Henry E. Teitelbaum
Dow Jones NewsWires
LONDON (Dow Jones)--In a world of vanishing trade barriers, shrinking product cycles and outsourced components logistics companies face pressure to consolidate to meet the ever-widening needs of their customers.
Within this highly-fragmented business, which provides services as diverse as sourcing raw materials, warehousing parts and assembly as well as transport, there are only a handful of companies capable of delivering the scale and range required by globalizing industries.
"These are markets worth hundreds of billions of dollars and the level of market penetration right now is low," says Alistair Gunn, transport and logistics analyst at Arbuthnot Securities in London.
How low is underscored by the fact that U.K.'s Exel PLC (EXL.LN), the world's largest operator, has only a 2% share of the globally outsourced, or third party market for logistics. By the company's own estimates, that share will rise to a mere 3% after it completes its acquisition of Tibbett & Britten Group PLC (TBG.LN) for GBP328 million.
Nick van den Brul, analyst at BNP Paribas in London, says a number of small- and medium-sized contract logistics providers have ambitions to expand regionally, but "their customers have told them they need to be global" to deliver economies of scale and expertise that are needed.
To compete he expects these, and freight forwarding boutiques that operate in local marketplaces, to merge with each other or risk becoming fodder for the giants of the industry.
One such giant is Deutsche Post AG (DPW.XE), Germany's former state-owned postal operator. Since the late 1990s, the EUR40 billion company has been on the acquisition trail, acquiring well-known names including U.S.-based DHL International Ltd., and Swiss freight forwarder Danzas AG in a drive to overtake Exel as the world's number one logistics provider by the end of next year.
A spokesman for the company, which has GBP3.8 billion in cash available for acquisitions, said: "If there are opportunities which make strategic or economic sense for our company, we will have a look."
Exel Chief Executive John Allan said he sees a "modest pace of continuing consolidation in this industry," with pressure building on medium-sized logistics companies, as customers demand more supply chain services globally.
But he added: "This doesn't mean there won't be a role for specialists" serving niche markets that don't have global needs. Over the past decade, offshore manufacturing and globalizing industry have created longer supply chains, expanding the scope of services required from logistics providers. At the same time, product cycles have shrunk, placing a premium on getting goods to market quickly.
Among logistics companies, the ability to manage and coordinate the growing range of functions and faster pace now in demand is a more recent phenomenon.
U.S. giant UPS Inc. (UPS) only established its Supply Chain Solutions division in 2002 following the acquisition in 2001 of Fritz Cos., a U.S.-based freight forwarder. But the $2.4 billiona- year unit has made 16 other acquisitions over the past four years to support its logistics activities.
Bob Stoffel, senior vice president of the unit, says third party logistics providers such as his are developing "complex integrated capabilities that cut across the globe, across markets and across competencies" to help companies manage all aspects of their business.
TPG NV (00905.AE), the Dutch-based global mail and express company, earlier this month received E.U. approval to buy Swedish freight services company Wilson Logistics Holding AB for EUR257 million. Besides expanding TPG's presence in markets such as China, observers say the purchase gives it a base in freight forwarding, which is essential to optimizing costs and expanding services.
The freight shippers themselves are also actively adding to their range of services.
Asset-heavy shipping giants such as Denmark-based A.P. Moller- Maersk Group (MAERSK-B.KO) and Germany's state-owned rail operator Deutsche Bahn AG (DBU.YY) are expanding into third party logistics and freight forwarding.
Investec Securities analyst John Lawson says that for Maersk and others, supply chain management offers a way to escape the boom and bust nature of their business.
"If you're a pure shipper, you have a highly volatile business," he says. Supply chain management will "reduce their cyclical exposure" and provide future growth.
These companies are trying to emulate Exel's success. The company was created in 2000 through the merger of logistics company NFC PLC and freight forwarder Ocean Group to become the industry's first dedicated provider of "integrated logistics," a term used to describe combined logistics and freight management services. BNP Paribas' van den Brul says success in logistics is "ultimately about reducing costs and improving efficiency." And Exel's model is unique in that it achieves this without owning air- and sea-cargo assets, thereby freeing the company's freight forwarding arm to operate independently and get the best deals available. Exel also doesn't have to worry about asset depreciation.
Analysts say for Exel, the focus will be on horizontal expansion to gain the heft needed to ensure its future role.
"The market where we buy and sell stuff is global," notes Yossi Sheffi, head of the MIT Center for Transportation and Logistics in Cambridge, Mass. He says "size and reach" are qualities that "companies can relate to" as global businesses.
Exel's purchase of Tibbett & Britten, which went unconditional last week after gaining regulatory approvals, moves the company towards this goal by giving it greater sector presence in nonfood retailing, as well as bigger market share in the U.S., western Europe and in the growing markets of eastern Europe. "We are moving into an era when competitive advantage doesn't lie in products," says MIT's Sheffi, because these can be reverse engineered relatively easily.
Rather, he says the challenge will be "to build an organization that can deliver operational excellence."
-Dow Jones Newswires; 44 (0)20 7842-9486; henry.teitelbaumdowjones.com.