2008 Set to Be Challenging Year for Logistics Industry

Effects of credit crunch to put increased pressure on 3PLs' margins, but shippers can make moves now to improve chance of future success, Datamonitor reports

London — February 22, 2008 — Logistics companies are set to have a difficult 2008 as the fallout from the global credit crunch puts increasing pressure on margins in the logistics sector, according to a new report by market analyst Datamonitor.

The report, "State of the Industry — Logistics" highlights several trends outside the macroeconomic environment that are set to have a large impact on the industry. According to Datamonitor, companies can make strategic moves now that will not only improve their chances of surviving but also maximize their chances of reaping potential future rewards.

Economy on a Knife-edge

The just-ended 2007 was indeed a year of two halves. In the first six months, the major concern for the global economy was that it would overheat through its rapid expansion, driven by continued consumer spending in the larger economies. However, the crisis over the U.S. subprime market rapidly tightened the tap on the liquidity market, quickly dampening global optimism.

The U.S. economy has been hit particularly hard. While it is not technically in a recession yet, there is no doubt that the economy has slowed considerably since mid-2007. This has had an adverse effect on confidence around the rest of the world, particularly in countries that rely on the U.S. market for trade, such as Japan. Coupled with fears over inflation in China and the continued rise in oil prices, the short-term outlook is for a global economy on the proverbial knife-edge.

"An outright global recession is unlikely, but what is fairly certain is that 2008 will be a harder year for consumers in the larger economies in the world and as such this will have a knock-on effect for the logistics market," said Chris Morgan, lead analyst within Datamonitor's logistics and express division and author of the study.

Slowdown Yet to Fully Hit Logistics Industry

Although the credit crunch began to squeeze global markets in the second half of 2007, this has yet to fully filter through to consumer spending and subsequently to the financial results in the logistics sector. Consequently third-party logistics players (3PLs) recorded healthy increases in both revenue and operating profit during the year.

However, operating margins are still at low levels. Datamonitor's report shows that the average across the companies analyzed was a mere 3.5 percent. While this is an improvement from 2006, it is still an unsustainable level for the industry in the medium to long term.

Indeed if the global economy does falter, this could well lead to a fresh wave of consolidation in the market as companies struggle to survive. Consequently, it is vital that 3PLs move now to fully capture the trends that are set to drive the market in the future, given that there is little they can do about the macroeconomic environment.

Significant Trends Ahead

The global logistics landscape is set to change. Technology will play an increasingly important role, and radio frequency identification (RFID) will eventually be seen as a standard product offering. The environment has rapidly risen up company agendas, requiring 3PLs to examine their green supply chain options.

There will also be a shift in geographic focus: While China will still enjoy its position as the main manufacturing region in the world, other areas of the globe will eat away at its market share. This will further diversify supply chains and increase the demands made by clients on logistics providers.

3PL costs are also set to rise due to the continued high oil price and coupled with any slowdown in economic growth this will result in companies seeking new ways of creating competitive advantages in order to capture market share. This will cause 3PLs to analyze the option of setting up collaborations with both their customers and their competitors, as well as considering their ability to make strategic acquisitions in the market.

"While the top companies have seen revenue increase in the past years, not all of them will survive in the medium term as the market consolidates. This is inevitable given its current structure." says Morgan. "Those that survive the next phase of the logistics revolution will be the companies that have a solid grasp of both their own capabilities and the market situation, particularly in relation to their customers, which will help them be proactive rather than reactive in identifying and exploiting market opportunities."