The relentless, aggressive growth and expansion of the global third-party logistics (3PL) industry, now estimated at $390 billion, continues to make the running of the bulls in Pamplona look like a stroll in the park.

For 2006, in the U.S. alone, 3PL gross revenues grew by $9 billion to $113 billion—a 9.5 percent increase over the previous year, according to consultants Armstrong & Associates, Inc. (Stoughton, Wis.). Earnings before taxes were up 8.6 percent and net income margins gained 5.4 percent for the year.

These are the kind of numbers that other sectors of the logistics industry—and most other industries and businesses—only dream about. But for U.S.-based 3PLs, 2006 represented a somewhat disappointing slip below the double-digit increase in total turnover they’ve enjoyed over the last decade, a slight decline which is being attributed largely to the stalling of the domestic economy in the last quarter of 2006.

Significantly, the 3PL sector with the highest gross revenues and percentage of growth was international transportation management, which was up 17.7 percent in 2006 to $42.4 billion. Sources agree that the greatest profit potential for 3PLs will lie in international markets as manufacturers’ continue offshore outsourcing and the consequential requisite expansion of globalized supply chains continue to increase.

“Most of the growth in the 3PL arena will come from doing business abroad, and we don’t see that changing anytime soon,” says Evan Armstrong, president of Armstrong & Associates. “The international management transportation segment had a net revenue gain of 18 percent last year. If you break down the global 3PL market in terms of gross revenue, it comes to $139 billion for Europe, $37 billion for Japan, and $30 billion for China, with the rest comprising other geographic areas and individual countries,” adds Armstrong. “Most major global players saw their significant gains in the Asia/Pacific to U.S. trade lanes.”

This will be the 3PL growth model for the foreseeable future, according to most observers, but it is not an easy market to break into. It is both demanding and unforgiving, and both shippers and 3PLs have to keep this in mind.

“Despite the best efforts of customs authorities in many countries to ‘electronify’ the import-export process, regulatory issues are becoming more and more complex, largely driven by security concerns,” observes Brooks Bentz, partner at consulting firm Accenture. “Shippers know that it’s manifestly more economic and efficient to have this handled by a 3PL, because documentation and customs clearance are specialized disciplines—but these services demand a high level of specialized experience.”

According to Bentz, the 3PL company seeking to expand its operations overseas has to establish its presence, staff the organization with local professionals, and demonstrate its core competencies in the given foreign marketplace. If they expect to get the shipper’s business, they have to understand the psychology and the mindset of the people on the ground as well as the intricacies of various country-specific commercial and regulatory issues.

With a fifth of the world’s population and a virtual lock on most of the planet’s manufacturing outsourcing, China will remain the major focal point of global 3PL expansion efforts for some time to come. The country has been tagged by one analyst as “the 900-kilo panda.”

Here again, industry sources have some cautionary observations. As the country’s economy has grown, so have labor rates and inflationary pressures. This has caused a number of U.S. and European manufacturers to seek lower cost production sites elsewhere in Asia, for the most part in Vietnam and India.

But the Chinese government is taking steps to improve what is probably its greatest liability—an antiquated road and rail infrastructure network that has for the most part limited foreign production investment to coastal areas and port cities.

“In terms of rail transport,” notes Bentz, “the system isn’t designed for today’s commerce. It has no national structure like Europe or the U.S., and the emphasis is on passenger operations. On the freight side, China is where the U.S. rail industry was in the 1950s. This means ‘loose-car railroading,’ mixed merchandise freight, and bulk commodities, and nowhere near the needed volume of high-speed high-capacity and dedicated intermodal trains needed to move product. This can offset the inherent cost advantages and labor savings if you can’t move the goods efficiently,” he adds.

But progress is being made with major construction work under way on roads, and a new legislative initiative allowing foreign ownership of Chinese companies. Most sources indicate that joint venture arrangements with local investors/partners are still the most advisable for the near term.

“Whatever the infrastructure drawbacks and provincial border hindrances in moving goods,” says Armstrong, “given the sheer size of the country and its extraordinary GDP growth potential, if any 3PL in North America with global aspirations doesn’t develop a presence in China they will be missing out on a tremendous opportunity.”

A number of observers believe that Vietnam will be a major beneficiary of Western producers seeking lower cost manufacturing as China’s economy continues to strengthen. With one of the highest literacy rates in Asia, and with two-thirds of its population under 30 years of age, the country offers considerable advantages to both manufacturers and 3PLs seeking to establish local operations.

The caveat here is that Vietnam has no deepwater ports, necessitating intermediary ocean transport via smaller vessels to Hong Kong or Singapore, requiring shippers and 3PLs to build in extra time for delivery to their final destinations.

India, with a population just over a billion and a well-educated workforce, suffers from virtually the same infrastructure problems as China. Its half-century-old rail networks are designed to carry workers from the countryside into cities, not manufactured products to the next link in the supply chain.

To rectify this, substantial investments will have to be made in track, cranes, and other yard and dockside ancillary equipment, and modern terminal facilities will be required to move large volumes of containerized cargo efficiently.

On the inland side, according to Armstrong, Indian 3PL operations are still quite fragmented by North American standards. While a number of international players have established profitable freight-forwarding businesses, Western-style, value-added warehousing and distribution operations are virtually non-existent. And while many multinationals are anxious and ready to go to India to occupy a 150,000-square-foot box to handle local needs, currently they can’t find one to meet their requirements.

Meanwhile, Russia and its former client states in Central and Eastern Europe represent a significant growth opportunity, but their infrastructure problems are in many cases exacerbated by a lack of political stability, causing shippers and 3PLs to move more cautiously than they would in Asia.

A number of observers single out the Czech Republic as the growth potential bellwether for the region. With its skilled workforce, industrialized production base, less complicated investment regulations than those in many Western European countries, and its favorable geographic position, it could become the natural hub for low-cost and efficient distribution throughout the Continent.

Source: Logistics Management

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