With many a transport company still on the path to recovery from the fallout of the Global Financial Crisis (GFC) in 2007, finding strategies to gain a competitive advantage over the masses has become of critical importance in the transport community, according to a recent report from McKinsey. As an inescapable reality of the transport and logistics industry is the requirement for ongoing – and often substantial – investments into equipment and assets to keep afloat, it says a clear plan is necessary to turn the considerable outlay into profit.
To help executives define their strategies, four McKinsey principals and partners – Ludwig Hausmann and Maximilian Rothkopf from Munich, Ishaan Nangia from London and Werner Rehm from New York – recently came together and took a look back at ten years worth of capital-market performance from 264 listed transportation and logistics companies from around the world.
Perhaps unsurprising to those who experienced the brunt of the GFC’s economic calamity, the investigation revealed that average total return to shareholders (TRS) in the transport and logistics industry has been well below cost of capital since 2007, and return on invested capital (ROIC) was lower than in most other sectors. The research team determined that TRS is increasingly impacted by the fact that “most companies in the industry have to invest significant amounts just to stay in business”, such as for on-going fleet maintenance, as well as the costs involved with meeting tightening emission standards, expanding distribution networks and launching new and more convenient services.
Although the capital outlay required to ‘just stay in business’ is already a hit on the hip pocket for many a transport company, the McKinsey foursome emphasises that failing to invest in new, more efficient trailing equipment is “not an option” when it comes to business survival. “Typically, companies that continue to use older assets in capital-intensive industries are able to generate windfall profits. However, the opposite holds true for the transportation industry. The efficiency gains from new generations of assets are critical to defending and strengthening competitiveness. It’s crucial to identify sources of competitive advantage that place the company ahead of trends and drive superior performance.”
A quick look at the latest generation of transport equipment coming out of both Europe and the US indicates a distinct push to improve the efficiency and environmental performance of trailers over the past two years or so, with new, innovative models coming out at a faster rate than ever before. “Transportation assets are becoming smarter, greener and larger at an ever-faster rate. Companies need to invest constantly in new-generation assets to remain competitive, while retaining capital discipline,” Hausmann et al. explain the development.
However, they also warn that only a depe understanding of both technology development patterns and regulatory frameworks will help avoid sinking money into equipment or infrastructure that would rapidly lose value or become obsolete. “This is especially true in road transport, where regulation changes can have a substantial impact on trailer dimensions and therefore payload capacity,” the group mention. “Staying competitive means keeping up to date with the latest changes to avoid investing in equipment that is on the brink of being replaced.”
This occurrence, which the McKinsey researchers call the ‘asset dilemma’, is the first of the five imperatives that they outline as crucial for consideration during strategy development, with the other four revolving around resource agility, digital transformation, M&A activity and preparing for the unknown.
The first imperative, the asset dilemma, also encompasses issues that arise from leasing equipment. Hausmann et al. say that the flexibility that comes with leasing equipment rarely justifies the higher price that comes with it. “[The findings] imply that many transport companies could outperform competitors by owning a larger part of their core fleet,” they say – also noting the possibility of avoiding higher manufacturing prices during peak order periods by planning ahead.
Touching on the second imperative, the McKinsey team says companies that are better prepared to reallocate resources at the drop of a hat are more successful in turning investment into a return for shareholders. “Nowhere is this more true than in the geographically diverse network industries of the transportation and logistics sector. In this largely asset-intensive business environment, huge strategic bets have to be made,” Hausmann et al. say – admitting that bold moves do, however, come with the risk of ‘even greater misallocations’.
One of the few transport and logistics companies that have been getting resource agility ‘just right’ recently is Singapore Post. According to the research team, the company reduced its spend on traditional mail services and got rid of several printing and mailing businesses to free up capital for investments that leverage the growing e-commerce trend. “Executives can unlock the benefits of agility by overcoming common barriers that hinder flexible resource reallocation – typically a lack of intent, an inadequate process and a lack of the right skills and mind-sets,” they explain.
In line with the e-commerce boom – which has been integral to the revival of the rigid body building market – the third ‘crucial ingredient’ focuses on the potential of the online sphere. With the current digital disruption exacerbated by the expansion of the Internet of Things, the McKinsey foursome identified that, “almost every company” is facing the pressure of digitally enabled change from customers, new competitors and shareholders.
“Turning a potential threat into an opportunity will require each company to define a digital strategy tailored to its own value drivers, and to make its transformation a success on its own terms,” they explain. To do so, it’s not enough for companies to think of digital access and capabilities as ‘add-ons’ to their current offering. Rather, they say there is more value to be uncovered through comprehensive evaluation of how to use digital assets to enhance what is unique about the company’s existing strengths.
“For most companies, this will mean defining and executing objectives that digitise core processes, reinforce the IT foundations of their business model, and stake a claim along new frontiers. The latter could reach from digital auxiliary products to partnering with digital giants to develop completely new solutions,” Hausmann et al. say, touching on the foundation of the fourth ingredient to success – Mergers and Acquisitions (M&A).
M&A has long been a viable growth driver for many a transport and logistics company, with Hausmann et al. stating growth from M&A is critical for the long-term success of companies across industries. In fact, they quote research* that shows 39 per cent of the top 1,000 firms to remain in business between 1999 to 2013 were engaged in M&A activities. The sector’s current ‘firepower’, which the team says comes from excess cash and debt-raising capacity, has prompted some 7,900 deals worth $2.5 trillion (€2.2 trillion)* that have been announced in the eight months between January and August 2015.
US corporation XPO logistics has become something like a poster child for M&A-based growth, aggressively pursuing the strategy with 15 companies purchased since current CEO, Bradley Jacobs, took over the business in 2012. Most recently, the company made headlines with the €3.24 billion take-over of French transport icon Norbert Dentressangle in June, quickly followed by a further €2.6 billion deal to acquire Michigan-based Con-Way in September 2014.
Similarly to the asset dilemma, the M&A imperative also has two sides – the second being the need for partnerships. Joint Ventures, like that between German trailer giant Schmitz Cargobull and China’s Dongfeng Motor Company are required for companies to access new markets and capabilities in a cost-effective way, they say. “In most industries, cooperation through joint ventures remains the primary means to gain access to new markets, especially emerging ones,” Hausmann et al. note.
The last of the five imperatives outlined by the researchers is a less tangible concept, although just as important the other four described, and calls for executives to plan ahead to manage for an uncertain world. “Now more than ever, a market-beating strategy will often mean departing from a company’s traditional markets and experience. Doing so prudently will require executives and boards to be explicit about building the assessment and management of risk and uncertainty into the strategy process. Among sources of uncertainty, changes in regulation can put substantial value at risk. Mitigating the negative impact of regulatory change, and capturing the opportunities it creates, requires a company to rigorously map its stakeholder landscape.”
For a company to gain competitive advantage in the transport and logistics sphere and successfully turn high capital investment into return for shareholders, the McKinsey researchers say that a business’ strategy must contain all five of the outlined imperatives. “Blending these five strategic ingredients into a compelling strategy will require ambition to outperform the market, tailored analytics, granular understanding of individual markets, and flawless judgment. Executives who are able to combine these inputs will have mixed a potent cocktail that has every chance of beating the market.”
*Source: Merrill Datasite, McKinsey, McKinsey’s Strategy and Corporate Finance Practice