeezing 3PL margins.
As detailed in Figure 1, opportunities in developing markets allow for expanded profitability prospects.
There are exceptions and variations to Figure 1, of course. Vertical niche specializations or return logistics can change the equation. For example, Genco ATC runs strong double-digit EBITDAs specializing as a high value-added fulfillment and reverse logistics specialist. In Armstrong & Associates’ mergers-and-acquisition work, we have seen relatively small specialized 3PLs with large customers and above-average profit margins. For the most part, however, the bigger the customer, the harder it is for the 3PL to profit.
The strategy traditionally used by 3PLs such as C.H. Robinson and Landstar Logistics of targeting profitable mid-market customers from the Domestic Fortune 500 to 1000 or higher ranks is still a good starting point for 3PL sales and marketing efforts.
For 2011, we predict net revenue for 3PLs in the United States to reach $63.9 billion. Gross revenue should reach $141 billion. The 3PL segment breakdown is reflected in Table 1.
For 2012, we anticipate growth in North American 3PL revenue to be in the 6 to 7 percent range. It’s possible the economic lights may go on for U.S. politicians, allowing for a healthy combination of spending cuts and tax increases, but few are banking on it. If that happened, the economy and third-party logistics would benefit greatly.
Globally, Asia-Pacific 3PL operations should have a strong 2012, led by China, India and Indonesia where GDP growth rates will be in the 6 to 9 percent range. The region already commands the largest ocean freight market with 25 million 20-foot equivalent container units, representing 40 percent of the global total, according to Morgan Stanley estimates. It also represents 41 percent of air freight metric tons, according to the International Air Transport Association. 3PLs with solid Asia-Pacific forwarding operations, such as APL, DHL, Expeditors, Kuehne + Nagel, Dimerco, Kerry Logistics, Toll, UTi Worldwide and Yusen Logistics, should benefit.
From a value-added warehousing and distribution perspective, Menlo Worldwide Logistics has done a good job expanding its Asian operations and has seen solid growth in Southeast Asia, with significant business development gains in India, Malaysia, Singapore and Thailand. Menlo is running 27 value-added warehousing operations in Southeast Asia with a total footprint of 3.5 million square feet. It has added many multinational and regional distribution customers in apparel, consumer packaged goods and retail. Menlo’s northern Asia-China operations also seem to be on the right track with new leadership and stabilized operations.
Jacobson Cos. is expanding its Asia-Pacific forwarding operations and is building out a domestic Chinese value-added warehousing and distribution network as a way to tap into China’s rapidly growing economy. To meet this goal, Jacobson last January acquired Hong Kong based Chimerica Global Logistics, a Hong Kong-based 3PL with subsidiary operations in mainland China. It is supporting Jacobson’s forwarding operations to and from the United States and provides warehousing and distribution services within Hong Kong and China. In addition to its CGL acquisition, Jacobson acquired Singapore-based international forwarder G-Link Express Logistics in August 2011.
Europe will be forced to muddle through as Greece, Italy and Spain governmental and banking debts limit economic growth. Major 3PLs such as DHL, DB Schenker and Panalpina will have to look elsewhere for gains.
Brazil is encountering difficulties but could overcome it all with an impressive expansion in oil production. Argentina, Chile and Colombia are doing better, but their combined GDPs are less than two-thirds that of Brazil.
Overall, we expect 3PL revenue growth globally to be 5 to 10 percent. The levels of operating efficiency will continue to grow more similar for 3PL operations globally, irrespective of location.
Evan Armstrong is president of Armstrong & Associates, a consulting and research firm covering the third-party logistics industry. Contact him at firstname.lastname@example.org.