Several leading economic surveys and trend reports are indicating that global business sentiment is improving and CEOs are feeling more optimistic, gradually switching from survival mode to growth mode. Ernst and Young’s Global Capital Confidence barometer points to an increasing appetite for deal-making, and the United States economy reflects a surging five percent GDP growth for Q3 of 2014, a rise in personal consumption expenditures and improvement in employment data.
But indicators are soft in many other regions: growth in China is slowing as it transitions to a consumer-led economy, emerging markets face potential stimulus reductions as Quantitative Easing is scaled back, and the Eurozone grapples with budget deficit concerns in its major nations and the wider threat of a triple-dip recession.
So, in reality, the signals are mixed. However, CEOs are realising that uncertainty itself cannot be a reason for mothballing growth plans. Indeed, the opposite may be true: PricewaterhouseCoopers’ 2014 CEO Survey paints a picture of business leaders flexing in their starting blocks in the quest not just for stability, but for growth and future-proofing the world’s leading organisations. Trade expansion and economic development are interlinked and reinforce one another. Which precedes or causes the other may be unclear, but the velocity at which both occur is crucial for global growth.
The Transport and Logistics (T&L) sector is progressively also taking centre stage, as it is being recognised as key to stimulating trade, helping business efficiency and supporting economic growth. But the search for growth is getting more and more complicated as the opportunities in both developed and emerging economies become more nuanced. So, given the mood, what are the underlying megatrends shaping the socio-economic landscape? And how are they likely to affect business and spur global trade dynamics in the next few years? Dave Gorin goes in search of some answers.
Emerging markets comprise the key arena of growth for many, if not most, industries. The demographic consumer weight of the future lies in Asia, Latin America and Africa. Improving per capita incomes within massively populated countries such as China, India and Brazil will result in the global middle class expanding by more than 1 billion people in the decade 2010–2020, and by a further 1.5 billion to reach 5 billion by 2030. CEOs are no longer questioning where the unfolding opportunity lies; rather, they are unravelling the pace of change in global consumption patterns, and interrogating their strategies to recalibrate without compromising existing market bases. In certain sectors, there is a degree of caution: as emerging market growth has slowed, some CEOs are implementing an interim re-focus on core, established markets such as Germany and the US.
Burgeoning urbanisation is a linked demographic trend. By 2030, approximately 60 percent of the world’s population will live in cities, rising to between 66-70 percent by 2050. When amalgamated with age and working population segmentation, GDP growth and migration statistics, demographers are projecting intriguing productivity data. For example, Shanghai already exceeds the Netherlands in wealth terms, and within the next decade Istanbul’s GDP will overtake that of Austria. The advent of these and other megacities, or de facto city-states, such as Tokyo, Delhi, Mexico City, São Paulo, Lagos and Mumbai, has myriad ramifications for transportation and third-party logistics provider (3PL) companies.
Trade movements are re-aligning
Against this backdrop, the preoccupation for T&L companies is the shift in trade flows. Between 2003 and 2012, the growth rate of intra-E7 trade value was approximately double that of the more established G7–E7 trade links , whilst intra-ASEAN volumes are currently reflecting significant upswing compared to inter-regional trade. The world’s largest 3PL company, DHL, is investing significantly into Southern Africa, to create an emerging market hub as a pillar of its ‘Strategy 2020’ expansion. The group currently generates 20 percent of its revenues in developing markets, but anticipates this climbing to 30 percent by the end of the decade as trade expands at a faster rate between — and within — Asia, Latin America and Africa.
The advent of de facto city-states, such as Tokyo, Delhi, Mexico City, São Paulo, Lagos and Mumbai, has myriad ramifications for transportation and third-party logistics provider (3PL) companies.
Infrastructure challenge tops the agenda
Although the sector’s confidence has picked up appreciably, T&L CEOs are less optimistic in outlook than their peers in other industries. Perhaps they see most clearly the hurdles to be overcome in many regions of the world, especially surrounding the development of infrastructure. Capital isn’t necessarily the problem; for example, South African logistics and transport utility Transnet has embarked on a US$30 billion investment programme, and Indonesian ports authority PT Pelabuhan is investing US$6 billion in 22 new or upgraded seaports in the next five years. Rather, development significantly lags demand, thus retarding growth trajectories. The Panama Canal expansion is due for completion on schedule in 2016, but the project will have taken a decade to fruition, and the missed opportunity for growth can be seen in the calculation that the ‘Third Set of Locks Project’ will almost triple the rate of annual tonnage flow increase.
Barriers to trade concern all business leaders
Generally, CEOs believe that governments have a specific responsibility to facilitate economic activity, whether via short-term stimuli, longer-term policy development and collaboration with industry, or through designing appropriate — and circumscribed — regulatory measures. T&L CEOs are particularly concerned with the latter; almost 70 percent express the view that regulations hinder trade and require urgent streamlining. The World Economic Forum concurs, positing that non-tariff barriers to trade add complexity, cost, and wasteful resource misallocation to global supply chains. Its report, Enabling Trade: Valuing Growth Opportunities, identifies Singapore as achieving best practice in border control and regulatory measures, and calculates 15 percent higher trade volumes and a five percent increase in global GDP if, worldwide, measures and processes were at just half this nation’s level of efficiency.
Global talent crunch becoming a crisis
The role of government is also worrying CEOs in its impact, or lack thereof, on employment. In almost all regions, encompassing developed and developing nations, unsatisfactorily high unemployment numbers co-exist with a marked shortage of skilled talent. CEOs across the industry spectrum agree that this structural unemployment disconnect is unlikely to resolve quickly, and over 60 percent believe it represents a significant threat to growth prospects.
In almost all regions, encompassing developed and developing nations, unsatisfactorily high unemployment numbers co-exist with a marked shortage of skilled talent.
For T&L companies, this manifests in current shortages of pilots, truck drivers and logistics professionals. Solutions are complex and will require collaboration with governments and educational institutions to forge better matching of labour force skills with workplace requirements.
Tighter connections and growing interdependence
In the information age — the Internet of Everything — trade connections and economic growth potential are unquestionably enhanced. But universal connectedness also underscores the world’s trouble spots. Escalating conflict in the Middle East and geopolitical uncertainty in Ukraine could negatively impact the stability of the world’s energy supplies. The price of crude oil, although currently at a two-year low, has nevertheless almost quadrupled in the last decade and a half, bringing into focus the importance of alternative energy sources such as liquefied natural gas (LNG). Disruption to the flow of these resources would negatively impact supply chains, with T&L companies being especially hard-hit. Air transport, in particular, carrying five percent of global volumes but 35 percent in value, is acutely sensitive to energy cost spikes. Unsurprisingly, high or volatile energy pricing is the single most pressing concern for CEOs in the T&L industry.
Forging sustainability is the business of today
CEOs acknowledge that plans for growth — on any continent and in any time horizon — depend upon mitigating risks associated with climate change and environmental degradation. Some 75 percent of CEOs in the consumer goods industry identify raw material price volatility as a concern, as ever-tightening global supply constraints become evident. The vulnerability of the earth’s natural systems is starkly highlighted in the latest Intergovernmental Panel on Climate Change (IPCC) report, and business leaders will need to collaborate across borders and industries, as well as within corporations, to improve the efficiency of raw material and resource consumption, and the efficacy of logistic and supply chain methodologies.
As a prerequisite, transport infrastructure will increasingly require climate-proofing. And, whilst practically every T&L CEO agrees upon the importance of ethical business practices and supply chain integrity, there is a clear dilemma in the sprint for short-term profit reporting. Maersk, in its Sustainability Strategy 2014–2018 document, claims to have achieved a 25 percent reduction in CO2 emissions since 2007, which has saved the company US$1.6 billion to 2012. The more complex debate is whether financial performance measures are the only, or most appropriate, incentives for companies to set sustainability goals in the first instance.
Massive digital capability, but is the opportunity being leveraged?
Technology constantly occupies the minds of CEOs: over 80 percent believe it will be a key growth tool over the next five years, mainly in expediting product innovation and engineering customer value. Again, however, implementation lags the vision: almost two-thirds of CEOs admit to having, as yet, invested inadequately in technology or the capabilities of Big Data.
Indeed, the scope for Big Data in the logistics sector is significant, if it were to be pooled and shared. The World Economic Forum’s Global Council on Logistics and Supply Chain Systems was recently critical of the wider industry in moving too slowly towards this goal, and sector CEOs seem out of synch with their peers in not acknowledging data and information technology advancements as a major opportunity to shape and refine their businesses.
Indeed, the scope for Big Data in the logistics sector is significant, if it were to be pooled and shared.
Mergers and acquisitions as a strategic solution
Some 31 percent of CEOs are interested in pursuing acquisitions in the next year, according to EY’s Global Capital Confidence report. M&A activity is likely to revive in line with a rejuvenated worldwide business outlook, and improved asset price stability. However, this overall indicator masks specific circumstances relevant to each industry. Consumer goods giants P&G, Unilever and Beiersdorf are seemingly poised to implement significant acquisition strategies; in the T&L sector, however, optimism is apparently less clear-cut. Maersk, for instance, is indeed gearing up for acquisitions, but these will focus around its Oil and Drilling divisions. Maersk Line is instead prioritising capital allocations into 20 new Triple-E class container vessels — the largest maritime cargo mode ever constructed. As part of cost-saving and restructuring measures, joint ventures and alliances are likely to supersede outright acquisitions in an industry where overcapacity has existed for some years and is just starting to turn.
Growth is perhaps the only bankable pillar of short-term success and longer-term legacy
It is increasingly evident that the role of a CEO in today’s business environment is exceedingly complex, both in scope and execution. It embraces the immediate demand of profit delivery and the longer-term vision of sustainable growth, with accountability to a broader range of stakeholders than ever before. Multifaceted, flexible strategies need to be plotted over varying planning horizons, with volatility carefully modelled and synthesised. The companies that will lead are those poised to capitalise upon demographic, societal and technological trends to build the business of today, and forge ultra-competitiveness for the future.
Ultimately, the outlook for the world’s economic prosperity is shaped by the state of manufacturing, industry — and trade. Inasmuch as Transport and Logistics is the enabler of mobility and flow, the sector is the lifeblood of global commerce, and its robustness is vital for optimising business opportunity.
This resource has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained herein without obtaining specific professional advice. Competitive Capabilities International (CCI) does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this resource or for any decision based on it.