Asia’s Strengthening Supply Chains Outlined in Recent Transport Intelligence Report

The Asia Pacific region became the largest regional market for contract logistics, overtaking Europe last year. According to Global Logistics 2017, a recent report released by the London think-tank, Transport Intelligence (Ti), the overall contract logistics market is estimated to have grown by 3.9% in real terms in 2016.

Despite stronger global growth during this period, many developed markets struggled to match even the modest growth rates seen in their contract logistics markets in 2015. This reflects trends in the global economy, where growth rates in advanced economies slowed overall. It would be “too easy” to match these struggles to the impacts of political events such as the U.S. presidential election and the Brexit vote, contend analysts.

In 2016, Barack Obama was still U.S. president and the European Union had 28 members. Instead, weak real wage, productivity and consumption growth dampened global economic growth.

“Manufacturing production and retail sales volume growth remain fundamental drivers of contract logistics,” says Ti Economist, David Buckby. “Manufacturing expansion in advanced economies remains weak while Asia Pacific, very much still including China, is seeing the lion's share of growth. Retail is a different story. To an extent, e-commerce has bailed out contract logistics in advanced economies. I expect these trends to continue to shape the background of the contract logistics sector for the next few years at least.”

Despite stronger global growth in 2016, many developed markets struggled to match even the modest growth rates seen in their contract logistics markets in 2015. This reflects trends in the global economy, where growth rates in advanced economies slowed overall.

It would be “too easy” to match these struggles to the impacts of political events such as the US presidential election and the Brexit vote, contend analysts. In 2016, Barack Obama was still U.S. president and the European Union had 28 members. Instead, weak real wage, productivity and consumption growth dampened global economic growth.

Weak retail sales and manufacturing production growth in particular had major effects on the contract logistics market.

This information on its own would suggest an overall struggle for contract logistics in 2016. After all, it is a market associated with formalised retail structures, developed for larger corporations with desires for operational efficiency gains and value-added services.

However, emerging markets are taking an ever-larger slice of pie. In fact, 2016 saw Asia Pacific become the largest regional market for contract logistics, overtaking Europe.

Asia Pacific's strength is a result of a number of factors. These include sustained robust economic growth coupled with continued retail formalization (thanks to rising disposable income) powers retail contract logistics.

Meanwhile, multinational manufacturers increasingly consider options outside China (especially nearby ASEAN) as production locations, primarily thanks to cheaper labor costs, all the while ingraining Factory Asia more deeply, a spur for the region's manufacturing contract logistics.

That being said, even with rising wages, manufacturing in China is still undeniably strong. As low cost manufacturing has departed, this has been offset by China moving up the chain to more value-added production.

While Europe and North America suffer from both stagnating retail sales and manufacturing production growth, Asia is taking advantage, driving growth for the global market as a whole.

This trend is likely to continue in the medium term. Overall, the global contract logistics market is forecast to grow at a real 2016-2020 CAGR of 4.8%. While economic growth rates in developed nations are forecast to pick up slightly, they will continue to be far surpassed by emerging markets. None of this is especially new, but it is the reality the market faces.

3PLs in developed nations will need to look at different aspects to improve their services in order to achieve better than average growth. They will need to address the omni-channel retailing needs of retailers that work online and through bricks-and-mortar stores. They will also need to adapt to disruptive technologies, incorporating practices faster than competitors and more than ever, 3PLs need to consider environmental impact, a theme covered in Ti's Global Contract Logistics 2017 report.

In emerging markets meanwhile, achieving growth should be much simpler, at least in theory. Robust manufacturing and retail sales growth coupled with an increased appetite for outsourcing is a far more favourable backdrop than in advanced economies. The challenge as ever will be to operate successfully in a logistics and supply chain environment which is so often dramatically different.

In a recent interview with Logistics Management - a sister publication - one prominent analyst noted that one of the most challenging hurdles throughout the ASEAN region is poor supply chain infrastructure.

Richard Armstrong, chairman of the third-party logistics provider (3PL) research and consulting firm Armstrong and Associates, maintains that a handful of prominent lead logistics providers can help U.S. shippers to do business in ASEAN while regional governments attempt to build more transport networks.

“We suggest that U.S. shippers seeking a foothold in ASEAN become acquainted with a variety of leading 3PLs in the region,” says Armstrong. “Shippers should examine which companies are expanding their LCL networks and services this year.”

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