The Business of Logistics Tech
At Mount Parker Ventures we have made logistics tech a core focus of our fund and we also run the KineticOne accelerator for logistics startups. One question I’m always asked is why we choose to focus on the sector and why we are so positive about its potential. Here I outline the core reasons we are so positive on logistics-tech in Asia.
Market Size and Lack of Investment in Technology
The logistics industry is in the top three industries by size in every SouthEast Asian country. However, the level of investment in logistics-tech startups has lagged other sectors such as finance. For example, in the last five years, eCommerce and FinTech startups have each closed over 1500 funding rounds, whereas logistics companies have only had 400 funding rounds.
This lack of investment has meant that startups entering a sector of the logistics market often face very little competition (with the notable exception of last-mile delivery) and have
More important than the overall size of the market is the structure of the logistics market. For example, in Singapore alone, there are over 7000 logistics companies and 80% of trucking companies have under ten trucks. The result is often an extremely inefficient market, in Singapore for example, over 50% of haulage trips are empty. These market inefficiencies are ideal for technology solutions to aggregate supply and demand and provide insights and guidance on operational efficiency.
eCommerce is SouthEast Asia is currently growing over 50% year-on-year and still only accounts for less than 3% of retail sales. There are two pillars that support eCommerce – finance (primarily payments) and logistics. In our opinion, the opportunity for early-stage investing in payments startups is limited since several well-financed payments companies are already established in each market, the same is not true of logistics where (apart from last-mile delivery) there are few large well-financed startups. For example, warehousing is an essential component of the eCommerce supply-chain, however, most warehouses have very limited technology to assist in stock management or to integrate the storage with last-mile delivery.
eCommerce also puts very different requirements on the logistics network. eCommerce loads are smaller and more frequent, and thus more expensive and complex than the traditional FTL/FCL (Full-Truckload / Full Container Load) model. Technology is an essential component of eCommerce logistics both to manage costs and increase supply-chain flexibility.
Deliveries were previous a low-priority function for most retailers and manufacturers. eCommerce has dramatically changed this, with delivery now being a key issue for customer satisfaction (over 40% of all product reviews on Asian eCommerce sites are for the delivery experience as opposed to the product itself). Customers are now demanding fast, low-cost deliveries and granular order tracking and eCommerce vendors will need to make extensive use of logistics-tech to fulfill those demands.
Low Profit Margins
The low margin nature of the logistics industry provides an opportunity for startups to provide cost-saving technology solutions. In trucking, for example, profit margins in Asia (ex-China) have declined from 30% in 2007 to just over 10% in 2017. Thus, trucking companies are actively seeking solutions that will reduce costs and increase efficiency to counter the downward trend in margins.
Technologies which can reduce costs by just a few percentage points will have a meaningful impact on profitability. In contrast, industries with high margins (such as finance or healthcare) are often less receptive to cost-saving technology solutions since they will not make a significant difference to profitability.
Logistics tends to be very lightly regulated compared with many other large industries such as finance, insurance or healthcare. The lack of regulation allows startups to grow faster and more efficiently.