Market Analysis: The South African Transport and Logistics Industry – An Industry in Turmoil

Most industries in South Africa face globalisation and transformation challenges but the South African Transport and Logistics industry faces its own peculiarities that impact on the country as a whole. Shaun Scott and Henry Carelse, Directors of Worldwide Integrated Logistics (WIL) provided Smart Procurement with an up to date market analysis of this core driver of cost and performance.

“This diverse industry comprises tens of thousands of individual truck and bakkie owners as well as some of South Africa’s largest conglomerates including Transnet, Bidvest, Imperial and Grindrod. These all experience reliability and cost efficiency challenges and many are faced with poor assets that struggle across inadequate road, rail and port infrastructure,” he says.

Challenges abound in the current situation

“Relentless service improvement and investment programmes will eventually have an impact on these issues, but there deep-seated challenges they face:

• The industry is rapidly consolidating – global deals are making a local impact;

• Most struggle to be relevant in global markets – there is no “SAB Miller” in this space;

• Empowerment deals have advanced, but their sustainability within a consolidating world is a challenge;

• Supply chains are demanding increased levels of integration forcing often reluctant changes to business models;

• Transnet, and particularly Spoornet have been in a downward spiral, impacting everyone that uses rails and sea ports;

• Technology is changing rapidly and South Africa’s players are going to have to play catch-up soon; and

• Supply chain skills are where IT skills were in the 20th Century; they are in demand, scarce and mobile.

This white paper outlines these challenges and provides a base for exploring potential solutions. “

1.1 Industry Consolidation

“In South Africa the industry went through a consolidation phase in the 80’s, 90’s and early part of the 21st century. This process saw the emergence of local conglomerates: Bidvest, Imperial, Unitrans, Supergroup, Grindrod, Crossroads, Fuel Group, Value Logistics and Laser Logistics, to name some of the largest in the market.

Whilst consolidation has slowed in South Africa, it has maintained its pace internationally.

Until recently, South African players have been relatively shielded by this unyielding process. But since 2004, local players have experienced an uncomfortable shift.

Unitrans, until 2004, built strong ties with UPS, the $37billion US-based parcel courier giant. Unitrans managed the growing UPS Parcel business and also had a joint stake in the UPS Supply Chain Services venture focused on technology and integration solutions.

UPS pulled out of both deals in 2004 and set up a separate entity. The Unitrans-UPS relationship remains cordial but the split hurt Unitrans. They quickly established a relationship with Aramex and have continued to reposition the express and supply chain parts of the business.

Unitrans is not alone. Bidvest has had deals with Fedex and Panalpina; and local Grindrod Limited has had deals with P&O Logistics and also Röhlig. Each company has been impacted by the global consolidation developments.

Exel is a well-regarded supply chain services company with operations across the globe. In 2001 Exel acquired Eagle (South Africa) and established its first presence locally. This however posed little competitive threat to local players.

With the acquisition of Tibbet & Britten in 2004, global consolidation started to hit home.

Tibbet & Britten was a successful player in the local consumer goods industry and had Unilever and Pfizer amongst its customers. Since the acquisition, Exel became a major player in the local market and started to make an impact winning a few large clients and deals. But it didn’t end there. Exel was acquired by Deutsche Post in late 2005. The $55b German giant that has been on an acquisition spree since 1999. The Deutsche Post brand that most of us are familiar with is DHL. The acquisition impacted the local operations and may have been the cause of some losses such as Pfizer. But the DHL brand is strong and DHL have started to win a few new local deals on the back of there global clients.”

1.2 Global relevance and ambitions

“Supply chains are increasingly global. A wide range of South African products from cars to coal and jeans to flowers, are exported. Apart from some transport on the local leg, SA’s transport and logistics companies struggle to be relevant within the international legs of the supply chains.

Large South African players have tried to establish a global footprint, but the success stories are few.

Bidvest acquired Jacobs Holdings in 2002 as the “base for international expansion of BidFreight”. After recently “rightsizing” the business, the newly renamed BidCorp plc, contributed 9% of the Freight Division’s revenue and 3% to its income. BidCorp plc is now a niche automotive transport company primarily based in the UK. It seems to have slim chance of providing Bidvest with a base to play in the international transport and logistics space.

Imperial’s international transport and logistics thrust is based in Germany. Imperial’s offshore operations have represented a more substantial share of its revenue (53%) and profit (22%). However, it recently chose to divest of a profitable offshore asset.

Amongst the other transport majors, Supergroup and Unitrans focus on Africa when they look beyond South Africa’s borders. The Transnet Group seems to have little capacity and no appetite for any offshore ventures.

UTi is an exception. This group started in the late 1970’s as Rand Freight. By the mid 90’s it had built a solid courier outfit (Sun Couriers) and acquired it first offshore asset, Union Transport. It now has over 260 UTi branch offices in 58 countries and agencies in another 75 countries.

UTi’s Africa operations accounted for only 19% of its gross revenue and 25% nett revenue. It is a global supply chain player.

This South African exception in the international transport and logistics field is listed on NASDAQ but keeps a strong leadership presence in Bedfordview, Gauteng.

Will Bidvest or Imperial decide to leverage its recent strong performances and the strong Rand to extend its global reach and follow the likes of UTi?”

”Only time will tell, “ says Scott.

1.3 Sustainable Empowerment

“There have been a plethora of empowerment deals in the industry.

Bidvest’s BEE deal has helped it achieve an “A” by the empowerment rating company Empowerdex.

Imperial has completed the Ukhamba and Lereko deals and believes it has struck a balance between broad-based and individual empowerment.

Supergroup’s link with Peu Investments; Unitrans’ Mvelaphanda deal; and Grindrod’s J&J relationship have all ensured that the main industry players are well on their way to meeting and exceeding the industry’s empowerment scorecard.

But as important as they are, are these deals structured to assist with the market challenges the companies face? And, given their conglomerate nature, how long will it take before the deals, mostly struck at holding company level, change a management team in an operating company housed within a subsidiary in the group? And what will happen when the company is acquired by a large multinational? The groups must move fast to cascade these deals to the benefit of the smallest operation.”

1.4 Service Integration

“Customers in the supply chain are requiring increased levels of integration from their service providers. In an Accenture, INSEAD and Stanford study of 600 global organisations, a key findings was that these organisations are “devoting significant attention to building integrated business models”. Many of them are expecting integration from their transport and logistics service providers.

The large international service providers are responding by restructuring their organisations, and building integrated processes and systems.

Common branding is one of the more visible signs of the extent of structural integration.

Deutsche Post’s DHL brand has “consumed” the brands of the companies it acquired: Air Express; Airborne Express; and Danzas have all been replaced by DHL.

The UPS brand is one of the most recognised Brands in the USA and is used as a key thrust in achieving integration amongst the many companies that UPS has acquired.

Exel was quick to close down the Tibbet & Britten website and has rebranded most of the buildings, trucks and stationary with the blue and red logo. It was not long before all those logos were changed to the DHL brand. Even the Kinesis brand that survived the Exel rebranding effort, succumbed to the DHL logo.

A common, integrated suite of IT applications is also key to achieving service integration required in modern supply chains. DHL invested a considerable amount in its IT platform and has strategically aligned itself with SAP, so we can expect to see significant continued investment.

The larger South African players have had little success in integrating their business models. BidFreight, the freight transportation division within Bidvest, consists of over 30 companies loosely grouped into 6 subdivisions. Each is autonomous and there is little that is done to change the entrepreneurial drive that exists amongst each of the operations that sometimes compete with each other.

Imperial’s logistics division has 60 entities across 3 subdivisions. They attempted a technology-lead integration initiative with their Synchrony venture, but it has had little visibility of late.

Transnet also tried a technology lead integration initiative with B2B Africa. Whilst some progress was made in a few of Transnet’s supply chains, B2B Africa closed its doors.

Supergroup and UTi are exceptions in the integration game.

Supergroup acquired The Logistics Bureau in early 2000 as their key integration capability. In 2002, they launched the Collaborative Xchange to provide the IT platform; and Supply Chain Partners to provide an integrated management capability. These have all subsequently been integrated into Supergroup’s “Supply Chain Solutions” vehicle with a common brand, technology platform and management structure.

UTi have made a substantial investment in IT using strategic alliances with i2 Technologies and Oracle. The organisation has a well integrated business model and seamless processes.”

1.5 Transnet’s Downward Spiral

“Rail and port services are integral to all freight transport and logistics companies, be it bulk or parcels. Yes, even small parcels. The express courier company UPS, is one of the largest users of rail services in the US.

Whether the cause be regulatory, as in the case of high axel load limits, or through poor management, the result is that Transnet, and particularly Spoornet is a weak link in the overall delivery of transport and logistics services in Southern Africa. The Road vs Rail debate has raged since the early 90’s. Spoornet’s infrastructure investment shortfalls have also been well documented recently.

The downward spiral is not as a result of the change in government in 1992. The spiral started before that when maintenance budgets and investment decisions were cut and deferred. The downward spiral started when customers started moving off rail. Fewer customers meant less revenue on some routes. This in turn made it difficult to justify continued investment and maintenance of infrastructure. Poor infrastructure resulted in poor service and drove even more customers away. And the cycle continues.

Ms Maria Ramos and the Transnet group have recognised the predicament and have started to address matters. These initiatives will go some way towards alleviating the situation, but it will take a Herculean effort to reverse the spiral.”

1.6 Technology Catch-up

“There have been significant developments in the Information and Communication Technology (ICT) industry over the past decade. This has resulted in advanced technology solutions with strong business propositions, coming onto the market in the last few years. Some examples relevant in the transportation and logistics industry include:

• Radio Frequency Identification (RFID);

• Advanced Track and Trace solutions;

• Electronic Proof of Delivery (ePOD) solutions;

• Leading-edge Warehouse Management and Transportation Management solutions that incorporate the latest and greatest features promised to improve productivity and customer service.

It might be argued that some of these technologies are still in the introductory stages, but in reality they are maturing at a rapid pace. Large customers like Wal-Mart and the USA Department of Defence are already insisting that service providers incorporate the above capabilities into their service or product offerings. These demands will increase and within the foreseeable future. It will not be uncommon for customers to insist that the above technology solutions become “must-haves”.

The challenge faced by transportation and logistics service providers is how to strike a balance between investing in developing technologies, whilst remaining cost competitive. This market has small margins and is very price sensitive.

Technology Integration is another challenge the industry faces. This issue will become more and more prominent over time.

Companies are introducing sophisticated and industry specific information system solutions to help managing their business operations. Coupled with this, supply chains involve numerous trading partners or intermediaries. In a bid to capitalise on the benefits envisaged different trading partners are looking for automated interfaces between each other’s systems.

Some of the more common integration needs have already been addressed. Uploading orders from customers to supplier; and downloading Goods Receipt transactions from customer to supplier are some of the achievements. However, integration needs are increasing. Shippers are already insisting that their transportation service providers automatically upload electronic Proof of Deliveries (POD’s) back to the shipper and that waybills are electronically uploaded into the transportation company’s systems. Another example cited recently was the request of a shipper that an exception signal (e.g. delay or cancellation of a scheduled flight) trigger an exception alert to inform the customer’s systems that all consignments on that particular trip run the risk of arriving late and even what the revised time of delivery will be.

To address these challenges the major software vendors have already started to introduce integrations features such as adaptors in i2 to communicate with SAP and other ERP vendor products. SAP’s investment in its Netweaver offering is another example of vendors’ commitment to improving integration capabilities. There are also a number of third party integration products also called EAI (Enterprise Application Integration) products on the market, such as Webmethods, WebSphere, Sonic Software, etc. “

1.7 Supply Chain Skills

“Supply Chain Management is where IT was in the 80’s and 90’s. It is an exciting and vibrant field with huge potential.

In particular, there is a major need for an increase in skill levels across all components in the supply chain. A number of companies have recognised the need and are offering numerous training courses to meet the demand. Just do a scan on the web to see how many companies are offering Supply Chain training!

Traditionally, people in the supply chain space were critical to the operations of the companies that employ them. Any requirement of these employees to attend training, by implication stretches the organisation’s operations. However, this has significantly changed today with employees having different alternatives to class room based training (e.g. e-learning, self-study, etc.).

The challenge in the industry is that people are not valued above a company’s traditional assets. Just look at where people are listed and referenced in company annual reports, most of the time after the financials, and the warehouses and the trucks and forklifts.

But it is a two way street. Unitrans, and many of the local transport companies, lost significant revenue due to strike action recently. The “contract” between workers and their employers needs constant attention and development.

People will however continue to be integral to our supply chains. They will continue to drive trucks, trains and ships; answer calls and queries; hand-over parcels; pick and pack parcels; and resolve glitches.

Those companies that get the people side of the business right, will be the winners in modern supply chains. Watch this space.”

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