Burgeoning global commerce, ever-expanding supply chains and a deeper corporate reliance on outsourced logistics raised the 2005 gross revenues for the Top 25 Global 3PLs to $110bn, an increase of 12.8 percent over 2004 (Table Two PDF). In the U.S., gross revenues for the 3PL market hit $103.7bn, a 16 percent increase over 2004.
But unprecedented organic growth of third-party logistics reveals only part of the story. Not only is the industry growing at a rapid rate, it is becoming more sophisticated and more concentrated at the top. Merger and acquisitions activity among the world's leading 3PLs in 2004 amounted to $9bn. This activity in the 3PL industry has been gaining momentum over the last few years. Since 1999, it has amounted to more than $14.5bn. We can expect the pace to stay hot for two to three more years.
While the 3PL industry is a magnet for M&A activity, a more important question for the customers of these emerging giants becomes, is bigger better? Do global reach, expanded IT capabilities and standardized processes provide the best solutions for customers? Is controlled organic growth better than mega-deals? Do individual customers loose clout with mega-3PLs? The answers to these questions are closely related.
To start, let's look at how some of the Global 25 are getting bigger. Deutsche Post's $6.6bn purchase of Exel will more than double the size of DHL's revenues when the operations are consolidated. Schenker's $1.2bn purchase of BAX significantly increased the German forwarder's inroads into the U.S. and Asian markets. Maersk Logistics, with just a few hundred million in revenue, more than doubled when its parent purchased the shipping and much smaller logistics operations of P&O Nedlloyd. Note that BAX and Exel remain on our Top 25 list because the sales happened late in the year and these entities continue to operate under their own brands in the U.S., at least for the time being.
SembCorp Logistics is included again on the Top 25 list, but this year it has a new owner. The former Singapore-based 3PL was bought by Toll Holdings, which owns the largest trucking and distribution company in Australia.
A new addition to this year's list is Public Warehouse Corporation of Kuwait, which nearly doubled its size last year when it bought GeoLogistics. PWC is now a $4.5bn company with $1bn in cash that it can invest in acquisitions or internal growth. PWC has grown rapidly since 2002, primarily because of its defense-related business with the U.S. government in the Gulf region. Besides this defense business, PWC has strong operations and increasing global coverage.
New Money Drives Market
Acquisitions have taken on a new momentum in the past year, not only because large 3PLs are strategically buying other 3PLs, but also because the investment world has discovered them. Financial companies like Bison Capital, EVE Partners, New Market Capital and many similar providers of private capital have dramatically increased the amount of money available to invest in third-party logistics. There are many more buyers than sellers. As a result, prices and multiples keep increasing well beyond what has been normal.
Companies like those mentioned above often invest without taking majority ownership. They will take a minority interest in a 3PL with a five-year deal, then provide the owners with capital to move to the next level. 3PL investments tend to be with good performers who can grow quickly beyond their current revenues, usually in the range of $100m to $150m. At the end of five years, the 3PL has to pay the investor back with accrued interest, be sold privately or go through an initial public offering. This type of investment gives the up-and-coming 3PL a chance to grow dramatically. Given the dynamic nature of the 3PL market, five years is plenty of time to move a company substantially.
Although there is a lot of buzz about the mega-deals, most of the activity has been with small to medium-sized operations with less than $150m in annual gross revenues. The acquisition emphasis also seems focused on non-asset businesses such as freight brokerage, freight forwarding and niche logistics. There are not a lot of investors interested in buying pure warehousing businesses. Companies like Ozburn-Hessey, TLC and Jacobsen that have warehousing services also provide integrated services through large transportation and distribution operations. Such combinations allow for faster growth, greater margins and high investor interest.
The next big 3PL deal will be the much-heralded sale of TNT Logistics, being handled by the financial firm Goldman Sachs. The purchase could well be announced by the end of June and the price will be about $1.5bn. If a 3PL strategic buyer acquires TNT Logistics, this huge acquisition will take some time to digest. If a financial purchaser acquires it, the results could be different.
C.H. Robinson Leads All Top 3PLs in Profits and Growth
In the dog-eat-dog world of third-party logistics, successful 3PLs have to produce both high profits and high growth. Too often, these goals are at odds. Fast growth, especially through acquisition, can hurt profits. Focusing on profitability can mean avoiding the risk of growing new markets and services.
Is Bigger Better?
Large global corporations are ambivalent about what they want from their 3PLs. On one hand, some say they want a one-stop 3PL that can provide all the services and geographic coverage that their customers need. No doubt this supposed preference has helped to encourage mergers, so larger 3PLs can provide more services and cover the globe. UPS and DHL are pursuing this strategy. Yet, most large customers are afraid to put all of their eggs in one basket. They don't want to risk their entire supply chains on one or two 3PL partners, nor do they want to limit their negotiating potential. For the most part, the result is that the global corporations are reducing the number of 3PLs that they use to those that offer a wide assortment of integrated services.
Another feature of market consolidation and mega-3PLs is that we are seeing greater effects from brand names. The tier-one global 3PLs, such as DHL, UPS and TNT, are included in the request for proposal (RFP) process by large customers. The second- and third-tier 3PLs with less well-established brand names are seeing fewer bid opportunities.
In addition, larger players are increasing the probability of success by using more direct sales rather than waiting for the RFPs to come in. Brand name recognition opens doors for those direct sales efforts. Direct sales are designed to avoid going through a bidding process and increase the probability of securing business. Occasionally, sales approaches may include joint proposals from two or three 3PLs that form ad hoc partnerships to meet specific customers' service and coverage requirements. These joint approaches can meet with success, especially where the customer faces a capacity crunch. If a 3PL can reliably promise the container, rail, truck or air capacity that the customer needs at competitive prices, that ability will capture large pieces of business.
How Size Matters
Small 3PLs under $250m in net revenues generally have a competitive advantage with strong customer relations because their scale allows them to have close communications. As a result, they can be more flexible and adjust faster to market needs than their larger competitors. These smaller 3PLs also tend to have better operating margins than many of the very large 3PLs because their overheads are lower. The problem they face is that they do not have global scale, so their sales and growth prospects are limited to customers looking for a North American or other single market solution. Solutions, usually tactical, are offered to small and medium-sized companies, which is turning out to be a good strategy. 3PL penetration has doubled since 2001 with small to medium-sized customers to the point that over half of these companies now use 3PLs. The largest companies have long used 3PLs. Kenco and Landstar Global are good examples of expanding companies in this smaller 3PL niche. Kenco is a solid warehousing company expanding into transportation management. Landstar is especially well suited to serve small to medium-sized companies needing integrated services. Both companies are growing organically and rapidly.
The 3PLs between $250m to $500m are having the most difficult time competing. They need to expand beyond a regional or functional focus to grow, but the larger players are crowding them out of many large contracts. Many of the players in this group are functionally specialized and asset-oriented. This asset focus normally lessens their operating margins, earnings and returns. While there are exceptions in this group, many will have to be acquired to survive.
The most successful 3PLs are in the group from $500m to $1bn. They have enough critical mass to provide a variety of integrated services. They are international operators often serving Europe, North America and maybe Mexico and Brazil. They have enough scale and density of network so that they can standardize operations supported by good IT. They have good services and a good customer following that allows them to have profit margins that are a few points higher than most other 3PLs. Most of the players in this group have grown organically.
For example, C.H. Robinson has grown at between 20 and 25 percent a year almost entirely through organic expansion without having to deal with difficult purchase integrations. Their growth has been steady and controlled. On the other hand, UTi and EGL have also grown quickly through acquisition. UTi has been particularly adept at acquiring companies, integrating them and improving their profitability.
Also included in the global $500m to $1bn category are SembCorp and FedEx Trade Networks/SCS. In the domestic arena, strong players include J.B. Hunt Dedicated and Werner's 3PL/Dedicated operations.
Beyond $1bn, there are only a few 3PLs that have both good financial results and thoroughly integrated operations. Most of the players above $1bn do not enjoy high profitability in their logistics operations. They may have very strong transportation or express services, but the pure logistics parts of their operations lag financially. For example, both Ryder SCS and UPS SCS earn only 2 to 2.5 percent after tax on their logistics business, while other transportation operations under the corporate umbrella produce much higher profits. Very large 3PLs with over $1bn can have very large problems integrating large purchases. Rebuilding a single, smooth running operation that can capitalize on their scale and scope can take a long time. For example, DHL has now begun to see good financial results from the logistics and forwarding operations that it built on its purchases of Danzas and AEI years ago. Such slow absorption is going to be the case with all of the big acquisitions that are unfolding. The profit leaders with over $1bn in net revenue-Expeditors, Caterpillar and PWC-have primarily grown organically. They have not been slowed down with acquisition absorption. It will be interesting to see how quickly PWC can absorb GeoLogistics.
Another important variable with regard to profit margin is the interest of large parent companies. According to Bob Stoffel, senior vice president of UPS SCS, his operation feeds UPS Package Services a billion dollars per year in package business. A skeptic might surmise that this makes UPS corporate more accepting of SCS's modest profitability.
Similarly, FedEx makes no bones about its single-minded focus on growing its core transportation businesses. Chairman Fred Smith has stated that he has little interest in owning warehouses. The role of the supply chain warehouse business that it acquired from Caliber Logistics is to feed the FedEx transportation businesses. The freight forwarding and customer brokerage businesses that constitute FedEx Trade Network are similarly constrained. As a result, these logistics operations are not carrier-neutral, which is a problem with many 3PL customers. FedEx is unapologetic about its strategy.
Despite any concerns about third-party logistics growing too fast, acquisitions are not going to slow down. There are many capitalists who see the logistics industry as a good opportunity to make money. Many 3PLs believe they need to acquire to grow fast enough to keep up with the market. There is always the hope that third-party logistics might be a better business if you pick the right company to buy.
Who's Going to Buy TNT Logistics?
TNT Logistics is currently the world's eighth-largest 3PL with $4.2bn in revenues, but next year don't look for this Netherlands-based company on the GL&SCS Global Top 25 list, at least under this name. The parent company, TNT N.V. is in the process of selling off its logistics division. According to TNT Group Managing Director of Logistics David Kulik, the division will be sold in its entirety, either to another large logistics company or to a financial buyer looking for a good investment.
Several vertical markets dominate 3PL activity today in terms of revenue. Automotive logistics is the largest single vertical for many of the top 3PLs. For example, TNT, Ryder and Penske earn half of their revenues from automotive logistics. Revenues there exceed $400m for each of these 3PLs. No other vertical creates that kind of revenue for individual 3PLs. All of the big players are involved in automotive logistics, and it continues to grow. Those with heavy involvement with GM and Ford have to be concerned.
Ryder is the 3PL at two of GM's most modern plants near Lansing, Mich. These operations involve JIT, kanban, lean inventory and space minimization. GM has pushed set-up, sequencing and subassembly back to Ryder. These two new GM plants will be unionized, with UAW white paper. Workers are paid less on a per-hour basis than in the assembly plants. Lower labor costs will make GM more competitive. Ryder's support facility involves more tier-one activity, more milk runs and more transportation management.
There are only a few 3PLs with enough scale to have a heavy automotive focus. Ryder, Penske and TNT are the biggest. Others majors include Menlo and Caterpillar. In Europe, TNT and Exel are the dominant automotive logistics players. The smaller automotive 3PLs such as Linc and Menlo's Vector are not gaining significant new business. The big guys with scale will continue to dominate automobile assembly. It is common for the major automotive logistics providers to work together to solve GM, Ford or other auto manufacturer problems. They do not make huge profits on this business, but they make four or five percent after tax and it has big volumes.
The automotive market for 3PLs also takes in the aftermarket and spare parts business. Schneider Logistics, for example, does about $50m for GM and Ford. Schneider Logistics is one of FedEx's largest customers because of the huge volumes of parts shipments that it moves for its automotive customers. But the big automotive business for 3PLs is supporting manufacturing operations. The aftermarket is just nice business.
High-tech is another important vertical. Leading 3PLs in this space are involved in planning activities throughout the supply chain, but especially in Asia where most of the products are made. 3PLs also play important parts in configuration/postponement activities close to the end user. From a transportation standpoint, all of this requires heavy involvement in airfreight. Shipping by air is a major requirement for internet-based supply chain management from Asia to final consumers in North America, Europe and Japan.
As an example, BAX (now part of Schenker) manages Apple's iPod supply chain from manufacturer to delivery throughout Japan. BAX Asia Pacific does a lot of end-to-end supply chain management. But high-tech is a volatile business. Contracts tend to be shorter, mainly because the product life cycles are short and the suppliers are always in flux. The customer focus is on velocity, tight inventory control and efficient long distance logistics. 3PLs in this sector must have sophisticated internet and supply chain management capabilities. They must be flexible enough to handle rapidly changing supply, assembly and configuration requirements.
The third-largest vertical for global 3PLs is retail/consumer goods. Retail supply chains focus on moving goods, and information, from plants in Asia and other low-cost areas to markets in North America and Europe. Besides the ocean container activity, there is a need for tremendous distribution capabilities to move large volumes of these goods from West Coast ports throughout the U.S. Furniture, clothing, footwear and other consumer goods dominate this segment.
In the North American retail market, there has been an important shift that has impacted 3PLs with traditionally strong freight forwarder activity. Just a few years ago, freight forwarders controlled the vast majority of ocean container traffic around the world. While that is still the case in most parts of the world, it is no longer true from Asia to the U.S. Freight forwarders and non-vessel operating common carriers (NVOCCs) in this lane now control only about 38 percent of the container traffic. The other two-thirds is handled direct by the large retailers such as Wal-Mart and Target. These major shippers have more clout with carriers. The traffic that the forwarders and NVOCCs handle on their own bills of lading is often for smaller accounts, less-than-container load quantities or multiple customer consolidations.
Many retailers are often using the same 3PL/freight forwarder, but for product handling and consolidation, not traditional freight forwarding origin to destination service. Some retailers have contracts that cover support activity, but not the movement on a freight forwarder relationship. When the containers hit the U.S., similar 3PL contracts may only cover container stripping, cross-docking and reloading. Major retailers are using 3PLs tactically, not strategically.
Well-IS Bigger Better?
When Armstrong & Associates puts its Top 25 Global 3PL list together, it is done primarily based on the companies' turnover (gross revenue). Turnover includes purchased transportation. It can be argued that the process is biased against warehousing-based companies short of global reach. Among the Top 25, only Exel, TNT Logistics, PWC, Caterpillar, Menlo, APL, Maersk Logistics and SembCorp derive most of their revenues from value-added warehousing.
There are, of course, other high-quality, value-added warehousemen, particularly in North America and Hong Kong that should be mentioned. They are listed in the Warehousing-Based 3PL table (Table One PDF).
And there are transportation management 3PLs like Hub Group (U.S.), Landstar Logistics, BNSF Logistics and Cargo Master that are growing quickly. Armstrong & Associates's experience in dealing with these companies and the warehousing companies in Table One is that most of their operations are very good. Individual customers tend to be more important to them. While they may lack global scale, they do provide high-level service for functions they have. (For more detailed information about the companies mentioned above, please consult Who's Who In Logistics databases at www.3PLogistics.com).
This year's Top 25 Global 3PLs list does not include any of the large Chinese governmental operation such as Sinotrans. While this 3PL does have $3bn in revenues, it is not a global player, nor one that competes on a level playing field. It operates almost exclusively in China, and it does not compete in the same way that all the other market-driven 3PLs in the world have to operate.
Emerging 3PL Trends
Security concerns involving import containers, air transportation and illegal aliens will continue to be major for years to come in all of the modern, westernized countries. Major international players like DHL, FedEx, UPS, Schenker, Kuehne + Nagel, Expeditors, UTi and TNT have long histories of getting the job done the right way while carefully controlling the cargoes they handle. They are very capable with C-TPAT, FAST, AES, SAFE and other government-related security programs. A major challenge for international supply chain logistics companies and their customers is to keep the uninformed, raging with ethnocentrism, and inside-the-beltway special deals from producing processes that are too expensive or otherwise not in the public interest. The DP World/P&O fiasco is a case in point.
A global issue that will affect 3PLs significantly in the next 10 years will be balancing multinational corporate interests with those of individual countries. Most 3PL CEOs are educated, international, culturally flexible and willing to do business. Several countries that are having trouble modernizing or are out of the economic mainstream of the global economy are increasingly difficult to service. Iran, Venezuela, Nigeria and Pakistan are examples. Occurring more often now for modern, westernized countries are questions about how to balance the interest of their citizens with those of multinationals whose revenues are global. 3PLs will, at times, be snared in these problems.
For users, investors and researchers, gaining better transparency into the finances and operations of major 3PLs will be important, especially when achieving good logistics operating results remains difficult. Fortunately, some major logistics providers are moving to make certain board governance practices are more public. Other 3PLs and their parents' logistics corporate communications operations regrettably remain less candid. As third-party logistics experts, Armstrong & Associates usually find it easier to get straight answers from small to medium-sized companies than the large ones. Among the Top Five, only Kuehne + Nagel provides real transparency into its business and operations. In the U.S., obfuscation and spin still rule.
At the same time, there is no question that the technical supply chain management capabilities of 3PLs will continue to improve. The levels of service to customers are much better today than a decade ago.
Third-party logistics will expand faster in China, India and Southeast Asia. English will continue to be the lingua franca of international commerce. The Chinese are conquering it. The Indians have it and use it fervently for telemarketing. Even the Japanese are now emphasizing it as a necessary part of basic education.
Change is difficult but good, we think.
Top 25 3PLs
Exel plc Berkshire, UK, London: EXL
Kuehne + Nagel International AG Schindellegi, Switzerland, SWX: KNIN
Schenker Essen, Germany; (U.S.) Freeport, NY, 516-377-3000
DHL Global Forwarding Basel, Switzerland, Deutsche Post World Net
UPS Supply Chain Solutions Atlanta, GA, NYSE: UPS, (United Parcel Service)
Panalpina Basel, Switzerland
C.H. Robinson Worldwide Eden Prairie, MN; Nasdaq: CHRW
TNT Logistics Hoolddorp, Netherlands
Expeditors International of Washington Seattle, WA; Nasdaq: EXPD
Schneider Logistics Green Bay, WI
NYK Logistics Tokyo, Japan; Tokyo: 9101
Penske Logistics Reading, PA
EGL Eagle Global Logistics Houston, TX; Nasdaq: EAGL,
NNippon Express Tokyo, Japan, Tokyo: 9062
PWC Logistics Sulaibiya, Kuwait, Tarek Sultan, Chairman
BAX Global Irvine, CA
UTi Worldwide Rancho Dominguez, CA; Nasdaq: UTIW
Ryder Miami, FL; NYSE: R
Caterpillar Logistics Morton, IL
Kintetsu World Express Tokyo, Japan; Tokyo: KWE
Menlo Worldwide Redwood City, CA
APL Logistics Oakland, CA
Maersk Logistics Copenhagen, Denmark;
SembCorp Logistics Singapore; Singapore Stock Exchange
FedEx Trade Networks/Supply Chain Services Buffalo, NY;
Click here for a PDF of Warehousing Based 3PLs (Table One)
Click here for a PDF of the Top 25 3PLs ranked by revenue (Table Two)
Want more information about Global and Regional 3PLs? Contact Dick Armstrong at 800-525-3915 or dick@3PLogistics.com.
About Armstrong & Associates: Armstrong & Associates Inc. is a supply-chain management consulting firm specializing in market research, mergers and acquisitions and outsourcing. Armstrong & Associates publishes Who's Who In Logistics? Armstrong's Guide to Global Supply Chain Management. Recent research papers include Warehousing in the United States and Global Logistics Services Providers II. In addition, Armstrong & Associates maintains databases of warehousemen, freight forwarders and third-party logistics and distributing companies. Armstrong & Associates, Inc., 100 Business Park Circle, Suite 202, Stoughton, WI 53589; Ph: 608-873-8929; Fax: 608-873-5509; Web: www.3PLogistics.com.