Global Push To Integrate Logistics To Drive M&A
Henry E. Teitelbaum
Dow Jones NewsWires
LONDON (Dow Jones)--In a world of vanishing trade barriers,
shrinking product cycles and outsourced components logistics
companies face pressure to consolidate to meet the ever-widening
needs of their customers.
Within this highly-fragmented business, which provides services
as diverse as sourcing raw materials, warehousing parts and
assembly as well as transport, there are only a handful of
companies capable of delivering the scale and range required by
"These are markets worth hundreds of billions of dollars and the
level of market penetration right now is low," says Alistair
Gunn, transport and logistics analyst at Arbuthnot Securities in
How low is underscored by the fact that U.K.'s Exel PLC (EXL.LN),
the world's largest operator, has only a 2% share of the globally
outsourced, or third party market for logistics. By the company's
own estimates, that share will rise to a mere 3% after it
completes its acquisition of Tibbett & Britten Group PLC (TBG.LN)
for GBP328 million.
Nick van den Brul, analyst at BNP Paribas in London, says a
number of small- and medium-sized contract logistics providers
have ambitions to expand regionally, but "their customers have
told them they need to be global" to deliver economies of scale
and expertise that are needed.
To compete he expects these, and freight forwarding boutiques
that operate in local marketplaces, to merge with each other or
risk becoming fodder for the giants of the industry.
One such giant is Deutsche Post AG (DPW.XE), Germany's former
state-owned postal operator. Since the late 1990s, the EUR40
billion company has been on the acquisition trail, acquiring
well-known names including U.S.-based DHL International Ltd., and
Swiss freight forwarder Danzas AG in a drive to overtake Exel as
the world's number one logistics provider by the end of next
A spokesman for the company, which has GBP3.8 billion in cash
available for acquisitions, said: "If there are opportunities
which make strategic or economic sense for our company, we will
have a look."
Exel Chief Executive John Allan said he sees a "modest pace of
continuing consolidation in this industry," with pressure
building on medium-sized logistics companies, as customers demand
more supply chain services globally.
But he added: "This doesn't mean there won't be a role for
specialists" serving niche markets that don't have global needs.
Over the past decade, offshore manufacturing and globalizing
industry have created longer supply chains, expanding the scope
of services required from logistics providers. At the same time,
product cycles have shrunk, placing a premium on getting goods to
Among logistics companies, the ability to manage and coordinate
the growing range of functions and faster pace now in demand is a
more recent phenomenon.
U.S. giant UPS Inc. (UPS) only established its Supply Chain
Solutions division in 2002 following the acquisition in 2001 of
Fritz Cos., a U.S.-based freight forwarder. But the $2.4 billiona-
year unit has made 16 other acquisitions over the past four
years to support its logistics activities.
Bob Stoffel, senior vice president of the unit, says third party
logistics providers such as his are developing "complex
integrated capabilities that cut across the globe, across markets
and across competencies" to help companies manage all aspects of
TPG NV (00905.AE), the Dutch-based global mail and express
company, earlier this month received E.U. approval to buy Swedish
freight services company Wilson Logistics Holding AB for EUR257
million. Besides expanding TPG's presence in markets such as
China, observers say the purchase gives it a base in freight
forwarding, which is essential to optimizing costs and expanding
The freight shippers themselves are also actively adding to their
range of services.
Asset-heavy shipping giants such as Denmark-based A.P. Moller-
Maersk Group (MAERSK-B.KO) and Germany's state-owned rail
operator Deutsche Bahn AG (DBU.YY) are expanding into third party
logistics and freight forwarding.
Investec Securities analyst John Lawson says that for Maersk and
others, supply chain management offers a way to escape the boom
and bust nature of their business.
"If you're a pure shipper, you have a highly volatile business,"
he says. Supply chain management will "reduce their cyclical
exposure" and provide future growth.
These companies are trying to emulate Exel's success. The company
was created in 2000 through the merger of logistics company NFC
PLC and freight forwarder Ocean Group to become the industry's
first dedicated provider of "integrated logistics," a term used
to describe combined logistics and freight management services.
BNP Paribas' van den Brul says success in logistics is
"ultimately about reducing costs and improving efficiency." And
Exel's model is unique in that it achieves this without owning
air- and sea-cargo assets, thereby freeing the company's freight
forwarding arm to operate independently and get the best deals
available. Exel also doesn't have to worry about asset
Analysts say for Exel, the focus will be on horizontal expansion
to gain the heft needed to ensure its future role.
"The market where we buy and sell stuff is global," notes Yossi
Sheffi, head of the MIT Center for Transportation and Logistics
in Cambridge, Mass. He says "size and reach" are qualities that
"companies can relate to" as global businesses.
Exel's purchase of Tibbett & Britten, which went unconditional
last week after gaining regulatory approvals, moves the company
towards this goal by giving it greater sector presence in nonfood
retailing, as well as bigger market share in the U.S.,
western Europe and in the growing markets of eastern Europe.
"We are moving into an era when competitive advantage doesn't lie
in products," says MIT's Sheffi, because these can be reverse
engineered relatively easily.
Rather, he says the challenge will be "to build an organization
that can deliver operational excellence."
-Dow Jones Newswires; 44 (0)20 7842-9486;
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