Trends in Global Trade: 3PL Executives’ Perspectives

This is part of a series of articles based on panel discussions held during the 2019 Harris Williams Transportation & Logistics Third-Party Logistics Conference. The conference explored key trends in the space and the opportunities they are creating for 3PL companies and their prospective buyers. Note that the panel participant opinions expressed in this article do not necessarily reflect the views of Harris Williams.

Global commerce continues to be in the spotlight, with the ongoing trade tensions between the U.S. and China, the world’s two biggest economies, being a particular focal point.

At the 2019 Harris Williams Third-Party Logistics Conference, a panel of four international supply chain professionals provided their insights on the current environment. Is global trade slowing? What impact are U.S. tariffs on Chinese goods having on commerce? Why are some manufacturers moving production out of China? And what can 3PLs do to protect their businesses during uncertain times?

Moderator: Lee Clair, 3PL executive
Panelists: Rich Bolte, BDP International; Gordon Branov, Pilot; Dante Fornari, Magnate Worldwide; and Keith Tholan, AIT Worldwide Logistics

Key Takeaways

  • Ongoing global trade issues are creating growth opportunities for 3PLs that can help their customers address new supply chain challenges.
  • Technology plays a vital role in maximizing these opportunities while minimizing the challenges. Panelists identified several ways they can apply technology to improve their businesses and provide the help customers are looking for.
  • 3PLs that can help international shippers respond to the global dynamic environment can make attractive targets for investors.

Global Freight Volume: Trending Up or Down?

Panelists are united in the belief that ongoing trade tensions between the U.S. and China, related tariffs and other factors have fostered uncertainty in the global economy.

20193pl-2.jpgFor instance, the burgeoning alliances among ocean carriers have caused concerns among those involved in ocean shipping that what is effectively a monopoly may restrict competition, dictate pricing, and limit shippers’ options. The International Maritime Organization’s new emissions standards designed to significantly curb pollution produced by the world’s ships, due to go into effect January 1, 2020, have resulted in ships being taken out of service to be refitted and a consequent drop in shipping capacity.

In contrast to the ocean market, which one panelist characterized as “mostly resilient,” air freight was described as encountering some turbulence: Air freight volumes have declined for several straight months, with much of that drop attributed to shipments from Asia Pacific. And China’s response to the Hong Kong protests and the disruption of the Hong Kong airport are making many companies think about the longer-term consequences for one of the world’s biggest air cargo ports.

“Air freight volume—eastbound and westbound—historically has primarily been driven by high-tech manufacturing,” noted one panelist. “And when you look at some of the key indicators of high-tech traffic and volume in and out of China, those indexes have been trending down for several months. Additionally, the latest report on the industrial manufacturing indexes also identified continued downward trends in manufacturing.”

Providing a backdrop to these figures is the possibility of an economic downturn. “Industrial manufacturing has shown some signs of weakness, as well as pockets of strength, said a panelist. “Strong consumer spending driven by higher disposable incomes and consumer confidence are supporting the economy.”

Alternatives to China

Do these indicators represent a temporary shift, or are they signs of a more permanent, structural shift in sourcing and trade flows? Panelists generally believed that many of the shifts are permanent and, in fact, began well before the U.S.-China trade tensions began. “A lot of people think that tariffs were the main driver of some of the shifts in sourcing and trade flows, and that’s simply not true,” one panelist observed. “There were some industries that were already on the move prior to the implementation of tariffs—to places like Vietnam, Thailand, Malaysia, and Indonesia.”

According to the panelists, companies that are moving out of China, or at least considering it, have been spurred largely by the country’s dismantling in 2005 of its industrial zones for low-value manufacturing (but not high-tech manufacturing, which China values highly). This action eliminated the incentives that attracted companies to China in the late 1980s and early 1990s. In other words, the shift out of China has been going on for more than a decade, and the tariffs merely helped accelerate it. “Even if the tariffs are eventually resolved, it won’t stop the shift,” predicted one panelist.

But, as panelists pointed out, moving out of China brings its own potential problems—namely, capacity and infrastructure concerns, particularly in Southeast Asia, where the infrastructure today is roughly analogous to China’s in the 1990s. And for some companies, moving isn’t really an option. Take, for example, chemical companies. The typical chemical plant, a major investment, is built to run for decades. Thus, a company isn’t simply going to move its production from China to Vietnam. Similarly, a company in China with a 10-year manufacturing contract with a Chinese customer can’t easily walk away from that commitment.

But it’s not just Southeast Asia that’s in play. One panelist suggested the biggest winner in the shift out of China over the long term is Mexico—especially from a U.S. manufacturing perspective—because of Mexico’s advantages over countries such as Vietnam. “It has better infrastructure, it’s geographically connected to the U.S., and it is still relatively inexpensive to produce there,” explained one panelist.

Another panelist noted that there’s an additional factor out there that could have a far bigger—and lasting—impact on global trade than the current trade tensions: the U.S. withdrawal from the Trans-Pacific Partnership Agreement (TPP). “By withdrawing from TPP, the U.S. potentially set in motion a shift in global trade flows that could have long-term impact.”

Opportunity in Transition

While acknowledging there’s a fair bit of chaos in the current geopolitical situation, panelists believe there’s always a silver lining for their business as long as they think beyond what they currently provide. They noted that today, many of their customers must adapt to an ever-changing global environment and do things differently than they did a year ago, or two years ago or even three months ago. And they’re looking for a partner that can be agile and nimble, that can anticipate changes, and that can help support them and work through change. 

“In general, our view is that in chaos there’s opportunity,” explained one panelist. “And since we’re in an environment where uncertainty is in great supply, there is a tremendous amount of opportunity for us—especially when you think about the important role we play. We’re not just freight movers and freight forwarders and customs house brokers anymore. We’ve been able to reinvent ourselves and create new solutions for new pain points that are guaranteed to occur when huge dislocations present themselves.”

Technology plays a vital role in maximizing these opportunities while minimizing the challenges. Panelists identified several ways they can apply technology to improve their business and provide the help customers are looking for.

One huge opportunity is to use technology to boost visibility across the supply chain. Better visibility has always been something shippers look for, and it’s even more critical now given the changes and disruptions happening in global commerce. “Global providers that don’t have a tool to allow visibility can’t even get into the game,” said one panelist.

Another big opportunity is to more effectively harness data to generate deep insights and drive better business decisions. “There are many avenues for business model change through business intelligence, data analytics, and the predictive use of data,” noted another panelist.

A third is to automate manual, time-consuming processes and interactions with customers to make the company more efficient, as well as to enable customers to get the information they need much more quickly and make it easier for them to communicate with their provider.

Regardless of the technologies they’re pursuing, panelists indicated that when considering solutions, it’s critical to always keep in mind how specific technologies and capabilities can provide a platform for growth—something that can help them scale and that gives them the visibility and connectivity across the supply chain required to excel in today’s environment.

“I’m very confident that the future of our industry will be characterized by customers having a massive amount of visibility and control over their supply chain at every single level,” said one panelist. “And if they can find a partner that can help deliver that visibility, and bring creativity and solutions, that partner will continue to grow in this environment, and even in a downturn, whenever it eventually occurs.”

Conclusion

There’s no doubt that it’s a challenging time for shippers and carriers as they try to navigate their way through global uncertainty and volatility. But that creates plenty of growth potential for 3PLs that can maintain a sharp focus on delivering what their customers need—and, by extension, significant opportunities for investors as well.

“3PLs are in an ideal position to help international shippers figure out their short- and long-term supply chain plays, which will enable them to respond to today’s dynamic global environment and prepare for the future,” said Frank Mountcastle, a managing director in the Harris Williams Transportation & Logistics Group. “Those with the vision and determination to continue to evolve with the demands of the market can make very attractive targets for investors.”

Read more from the 2019 Harris Williams Transportation & Logistics 3PL Conference:

 

Published December 2019