What will 2017 bring for logistics startups?

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Logistics startups are forecast to enjoy a robust year of growth in 2017, given patterns of development from 2016. With supply chains constantly changing as new rules, technologies, resources and market trends transform operations, analysts say there are six primary factors impacting development of the sector.

As the growth markets of the Indo-Asia Pacific continue to maintain their growth narrative and mature, logistics is likely to be a growth sector and source of opportunities for entrepreneurs and corporates seeking to innovate.

Moreover, these shifts coming at a time when manufacturing is slowly but steadily migrating out of China – which is moving up the value chain and shifting towards being an engineering centre – to outlying countries in South America, Southeast Asia and along the the rims of the Indian and Pacific oceans.

With the international system usually favouring low-wage, high-growth countries producing basic and inexpensive manufactured goods – a historical pattern repeated by Japan, South Korea and Germany prior to China – it is crucial to contextualist Chinas’ rise 1980s and 1990s.

This was a period of robust economies, with a surging demand for cheap manufactured goods. The 2010s present a different economic environment; China is heavily investing in automation and robotics, with the country set to become the world’s “automated factory.

These developments will impact how logistics startups for the foreseeable future, with the short-term impact (i.e. 2017-2020) potentially seeing increasing investment in logistics startups, as well as established logistics companies potentially innovating in order to remain competitive, leveraging on their large and established customer base and core strengths in the logistics space.

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Logistics developments follows manufacturing geographies

According to George Friedman of Geopolitical Futures, with manufactured consumer goods being labour-intensive, cheap consumer goods such as clothes  require that labour costs be kept low; lower profit margins translate to less competitive products. With this in mind, much of China’s manufacturing is expected to migrate to countries along the Pacific Rim and along the Indian Ocean rim.

China's manfacturing successors. Credit: Geopolitical Futures

The rise of wages and living standards in China means that related manufacturing is migrating to destinations with lower labour costs. In South America, countries such as Mexico, Nicaragua, Peru and Paraguay will emerge as manufacturing destinations, spurring investment in their transport and logistics infrastructure.

In the Indo-Asia Pacific region, African countries such as Ethiopia, Mozambique and Kenya will see a similar surge in investment into these sectors. But the ones that will see a continuing benefit in the long term are destinations such as Bangladesh, Myanmar, Vietnam, Cambodia, Indonesia and India.

What spurred the manufacturing growth of Japan and China was the production of basic consumer goods such as textiles, footwear and personal electronic devices. This is likely to be repeated with the aforementioned countries, thought India and Indonesia hold particular advantages with their large population bases and generally low incomes, while being in proximity to China’s One Belt, One Road (OBOR) infrastructure network.

As a result, these manufacturing movements are likely to see corresponding shifts in the logistics sector, which will shift to reflect this.

Also Read: Asian VC slump a return to more rational funding levels: Anand Sanwal, CB Insights

Global logistics trends

There are several factors shaping developments in the global logistics sector. These range from regulations and the growth of e-commerce driving an increasing need for greater storage capacities to keep up with rising consumers demands to increasing automation in warehouses, as well as political factors.

In addition, corporates may also seek to take control of its supply chain through in order to increase oversight while also securing and maintaining internal synergies.

With the various developments in the logistics space, third-party logistics (3PL) and fourth-party logistics (4PL) players, in addition to logistics SaaS-providers, are likely to emerge as companies embrace more horizontal supply chains. .

A Forbes content piece observes that beyond just e-commerce and increasing automation affecting a growing number of industry verticals and reshaping the logistics industry, emerging phenomena such as the digital supply chain, supply chain control tower and politics are also shaping logistics trends.

A specific political factor likely to reshape global logistics is the Trump factor. In an exchange with Logistics ViewpointsToby Brzoznowski, EVP at LLamasoft, a provider of supply chain design software shared: “Companies for better or worse are forced to be global on both the supply and demand side of their businesses. Supply chains are extended globally as well. To compete, companies have to continuously trade off service and costs. The ones that do it best are walking the finest of lines. Anything that could disrupt that balance is a major risk.”

This is predicated on the introduction of new trade policies by Trump. whose election win is a disruptive event for the logistics sector. Brzoznowski opines: “Any new administration creates uncertainty. The most recent campaign promises on tariffs – and on providing incentives to get companies back to U.S. – have already put global companies into overdrive, examining their options and determining how best to redesign their supply chains.”

Data from New York-based venture capital database CB Insights suggests that “well-capitalised companies are concentrating on e- commerce logistics enablement or on- demand delivery services,” with a number of startup ventures focused on developing tech- driven marketplaces for international freight forwarding as well as trucking. This correlates with a report that Amazon is building an on-demand trucking service.

Also Read: GIC-backed Global Logistics Properties launches $620m fund

Startup investment patterns

In an October 2016 webinar, CB Insights analyst Kerry Wu, who focuses on automotive, transportation, and logistics tech, and whose previous experience included a stint as a management consultant at Simon-Kucher & Partners, noted that data compiled by CB Insights indicated that supply chain & logistics tech funding had reached $8.4 billion across 938 deal since 2012.

Investors have been steadily increasing their exposure to this space,with annual deal volume and funding rising every year since 2012. CB Insights defines whit particularly category as “private companies that use software to improve efficiency across the supply chain and logistics ecosystems, excluding vertical-specific (e.g. grocery delivery) on- demand companies.”

Annual financing of logistics and supply chain startups until 19/10/2016 This growth in funding until Q3 2016, where deal volume grew to 100 transactions, is the highest quarterly deal count on record and roughly 8x the quarterly activity seen in the beginning of 2012. According to CB Insights data, Two of the last three quarters have reached over $1 billion in funding, fuelled by Asian mega- rounds.

Following a 2013 spike, early-stage (seed to Series A) investments have consistently accounted for in excess of 60 per cent of total deal volume in the space. Meanwhile corporate minority stakes and convertible notes constitute a sizeable share of deals that fall outside of early-stage financing, with a tilt towards late-stage rounds of the Series D and Series E stage.

A notable corporate participant in the latest wave of funding rounds is UPS and its UPS Strategic Enterprise Fund, which has invested in a number of startup ventures.

This comes at a time when many startups founders are seeking to disrupt and innovate a range of services traditionally associated with logistics giants like FedEx and UPS. This is seeing those ventures “applying technology, mobile platforms, and on- demand concepts to lower costs, increase flexibility, and streamline operations.”

In addition, CB Insights data indicates that the Series E+ share in particular reflects large private equity investments, such as the Chinese firm Best Logistics’ $760 million round in September 2016. This specific development reflects how corporates and corporate venture capital (CVC) participation in supply chain & logistics funding has grown, with Chinese logistics companies being heavily such as saw Fosun and Alibaba affiliate Cainiao being involved in the Best Logistics deal.

Quarterly financing of supply chain and logistics startups since 2012 Asian megarounds for 2016. Credit: CB Insights

2017 is likely to see an increase in other segments of the logistics market as well, such as the telematics startups focusing on fleet management, safety, and efficiency for commercial trucking; mobile platforms offering logistics brokerage services with enhanced performance measures, and algorithmic matching; as well as the rise of investment in startups using drones for last-mile delivery services.

Meanwhile, 2017 is likely to see a continuing trend of supply chain & logistics exits involving acquisitions with a smattering of mid- size IPOs. Annual exit totals have also steadily risen since 2012, with 2016 on pace to continue this trend at the current run rate. Since 2012, there has been a series of entrepreneurs making exits in deals worth more than $500 million involving both acquisitions and public offerings.

Supply chain & logistics exits tel 2016. Credit: CB Insights

Spanning companies in segments ranging from warehouse automation to supply chain management platforms, current trends suggest a sharpened focus on last-mile logistics involving drones, logistics automation and SaaS services in Asian markets, which will be the focus of investment in coming years.

SaaS startups are likely to proliferate in the developed economies of North America, Europe, Japan and China, given that infrastructure there is more mature compared to emerging markets elsewhere in the world.

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