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A complete review on 2008 15th Annual 3PL CEO survey: threats or opportunities

By Amarendra Bhushan for CEOWORLD Magazine Updated:October 7, 2008

The surveys discussed below mark a continuation of a series of annual surveys of the CEOs of major 3PL service providers that began in 1994. During 2008 three separate surveys were conducted—one of the CEOs of large companies serving the North American 3PL marketplace, another of those serving the European market, and a third of companies serving the AsiaPacific 3PL marketplace. Thirtynine CEOs were involved in the surveys, and collectively their companies generated in excess of $60 billion in 3PL revenues in those three markets during 2007.

· Nine of the 39 companies failed to meet their revenue growth projections during 2007 (five in North America, three in Europe, one in APAC).

· The average revenues reported for 2007 by the companies involved in the surveys were: North America$ 1.33 billion; Europe$ 2.6 billion; and, the AsiaPacific region$ 693 million.
· Thirtyfive reported their companies were profitable during 2007, with four reporting their companies were unprofitable.

· Only one CEO believed that the 3PL industry in the geography in which they operated had been unprofitable during 2007.

· While the CEOs in all three regions continue to be bullish about future revenue growth prospects of not only their companies but also the regional 3PL industry, their growth projections have become more modest over the past several years, particularly in Europe. The average one and threeyear
industry revenue growth projections of the CEOs involved in the North American and European surveys are in the single digits.

· From a company standpoint, the oneyear revenue growth projections were 12.6% for North America (12.9 in 2007), 10.8% for Europe (12.5% in 2007), and 21.4% of APAC (28.8% in 2007).

· The average threeyear company growth projections were 13.4% for North America (13.2% in 2007), 10.0% for Europe (15.1% in 2007), and 23.1% for APAC (26.7% in 2007).

· The oneyear regional 3PL industry revenue growth projections averaged 9.0% for North America (11.1% in 2007), 7.3% for Europe (7.5% in 2007), and 11.2%
for APAC (12.9% in 2007).

· The average threeyear regional 3PL industry growth projections were 9.8% for North America (11.4% in 2007), 6.5% for Europe (9.7% in 2007), and 12.9% for
APAC (12.6% in 2007).

· There has been a substantial increase in the attention paid to “green” and environmental sustainability issues within the 3PL industry in the past several
years. Many of the companies involved in these surveys have formal sustainability programs, formal sustainability statement, a leader designated to
head company efforts in the area, and they have made major changes in the operations to pursue “green” goals. According to the CEOs, while many existing
and potential 3PL customers discuss such issues in their negotiations with the 3PLs, to date those issues have been relatively insignificant in getting new
business or retaining existing clients. However, as a group the CEOs believe such issues will become considerably more important over the next three years.

· Only 10 of the 39 companies were involved in significant merger/acquisitions during 2007; nevertheless, more than half the CEOs expect the industry’s
consolidation to continue and that acquisitions will make a significant contribution to their companies’ revenue growth during the next three years.

· The CEOs of 36 of the companies indicated that their companies had undertaken significant “branding” activities during the past several years to attempt to
differentiate their services from those of competitors. These efforts were often directed at offsetting the perceived “commoditization” of the 3PL industry.

· In all three geographies the CEOs identified various forms of international expansion among the most important opportunities in their markets. In North
America the CEOs tended to focus on possible expansion of international services, while in Europe they tended to focus on possible expansion of services
in Eastern Europe and Russia, and in the APAC region they focused on the growth potential in China and India as well as the growth potential of intraAsia
business.

· As has been the case for the past several years, the CEOs in all regions identified the “talent shortage” as the most significant problem faced by 3PL service providers in all three regions. Their difficulties in recruiting, training, and retaining talented managers have been well documented in our previous annual surveys.

· Price compression continues to not only be perceived as the most important industry dynamics in all three regions, but also is considered to be one of the top problems faced by 3PL managers across the regions. This problem continues to be exacerbated by the growing involvement of procurement professionals in the 3PL selection process in all three regions, and more recently by rising fuel costs. The growing involvement of procurement professionals in the process was also identified as a “Top 3” industry dynamic in both the North American and European surveys.

· All nine of the companies involved in the APAC survey provide 3PL services in China, but only one reported that the Olympics provided any significant business opportunity for his company. Fortunately, only two CEOs reported that their companies had been impacted by the natural disaster in the region during the past year.

· Six of the nine companies involved in the APAC survey provide 3PL services in India, and nearly all report their companies have been successful in such areas as penetrating the market, establishing their brands in the market, and generating operating profits in India.

· When asked to identify the most important changes they expect in their markets over the next three years, the North American CEOs tended to focus on
continued consolidation activity and the continued globalization of the industry. The European survey participants focused on continued consolidation and
expanded growth opportunities in Eastern Europe and Russia. The APAC CEOs predict a more general acceptance of the concept of logistics outsourcing in the
region, continued increases in labor and fuel costs, and transportation improvements as the most important changes.

· What do I expect?

1. Continued growth, at more modest rates, in all three geographies.

2. Continuation of the consolidation movement in all three geographies, possibly at a slower pace.

3. More pressure on 3PLs to establish and extend their “brands.” The 3PL industry to become “greener” and the “green” issues to become considerably more important not only in terms of increased regulations but also in the 3PL selection process.

4. Many of the recent operational and strategic decisions made by 3PLs in response to rising fuel costs to become “institutionalized.”

5. Continued increases in labor costs in China coupled with rising fuel costs to lead many manufacturers to reassess their global sourcing and manufacturing strategies, particularly related to exports. This may ultimately lead to redeployment of assets and talent by the 3PL industry in response to any related shifts.

6. Despite those cost increases the emergence of substantial domestic markets in Asia, particularly in China and India will not lead to any nearterm outmigration of manufacturing activities from China and India.

7. Price compression will continue, exacerbated not only by the growing involvement of procurement professionals in the 3PL selection process, but also increased fuel costs. While contract provisions allow most of the large 3PLs to recover a high percentage of their fuel cost increases, customers will likely resist any increases related to the other increased costs incurred by the 3PLs.

8. While the industry has taken many steps to improve its success in recruiting, hiring, training, and retaining managers and operating employees, due to intense competition for talent in this area, this will continue to present a significant challenge to the industry in the nearterm.

Results from the “2008 3PL Provider CEOPerspective” surveys were presented today by Dr. Robert Lieb, Professor ofSupply Chain Management at Northeastern University, and Joe Gallick, SeniorVice President of Sales for Penske Logistics, at the Council of Supply ChainManagement Professionals Annual Global Conference in Denver.
Incorporating insights from 20 CEOs in North America, 10 in Europe andnine in the Asia-Pacific region, this year’s research showed some of thelowest industry revenue projections ever seen in the history of the surveys.Sponsored by Penske Logistics, the surveys found the “greening” of supplychains and the 3PL industry, as well as continued pricing pressures among thetop industry trends, and cited rising fuel prices and a slow-growth economy askey challenges facing the industry. A trend toward reverse globalization wasalso noted.

“While nearly one-fourth of CEOs said that their organizations failed tomeet 2007 revenue projections, almost 90 percent reported profitability lastyear,” said Lieb. “Despite rising prices at the pump and a stagnatingeconomy, these numbers indicate that global 3PL efforts to reduce costs,optimize networks through technological advances, and intensify the focus oncustomer selectivity are working — we will definitely see a continued focusin these areas well into 2009.”

“These are certainly exciting, yet challenging, times for third partylogistics providers as we attempt to predict, analyze and adapt to the variousforces that will affect our customers’ supply chains in years to come,” saidGallick. “The results of the 2008 survey shed an interesting light on thecontinued maturing of the 3PL industry while touching upon the new supplychain influences that were barely visible only a year ago.”

Further insight into this year’s research findings is outlined in moredetail below:

Softer revenue projections

Though CEOs continue to be bullish about revenue growth prospects fortheir companies and the industry as a whole, projections have becomeincreasingly conservative during the past several years, particularly inEurope.

– One-year revenue projections for North American companies were reportedto be 12.6 percent; in Europe 10.8 percent; and in the Asia-Pacific region,21.4 percent. The three-year company revenue projections are 13.4 percent inNorth America, 10 percent in Europe and 23.1 percent in Asia-Pacific.

– One-year industry revenue projections averaged nine percent in NorthAmerica, 7.3 percent in Europe and 11.2 percent in Asia-Pacific. The averagethree-year industry projection for North America is 9.8 percent, 6.5 percentin Europe and 12.9 percent in Asia-Pacific.

– Operating revenue in Asia-Pacific continued to grow in 2007. However,approximately 25 percent of North American and 30 percent of Europeancompanies surveyed did not meet revenue growth targets.

– In North America, 19 of 20 companies reported profitability in 2007,while only two European companies reported they either broke even or wereunprofitable.

– There are mixed perspectives about the profitability of the industry inAsia-Pacific, with 22 percent of CEOs indicating they believe the industryeither broke even or lost money during 2007.

Reverse globalization

Due to rising costs of labor, the impact of high fuel prices on shippingcosts, and continued concern around government regulations in Asia, 16 of the39 CEOs involved in the surveys indicate some of their customers are changingtheir sourcing and manufacturing strategies and are moving operations awayfrom Asia and “closer to home.”

– 11 of 20 North American executives reported seeing a shift in customerspulling manufacturing back from Asia to North or Central America In Europe,20 percent of CEOs reported that some customers have moved operations fromAsia to Eastern Europe. Similarly, in Asia-Pacific, one-third indicated that anumber of customers have shifted manufacturing out of the region.

Expansion in developing markets

Hand-in-hand with reverse globalization, 3PLs and customers aregravitating toward expanding into nearby emerging markets where the cost oflabor, shipping and land is less expensive.

– North American logistics providers are increasingly turning to Mexicoand Latin America.

– In Europe, CEOs are focusing on expanding services into Eastern Europeand Russia.

– Though limited by infrastructure challenges, CEOs reported 2007 revenuegrowth in India of 48 percent, with a projected growth rate of 31 percent forthe next three years.

– Growth opportunities are emerging in other Asia-Pacific countries suchas Japan, Thailand, Cambodia and Vietnam.

“Greening” of the supply chain

The 3PL industry has made significant strides in establishingenvironmental responsibility as part of broader corporate visions, withcompanies reporting numerous internal changes in response to these concerns.However, to date, the CEOs involved in the surveys believe these “green”capabilities are relatively insignificant in winning new business or retainingexisting customers.

– “Green” initiatives and environmental sustainability are consideredunimportant when it comes to attracting or keeping 3PL customers. In Europe,100 percent of respondents said “green” efforts are insignificant in winningand keeping business; in North America, 95 percent; and in the Asia-Pacificregion, 89 percent.

– Most CEOs indicated they are increasing spending on “green” initiativesprimarily as a corporate social responsibility initiative as opposed tocustomer demand.

– Though 79 percent of all companies surveyed have a formalsustainability program, 87 percent have a formal sustainability statement and74 percent have appointed a formal leader of sustainability, less than threepercent of customers globally have performance metrics for their 3PLs thattrack the 3PL’s ability to help customers achieve its “green” goals.

Downward pricing pressure

As commoditization pressures mount in the 3PL industry, the role ofprocurement in contract negotiations continues to rise, and fuel costsincrease, the companies surveyed cited downward pricing pressures as acontinuous, major concern for the industry and noted a growing trend inbranding as a way to differentiate.

– 12 CEOs in North America, six in Europe and five in Asia-Pacific citeddownward pricing pressures as one of the top three problems faced by 3PLs.

– 92 percent of companies involved in the three surveys reported pursuingbranding initiatives in the past year to help differentiate their companiesfrom the competition.

Survey design

CEOs completed 39 surveys via an Internet-based questionnaire during thesummer of 2008. Companies participating in the annual survey included:Cardinal Logistics, Caterpillar Logistics Services, CEVA, DSC Logistics, DHLExel Supply Chain, Genco, Kuehne & Nagel Logistics, Landstar, Menlo Logistics,NYK Logistics, Panalpina, Penske Logistics, Pittsburgh Logistics, Ryder,Schenker, Schneider Logistics, Transplace.com, UPS Supply Chain Solutions,UTi, Wincanton and YRC Logistics. In total, these companies are responsiblefor generating approximately $60 billion in revenue.

In addition to those highlighted above, the survey identified othertrends, including industry consolidation, opportunities and challenges in the3PL industry, and the major changes expected in each of the three geographiesexamined during the next three years. For access to the full ExecutiveSummary, please visit www.gopenske.com/newsroom/.

About Northeastern University’s College of Business Administration

Northeastern University College of Business Administration, established in1922, provides its students – undergraduate, graduate and executive — withthe education, tools and experience necessary to launch and acceleratesuccessful business careers. The College credits its success to expertfaculty, close partnerships with industry and its emphasis on rigorousacademics combined with experiential learning.

The College is highly ranked by several prestigious publications.BusinessWeek ranks the College 34th in its “Best Undergraduate B-schools” andnumber one in internships, and students have ranked the undergraduate programnumber one in job placement three years in a row in the publication. TheCollege’s Bachelor of Science in International Business program is rankednumber thirteen by U.S. News & World Report. The undergraduate program is alsodistinguished by The Princeton Review and Entrepreneur magazine as number 14of the U.S. top 25 entrepreneurship programs. For more information aboutNortheastern University’s College of Business Administration, visithttp://www.cba.neu.edu/.

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