A thesis of the supply chain and transport ecosystem

This article is the compressed version of my notes prepared for the panel on global value chains (GVC) held at the World Bank in Washington DC on October 1st, 2019. It was the set of the following 10 points that resulted from extensive research over the last years. 10 drivers that stand for major developments and shifts in the ecosystem that influence supply chains and transport, today and in the years to come.

1-     The shifting landscape of global trade

2-     One Belt, One Road – boosting connectivity

3-     Sustainability – a serious business by now

4-     The super robot in the making; entire worlds are digitized

5-     The future is platform

6-     Omni-channel – arriving at scale

7-     Trading nations turn into digital hubs

8-     New risks, new remedies

9-     Innovation ecosystems

10-  Top talent, or the scarce differentiator

During the panel discussion, I elaborated on each of the drivers, also with the intention to provide context, examples and ideas for potential measures to capture the opportunities and mitigate the risks they bring.

1-     The shifting landscape of global trade

The growth in goods trade that we have seen over decades before the global financial crisis (GFC) are gone. We can observe a localization and regionalization of value chains. Goods trade has matured, and trade services have taken over. The trade services market already exceeds that in goods when measured in value-added terms and is growing more than 60 percent faster than goods trade globally. Telecom, IT, and business services are even growing two to three times faster, according to a study conducted by McKinsey.

Trade wars have come back. So far, the current trade wars have not caused the damage many feared. But this may change. “With no sign of a trade agreement, 2019 will be a difficult year; without a trade deal, 2020 may be worse,” an American Chamber of Commerce report stated. “Mexico picks up exports where China slips” wrote Bloomberg, explaining that newly established Chinese factories in the NAFTA member state boost Mexico to United States (US) exports. But Mexico is not the only country that benefits from the US-China trade war.

In 2019 the US is importing 40 percent more from Vietnam than in 2018. Vietnamese exports to the US account now for a 26 percent of GDP. South East Asia as a bloc has been well on track to become the fourth largest economic force after the US, Europe and China by 2030. This trend has been accelerated, making Asia more quickly economically more balanced and inclusive. South Asia, with India at the lion market is also taking its share as an alternative provider to China. In a more difficult position are smaller countries that are dependent on China-related trade flows, like Singapore.

Services trade and trade wars are reshaping global value chains (GVC), as manufacturers and logistics companies are adjusting their networks and capacities. Countries their strategic positioning. Not every value chain can be easily redesigned but those that can adjust. New trading relations between countries emerge.

2-     One Belt, One Road – boosting connectivity

The One Belt, One Road (OBOR), also known as the Belt and Road Initiative (BRI) is the largest economic area development project of all times. With its four dimensions, namely land, sea, air and cyber, the initiative is enhancing existing corridors and infrastructure. The investments are ranging from railways, to seaports, airports, and overseas cables involving over 150 countries and international organizations in Europe, Asia, Middle East, Latin America and Africa. BRI is improving international connectivity in an area that stands for more than two-third of global population, more than 50 percent of global GDP and about one-fourth of global trade.

The BRI also helps to rejuvenate and upgrade existing infrastructure. China silk road trade has helped to revitalize Duisport, Europe’s largest inland port. Duisburg strengthened its position as a major physical hub. The Port of Piraeus ranks now 36th among the 100 biggest ports of the world, up from 93rd when COSCO took over.

China can only benefit in the long-term, when they create win-win situation. On the other hand, nations that don’t participate risk to lose out. Projects need to make local and international sense and are to be assessed and evaluated properly so that repayment of loans is ensured. Blocs, like the European Union (EU) and the Association of Southeast Asian Nations (ASEAN) may be better off by negotiating jointly to achieve coherence and maximum impact.

3-     Sustainability – a serious business by now

Long time, the logistics and transport industries were seen as the laggards of sustainable action. Now, the IMO 0.5 percent global cap on Sulphur dioxide (SOx) content in fuels for shipping will enter into force January 1st, 2020. The compulsory switch will affect at least 60,000 vessels is estimated by shipping executives to cost up to $50 billion industrywide. Although the details of distribution of costs still need to be worked out between the participants along the chain, the community takes the change positively.

In December 2015, the United Nations COP21 Paris Accord committed participating countries to keeping the temperature increase well below 2 degrees centigrade. Aviation and ocean shipping were not part of the agreement. However, the aviation sector achieved its carbon deal on 6 October 2016 and the ocean shipping industry theirs on 13 April 2018. Now, airlines and shipping lines are investing in developing and deploying energy efficiency solutions to meet the self-imposed targets. Other modes of transport are more closely tight to COP21, like the electric vehicle revolution. Some academics claim that also the reduction of transport activity itself needs to be a part of the measures.

The innovations and improvements required needs more collaboration across the ecosystem to agree for instance on standards that comfort manufacturers to make the investments in developing more effective decarbonization technologies. There is no way to escape the costs. Either they will hit us by disasters, food shortages and other effects, or we invest in slowing down climate change, which might be also good for the economy at the end – through the business opportunities that emerge from the transformation.

4-     The super robot in the making; entire worlds are digitized

The Fourth Industrial Revolution is upon us and hardly one denies it. The accelerated development and convergence of the physical, digital and biological spheres will result in the digital economy and society. The conversation in the supply chain and logistics industry about the why, what and how has matured. My assessment based on numerous discussions with decision makers in the public and private sectors is that 80 percent are conscious about the why they should digitize, 40 percent have a clear idea about what to focus on, and 20 percent are clear about the how to digitize. Now, we are entering the phase of experimenting and scaling across organizations and ecosystems. The incentives and the potential are large. The average supply chain digitization is 43 percent – the lowest of five business areas assessed by McKinsey.

The first step in the process of digital value creation is gathering, generating and aggregating data to realize the “complete” end-to-end replica of the supply and logistics chain. Internet of things (IoT) devises will produce the data. Data allows to describe what has happened or is happening, to predict what will happen and to prescribe what the system or stakeholders should be doing to avoid a failure or disruption. Enabled through artificial intelligence, (AI), machine learning (ML), deep learning and neural networks. Automated systems execute on the recommendations resulting from the data analysis. With the help of powerful digital architectures, platforms are pulling this together – into stacks and advanced solutions. Robotics process automation (RPA) and smart contracts are additional instruments of workflow automation. The automation of terminals, vehicles and warehouse operations will grow exponential once end-to-end data availability along the supply chain has been achieved. This, because only then the robots achieve their full impact. 3D-printing is part of automation too - which will enable mass customization and totally new designs.

The digital world has arrived and will only expand. Considering the potential returns, governments and companies need to invest in understanding the benefits and unwanted side-effects to be able to develop the solutions and policies that capture opportunities and mitigate the risks.

5-     The future is platform

Seven of the world’s 10 most valuable companies operate a platform-based business model – among them Amazon, Google, Alibaba and Tencent. The logistics industry’s first unicorn, the digital forwarder Flexport, is also a platform-based business. Traditional logistics companies from Kuehne & Nagel to DB Schenker, from Agility to DSV are also digitizing their business and moving towards a digital platform approach.

Developing the business ecosystem is the central philosophy behind digitization. Platforms provide access. Platforms allow the various ecosystem stakeholders to expose their capabilities and leverage the capabilities of other parties, driving higher levels of business value. But foremost, platforms a very powerful customer experience machines. Designing them like social media is the key to superior interaction and transaction.

Platforms like US-based Uber Freight or Dutch Quicargo, a company I am working with, have entered the market. But the platform development is not limited to the the trucker market. Also, the Airbnb of warehousing has emerged. In the United States of America through Flexe, and in Europe Stockspots. While some players are turning products into platforms, others are working on creating the “ring that rules them all”, i.e. the management system that can access the capabilities and capacities offered by the various digital platforms on the market.

Shippers, forwarders and carriers can leverage platforms to standardize their datasets and processes. Platforms don’t aggregate only the data of one company, but of the many parties engaged with them. This allows to produce benchmarks, indices and identify and predict market trends. Public and private sector experts need to reflect on the governance of platforms to ensure healthy competition and that small and medium-sized business can continue to exist and get their fair share.

6-     Omni-channel – arriving at scale

Today, businesses integrate online with offline activities, digital with analog processes, and machines with humans. Big and small data analytics is driving new supply chains and business models. A customer is approaching the store and the store systems gets alerted and can check whether the products she prefers or wants to collect are available. Stores have become smart showrooms and warehouses. Part of an intelligent omni-channel demand and supply system. Omni-channel, this is total transparency, maximum choice and immediate response. Total customer orientation. The more we digitize, the more the omni-channel concept will expand and prosper.

The world will be increasingly integrated. This is not only valid for business but also for the public sector. Governmental services find a better future in integrated solutions. With technological advancements, such as 5G connectivity, IoT and AI, not only the omni-channel but the entire customer experience will significantly improve going forward.

7-     Trading nations turn into digital hubs

With digital technologies changing the nature of trade, locational and infrastructural advantages may no longer be as strong a control point as they were in the past. Countries that are strategically located may consider reinventing themselves as hubs for digital trade. The digital trade hub can for example consist of a SME trade platform, a free data port and fintech and other intellectual property (IP), as suggested by Tan Chin Hwee and Sangeet Paul Choudary. Even control over trade may be gradually shifting from countries to these platforms. Digital platforms, such as Amazon and ebay, Alibaba and Tencent allow small and medium-sized enterprises (SME) to participate in global trade without the need to invest in building their own supply chains. However, some might prefer a more neutral partner than companies.

Singapore has already turned into a hub for Southeast Asia e-commerce. Compared with nations like Malaysia, Indonesia, the Philippines, Vietnam and Thailand, Singapore has the shortest processing time when it comes to exports and imports. Singapore has also the lowest risk scores for infrastructure for port facilities, air transport facilities, retail and distribution network and road network based on the EIU's Risk Briefing. Singapore is a rising hub of trade finance in Southeast Asia. Singapore’s virtual banks are targeting the region's small and medium-sized companies. A 2016 report by the McKinsey Global Institute estimated that of the 39 million SMEs operating across Southeast Asia, just over half were either not being catered to by credit services or were being underserved.

Staying competitive requires that countries and economic blocs to invest in platforms that appeal to other nations. This will only be successful if the private sector is part of the journey. Because the public platforms need to be built as host structure for (certified) existing or future private and public sector platform services. The publicly supported architectures and platforms will amplify what public sector companies offers – in terms of capacity and loads, functionalities and services.

8-     New risks, new remedies

Digitization does not come without risks. Gartner cyber-security experts estimated that worldwide spending on information technology (IT) security will jump 8.7% in 2019 to $124 billion. As reference, Gartner expects general IT spending to grow by only 3.2%. Cyber risk and mitigation are not alone about technology. Studies revealed that 70 percent of breaches are caused by people and process failures within organizations. Despite the cyber-attacks that hit the terminal business of A.P. Moller Maersk and TNT, a subsidiary of FedEx, with hundreds of millions of US-dollars of damage, 60 percent of C-level executives believe that their current company solutions protect them well enough against hackers. Only 29 percent of IT professionals, however, share their assessment.

Geopolitical and security risks have risen too. With the trade tensions, security incidents are rising. A quote that is regularly attributed to the French economist, Frédéric Bastiat, goes: “When goods do not cross frontiers, armies will.”

Rising income inequality elevates social risks. In the article Global Network Perspectives by Gayle Allard, Professor of Economics, IE Business School, we can read: “Globalization is a win-win. If two countries trade, both benefit; if a country receives immigrants, home and host countries gain; if capital flows freely, both the sender and the receiver are better off. Economists, who agree on little, are almost unanimous about this. There is only one caveat: though both sides gain, there are groups of winners and losers within each country. In rich countries, the “losers” from globalization are the low-skilled workers who lose their jobs due to immigration and trade (and automation) and cannot find equally well paid work elsewhere. These “losers,” buffeted by the winds of globalization and technology and the tough years following the financial crisis, have watched their incomes stagnate or fall since the 1990s, while those at the top have increased.”

Mitigating cyber risks requires a holistic approach led by the leadership. Security risks can be mitigated by amical agreements and social risks through measures to reduce income inequality, like high minimum wages. Prewarning systems – a mix of an intelligent connected net and human networks – are a helpful mitigation tool.

9-     Innovation ecosystems

Patrice Caine, chairman and CEO, Thales, writes “Yes, you may have the capacity to invest massively in research and development (R&D) to hire the best engineers in your field. … But it is not enough, for one simple, statistical reason: there will always be more groundbreakers outside of your company than within.” Patrice sees two ways to leverage start-ups. The first is incubating internal start-ups, providing them with a degree of liberty towards the hierarchical structure. The second is partnering with startups, i.e. identifying the most promising ones and finding ways to work with them.

Singapore has launched its logistics industry transformation map (ITM). The ITM includes an assessible innovation ecosystem – specialized research capabilities paired with supply chain decision makers. Singapore invests in next-generation facilities with high-specification units that encourage the co-location of companies and drive the use of advanced technologies. Also, Port Authority of Singapore (MPA) grants funding to digital startups. Dr Lam Pin Min, Senior Minister of State, Ministry of Transport & Ministry of Health has announced in April 2019 that the Singapore Maritime Institute (SMI) will prepare “the Singapore Maritime R&D Roadmap 2030 to optimise R&D efforts and resources for greater value co-creation within the maritime industry”.

The culture of organizations poses limitation. Forwarders and carriers are not technology companies. Which makes it hard for them to build technology solutions on their own. Moving ahead requires government support and technology and innovation partners. Or innovation alliances along the chain.

10-  Top talent, or the scarce differentiator

Even partnering with innovator and technology companies does not work without digital talent within the global value chain participants. As organizations need to select the most appropriate partners and products. Experts need to ensure the proper implementation and integration of the selected solutions. Maintenance and continuous development of the systems and tools is mandatory in today’s high pace world and requires talent too.

The shortage of drivers and warehouse workers can be solved with money – by paying more. This does not work with high skilled workers that are in high demand across the economy. Therefore, Singapore’s logistics industry transformation map (ITM) includes the development of a strong pool of talent specifically for the logistics industry.

Well trained personnel have always been critical for success. The United States, the United Kingdom, France, Germany, Japan, Korea and China are not the only countries that have demonstrated this fact. However, in today’s digitized world this factor has risen in importance. While the middle and lower segments suffer from a certain level of substitution of labor by technology, high-end skills have never been as much in demand as today.