Are new demand patterns and trends causing a disruption in the logistics sector?
Wherever there is trade, there is a need for transport. Since long, the UAE has been recognized as a trading hub be it across land, sea or air. Undoubtedly, UAE would be the ideal destination for any logistics company to establish itself with so much scope of work. While this statement holds true to an extent till date, over the last decade this industry has witnessed a lot of change and a disruption in profit models.
As per Mohan George Pulinthitta, Partner and Managing Director of Integrated Freight & Logistics LLC, the economic recession is the biggest factor that ignited this disruption. “The global recession we have been experiencing for the past few years has forced many of the clients to look into cost reduction in every segment,” he says. With cash flow being an important concern across all industries where customers decided to spend lesser on transportation and storage, this lead to many logistics firms collaborating with third party international players to share costs.
“The last decade has witnessed companies realizing that emerging international markets are a part of their growth strategy,” says Thomas Gregory, Executive Director and Partner at Fusion Specialised Shipping & Logistics LLC. “Logistics solution providers pushed themselves to go international and established this trend by networking with key players in the international markets. Technology has played a key role in these developments. Having said that, this also led to a lot of new companies mushrooming every other day. With a hunger to grab business “at any cost”, a latent price war has taken form.”
Varsha Sharma, Business Development Manager of Diligent Freight Services LLC seconds Thomas. “Due to this upsurge, expense awareness to the clients has been simplified and profit margins have been affected.”
While price wars do not affect big firms as much, considering they have an established market value, loyal customers and benefits from economies of scale, it were the mid-market companies which were drastically affected. On one hand, the weak new startups obviously couldn’t continue because it didn’t make financial sense, and stronger startups, on the other hand, made corrective measures to not sink. “With over 10 years of industry presence, we were able to clearly stay above water. Yes, our margins were up for negotiations and in some cases were reduced. But our long standing relationship with our customers and the quality of service provided has been helping us tide over these challenges,” says Thomas.
For other companies in the same pool, apart from relying on long term customer relationships, increasing volume seemed like the most viable option to maintain continuous cash flow. “With the shift of customers towards cost optimization, our business pattern has changed from value based to volume based shipments. Definitely, increasing of volume has increased our investment with a direct impact on cash flow. ” says Varsha. However, are increased volumes and quicker transportation requirements impacting the quality of goods being shipped?
“We don’t feel this has or will ever impact the quality of goods – that could spell out the doomsday for such business,” says Thomas. According to him, customers have compromised on quality of services by extending the delivery timelines but have never compromised on the quality of goods. With constant technological innovations in place, the inspection practices have improved for faster shipment. “The sample testing practices have improved a lot which is really time saving and the quality of products has not been compromised at all. This has also raised the efficiency bar with first time right solutions,” notes Varsha.
Mohan also credits Government authorities and improved regulations in this matter. “With proper systems in place from Dubai Ports and Customs, Dubai Municipality and other Government authorities, it is nearly impossible that there will be any impact on the quality of inspection and the goods. Speed is measured terms of processing and delivery, without compromising quality,” he adds.
Talking about technology, where procedures have been implemented to improve efficiency, quite a few international companies are also taking steps to automate the entire process. With rising fuel prices, wages would increase which would eventually increase the costs on the transporter’s end. Companies like Tesla, Starsky Robotics and more are hence creating long haul robotic drivers to curb the expenses, improve efficiency and reduce the probability or errors. Regional companies, however, still feel that this is too long away.
“The infrastructure requirements to have these advanced services operational is going to take a lot of time and none of the countries have taken a big step in developing the support infrastructure,” notes Thomas. “UAE being a major trading hub and infrastructure developments contributing a sizeable share in the non-oil sources of the GDP, such automations could put a clog in the machinery as UAE is not ready yet.” By the looks of it, while the technological advancements will have an impact, such developments regionally would take time to build. “With Tesla rolling out their EVs almost 2 years back, we are yet to see a major shift in the people’s preferences. We feel this could be similar case with transport automation in logistics,” he says. Mohan also feels that these vehicles need to be carefully monitored and tested well before being launched, which doesn’t seem to be happening soon.
But companies do feel that once these technological innovations are in place, they would have a positive impact on the industry. As Varsha says, “When automated transportation will be available in the UAE it would definitely open up new or untouched segments of business, bringing in new opportunities in the market. Furthermore, highlighting some benefits being life safety where human life is the topmost priority; timely or time-bound delivery of materials would be considered wherein rest breaks of drivers would be eliminated, therefore increasing the efficiency in work.”
The fact, however, remains that automation can only solve one part of the problem. The major challenge logistics companies are facing today still remains unaddressed - cash flow. In today’s date, credibility of customers has become a huge concern for many companies with quite a few of them falling out on payments leaving the logistics firm in financial stress. “In an industry where our payouts are non-credit and our pay-ins are on a long term credit, the commitment to ensure that the wheel doesn’t stop at any point in time is a daunting task. However after such struggles, if the customer is a willful defaulter and if there is no recourse to receiving the payments, is when we feel that the whole business exercise is of no use. Risk cover against pay-ins is the biggest ask for the hour,” says Thomas.
There is a need of a regulatory body comprising of government institutions, banking heads and other commercial regulatory authorities who can grade, rate and monitor the performances of companies in terms of vendor payments. This will then allow the logistics industry to have this as a shield against willful defaulters and chronic delayed-payers. “Also I feel they need to allow only the registered forwarding agents to process custom clearance and related activities. This will bring in more energy to the industry and less headaches for the authorities,” concludes Mohan.