Geopolitics, protectionism and emerging manufacturing hubs

In recent years, globalization has led to international supply chains becoming intricate networks, moving goods between regions, countries and continents. As businesses source materials and components from multiple suppliers around the world, supply chains are evolving to meet the changing needs of international trade.

The vulnerability of global supply chains was highlighted during the Covid-19 pandemic, and we are seeing further disruption caused by a reversal of globalization, protectionism, rising labor costs in emerging markets and a desire to reduce the environmental impact of long-distance transportation. Heightened geopolitical tensions and climate change can even result in port blockages and closures, as seen with the recent issues in the Suez Canal[i], forcing shipments to be delayed and rerouted, causing further disruption to logistics companies managing supply routes.

One of the biggest changes to global supply chains has been caused by a manufacturing shift away from China[ii], the global manufacturing hub of the 20th century[iii]. The US - China trade war, increased Chinese labor costs, and reservations over China's political and economic stability[iv] have spurred the emergence of regional manufacturing hubs in India, Thailand, Vietnam and Mexico[v], representing hot spots for growth.

India, in particular, has been a significant beneficiary of global companies diversifying supply chains under the “China Plus One” strategy[vi], driving inbound investment and M&A, as seen with CEVA Logistics recent acquisition of Stellar Value Chain, an Indian supply chain specialist, and Hapag-Lloyd’s acquisition of a substantial stake in J M Baxi Ports & Logistics Limited, a leading private terminal and inland transport service provider in India.[vii] We also expect the diversification of supply chains in Asia to accelerate M&A activity from global freight forwarders into India, Thailand and Vietnam.

In parallel, a similar trend is unfolding in Japan, where companies are actively seeking to expand beyond their borders, driven by population decline[viii], weakened local currency[ix], and the desire to capitalize on post-Covid-19 growth opportunities in markets like Asia, Europe and the US[x]. The combination of supply chain shifts and Japanese companies' overseas ambitions is likely to fuel further cross-border M&A activity across the region.

Climate Change

Climate change and the rising global temperature[xi] is another factor we see impacting supply chains, causing disruptions to transportation routes, production facilities, and crop yields. As a result, logistics companies increasingly need to develop more resilient and sustainable strategies to adapt to these changes. While climate and weather disruptions increase costs and complexity in some areas, they also present opportunities to establish new transport routes, increase revenues, invest in green logistics capabilities, and partner with niche providers focused on emissions optimization.

Logistics companies are also an essential part of the climate change solution, with technology driving improved efficiency in shipping (and reduction in carbon footprint).

Lineage Logistics, Maersk, CMA-CGM and DP World are part of a coalition of food logistics companies pushing for a reduction in cold storage temperatures from -18C to -15C[xii]. The coalition has reported that academic research evidence that raising the standard storage temperature of most frozen food by just 3C to -15 C could make a significant environmental impact[xiii]. It would be equivalent to removing 3.8m cars from roads per year, without compromising food safety or quality.

Population growth and wealth expansion

The global population is expected to reach 9.7 billion by 2050[xiv], up from 8 billion in 2022[xv].

However, this is only part of the story, with significant population growth, younger demographics, external investment and expansion of wealth predicted in Asia, Africa and South America, driving increased consumption.  

We expect this growth to open new trade lanes and increase demand for goods and services, putting pressure on supply chains to become more efficient and responsive.

Global carrier MSC and global logistics provider DP World are just two parties that have recently invested significantly into Africa, with their respective acquisitions of Bollore Africa Logistics for €5.7bn[xvi] and Imperial Logistics for $890m[xvii], significantly expanding their presence and service offering on the continent.

Source: United Nations, Department of Economic and Social Affairs, Population Division (2022). World Population Prospects 2022: Summary of Results. UN DESA/POP/2022/TR/NO. 3.

Technology investment

The growth of e-commerce giants such as Amazon and Alibaba over the last 10-15 years has significantly raised the bar for consumer expectations on speed, transparency and reliability, when buying and receiving goods.

With these demands, the logistics market has attracted significant invest in technology to track goods and shipments, to identify and mitigate increased risks to supply chains. Artificial intelligence (AI), automation, and other technologies are also helping supply chain managers to improve visibility, efficiency, and resilience. Significant investment has been made across the board from digital logistics and freight forwarders such as Flexport[xviii] and Forto[xix] to supply chain visibility and fulfilment software and technology companies such as Project 44, Shiprocket and Instacart[xx]

The fragmented nature of the supply chain, with numerous suppliers in Asia and a vast customer base across the globe, and the complexity of managing many intermediary steps, can pose significant challenges to maintaining efficiency and resilience. Technology alone cannot tackle these problems, with operational experience remaining critical to success. Companies that invest strategically in transformative technologies while possessing sound operational expertise will, in our view, be in demand acquisition targets.

Opportunities for partnership and consolidation

As markets scale and become increasingly complex, there will continue to be consolidation opportunities for regional transport providers that are scaling locally to service new manufacturing hubs. India's logistics sector is expected to be valued at $320 billion by 2025[xxi], driven by its growing manufacturing base[xxii], improving infrastructure, and favorable government policies. The return logistics market in the largest six economies in Southeast Asia, is expected to reach a combined value of $21.9 billion by 2026[xxiii], fuelled by its strategic location, increasing wealth, and rising internet penetration. In certain regions, these regional hubs offer trade and private equity the potential to consolidate fragmented local players into larger, more efficient businesses with a broader geographic reach.

In the past, port companies were distinct from terminal infrastructure companies and logistic service providers, though we believe integrated supply chains are blurring the lines between these distinctions. In our view, they now aim to deliver end-to-end integrated supply chain solutions by acquiring third party logistics companies. In 2022, DP World, traditionally a ports company, acquired Africa’s Imperial Logistics[xxiv], whilst in the same year, Maersk, the container logistics company, acquired LF Logistics, a Hong Kong-based contract logistics company, with premium capabilities within omnichannel fulfilment services, e-commerce, and inland transport in the Asia-Pacific region[xxv]. As shipping and ports businesses can be cyclical, acquiring businesses throughout complementary sectors in the global supply chain, can be beneficial with the aim to provide structural long-term growth and increased resilience through market cycles.

Private equity firms have traditionally been successful at consolidating fragmented local players into platforms with scale and synergies. However, thorough due diligence is essential to prevent investing in regional operators with weak fundamentals or inadequate execution capabilities. In India, rather than backing traditional logistics businesses, we have seen increased activity from private equity in tech-enabled aggregators. Demonstrating this trend, Shiprocket, Porter, Lets Transport, GoBolt, Onmove and Wizfreight are examples.

Trade parties are increasingly looking at investments and commercial partnerships rather than pure M&A to open up new geographies and expand service offerings, such as Shopify’s investment in Flexport and FedEx’s investment in Delhivery.

Surging social commerce and e-commerce activity

The rapid recent growth of social commerce (e.g. Tik Tok Shop) and continued growth of e-commerce presents opportunities for specialist e-commerce fulfilment platforms to leverage advanced analytics and automation enabling seamless omnichannel retail delivery. We expect continued interest in tech-enabled logistics e-comm fulfilment platforms serving online marketplaces and emerging social commerce businesses.

Last-mile delivery, omnichannel warehousing and returns management are key capabilities where start-ups are disrupting legacy firms, but the space remains competitive with corporate venture capital (CVC) arms of global powerhouses including Amazon and Shopify, seeking new supply chain partnerships.

The sector has attracted significant investment globally over the last few years, India based Delhivery, ECOM Express Xpressbees, Loadshare, Holisol, J&T Express (Asia) and Huboo (UK), to name but a few – with investors including global funds such as Temasek, Carlyle, Partners, Softbank,Tiger Global and Maersk Growth.

Labor shortages

The global supply chain struggled in 2023 under a critical shortage of skilled transport and logistics workers that led to widespread delays, disruptions, rising costs and uncertainty. This labor shortage resulted from pandemic impacts, an aging workforce, poor working conditions, and talent competition[xxvi]. In Japan particularly, new legal overtime limits taking effect April 1, 2024, in the transportation sector, restrict overtime hours to 80 per month and 960 per year[xxvii].

We anticipate this regulatory change will further strain existing labor shortages, reduce logistics profitability, and accelerate the adoption of technology within the industry[xxviii].

In addition, Japanese companies are grappling with mounting pressures, including the imperative to reduce CO2 emissions, rising costs due to inflation, rapid technological advancements, and the need to expand overseas as domestic demand recedes post-pandemic.

Consequently, we foresee increased domestic and cross-border alliances in Japan over the next few years, as companies are likely to merge to reduce costs and achieve larger scale.

Addressing the multifaceted global and local workforce challenges in transportation and logistics requires improvements to working conditions, targeted training programmes and immigration policies, adopting innovative technology solutions, and improving government policies[xxix].

A compelling case for M&A

In the long-term, we expect the Logistics sector to continue to attract significant investment from both trade and private equity given the significant global growth drivers underpinning the sector.

Whilst there is some short-term dislocation in certain parts of the market, trade buyers remain cash rich and keen to diversify and invest.

Private equity have historically invested successfully in the sector and there will be opportunities for them to consolidate regional supply chain providers and invest in technology to enhance efficiency, reliability and visibility.

Logistics is a truly global market, with different regions at different stages of maturity and facing different challenges and investment requirements. There is “no one size fits all” way to summarise the opportunities, but what is clear is that the global challenges we face over the next 10-20 years; climate change, conflict, shifting supply chains, global population growth and social commerce, will likely drive investment opportunities and M&A.

To discuss any of the themes in this piece further, get in touch with Robert Jones, Anil Ujwal and Shinji Hata.

DC Advisory has prepared this material solely for informational purposes and it is not a research report. This material does not constitute or form part of, and should not be construed as, an offer to sell, or a solicitation of any offer to buy, or any recommendation with respect to, any securities.

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