The global contract logistics market grew by 3.9 percent in 2016, up from 3.7 percent in 2015, Ti reports. But that aggregate number masks downward trends in a number of regions. Seven of the 10 largest markets for contract logistics grew at a slower rate than in 2015, the report finds.
The trend was most evident in a number of western developed markets, which “struggled to match even the modest growth rates seen in their contract logistics markets in 2015,” Ti says. “This reflects trends in the global economy, where growth rates in advanced economies slowed overall.”
Asia Pacific was another story. Ti attributes the region’s healthy numbers for contract logistics activity to “robust” economic growth, coupled with higher retail sales driven by a rise in Asian consumers’ disposable income. Hence those strong results in the retail contract logistics arena.
Ti economist David Buckby cites two main reasons for the gap between the performance of developed markets and Asia: macroeconomic factors, and differences in the rate of outsourcing.
Ti’s market models take into account a number of macroeconomic indicators, including gross domestic products, imports and exports, retail sales and growth in manufacturing and industrial production. Improvements in those areas increase demand for distribution capabilities, which in turn fuels growth in contract logistics. And when it comes to those key economic factors, Asia is currently experiencing better results than developed economies.
The consumer and retail sectors account for roughly half of contract logistics revenues, notes Buckby, with the industrial sector providing another 40 percent. (The remaining 10 percent comes from agriculture, the financial sector and other smaller sources.)
Then there’s the difference in growth rates based on the market size. Contract logistics activity in Asia is growing from a smaller base, so a rise of one percentage point there will have a larger impact than in developed markets, Buckby explains.
Emerging markets in Asia are undergoing “formalization” of their retail and manufacturing operations. “As the retail sector formalizes,” Buckby says, “contract logistics is also going to grow.”
In India, for example, the rate of formal retail penetration is relatively low. The state of affairs provides the country’s contract logistics sector with “a lot of low-hanging fruit,” Buckby says.
The picture within Asia is changing as well. A growing number of multinational manufacturers are looking at options outside China, where steadily rising wages are providing to be a disincentive for companies seeking cheap sources of production. The beneficiaries are members of the Association of Southeast Asian Nations (ASEAN), including Indonesia, Malaysia and Vietnam.
The impact of e-commerce and the omnichannel on contract logistics is unclear, Buckby says. One might assume that retailers venturing into new channels would seek the expertise of professional logistics providers. Whether the latter have amassed the necessary expertise to handle a business that’s so closely tied to brand reputation remains an open question, he says. And if they have, can they insert themselves into a distribution chain that operates on perilously thin margins?
Over the years, contract logistics providers have shown themselves capable of taking on new roles in line with the ever-changing nature of global supply chains. These days, the top players are likely to be performing a range of value-added services, including kitting, labeling, packaging, light assembly, and returns management. So adapting their operations to the demanding needs of the omnichannel doesn’t seem like that much of a stretch.
The global shipping community has “a level of confidence in third-party logistics providers being able to respond to these challenges, but they want to see proof of that,” says John Langley, professor of supply chain management at Penn State. “I’ve always thought that a core competency of a 3PL is to be responsive to change.”
One change that’s undeniable among contract logistics providers is the shrinking number of major players, driven by a wave of mergers and acquisitions. Today, the industry consists mostly of “very large companies at one end, and thousands of small guys with one truck at the other,” says Robert Lieb, professor of supply chain management at Northeastern University.
Lieb believes the trend of higher growth in Asia Pacific contract logistics will continue, with a focus on developing countries such as Cambodia and Thailand. Buckby also foresees the continued dominance of that region, as least in the medium term. He pegs the growth of the global contract logistics market between 2016 and 2020 at 4.8 percent.
“Whilst economic growth rates in developed nations are forecast to pick up slightly, they will continue to be far surpassed by emerging markets,” Ti says in its report. “None of this is especially new, but it is the reality the market faces.”