How Different are Road Freight Markets in China and South-East Asia?

Upon relocating from China to Singapore in 2022 to extend oTMS coverage to South-East Asian markets (SEA), I was struck by the marked differences in these transportation sectors.

Having spent 22 years in China, primarily engaged in domestic logistics and freight markets, including founding oTMS over a decade ago, I presumed myself well-versed in the industry and expected a similar landscape in smaller SEA economies.

However, the realities were starkly distinct. China boasts a GDP 4-5x larger than the combined GDP of SEA, with its domestic road freight market ranking as the second largest globally. The sheer geographic size of China also results in a very diverse economy with multiple consumption and manufacturing centers like the EU or the US. This in turn created a need for delivery networks spanning huge distances but able to deliver quickly and inexpensively even small consignments

SEA presents a more streamlined environment, with domestic consumption often revolving around single capital cities and focused on export-centric manufacturing, Countries are smaller, and except for the multi-island complexities of Indonesia and the Philippines, require simpler distribution networks that can be effectively served by individual carriers without a need of multi-layer outsourcing.

The divergence in market dynamics extends to three key factors:

1. Carrier Structure and Outsourcing Methods: In China, LSPs typically don't own truck assets beyond regulatory requirements, leading to multi-layered outsourcing. Conversely, in SEA, except for deliveries to remote islands, main cities and lanes are managed by carrier in-house fleets.
2. Freight Rate Structures and Risk Allocation: SEA markets tend to base rates on full truck loads or even by km distance driven, with responsibility for planning and utilization resting upstream with asset-light LSP or even large shippers. In contrast, China often expresses rates by unit like ton, kg, or cubic meter, transferring responsibility and risk downstream to brokers and small trucking companies.
3. Carrier Management Practices: Chinese companies tend to employ fewer staff in their transport departments, relying on downstream outsourcing, while SEA counterparts may have larger teams managing comparatively smaller order quantities, doing in-house planning, allocation etc.

The implications of these disparities are multifaceted, influencing cost structures, risk management, and the potential for digitalization within the industry.

How do these differences matter?

?For starters, both have their advantages and disadvantages for our potential customers and diving deeper into this topic would take a long article on its own.

?We may observe that the Chinese model is more pragmatic, for as long as you can find enough carriers that can accept such risk allocation. Is their cost the lowest? I saw far lower rates per truck/distance in some cases in the SEA but this stems also from other factors.

?I was surprised by how much the SEA market resembles the EU or the US in terms of the need of planning and optimization. I thought before more risk would have been absorbed by carriers in such developing markets, presumably as competitive as China.

How does it matter for transport digitalization?

?Any decent, full-scope TMS implementation for shippers and asset-light LSPs would cover these 3 broad areas with corresponding benefits:

1. Connectivity & end-to-end order workflow automation to eliminate any manual workload, improve productivity, boost execution speed, and minimize errors,
2. Freight cost management: ?from procurement, planning/optimization to billing and invoicing to reduce actual freight cost per unit and control transport spend by eliminating any manual billing errors
3. Improve visibility and transparency of operations – not just shipment visibility (track & trace or RTV), but also the visibility of carrier performance, operational KPIs, cost performance, team productivity, CO2 emissions etc.

?In conclusion, there is much more focus in the SEA region on point #2 vs point #3 for China, while #1 is kind of an unloved child in both since labor seems cheap and abundant, but it is an absolute foundation needed for 2 & 3 to work properly.

?Of course, companies who implement oTMS both in China and SEA will generally implement all 3 areas, but the focus for the project and TMS business case differs as described above.

Why despite a better market fit, TMS penetration is lower in the SEA?

Gartner estimates that +50% of large shippers (+100M USD transport spend) and +25% of medium ones (+25M USD) in the US use TMS. These numbers are slightly lower in the EU. There are no public estimates for APAC alone, aside that APAC is supposed to experience the highest ~20% CAGR in the coming years.

Our estimates for China are that 10-20% of shippers of the size that should consider TMS already use one. In the past years, most of our sales come from incoming inquiries and tenders. When we launched in 2013 very few shippers and LSPs knew TMS, understood its potential and let alone use it.

In the SEA market, our estimate of TMS penetration rate is 3-5%, only the largest private companies either TMS or similar, such as a route-optimization system for captive fleets. There is also confusion about what TMS is, e.g. putting systems like fleet management systems or GPS-linked software in the same bucket, but very different use cases and target customers, far outside Gartner TMS definition.

We are optimistic though as we see huge potential in SEA to replace or at least augment the manual planning process saving both labor and freight costs. Generally, ROI on planning is much higher and much easier to define than ROI on visibility, even when visibility is defined much broader than track trace, like point #3 above.

?Looking ahead, will freight markets converge between the SEA and China?

Will China's hyper-competitive transportation practices diminish, prompting a shift towards in-house planning and optimization?

Conversely, will SEA's economic growth foster the emergence of larger LSPs capable of absorbing more risk from shippers?

As we ponder these questions, it's worth considering the unique dynamics of the Indian market, which shares similarities with China but possesses its distinct characteristics.

In conclusion, the disparities between Chinese and SEA road freight markets highlight both challenges and opportunities for industry stakeholders. By understanding these differences and embracing digital solutions tailored to each market's needs, companies can navigate the evolving landscape with greater efficiency and competitiveness.

Your feedback, insights, and observations on these topics are highly appreciated.