Commentary
Logistics – the quiet force powering global growth
October 10, 2024
Logistics have become as essential to our daily lives as electricity and water. Operating largely behind the scenes, the growing logistics sector ensures the seamless movement of goods and services across the globe. Just like utilities, we only notice it when things go wrong – be it delays, shortages, or supply chain disruptions – that remind us how indispensable logistics have become to everyone.
Many of us still recall the severe supply chain disruptions during the pandemic, which exposed the vulnerabilities of global logistics networks. While those acute challenges have eased, the industry continues to face headwinds. For example, recent geopolitical tensions in the Red Sea have blocked critical shipping routes, further complicating the already strained system.
Closer to home, the recent port worker strikes on the East and Gulf coasts over wages and automation have impacted roughly half of all containerized imports into the United States. Although a prolonged strike has been avoided with the tentative agreement, the ripple effects might soon be felt. Retailers began moving shipments earlier this year to prepare for potential port strikes, the effects of which can raise freight cost by up to 20% due to the extra warehousing needed to store the larger inventories. The rising cost, along with higher wages, may add pressure to inflation – an indicator the Federal Reserve is closely watching.
These events highlight how reliant businesses and consumers are on the smooth operations of logistics networks. In 2023, the industry was valued at $9.41 trillion, representing 9% of the global GDP. By 2028, it’s projected to grow to $14.08 trillion, at an annual growth rate of 8.4%. The Asia-Pacific region leads the logistics market, contributing $4.6 trillion, as trade routes expand and production shifts to the region. In fact, the container trade flow within Asia is larger than any trade lane globally.
A key segment of the logistics industry is third-party logistics (3PL), which offer a comprehensive suite of services, including warehousing, inventory management and automated shipping. The global 3PL market was valued at over $1 trillion in 2023.
One of our holdings in this space is Kerry Logistics Network (636 HK). The company is an Asia-based 3PL leader with an extensive global portfolio. With its strong presence in Asia, Kerry Logistics supports multinational corporations by providing value added solutions, including integrated logistics, international freight forwarding, e-commerce, industrial and infrastructure project logistics. The company demonstrated resilience during the pandemic, with proven capabilities to move shipments efficiently despite global supply chain disruptions.
Another one of our holdings is ID Logistics Group (IDL FP), a leader in contract logistics, with over 8% market share in France and a growing presence in Europe and the rest of the world. Contract logistics, a specialized service offered by 3PL providers to manage supply chain operations on behalf of clients, generates high levels of recurring revenue under multi-year contracts. The segment was worth $426 billion in 2023 and is expected to grow at over 7% annually by 2032. Given the recurring nature, the business is not very sensitive to recessions and freight cycles. ID Logistics has been constantly gaining market share in Europe and has entered the US through an acquisition, which opens new growth opportunities for the company.
One of the key issues during the recent port strike was the opposition to automation. However, persistent labour shortages, rising operational costs and the growing complexity of global supply chains are pushing CEOs to adopt automation to boost productivity and reduce human error. The global logistics automation market was valued at $34.6 billion in 2023 and is expected to grow at CAGR of 15% from 2024 to 2030. GXO Logistics (GXO US), a holding, which focuses on contract logistics and provides integrated automation solutions to its blue-chip customer base, which includes about 30% of Fortune 100 companies. Its large-scale automation solutions can lead to 50% reduction invariable costs, 60% reduction in inventory wastage, and 50% improvement in inventory efficiency.
As the logistics industry continues to evolve and expand, it creates many opportunities for innovation and growth. It will remain a key area of focus for our investment strategy.