The changing logistics industry: Africa, India and the Middle East

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The changing logistics industry: Africa, India and the Middle East

4 Oct 2018 Bangalore

Alagu Balaraman, Partner and Managing Director of Indian Operations at CGN Global, highlights the critical drivers of change in logistics. He warns the industry to stay ahead of the curve so not to lose out on the opportunities.

There is a view that the world of transport is simple and has remained unchanged for many years. This is certainly not the case today. It would be both interesting and educational to see what is driving these changes and how companies can best use new opportunities. In this article, we will focus on the trends in the regions of Africa, India and the Middle East. Most of the references will be from the same geographies.

Looking at demand for transport services, we see some critical drivers. Some interesting and significant areas are (a) economic development, (b) a leap frogging of customer demand fuelled by e-commerce and (c) shifting patterns of food consumption.

Economic development leading to accelerated logistics growth

Recently, turmoil in global trade policy and protectionism has resulted in increasing tariff barriers being imposed across the major trading partners of the US and China. This has led to a flight of capital out of emerging markets, giving the impression that all is not well in economies. However, that is not reflective of economic growth in these markets as a whole. Both domestic and trade within the regions is doing quite well.

Looking at some large growing emerging markets, we find that some countries are maintaining a relatively healthy growth rate. In cases like India (8.2% in 2018) and Ethiopia (10.2%) it is actually a high rate of growth. The UAE is going through a period of slow growth but is forecasted to pick up beyond 3% pa once again. This level of growth will lead to increased consumption, both in consumer and industrial markets. In the case of lower income countries there will be shifts in patterns of food consumption (addressed later in this article) and the nature of goods being purchased as disposable incomes rise. This in turn will alter the demand networks within countries and in ports dealing with exports and imports.

As an indicator, the projected GDP growth for India is 8% per annum or more. In turn, the projected growth in the logistics market of 12.9% CAGR. This is not surprising.

“As growth increases, production and exchange of goods and raw materials will increase leading to a significantly increased growth rate in logistics.”

This will call for an overall increase in volumes to be shipped, leading to increased demand for infrastructure, skills and supporting technologies.

E-commerce changing the nature of demand

Technology has been making a significant impact in changing how we lead our lives and how we do our work. It is not surprising that it has also changed the way in which we consume goods and the profile of goods being consumed. The idea that an individual can search for, order and receive a single product means that people can access goods faster and cheaper than traditional retail networks can be built. This has fuelled disproportionate growth in the express logistics area.

“Correspondingly, the e-commerce logistics industry in India is forecasted to grow at a much faster rate than even the logistics industry, at approximately 36%.”

This is almost 3 times faster than the overall logistics market growth in the country. Why is this and what is the difference in the pattern of demand in logistics?

Firstly, the growth is happening due to the growth in the industry. Consumers who have a high disposable income but are not located in urban centres are now able to order goods. To capture this market, e-commerce players are looking for faster and more economical ways to do small unit delivery. So, while traditional industry looks to minimise the tonne/km cost of transport, e-commerce companies are more interested in speed of delivery and safe handling of the product.

They are penetrating geographies further away from large population centres and are using technology to plan, track and transact. This is a different type of logistics customer from the traditional industrial customers and, in turn, this places new demands on the infrastructure, processes and skill levels of the people in the logistics space.

“This is clearly evidenced by the fact that logistics companies are being asked to handle last mile delivery, which can account for as much half the total logistics cost.”

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Interesting changes in food consumption patterns

Another, less visible trend in demand, is the change in patterns of food consumption and its impact on logistics. Food is a major component of any logistics industry. Food logistics alone is expected to be a $150 billion industry by 2023.

“So, any big shifts in food consumption patterns have large implications on the logistics industry.”

After all, it’s something we consume every day and, sometimes, in significant quantities!

An interesting study on current food habits and future trends shows some startling changes. For example, Africa is expected to see a significant increase in processed foods consumption in the period till 2027. This is expected to be driven by population growth and this is despite a slowing in income growth that is anticipated worldwide. 

Similarly, India is expected to see a dramatic increase in dairy product consumption. This is partly driven by a population growth that will make it the most populous country by around 2022. Also, by growing disposable income. At the same time, traditionally large markets like the USA and Europe are slowing down.

Such shifts in consumption patterns will make it necessary to deliver new products and larger volumes into these markets. They will also require new capabilities by the logistics players. More refrigerated facilities in India and more responsive supply chains in Africa.

The expectations of the industry will evolve

These and other factors will change the expectations of customers of the logistics industry. We’ve discussed important drivers like the ability to handle growth, being able to improve penetration into low traffic areas, a change in profile of capabilities (like refrigerated facilities) and faster response times. These raised expectations will be the new challenges that the industry will have to rise to.

“Every challenge also presents an opportunity.”

The logistics industry, like many others, is undergoing a transition as (a) governments and (b) businesses start changing the rules of the game. Having looked at some changes in the demand side of the picture, it would be useful to see some supply side changes that are also influencing change.

The role of government in logistics

It is interesting that governments that are so focused on production, as in manufacturing, and consumption, as in consumer demand, have paid relatively less attention to logistics in the last few decades. An interesting study on how countries can look at reducing the total cost of ownership of logistics by taking a “macrologistics” view gives some interesting insights.

By modelling a country’s freight flows, both internal and external, it is possible to identify areas that can best benefit the economy. Also, by collecting and aggregating cost data, it is possible to do a more accurate estimate of the true cost of logistics at a national level. Currently, there are three countries that consistently measure and publish logistics cost at a national level. These are the USA, Finland and South Africa. Without such data, misunderstanding of the cost of logistics can lead to faulty decision making at a government level. A piece of research McKinsey describes how conventional wisdom on the Indian logistics industry is inaccurate.

Fortunately, governments around the world are much more focused on the need for reliable and cost-effective logistics operations within and between countries. So, using a combination of policy, infrastructure and technology, they are facilitating change. For example, in terms of policy, India has created a Logistics Division under the Ministry of Commerce and Industry in 2017. Since then the government has awarded industry status to logistics companies, allowing them access to lower cost funding. Infrastructure is being supported by several governments and across nations, as can be seen by the Connect Africa Initiative by OPIC and the Belt & Road Initiative of China that spans Asia, Middle East, Eastern Europe and Africa.

The rise of startups in the logistics space

“While government usually removes road blocks, both physical and policy, often the driver of innovation is the private sector.”

In the last few years, the level of innovation in the space of logistics has dramatically increased. This has been fuelled by e-commerce companies that found traditional logistics support inadequate for their needs, as well as start-ups that saw opportunities to leverage new technologies to address old problems. So, Amazon has been driving large-scale change in logistics models wherever they operate. This, in turn, is raising the bar on other e-commerce players and on other retailers. Once the pressure starts, it flows backwards up the supply chain quite quickly.

Fortunately, these tougher expectations are being addressed by a swathe of start-up companies across the globe. Having access to smart phones means a lowered cost of penetration to new logistics markets.

“Everyone uses a smart phone and by linking them to corporate networks, much is possible.”

This could range from simple tracking of consignments, to sharing of truck loads, to more complex milk runs and more reliable multi-modal transfer.

The talent risk is looming

One of the largest concerns, across the industry has been the lack of adequate talent. Given the new expectations of customers, companies need to determine how best to meet these new needs. Old methods often don’t make the grade and not changing leads to a risk of losing out to competition.

On the other side, with all the new changes being brought about by policy and technology change, the ways of working will have to be overhauled.

“This requires relooking at the nature of work, the nature of the work force, as well as the nature of the workplace to get best results.”

These two changes require companies to gear up by redesigning their strategies, infrastructure and processes. This is difficult enough to do when running a business. When this is coupled with a steady growth in volumes and demand, it places a huge pressure on talent. From truck drivers to supply chain planners, there is a shortage of skills across the board – they are well paying jobs, but getting the people is tough.

In conclusion

The world of logistics, like many other areas of business, is undergoing big changes. These changes are simultaneously taking place on the demand side as well as the supply side.

“Times of change are times when incumbents are most at risk and new entrants can get a foothold.”

Companies that track and utilise those changes to their advantage will benefit the most. While it is difficult to predict how exactly things will pan out, it is clear that the customer will benefit, and the industry is going to be very different from the past.

 

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Alagu Balaraman

Alagu Balaraman
Partner in CGN & Associates and the Managing Director of India Operations

Alagu has over 25 years of experience spread across both consulting and senior management roles. He has headed individual functions, such as Corporate Strategy, IT strategy and Business Process. He has also run businesses in technology and consulting. CGN is a global business performance consulting firm that specialises in driving improved business performance through transformation in operations, end-to-end supply chain redesign and implementation, and analytics. Clients are a mix of global, regional and national players, including Carrier Midea, Caterpillar, Coca Cola, DTDC, DuPont, Kelloggs and Motherson Sumi.