Once again, there is another mega acquisition within the transport and logistics industry. Last week, Denmark based DSV, currently ranked the sixth largest global logistics provider, agreed to acquire U.S. based UTi Worldwide for $1.35 billion. Previous acquisitions announcements involve U.S. providers acquiring European based firms, but this time, the tables are turned. For instance,
For DSV, UTi will be in biggest acquisition challenge, and when consummated, could increase DSV’s revenues by nearly 50 percent. The cash offer of $7.10 per-share represents a 34 percent premium over the 30 day volume-weighted average closing price of UTi shares. However, DSV has struggled of late with profitability, disappointing equity markets with its second-quarter financial results in September. The board of directors of UTi has already unanimously approved the agreement, but the agreement is still subject to approval by UTi shareholders.
According to business media reports, the combined companies will have geographic service presence in Asia, Africa, the Americas, Europe and the Middle East. The deal is further conditional on receiving regulatory approval and customary closing conditions and is expected to close in the first quarter of 2016.
This latest acquisition comes in the wake of the recent announcement by XPO Logistics in its intent to acquire Con-way Inc. for an estimated $3 billion, FedEx’s earlier acquisition of GENCO and Bongo International, and in its current intent for acquiring Europe based TNT Express. Earlier this year, UPS acquired freight broker Coyote Logistics.
At a recent transportation industry conference, FedEx Chairmen and CEO Fred Smith predicted even more acquisitions, attributing the current trend to slower growth prospects for the logistics and transportation sector. Smith further predicted more technological advances for the industry, which is another motivation for the current wave of consolidation.
With each major announcement, the impetus increases for other major logistics and transportation providers to seek acquisition moves to either lock-up capacity, geography services coverage or industry concentration. As Supply Chain Matters has previously opined, Industry supply chain leaders are already highly concerned with growing transportation costs, and now need to be even more watchful and diligent to the implications of these moves, especially if your current logistics provider is involved. Already, FedEx is receiving pushback from EU regulatory agencies to divest of certain TNT assets to make its acquisition deal work. UPS faced similar pressures on its prior, ill-fated attempt to acquire TNT. The problem this time is finding viable available European logistics providers to assume control of divested assets.
The landscape of global logistics and transportation services providers will continue to undergo significant changes in the coming months, With upwards of $4 billion already in play, the pressure for deal making will intensify as financing remains cheap. Industry supply chain teams need to stay aware of the many implications in relation to added services, technology and/or costs.
Such activity is not just limited to logistics services. Ocean container shipping continues ripe for consolidation. The large industry players are squeezing out smaller players.
If contract renewals are due, it is wise to include clauses that address the event of an acquisition or sale, and its impact on continued services and costs.
Last week’s incident involving the container ship El Faro and its encounter with a Category Four hurricane has surely touched and saddened our supply chain community.
The ship departed Jacksonville Florida on its scheduled route to San Juan Puerto Rico and was apparently sunk by the effects of Hurricane Joaquin. According to various reports, the 33 member crew ranged in age from early twenties to over 50. Only one deceased crew member has been found to date, along with some minor floating pieces of the ship.
Yesterday, the United States Coast Guard, after searching for six days, halted its search for any additional survivors, indicating that after its exhaustive search, it is unlikely that any of the crew members could have survived in open water.
Our thoughts and prayers go out to all those family members whose loved ones were lost in this tragedy.
We often take for granted the risks taken every day by mariners, cargo plane pilots, truckers, and all those who transport goods, large and small in order to support industry supply chain needs.
Thank you all for the work you do.
Supply Chain Matters and other supply chain focused media has called specific attention to the current wave of mergers and acquisitions impacting the global logistics sector. Yet, it is quite important that supply chain leaders pay close attention to the motivations of such actions, as well as the implications related to providing more one-stop services. Incorporating a logistics provider as an extension of complex and often changing supply chain business processes comes with an expectation that such a provider has the asset, process and technology enabled capabilities that can accomplish the job and meet operational milestones and performance measures.
The Wall Street Journal recently noted that there have been 10 major acquisition deals totaling $18 billion since early 2014. The most notable have been the recent XPO Logistics acquisition of Conway Way, FedEx’s acquisition of GENCO and Bongo International as well as TNT Express, and UPS’s acquisition of Coyote Logistics. Once more, there are strong indications that this trend will continue.
The primary reasons are that globalization, increased process complexity and impacts of online and Omni-channel fulfillment are motivating more and more firms to seek one-stop services or to outsource various value-added logistics processes. In essence, the third-party logistics (3PL) logistics business model is fundamentally moving toward the termed fourth-party logistics (4PL) model. Many supply chain and logistics professionals recognize the 4PL model as one that provides an extension of the customer’s current business process needs, including the integration of information and technology systems. However, the misnomer is that many 3PL’s who have shied from significant investments in technology and processes now look to acquisitions to quickly gain such capabilities.
But alas, the ability to be an extension of a customer’s business processes presents its own challenges, even for the largest and most savvy logistics providers.
The Wall Street Journal published a report indicating how aircraft jet-engine producer Pratt & Whitney’s production was stalled nearly a month because of issues at a UPS logistics center. (Paid subscription). Pratt had contracted with UPS to streamline its manufacturing processes and ramp-up production levels of its newly designed aircraft engine. Readers will recall that that Pratt’s new and more fuel efficient engine will power new aircraft models including the Airbus A320 neo. Pratt’s current customer booking stands at 7000 orders.
A UPS logistics center would receive parts from various Pratt engine suppliers and package them into kits holding 8000 parts and ship them to various final assembly production facilities. According to the report, the logistics center was beset with problems when it first opened in July that slowed Pratt assembly operations to a crawl. Kits were received with what was described as dirty, damaged or missing parts, prompting Pratt production workers scrounge among multiple kits to find a full complement.
Pratt and UPS quickly assembled dedicated teams to address these process start-up issues that included additional training as well glitches in inventory tracking software. The problems are now reported as resolved but Pratt’s production levels in August nearly came to a crawl.
Pratt’s parent is United Technologies and its CEO indicated to the WSJ: “It’s the ramp. The technology, I’m very confident we’ve got that right. But you’re only as good as your worst supplier. When you’ve got 8,000 parts in an engine, one of those parts aren’t there, you’re not building an engine.”
Pratt had turned to UPS to eliminate low-value work and avoid holding extensive inventory on its own books. The engine producer has a unionized work force and the WSJ report indicates that union members were not all that pleased with this new arrangement. Pratt transferred management of parts and inventory to an automated UPS warehouse system.
The Pratt story is somewhat of a typical example of what is currently driving the logistics industry today, along with the challenges for becoming the extension of an existing manufacturing, supply chain or customer fulfillment business process. The fact that a provider the size, scope and resources of UPS initially stumbled is indeed an indicator that beyond business growth through acquisition, the logistics industry has to concentrate on added technology and information integration capabilities.
Last week, FedEx formally reported its financial results that essentially missed Wall Street expectations. However, what is of more importance for supply chain teams anchored in online commerce is FedEx’s intention to raise rates on oversized packages related to B2B/B2C online commerce.
For the August-ending quarter, FedEx posted an operating profit of $692 million compared to $653 million in the prior year quarter. Operating margin improved from 9.1 percent in 2015 to 9.3 percent. Yet in today’s often volatile investment environment, this was perceived as a disappointment. The global parcel carrier primarily blamed weaker demand for its transportation services and increased costs for its FedEx Ground operating unit for the shortfall in expectations. That was in addition to missing expectations for its June-ending quarter as well.
Regarding its latest reporting, CEO Fred Smith was quick to point out that without the need to have to boost self-insurance reserves, the carrier would have met expectations. However, self-insuring is a cost of doing business, especially as FedEx places more emphasis on both its Ground segments, eliminating its last mile Smart Post dependency with the U.S. Postal Service, and in expanding 3PL services via acquisitions.
As we have noted in prior Supply Chain Matters commentaries, FedEx has been more exposed than its competitors to declining parcel air freight volumes emanating from China and other parts of Asia. However, operating income for the FedEx Express division improved nearly 45 percent in the latest quarter, a reflection that right sizing and modernization efforts direct at air assets has begun to provide positive results.
While global providers DHL, FedEx and UPS are all quick to point out that the exploding growth of online and Omni-channel commerce have changed the dynamics of transportation, they continue to exercise strategies to leverage additional revenues from these trends. The argument is that higher volume with lower average shipment value equates to added network and labor costs.
Of more importance was the announcement that FedEx Express, FedEx Ground and FedEx Freight will increase shipping rates an average of 4.9 percent effective January 4, 2016. FedEx is additionally increasing surcharges for shipments that exceed the published maximum dimensions (“unauthorized packages”) in the FedEx Ground network and updating certain fuel surcharge tables at FedEx Express and FedEx Ground effective November 2, 2015. Supply Chain Matters has thus far heard from an informed source that the unauthorized package surcharge is quite significant. According to the FedEx announcement: “The changes related to fuel and unauthorized surcharges are in response to changing industry demand dynamics, including increases in average package size and weight and increased residential deliveries.”
FedEx was the first global parcel provider to announce dimensional priced pricing starting this year. The argument was that higher cubed packages require added handling, logistics and transportation expense which FedEx was not being compensated for. Rival UPS quickly followed in announcing dimensional based pricing. Earnings announcements thus far from both carriers point to positive benefits from these rate increases.
The announced rate increases from FedEx will surely be similarly announced by UPS and perhaps other package carriers.
Last year, we noted that dimensional pricing implied a major revisit of packaging and transportation practices for bulky items as well as policies related to free shipping, the lifeblood of online commerce. Once more, while larger online firms such as Amazon and Wal-Mart have the scale and influence to push back on such rate increases, smaller firms or online consumers themselves have little leverage.
Survey data related to online consumers continually indicates that online shopping carts are often abandoned when shipping costs are deemed too expensive or free shipping is not offered. Once more, as the volume of online commerce continues to grow, it will involve the selling of even more bulky items.
To no surprise, many online consumers now opt to pick-up their online orders at local retail outlets, since this option often results in free shipping. The U.S. Postal Service has become a major beneficiary of added business from online retailers and that trend will continue until pressure for USPS profitability reignites on Capital Hill.
The most significant takeaway for industry supply chain teams is that there remains a discernible set of strategies on the part of logistics providers, carriers and transportation service providers to constrain available capacity while layering on additional pricing to boost individual balance sheets. Some providers will argue that rate increases are justified in order to make more expensive capacity and technology investments. Shippers and online providers will have to be the best judge and jury to the merits of such arguments. Meanwhile, a whole new wave of major acquisitions involving 3PL providers continues in the prize is increasingly locking-up capacity and customer logistics fulfillment contracts. The most controversial to-date has been the XPO Logistics acquisition of 3PL provider Con-Way Inc..
In the wake of the current environment, software technology and service providers who provide the added intelligence to help online firms, retailers and shippers discern the most cost-efficient transport channel option, along with recommending best packaging methods, will likely thrive.
During the holiday surge two years ago, UPS served as the butt of criticism for a last-minute breakdown in its delivery network. Last year, U.S. West Coast ports and longshoremen were widely cited for significantly impacting holiday business. In the coming months we may well observe a prominent online retailer as the headline victim of a far more expensive and capacity constrained package delivery transport network.
In the fall of 2014, Supply Chain Matters began to call reader attention to the notion that the U.S. Postal Service could well change the dynamics of B2C/B2B parcel shipping and online fulfillment strategies. The headline of 2014 was that the agency was aggressively cutting shipping rates and improving customer service in order to capture more of the shipping volume and package delivery revenues associated with online commerce. The agency was put to the test in the holiday surge of 2014, and again in 2015, and seems to have fared very well.
The agency has now formed a close relationship with Amazon as both have partnered to provide Sunday and same-day delivery along with finding more cost-efficient means for transporting packages to customer destinations. Amazon has deployed a network of package pre-sortation facilities which are then trucked to regional and local post offices for last-mile delivery. More of these Amazon pre-sort facilities will be deployed this year. When both FedEx and UPS instituted dimensional-based package pricing at the beginning of this year, the USPS became an important alternative for package shipping requirements.
In August, Bloomberg BusinessWeek featured an article reflecting on the ongoing USPS strategy under its new postmaster Megan Brennan and disclosed an estimate from Bernstein Research indicating that the agency handled 40 percent of Amazon’s fulfillment needs in 2014 amounting to nearly 150 million items. That compares to a Bernstein estimate of 15-20 percent of amazon volume handled by FedEx and 20-25 percent handled by UPS.
This week, China’s dominant online fulfillment provider Alibaba has also reached out to the USPS. A posting in Venture Beat indicates that the Alibaba logistics unit, Cainiao has signed a Memorandum of Understanding with the agency to “develop new international shipping solutions, and enhance the logistics service experience for both sellers and buyers involved in cross-border commerce.” The report indicates that Cainiao and the USPS have agreed to work together to speed delivery of merchandise sold through AliExpress and destined for online customers in the United States, and to help delivery networks globally, especially in Latin America. Such an agreement obviously opens the door for online Chinese companies to sell and fulfill orders directly with U.S. based customers.
The announcement is yet another opportunity for the USPS to become both a broader domestic and international player in the logistics and fulfillment of B2C/B2B online commerce and will probably lead to other efforts to insure online providers control shipping costs while continuing to innovate in last-mile delivery.
As we approach the annual peak period of global transportation over the next three months, there are additional troubling signs related to global transportation trends, trends that indicate more excess capacity remaining in ocean and air cargo, but continued restricted capacity within U.S. trucking.
Ocean Container Segment
Drewry Maritime Research recently reported that a the half-way point of 2015, east-west container trade was flat, and that the firm will likely be downgrading its global container traffic forecast for 2015 from 4.3 percent to roughly 2 percent in growth. Drewry pointed to some optimism related to Middle East traffic as a result of the possible lifting of economic sanctions related to Iran, causing the need for increased goods volumes. Keep in mind that many global ocean container carriers were previously forecasting global container volume increases averaging three to four percent, while adding more mega container ships to the global fleet. In August, ocean container carriers were motivated to significantly cut back on scheduling. The Wall Street Journal reported that freight rates at the time between Shanghai and Rotterdam barely covered carrier operating costs, hence the announced cutbacks. The WSJ noted that carriers were significantly reducing capacity to insure higher freight rates, in spite of dramatically reduced fuel costs. During that same period, industry leader Maersk Line revised its estimates of global container volume down to a range of 2-4 percent from the previous 3-5 percent growth estimate and vowed that it would defend and even expand its industry market share position.
The Drewry forecast downgrade comes in midst of the National Retail Federation’s (NRF) Monthly Import Tracker report indication that import cargo volume at the nation’s major retail container ports is expected to increase 1.2 percent this month over the same time last year as retailers head toward the holiday season. The Tracker reported that import volume was up 2.9 percent from June and 8.1 percent from July 2014. The Tracker indicated that inbound container volume for the first-half of 2015 totaled 8.9 million TEU’s, up 6.5 percent over the same period last year. That may be an indicator that retailers elected to position holiday inventories much earlier, given last year’s port disruption. The NRF further reports increased inbound U.S. volumes for September through November, but that number may be skewed by last season’s U.S. West Coast port slowdown. The NRF additionally notes that U.S. retailer inventories are “plentiful’ and that “Shoppers should have no worries about finding what they’re looking for as they begin their holiday shopping.” By our lens, reports noted above are an indication that ocean container volume will indeed level off for the remainder of this year.
Air Cargo Segment
On the air cargo front, the International Air Transport Association (IATA) indicated a decline in air cargo demand in July. IATA reported that disappointing July air freight performance was symptomatic of a broader slowdown in economic growth, most likely caused by a slowdown of activity in China and other Asia based countries. The news comes as passenger airlines continue to add more air freight, as IATA indicates that in July, available air cargo space expanded by 6.7 percent.
IATA’s CEO noted to The Wall Street Journal:
“The combination of China’s continued shift towards domestic markets, wider weakness in emerging markets, and slowing global trade indicates that it will continue to be a rough ride for air cargo in the months to come.”
On the U.S. surface trucking front, the American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index decreased 0.5% in June, following a revised gain of 0.8% during May. The soft June volume number was attributed to flat factory output and falling retail sales. However, the June, the index equaled 131.1 (2000=100) somewhat below the all-time high of 135.8 that was reached in January of this year. During the second quarter, the index fell 1.7% from the first quarter but increased 2% from the same quarter in 2014.
The ATA recently extended its U.S. Freight Transportation Forecast to the year 2026. The report forecasts a 28.6 percent increase in freight tonnage and an increase in freight revenues of 74.5 percent by 2026. However, the not so good news for industry shippers is a forecast indicating that the number of Class 8 trucks in use will grow from 3.56 million in 2015 to mere 3.98 million by 2026. That current demand-supply imbalance does not bode well for trucking cost projections. Factor the current building wave of acquisition activity among non-asset and asset based transportation and logistics providers and the picture becomes far more troublesome for industry supply chains that do not plan accordingly.
How different can the clock speed of industry business change occur- consider the current plight of the U.S. railroad industry. Last year, the industry was booming, and was strategically placed to take advantage of the explosion of new oil exploration methods occurring throughout North America. Crude transport by rail was the new phenomenon that restored profits and expansion for U.S. railroads.
The continued plunging global based cost of crude oil and sudden glut affecting global commodity needs has changed that dynamic dramatically.
Union Pacific, a major U.S. railroad recently disclosed that 2300 workers are currently on temporary layoff or alternative work status as that railroad initiated efforts to adjust its current cost structure toward lower transport demand needs. UP’s shipping volumes are down 4 percent year-to-date with reported declines in chemical, agricultural and industrial goods segments. Industry rival, Burlington Northern Santa Fe (BNSF) is now part of Berkshire Hathaway, and it may be some time before similar news leaks out regarding the effects of the declines in crude-by-rail shipments.
Reports concerning other U.S. railroads indicate similar trends with hundreds of idle tank cars now parked and idle after recently being utilized to transport dedicated crude-by-rail trains. Railroads are now reportedly pushing-back on end-of-year regulatory mandates regarding positive-train control and tank car safety upgrade initiatives. The U.S. rail industry now has a capacity imbalance related to commodity transport, the bread and butter of volume and profits.
Thus, as we approach that last three months of 2015, different capacity dynamics across global transportation lead to a similar impact and concern that being far more turbulence in global transportation circles in the months to come. Rest assured, these different imbalance situations will be included in our 2016 predictions for industry and global supply chains.
We want to hear from our readers on these trends. Is your organization currently concerned and is your organization actively planning contingency scenario? You can email your comments and feedback to: feedback <at> supply-chain-matters <dot> com.