Back in 2021, PeakSpan published a blog post entitled “What Billy Beane Can Teach Us About E-Commerce Logistics.” We used the example of analytics in baseball to dramatize the importance of nailing every node in the supply chain, and ensuring that brands maintain control over their customer relationships in the age of Amazon.com.
While we continue to be bullish on e-commerce logistics — we expect online sales to reach $6 trillion in 2023, accounting for 22% of total retail sales — this year we’re zooming out to make a major bet on the digitization of international freight. And the sports analogy that we’ve chosen is baskiceball.
Born in St. Cloud, Minnesota and described as a mashup of “basketball, ice skating and beer,” baskiceball is an extremely violent sport. It’s often described as having no rules, with competitors simply “wailing on each other.”
For those in the logistics industry, the comparison surely resonates. The common sentiment today: “Uncertainty is the new normal for international freight.” Toss out the predictions, rulebooks and playbooks; as with baskiceball, all you can do is get out there and compete.
Technology offers endless opportunities to optimize and fine-tune the supply chain. That’s the primary reason we’re betting on international freight: the complexity is high, and volatility and variability are even higher. We see this as a recipe for technology to step in.
That said, the industry’s current level of digitization and use of technology remains extremely low. Despite $26 billion being invested in logistics up until 2019, paper is still widely used as part of the procurement, sales and operations processes in international freight.
Following are our top ten themes which we feel make the case for 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. When you add in revenue from ports, intermodal rail and drayage trucking, you quickly get to 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 over time, this is really a $100 billion technology opportunity.
Volume and velocity: an optimization dream. On average, cargo changes hands 20 times and touches 20 different companies before it reaches the receiver’s doorstop. One shipper told us that it will often do one million loads per year — nearly 20,000 per week — across 40 locations. To keep that volume moving, this particular shipper had a team of 40 procurement professionals working strictly on logistics. Given that much of this activity is done manually, that’s a scary reality for most.
High fragmentation with multiple constituent groups to sell into. The international logistics landscape is highly fragmented, with 400,000 shippers and more than 100,000 freight forwarders or non-vessel operating common carriers. These figures can be further sliced by type of shipment, specialty shipping requirements and trade lanes. Add to this thousands of drayage trucking companies, railroads and port operators, all needing software.
Infrastructure is also highly fragmented. There are around 55,000 merchant ships trading internationally, including 15,000 for general cargo, 12,000 for bulk, 7,000 for crude oil, 7,000 for roll-on/roll/off vehicles, 6,000 for chemicals, 5,000 for containerized freight and 2,000 for liquefied natural gas tankers. There are 835 active ports around the world and more than 360 commercial ports in the U.S. alone. These fragmented ecosystem participants are all in dire need of software that’s purpose-built for their role within international logistics. While all players are investing heavily in tech, many have been stuck with siloed solutions that operate independently. What’s needed to make supply chains more efficient is an investment in systems that talk to each other — and the people to plan it all out. Sadly, we’re woefully behind where we need to be, and most expect several years to elapse before we’re able to build more and bigger ports. Once again, there’s an opportunity for technology to step in.
Most supply chains include an international voyage. Ninety-five percent of the world’s trade is carried in ocean containers. You can’t provide an excellent and transparent customer journey if you lack visibility into where the goods are, when they’re due to arrive, and the potential for disruption or delay.
Shippers are shifting strategies, to control more of their supply chains. Amid massive waves of disruption, advances in technologies and a desire to provide a better customer experience, many shippers are pushing to own more of their international supply chain strategy. They’re turning to freight forwarders to complete the tactical movement of goods, leaving higher-level strategy to their own supply chain teams. With so much inefficiency plaguing international freight, expect to see these constituents duking it out to capture more margin and savings.
Disruptions, disruptions and more disruptions. As the events of the last three years have demonstrated, supply chain disruptions are unpredictable. We’re bearish on mankind learning to foresee these events anytime soon, but are bullish on the role that technology can play in help shippers to navigate choppy waters.
A new year’s resolution: get off the paper! An average package of shipping documents includes 50 sheets of physical paper, and can sometimes be exchanged among as many as 30 stakeholders. These documents provide details on cargo, financing and licensing. They include bills of lading, carrier and authority certificates, import/export licenses and vessel-sharing agreements. For BOLs alone, the Digital Container Shipping Association estimates that a minimum of 16 million original documents are issued per year, costing the industry around $11 billion. And just 1% of those documents are electronic today.
A massive payments opportunity. On a recent logistics podcast: a shipper and carrier were discussing invoice accuracy. The shipper was complaining about being overcharged. The carrier was defensive, claiming that it was “nearly” spot-on with its billing. When shipper disclosed that on average, invoices were off by 14%, the carrier responded that “We’re only off by 10%.” When overcharging by 10% is considered acceptable practice, we can safely say that a lot of work needs to be done in the freight payments space.
The global freight-audit market alone is projected to reach $30 billion by 2030, and that’s just one sub-sector of freight payments. There are so many ways to play this space, including simply digitizing B2B payments between shippers and carriers/forwarders or between forwarders and carriers — processes that are still quite manual. Another angle is fintech, which expands the total addressable market beyond the value of the cargo itself. Forecasts suggest the global trade finance market will reach $11 trillion by 2026.
The forgotten middle child: drayage. We include drayage in our “big bet on international freight,” and see this segment of the supply chain as another area primed for continued digitization and disruption. Early applications have focused on connecting supply and demand, given the highly fragmented nature of drayage trucking. However, we also see plenty of software-as-a-service (SaaS) applications that might target carriers or the ports themselves. Whether you’re a shipper or forwarder, nailing the container handoff from port to chassis can be one of the gnarliest and most inefficient processes. We still see this market as being in the early innings, with much digitization and collaboration needed across multiple constituents, including ports, carriers, shippers and Customs.
The size and importance of the international freight market is no newfound phenomenon, and we must recognize the disruptive nature of 2021 and 2022. Will supply chain executives need to continue honing their baskiceball skills in 2023? Or can technology help improve things? We sense the tide turning: the time is right for international freight digitization to accelerate.
Jack Freeman is a partner with PeakSpan Capital.
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