3PLs face uncertainty as Trump takes on trade

Alan M. Field, Contributing Editor | Jan 15, 2017 8:30AM EST

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For third-party logistics providers, 2016 will prove a year of overall slow growth that sets the stage for one of the more unpredictable years in recent memory. When all 2016 data is in, overall gross revenue likely will show 4.2 percent growth, to $168 billion, according to estimates from Wisconsin-based supply chain research firm Armstrong & Associates. 

Domestic transportation management, including freight brokerage and non-asset activity, is the fastest-growing segment of the market, and was on pace to increase revenue by 8.4 percent, to nearly $10.4 billion in 2016, according to A&A President Evan Armstrong. He expects 2016 to show much slower growth for other areas: 4 percent for dedicated contract carriage, 3.2 percent in software activity, 2.4 percent in value-added warehousing and distribution, and just 2 percent for international transportation. 

“We still see room for growth in DTM, helping customers manage multiple modes (and) optimizing transportation networks,” Armstrong said. But 2016’s 8.4 percent growth figure for domestic transportation management is lower than in the strongest recent growth years of 2013 and 2014, primarily because of the abundant capacity in the market, he added.

“There are plenty of carriers to handle loads, and we (didn’t see) a ton of tightening” during the holiday peak season, Armstrong said.

On the international side, overcapacity is even more dramatic, especially on the ocean side and even with Hanjin Shipping’s August collapse. “And there is also a lot of capacity on the air freight side, even though there are some strikes going on (including December’s Lufthansa pilots’ walkout) that will probably have some impact at Amazon and others,” he said. “Still, there is overcapacity, so large shippers can contract directly with airlines or with ocean carriers to meet their capacity needs. That weighs on the freight forwarders. They don’t have to use freight forwarders to meet capacity needs.”

Amazon, meanwhile, has emerged as a one of the world’s largest providers of value-added warehousing and distribution. According to recent figures, Amazon’s total warehousing square footage was 100.6 million square feet. “If all of that were third-party logistics square footage — and it’s not — it would make Amazon the third-largest 3PL in terms of warehouse square footage globally,” Armstrong said. 

Only two 3PLs are larger in that regard: DHL Supply Chain and Global Forwarding, with 248 million square feet; and XPO Logistics, with 151 million square feet. Last June’s hiring of Ed Feitzinger, former CEO of Long Beach, California-based 3PL UTi Worldwide, as Amazon.com’s vice president of global logistics, is “a step in the direction of Amazon becoming more of a ‘go-to market’ firm,” that is, toward Amazon offering services as a 3PL, Armstrong said. 

What lies ahead for 3PLs in 2017? Donald Trump’s presidential election victory last November makes forecasting the future more difficult than usual, given Trump’s unorthodox and unpredictable views on international trade. For one thing, the fate of the Trans-Pacific Partnership may not be as clear as most observers believe. 

“Everybody is assuming it’s dead on arrival with the change in administration,” Armstrong said, before noting, “Hopefully, there can be some sort of Phoenix coming out of the ashes” now that China has announced the advent of its own pan-Pacific trade pact. That agreement, the Regional Comprehensive Economic Partnership, would group the 10 member states of the Association of Southeast Asian Nations and the six states with which ASEAN has existing free trade agreements: Australia, China, India, Japan, South Korea, and New Zealand.

Chinese Premier Xi Jinping told leaders of the Asia-Pacific Economic Cooperation that Beijing wants a level playing field for foreign and local companies so they can share in the country’s growth. But TPP supporters fear the RCEP would leave US-based multinationals playing a secondary role on a playing field designed by and for China. Could growing awareness of such a danger reawaken interest in the TPP among Republicans, who initially supported the TPP? A revival of the TPP would be helpful in expanding international trade activity for 3PLs, Armstrong said. 

Another possible sales point for the revival: With all the negativity about free trade during the US presidential campaign, TPP critics seem to have forgotten that the agreement was originally “created in order to establish product standardization in and around different measures of quality. A lot of that would be very helpful in global trade,” Armstrong said. “Anything that can positively affect (import) volumes would be helpful. The TPP probably could have gotten that.”

But if the Trump administration also imposes high tariffs on imports from China, Mexico, and other major US trading partners, then “we are going to lose volumes on the freight forwarding side,” he added. And yet it’s also possible that if the Trump administration imposes greater complexity in the international trade compliance processes, US shippers will require additional value-added services from forwarders, as well as software that manages that complexity efficiently. 

“There is so much uncertainty now that it is hard to tell which way it is going to go,” Armstrong said. “But there are plenty of headwinds when it comes to international transportation management. And we are looking at a year here where we’ve had 0 percent gross revenue growth and about 2 percent net revenue growth in terms of international transportation management. That’s very meager growth due to overcapacity and ongoing slowing in the Chinese economy. Nothing has been happening on the global trade side to amp that up.”

Another uncertainty in the new year is the fate of Trump’s infrastructure plans. In theory, a massive infrastructure program would provide new business for 3PLs, but would deficit-minded Republicans be more cautious about such a program than Trump? Overall, we should have a better year in domestic transportation management, and probably on the warehousing side, just because a lot of what we’re talking about is fiscal stimulus through tax cuts,” Armstrong said. “However, we’ll also have monetary policy tightening, so we’ll see what the net effect is.” 

In any case, shippers and their 3PLs feel positively about collaboration and moving away from primarily transactional relationships and more toward meaningful partnerships, according to the 21st Annual Third-Party Logistics Study produced by Capgemini Consulting, Penn State University, and Penske Logistics. The most recent survey, released in October, suggests 3PLs and their customers are improving the quality of their relationships.

For example, 91 percent of companies that use a 3PL and 97 percent of 3PLs themselves reported that their relationships were successful and that their work was yielding positive results. The 2017 3PL Study also showed that 75 percent of those shippers who use logistics services and 93 percent of logistics providers said the use of 3PL services contributed to overall logistics cost reductions, while 86 percent of shippers and 98 percent of logistics providers said the use of 3PLs contributed to improved customer service. 

Almost as positively, 73 percent of shippers and 90 percent of logistics providers said 3PLs offer new and innovative ways to improve the effectiveness of logistics initiatives.