Market size and lack of investment in technology
The logistics industry is in the top three sectors 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, e-commerce 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 per cent of trucking companies have under ten trucks. The result is often an extremely inefficient market, in Singapore, for example, over 50 per cent 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.
E-commerce in Southeast Asia is currently growing over 50 per cent year-on-year and still only accounts for less than 3 per cent of retail sales. There are two pillars that support e-commerce finance (primarily payments) and logistics.
In our opinion, the opportunity for early-stage investing in payments is limited. This is because 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 well-financed startups.
For example, warehousing is an essential component of the e-commerce supply chain.
However, most warehouses have minimal technology to assist in stock management or to integrate the storage with last-mile delivery.
E-commerce also puts very different requirements on the logistics network. Its loads are smaller and more frequent, and thus more expensive and complicated than the traditional FTL/FCL (Full-Truckload / Full Container Load) model.
Technology is an essential component of e-commerce logistics both to manage costs and increase supply-chain flexibility.
Deliveries were previous a low-priority function for most retailers and manufacturers. e-commerce has dramatically changed this, with delivery now being a key issue for customer satisfaction. Over 40 per cent of all product reviews on Asian e-commerce 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 e-commerce vendors will need to make extensive use of logistics-tech to fulfil those demands.
The low margin nature of the logistics industry provides an opportunity for startups to offer cost-saving technology solutions.
In trucking, for example, profit margins in Asia (ex-China) have declined from 30 per cent in 2007 to just over 10 per cent 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 (like finance or healthcare) are often less receptive to cost-saving technology since it will not make a significant difference to profitability.
Also Read: How to get smart capital in Southeast Asia
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.
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Image Credit: Hans Eiskonen