By Hussein Hachem
A tale of two logistics markets. The Asia-Pacific region and Africa holds the key to the transformation of the global logistics industry landscape, believes Aramex CEO Hussein Hachem.
Growth in the global logistics services industry is on the rise. With the sector playing an increasingly important role in international commerce, the worldwide market for logistics services is expected to grow up to an estimated 3 percent per year in the period up to 2020.
Over the next six years, the market could see some fundamental changes as the balance of global trade continues to shift from traditionally dominant developed markets to emerging markets. There are two regions that I believe hold the key to the transformation of the global industry landscape — Asia-Pacific and Africa (APAC).
The first is the world’s fastest growing logistics market while the second offers the largest untapped opportunities in the global industry.
APAC is today the main driver of worldwide logistics growth. The region’s surge is being driven by the massive expansion of the Chinese market. However, other emerging countries such as India, Indonesia, Thailand, Malaysia, the Philippines and Vietnam are also expected to grow rapidly.
APAC is also at the centre of the global e-commerce boom, and is on course to becoming the world’s largest region for online retail sales. According to some estimates, 46 percent of global online buyers currently come from Asia-Pacific.
On the other hand, Africa punches below its weight in the global logistics market. Despite being a region of more than a billion people, the continent still isn’t a major source of exports and its consumer markets are small in comparison to other continents. Africa also faces huge challenges. Political instability, weak infrastructure and red tape make it a difficult market for foreign investors. Nevertheless, global investors cannot ignore the African market of the future. It is the second fastest growing region in the world. Half the continent’s population is under the age of 20 and annual GDP growth is expected to average 7 percent over the next 20 years. The global logistics industry has a real opportunity to support Africa’s efforts to improve its infrastructure, expand distribution networks and enhance mobility, ultimately contributing to larger economic goals.
From the Middle East’s perspective, both regions are vital trade partners. Trade between the Middle East and Asia-Pacific has risen exponentially over the last decade. Exports to Asia alone from the region increased by 11 percent in 2013 from 2012, according to the World Trade Organisation (WTO). What is interesting is that while Middle East-Asia trade has risen, trade flows to and from Europe have dipped, a trend that reflects the ongoing shift in world trade ties. Similarly, the volume of Africa-Middle East trade has also been growing in leaps and bounds over the last few years.
Dubai has played a vital role in the Middle East’s growing trade links with these regions. The city is located at the centre of new trade corridors encompassing the world’s largest and fastest growing emerging economies. African businesses are increasingly using Dubai as a hub for its European and Asian operations. Global companies, especially from Asia, are increasingly hubbing their African ventures out of Dubai. With Expo 2020, Dubai’s role in the global trade landscape is only set to increase. Dubai’s foreign trade is expected to touch over $1 trillion by hosting Expo 2020.
As trade grows in Africa and Asia-Pacific, so will the need for logistics services. Dubai-based players have an opportunity to tap into logistics growth in these regions through investments. To ensure successful investments, however, they must define the right market and portfolio strategy. One strategy could be to focus on e-commerce-centred opportunities. Both Asia-Pacific and Africa hold vast potential for e-commerce growth.
E-commerce could account for 10 percent of retail sales in Africa’s largest economies by 2025 while the Asia-Pacific e-commerce market could grow over 20 percent annually, surpassing North America by 2018. Greater mobile and internet penetration, increased diffusion of credit cards, more supply of new e-commerce players and increasing logistics options are contributing to rapid growth. Rising smartphone and tablet usage, partly driven by youth, has been a game-changer in the online retail landscape. Nowhere is this clearer than in the explosion of e-commerce in Asia, especially China. By 2013, the value of global e-commerce conducted via mobile handsets and tablets is expected to exceed $3.2 trillion by 2017.
While e-commerce offers exceptional logistics opportunities, investors should be mindful that e-commerce presents unique business challenges. Logistics companies need to be able to deliver products in lower quantities, in shorter time spans and at low prices, which puts pressures on margins. Having a large distribution network, sizeable distribution hubs and delivery fleets in the market are critical to success in this sector.
Aramex’s acquisition strategy in Africa and Asia-Pacific has followed an asset-light model, which has allowed us to sidestep some of these challenges. Under this model, we have invested in local logistics providers that use third party owner-operators in their respective markets. This has allowed us to avoid the significant costs required to maintain our own fleets and ensure operations.
Our recent acquisitions of Mail Call Couriers in Australia, PostNet in South Africa and Leo Global Logistics in Thailand are examples of this model. All three companies have low ownership of fixed warehouse and transportation assets and work with strategic partners to maximise efficiencies and reduce costs.
Another sound investment strategy could be focusing on markets and niche sectors that require specialised services. Examples are logistics companies that provide specialised value-added services in key sectors. The growing demand for specialised logistics services across the world and the potential for high margins make such companies good investment targets.