The golden age of freight forwarding is finished. That is the assertion from Merrill Lynch in an investment note published last week which said to expect tougher competition, reduced profits and slower growth from here-on in.
Entitled “After the Golden Age”, it outlines Merrill Lynch’s opinion that “the structural growth story for the freight forwarding industry is being gradually undermined by changes in world trade patterns”. The drivers behind this change are a combination of the fall in the attractiveness of China for outsourcing, the resultant shift back to production in developed economies and the nature of demand in emerging markets.
The explosive growth in wage rates in China in recent years has weakened the previous appeal of almost unlimited cheap labour which led to the growth of Shenzhen in particular. In addition, the cost of labour in countries such as Mexico is now not much higher than that of China, whilst the attraction of relocating more complex operations to the US or Europe has also increased.
To compound this, the report suggests that servicing the new consumers in China and other parts of Asia will be less demanding in terms of transport. It is believed that the intra-Asia shipping lanes will become less profitable for both transport asset owners and forwarders than the deep-sea routes to Europe and North America.
Both factors undermine “the principal reason why global trade has historically grown faster than global GDP, the emergence of international supply chains”. With less global supply chains, there will be smaller profits for freight forwarders.
There is a further reason that forwarders will suffer in this new world economy. A combination of a tougher underlying market and fewer opportunities for increasing market share will shrink even the market leaders’ profit margins.
What Merrill Lynch has indentified is the continuing change in the dynamics of supply chain management in the world’s economy. This, all too often, half understood discipline was vital in creating the China growth story and underpinned the prosperity of global logistics service providers. Yet, it is changing again and yesterday’s winners may be tomorrow’s losers. Still the question remains, what will tomorrow’s supply chains look like and what role will transport play in driving their productivity?