On the Bubble

Will a recent boom in IT startups shake up the forwarding industry?

On the Bubble

Will a recent boom in IT startups shake up the forwarding industry?

On the Bubble

Will a recent boom in IT startups shake up the forwarding industry?

 
The tech bubble of the late 1990s has been lamented for all the dotcom casualties left in its wake, but it’s rarely celebrated for all the innovation it spawned. Simply put, much of the Internet-driven technology upon which businesses and consumers now rely is a direct result of that seemingly gilded era of IT investment.
    What’s interesting is that the freight forwarding industry seems to be going through its own cycle of IT investment at present. That’s not to compare it to the breadth of both ideas and overall funding that were directed at dotcoms 15 years ago. But there is a burgeoning group of IT-oriented forwarders and software providers aimed squarely at forwarders coming into the market, many of which are backed by private equity.
    Why the interest in this market? Clearly, these technology-oriented startups are aiming to capitalize on some key dynamics:
       
  • The proliferation of marketplace-based technologies in consumer markets.
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  • The demand for more intuitive business-to-business platforms that mimic the look, feel, and ease-of-use of commercial applications.
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  • The fact that millennials coming into the trade and transportation industries address workflow in a fundamentally different way than previous generations of workers.
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  • The attempt to “demystify” age-old processes like quoting rates, securing transportation capacity at origin, and generating customs documents.
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  • The coupling of transportation and trade compliance processes with functions like sourcing and supplier management.
    Not all the emergent technologies are attempting to address all of these dynamics, but most are addressing one or more. It all equates to a common theme: the forwarder market may be about to go through a very disruptive period.
    “We’ve seen a lot of startup activity and a lot more interest from players, whether it be freight forwarders, carriers, or shippers,” said Zvi Schreiber, chief executive officer of the cloud-based freight rate management and marketplace provider Freightos. “They all go home and shop on Amazon and eBay. Why should their experience during the day be any different?”
   Freightos this year compiled a list of nearly 30 startups targeting the freight market with either a direct service or marketplace model across various global and domestic transportation modes. Those companies have garnered more than $150 million in collective funding. Freightos itself secured an additional $14 million in funding from six equity groups in September.
    To put that total funding number in context, the cloud-based e-commerce visibility and execution platform GT Nexus (itself a product of the late 1990s tech investment boom) over the summer sold for $675 million alone. As further context, the supply chain design software provider LLamasoft recently received $50 million in investment from Goldman Sachs.
    But the sheer activity in the space—both the number of companies entering the market and the number of equity groups willing to back them—shows there’s keen interest. Forwarding isn’t necessarily an industry that requires technology transformation as much as it is one that needs modernization.
    At the top of the market, the biggest forwarders target large shippers with vast geographical footprints of owned offices or agent partners, capacity networks that crisscross the globe, and technology-backed services from order and supplier management to trade compliance.
    Much of the technology being developed by startups is addressing a tier or two below that large established global shipper-forwarder nexus. The startups see that broad mid-market category as underserved or overlooked.
   “I started thinking, what does a midsized freight forwarder need to manage their business, to compete with the big guys?” said Alex Ruf, founder of Centrolene, a Singapore-based startup that’s aiming to bridge the two areas where midsized forwarders tend to struggle (technology and agency network development). The company’s network, which launched in September, is a fee-based single platform that concurrently provides users with modern internal and customer-facing solutions and access to a network of like-minded forwarders in different countries.
    The essence of Centrolene is marrying modern applications with a partner network that can help those companies offer service breadth and depth.
    On the other side of that coin is Flexport, a cloud-based freight forwarder built around its technology. While CEO and founder Ryan Peterson said his company is “closer to a freight forwarder than a pure software company,” his ethos is that the industry is in need of IT disruption.
    “We thought about this as if a major forwarder started the company from scratch today, what technology would it build?” Peterson said. “There’s not a software layer that can come down and change the industry.”
    Flexport in many ways looks like a software company. It’s based in the San Francisco Bay area, where Peterson has brought in a bevy of hand-picked developers to write code and algorithms designed to make the process of securing capacity and providing visibility more straightforward and intuitive for shippers.
   “The goal is to use technology to improve the customer experience and reduce costs,” he said. “You reduce price through being more efficient. We’re not trying to drive down rates. We want to free up people from doing mindless data entry.”
    And that’s a key distinction. How or if these startups impact costs and rates will be key to how they’re perceived and accepted by the market.

Costs Vs. Rates. Freightos and other startups aim to build robust freight rate marketplaces that allow forwarders to provide public quotes in a dynamic way. Will forwarders see this ability as a good thing or a bad thing? That depends on whether they worry whether rate marketplaces might have a corrosive effect on prices, or if it will help them tap into new categories of customers they couldn’t (or didn’t want to) reach before.
    Of course, rates are different from costs. Technologies that enable forwarders to better understand their cost structure, or help minimize costs, are increasingly vital in a market where rates will simply become more transparent. That horse is already being let out of the barn, thanks to Freightos, CargoSphere (an established rate-sharing network solution that is building its own marketplace), and other startups that are working backward from the idea that freight procurement ought to more closely resemble how people buy goods or plane tickets on line.
    Again, these developments are largely aimed at mid-market shippers and those forwarders serving them. As such, the startups are often focused on specific applications, like Weft, a container visibility tool, or Haven, a marketplace where shippers can bid on available container slots. Others, like CargoChief or Globatom (covered in the October 2015 issue of American Shipper), are designed to be more end-to-end solutions. Some are aimed directly at the forwarders, while others are out to disrupt the current forwarder model.
    The transportation and logistics consultancy Transport Intelligence argues that emergent technology—particularly cloud-based systems—will have an indelible impact on all categories of forwarders. In a report released in late September, The Future of Logistics – What Does the Future Hold for Freight Forwarders, Ti posited that:
       
  • Independent forwarders need to leverage new technology to compete with market leaders.
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  • Forwarders will continue to develop value-adding services to expand their business proposition, but need “cloud-based,” highly functional systems for control, visibility and flexibility.
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  • Market leaders need to be more agile and fast-moving to maximise the many opportunities which exist and overcome the problem of legacy systems.
    “What does this mean in terms of technology requirements? At the (small and medium-sized) forwarder level, technology solutions will need to be quick and easy to implement, providing much higher levels of end-to-end visibility,” the Ti report said. “At the other end of the spectrum, logistics giants will also need to adopt cloud solutions that remove the need for huge internal support functions. These solutions will require the capability of adding broader logistics services as and when required.
    “So who will win out in this battle between the independent forwarders and the logistics giants? It is clear that scale can be a help but it is also a hindrance in terms of agility and the implementation of innovative technology solutions. However for independents to prosper they will need to become smarter in order to succeed, grow and lock in customers. This means that they must exploit the opportunities that the democratization of technology has brought about as well as using the experience, expertise and decision-making capabilities of their greatest assets—their employees,” the report added.

Large Shipper Relevancy. It begs the question: which type of shippers are being drawn to forwarders powered by cutting-edge technology?
   Peterson said his typical customers tend to be “companies who have grown so fast their supply chain infrastructure hasn’t been set up to manage the growth. That’s usually a mid-market shipper (between $2 million to $500 million in revenue). They’re high margin, they have a brand. They’re producing in China (where 80 percent of Flexport’s shipments originate). A lot of high-tech and consumer electronics companies. Well-funded startups. Companies like fast fashion that value inventory turns. Companies that are open to new solutions.”
    But do these startups have relevancy to larger shippers and the global top 20 forwarders that serve them? Most likely yes.
    For one, Freightos already serves companies like CEVA Logistics, Hellman Worldwide Logistics, and Nippon Express.
    For another, the empowerment of midsized forwarders on platforms like Centrolene’s figures to arm them with tools that allow those forwarders to compete in a real way with the technological might of the biggest forwarders. Imagine a forwarder of that size being able to offer transportation control tower capability, connected to an agency network that mirrors the global footprint of a top 20 forwarder, with customer relationship management and profit management tools, all aligned to the nimble characteristics inherent in smaller businesses.
    Indeed, forwarder technology startups are trying to take advantage of the fact that many top-end forwarders are perceived to be sitting on a complex cluster of systems that lack true integration. Some of the largest forwarders are dealing with multiple systems, or legacy systems, or a mix of the two problems, due to acquisitions or entry into new markets or services long ago. It’s just the nature of running a massive, multinational operation that there will be legacy systems, and multiple instances of systems, and near-constant integration.
   One other, more basic way that the tools from these IT startups may impact larger forwarders and shippers is simply rate transparency. If mid-market forwarders are providing public rates for mid-market shippers in a marketplace environment, large shippers can have access to those same rates. Will these marketplaces percolate up to that large shipper category?
    While Flexport is not a marketplace, Peterson said he has seen the size of the customers he serves gradually grow. Maybe that doesn’t mean a multibillion-dollar company migrating its transportation spend to Flexport overnight, but it could mean that same company switches a portion of its capacity requirements to Flexport to see if the platform reduces cost and improves efficiency.
    Peterson said a big part of the value proposition is analytics, a development certainly not restricted to the new breed of startups impacting the forwarding space. Long-established shipment management solutions providers like Descartes, CargoSmart and INTTRA provide these key tools to forwarders to varying degrees around different metrics.

Rise Of APIs. But Peterson argues the clean slate of technology from which his company is working provides more actionable data.
    “There’s no integration required,” he said. “We have a modern API (application programming interface) that some of our customers prefer to integrate.”
    He said freight movement networks have to migrate to APIs (covered in detail in the October 2015 issue of American Shipper) instead of relying on electronic data interchange.
   “EDI is an API—it’s just a really bad one,” he said. “It’s one-way and not very flexible. That’s why the modern API structures are better. A lot of forwarders’ systems are restricted by older software where EDI is required. But APIs provide an open way for your supply chain to communicate with your sales, marketing, and sourcing teams.”
    Peterson is focused on bringing benefit to the carriers from which he secures capacity, not just his shipper customers.
    “There’s little yield management technology in ocean carriers compared to airlines,” he said. “We want to build tools that provide value to both sides.”
    Schreiber said Freightos’ relevancy will only increase as shippers, forwarders, and carriers move away from procurement cycles that aren’t applicable to modern demand patterns.
    “The once-a-year thing is losing dominance,” he said. “Annual tenders are only for part of what [shippers] do. People’s supply chains are dynamic. No one can sit down and predict their shipping one year ahead. Product cycles are quicker. Suppliers change. You have to respond to disruptions.”
   Schreiber noted that “shipping isn’t different from other industries,” citing the example of how generators of electricity have a base load they have to produce, and then they have to adjust further production based on dynamics like weather patterns or the time of night people tend to turn off their lights
    “Every industry has this—the base load and the dynamic part,” he said. “Over time that dynamic part becomes bigger because the world is becoming more real-time. Walmart will always have the base 100,000 containers from China. But the part not planned a year in advance will grow.”
    That type of change is representative of the way this group of startups is attacking changes to global transportation and end-to-end supply chain management. Globatom, for instance, is designing its platform to link supplier quality assurance audits to trade compliance and transportation procurement and management. That’s similar to the model that the global trade management software provider Amber Road uses to target its major, multinational shippers that want more than a compliance point solution.
    In that way, Globatom founder Daniel Acosta sees his platform as a replacement for the current forwarder model, a tool that demystifies some of what forwarders do at origin. Acosta said he believes Globatom will eventually become a forwarder as well, procuring capacity from carriers but enabling shippers to leverage its technology to handle the shipment arrangements they typically handed off to forwarders.
    So, what does this mean for established forwarders big and small? There’s a school of thought that there really is enough business to go around. That much of what this startup technology will facilitate is the movement of mid-market forwarders and mid-market shippers from a “no-automation” environment to an automated one, and big shippers will still lean on big, global forwarders. A corollary to that thinking is that these midsized companies have the chance to race past their bigger counterparts in terms of technological prowess by employing modern systems to their fullest.
   The other line of thought is that of all the startups to appear, a handful will actually survive and prosper and those companies’ technologies will truly be disruptive, the way Amazon has been in the retail space (and, increasingly, in the logistics space, where Amazon acts as the world’s biggest startup itself). If that scenario occurs, the large, global forwarders will be indelibly affected, either because they’ll be purchasing a startup to acquire technology, or because a new emergent technology will displace their model and cost them business.
    Either way, forwarders would be wise to keep track of developments in the startup environment, whether it be mass migration to rate marketplaces; the rise of API-led, cloud-based forwarders; or platforms that seek to make the global shipment management process more intuitive and less mysterious.
    We may be in the midst of a forwarder tech bubble, but like 15 years ago, the bubble won’t burst for everyone.

This article was published in the November 2015 issue of American Shipper.

On April 2, 2019, Gambia became the 22nd country to ratify the African Continental Free Trade Area, meeting the minimum threshold needed for the agreement to move forward. 

The U.S. international trade goods and services deficit was $49.4 billion in February, down $1.8 billion from January's revised figures, according to U.S. Census Bureau and the U.S. Bureau of Economic Analysis.

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On the Bubble

Will a recent boom in IT startups shake up the forwarding industry?

on Oct 17, 2015AmericanShipper.com