Third-party logistics providers may approach emerging markets in different ways, but one thing is certain: Doing business in them isn’t an option; it’s a necessity.
In 1998, Penske Logistics entered the Brazilian market through a relationship its corporate parent had with a Brazilian trading company. Penske initially provided warehousing and distribution for the trading company’s products. By the time the contract between the parties expired, Penske had developed relationships with multiple customers and decided to establish itself in Brazil on its own.
Penske’s approach to emerging markets is different from 3PLs that are based on freight forwarding and need to be established in many countries. Penske follows its target customers, which are generally high-growth multinational companies, but won’t commit to a country unless it sees strong overall growth potential. If it doesn’t, it will pass on that portion of the customer’s business and recommend another 3PL, or act as a 4PL and contract for outsourced logistics.
The company’s approach to emerging markets is strategic and opportunistic, said Joe Gallick, Penske’s senior vice president of global sales. “Brazil happened less by design and more by taking advantage of an opportunity,” he said.
China, India, Brazil and Mexico are ranked as the top emerging markets, defined as economies experiencing rapid growth through industrialization, according to the 2012 16th Annual Third Party Logistics Study conducted by Capgemini in collaboration with Penn State University, leadership advisory firm Heidrick & Struggles and global logistics provider Panalpina. Eighty percent of the 1,561 industry executives and managers who participated in the survey do business in an emerging market, along with 77 percent of 3PLs.
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Conducting business in emerging markets is difficult because of infrastructure problems, complex laws, customs regulations and tax regimes, cultural differences, and the possible inability to deliver against promises or agreed-to service levels.
Shipment visibility and knowledge of global trade regulations and free trade agreements are critical to shippers operating in emerging markets.
Add to that capacity constraints, antiquated highways and gridlock in major metropolitan areas and it’s easy to see why shippers in emerging markets rely on 3PLs to manage that complexity, said Shyamal Roy, a Capgemini managing consultant.
More than half of shipper respondents in the Capgemini survey said the ideal model for operating in emerging markets is a 3PL with global scale working in tandem with local partners who have detailed knowledge of national, regional and local trade rules and regulations.
“We need to ensure 3PLs have the right resources, content experts, etc., to understand the local flavor,” said Michael Keong, director of regional logistics Asia at Levi Strauss. “A strong account manager who understands the local area is important to us.”
If local providers are good enough, they are frequently acquired by global players and rolled into their own logistics brands, Roy said.
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According to the Agility Emerging Markets Logistics Index 2012, a ranking of the world’s major developing logistics markets, Brazil is the world’s third-ranked emerging market, behind China and India. The survey, compiled by global logistics provider Agility, ranks countries according to market size and growth potential, market compatibility — based on risk, regulations, demand for 3PL services and access to markets — and market connectedness, or infrastructure.
CEVA, a Houston-based global 3PL, has been operating in Latin America since 1974. It has a strong presence in Brazil where it operates 10 branches, has 7,600 employees and 455,000 square feet of warehouse space. The company operates another 10 branches in 16 other Latin American nations, working with dedicated agents, and serves the pharmaceutical, energy, technology, automotive, industrial and consumer/retail industries in Latin America.
CEVA Latin America is rapidly expanding its ground transportation and customs brokerage services, said Nadia Ribeiro, senior vice president for business development. On average, CEVA Ground handles more than 90,000 roadway bills and monitors about 10,000 full truckloads per month. It has a dedicated fleet of about 900 tractor-trailers and works with more than 130 independent carriers and 200 owner-operators. The company’s less-than-truckload network covers 290 cities in southern Brazil and other southeastern Latin American countries.
Overall, CEVA Ground represents about 30 percent of CEVA Latin America’s total revenue.
With a strong risk management and loss prevention program, CEVA Latin America has outlined a broad range of risks to high-value goods in transit, including theft, accidents, inadequate handling, humidity and poor equipment.
To address risk, trucks are outfitted with safety and tracking devices that allow real-time communication with drivers and relay information about external interference with truck operations.
A key to effective risk management is having people on board with local and regional knowledge. CEVA operates its own subsidiaries in key markets including Brazil, Chile and Peru and invests heavily in local talent; at least 90 percent of CEVA Latin America managers are from the regions in which they work, Ribeiro said.
Emerging markets are characterized by fast-growing consumer classes that will eventually require hub-and-spoke distribution networks. That’s what Agility has been building in China, India and Southeast Asia, said Hans Hickler, chief executive, Asia-Pacific region.
Agility, based in the Middle East, is rooted in emerging markets, and its customers tend to be companies that are early investors in those markets. The company has more than 7,000 employees in 24 Asia-Pacific nations.
Agility operates a major project logistics business that extends into remote corners of the world. To supply those projects and keep up with other global demands, Agility works with local 3PLs — what Hickler calls “local heroes” — to build logistics networks designed to meet current and future needs and flexible enough to adapt as markets mature.
In India, for example, Agility has some 3 million square feet of warehouse space in 46 locations, not just in main hubs but also in second- and third-tier cities. As India’s infrastructure improves and tax and regulatory rules change — for example, by adoption of a national value-added tax instead of provincial tax regimes — Agility’s warehousing and distribution networks will evolve into more of a classic hub-and-spoke system.
China and India are Agility’s two biggest Asia-Pacific markets. Hickler sees intra-Asia trade as the fastest area of growth for 3PLs. About 65 percent of Agility’s Asia-Pacific revenue is from intra-Asian trade.
Agility is concentrating on building cross-border infrastructure between Southeast Asia and China. Hanoi, Vietnam’s capital, doesn’t have enough air capacity to meet the needs of a fast-growing cluster of global manufacturers. California-based semiconductor maker Intel recently opened a billion-dollar plant in Vietnam, and Samsung, Nokia and other global manufacturers have major manufacturing plants in northern Vietnam.
Routing product by truck from Vietnam to Shanghai could create a lot more capacity during peak periods and open southbound routes for moving consumer goods from China to Southeast Asia.
It’s a long process, but forward-looking 3PLs are in it for the long haul. “We’re in the very early days of connectivity between Southeast Asia and China,” Hickler said.
Red-hot automotive and energy sectors and a growing consumer class are driving demand for 3PL services in Brazil. According to Capgemini’s 2012 3PL Study, more than 90 percent of Brazilian companies outsource transportation, while 75 percent outsource customs clearance and warehousing.
Even as demand grows, 3PLs are challenged by poor infrastructure and gridlock, especially around Sao Paulo, said Mike Bible chief executive, Americas region, global integrated logistics for Agility.
Chile is a “jewel of a market,” with good infrastructure, limited regulation and a booming mining sector. Peru has great potential but is more heavily regulated.
Mexico, which has slipped to 10th place on Agility’s Emerging Markets Index, is recovering from the recession. Mexico’s biggest issue by far is safety, as the nation is in the grip of a drug war that has spread from border areas to the entire country.
About five years ago Penske purchased its original Brazilian trading partner. Growth has been phenomenal since then, in part because of pro-business measures implemented by the government to spur the economy. Business grew at a 50 percent clip in 2011 and is projected to grow 20 percent this year.
Penske has 15 distribution centers in Brazil with a total of 3.4 million square feet. Most are clustered around Sao Paulo, including the company’s Latin American headquarters and a large multiclient facility in nearby Cajamar.
Within the past three years Penske has expanded into Salvador, a large import city on Brazil’s northeast coast, and Manaus, the largest metropolitan area in northern Brazil and home to a free trade zone that has attracted Sony, Whirlpool, Samsung, Honda and other global manufacturers.
Moving goods from Manaus typifies the logistics challenges for 3PLs in emerging markets. It takes two weeks for products to be shipped 2,400 miles from Manaus to Brazil’s major population center in Sao Paulo. The first leg of the trip is a 770-mile journey via waterways on balsa wood barges. For the 1,800-mile ground portion of the trip, Penske contracts out with local and regional carriers.
Penske finds transportation partners in Brazil by managing customers’ carriers or searching for new ones from its transportation management center in Sao Paulo. Drivers are thoroughly vetted and trucks are outfitted with GPS and other security devices as part of a theft-prevention and risk-management program.
To deal with Brazil’s complex tax regime — each of the nation’s 26 states has its own value-added taxes — a large percentage of Penske’s staff is comprised of finance experts to provide the financial transparency that customers require.
In 2006, Penske entered China by setting up its own logistics engineering and consulting firm. As restrictions eased on foreign companies, Penske established its own business, which is growing but at a slower pace, given that it started from scratch.
“China and Latin America represent different things for us, so have different levels of expectations,” Gallick said.
Although service level expectations are lower in emerging markets given poor infrastructure and other challenges, they tend to ratchet up rapidly. Competition among 3PLs in Brazil and other emerging markets is fierce and will remain so. “Customers still expect continuous improvement,” Gallick said.
Contact David Biederman at email@example.com.