Transformative power of digital technologies
Consider three facts about China’s freight and logistics business. First, 40 billion packages were delivered express in 2017. Yet an estimated one-quarter of intercity express deliveries has missed time targets according to China’s State Post Bureau. Second, seven of the world’s top 10 container ports are in China, but a lack of pricing transparency and customized services especially for small and medium-size enterprises mean that the ocean shipping sector is inefficient. Third, on China’s Singles Day annual shopping spree, the time it takes to deliver 100 million packages has fallen from nine days in 2013 to only about 3 days in 2017. This is a story about soaring demand, rampant inefficiency, and the transformative power of digital technologies.
Demand for all kinds of delivery — express, and road and ocean transportation — is soaring. China is today the internet shopping capital of the world, with more than 40 percent of global e-commerce transactions. Growth in deliveries has been remarkable — 40 billion packages in 2017 from only 0.3 billion only ten years earlier. China is also the world’s largest goods-trading nation with annual volume now at the US$4.4 trillion mark, and ocean shipping is a huge sector. China has the world’s largest container ports — in 2015, the World Shipping Council ranked Shanghai’s and Shenzhen’s first and third in the world, respectively, in throughput volume.
But inefficiencies are rife. China has an estimated 8 million truck drivers, but 95 percent of them are single operators or small companies. Only 1 percent of truck companies has more than 50 employees. A lack of transparent, real-time information on routing means that China’s average empty running ratio in road transport is estimated to be about 40 percent, compared with 10 to 15 percent on average in Germany and the United States. Overall, the cost of China’s freight and logistics sector is about 15 percent of GDP, almost double the share in the United States. The efficiency of the ocean shipping industry is negatively affected by fragmentation in road transportation, as well as the continued prevalence of paper-based customs clearance and high dependence on third-party providers such as forwarding companies.
A major opportunity
China is already a leading digital force with 42 percent of global e-commerce, processes 11 times more mobile payments than the United States, and one-third of the world’s unicorns. But there is enormous upside. China is a large and young digitally savvy market, and digital approaches can easily be commercialized. The incentive to go digital is large because of inefficiencies. MGI research finds that three digital forces — disintermediation, disaggregation, and dematerialization — can potentially shift (and create) 10 to 45 percent of industry revenue pools by 2030.
Freight and logistics is both highly inefficient and less digitized than other sectors in China, reflected in the low ranking of the transport and warehousing category. The McKinsey Global Institute finds that broader use of digital technologies could shift or create between 23 and 33 percent of the industry’s revenue pool, creating an efficiency revolution. To assess the impact of digital forces in the freight and logistics industry, MGI analyzed around 70 use cases and focused on three subsectors: ocean shipping road transportation, and express delivery. Together, these three subsectors are valued at around US$570 billion and account for three-quarters of China’s freight and logistics market; all are highly inefficient and underutilized. The express-delivery market is much smaller, at around US$45 billion, but is the fastest-growing subsector.
We looked at how three major digital forces could reshape value chains and improve productivity in the industry.
Disintermediation. This is a major trend in China. Alibaba and others have disrupted the retail industry by cutting out a middle layer and linking suppliers and consumers directly through digital platforms. Industries with high margins on offline channels, a lack of information transparency due to multiple layers between suppliers and customers, and a highly fragmented landscape are ripe for this type of digital disruption.
Disaggregation. Digital attackers are disrupting traditional business models and reinventing industries by disaggregating huge assets into many pieces, turning them into services, and serving fragmented consumer bases. Industries that have high value, high durability, and fluctuating utilization are the main territory for this type of disruption. Digital disruption through disaggregation is increasingly prominent in China, shared mobility being a prime example.
Dematerialization. This digital force changes products or processes from physical to virtual, unbundling demand with digital delivery and enabling consumers to receive products or services anywhere, anytime. In China, the pace of this conversion has been faster than elsewhere in categories such as music and e-books, and the upside for digital attackers far larger than in other countries.
Disintermediation through real-time matching platforms can address the sector’s fragmentation, while disaggregation such as crowdsourcing delivery can enable flexibility. Dematerialization driven by 3-D printing, e-working, and paperless solutions can reduce the flow of goods, but its impact is likely to be relatively small compared with the other two forces.
The start of a digital revolution
Faced with ever more insistent calls from China’s e-commerce giants, players are beginning to respond this yawning gap between demand and what the industry is able to deliver through digital means.
In express delivery, one issue that digital is helping to solve is the fact that there are not enough drivers to meet customer demand. China now has several platforms that crowdsource delivery drivers — Dada, Shensong, and Fengniao Delivery. JD.com’s delivery network has now merged with Dada’s and together they have 1.3 million crowdsourced delivery drivers in 37 cities. Backed by Alibaba and a number of other large express-delivery companies, Cainiao’s big-data platform processes 9 trillion lines of information a day, and mobilizes 1.7 million drivers every day. The platform offers predictive demand analysis and a radar alert system to distribution centers in more than 600 major cities and 50,000 express-delivery points.
By matching demand for, and supply of, drivers in real time using algorithms, online matching platforms can increase the loads of carriers by, for instance, matching trucks with freight for their return trip and avoiding them running empty. More than 200 truck-matching platforms have been launched in China since 2013. One of these is Ymm56, which offers real-time matching in trucking services and integrates receipts, loans, and other financial services into its offering, has 850,000 registered shippers and 3 million heavy truck drivers on its platform. Yihuodi provides less-thantruckload shippers and truck drivers with a free mobile app that enables them to match scattered shipments with available trucks.
The increasing use of digital tools and platforms will inevitably shake up the industry with less efficient traditional players being replaced by more efficient digitally enabled players.
Winners and losers
In express delivery, traditional companies are likely to lose part of their revenue to line-haul truck real-timematching platforms instead of owning their own fleets. In contrast, providers of digital solutions are likely to gain as they disintermediate express-delivery companies with these platforms. By using crowdsourcing platforms, express companies can make more delivery drivers available and increase their capacity.
In road transportation, companies running digital platforms are likely to gain share from traditional trucking companies. They can eliminate information asymmetries, enable the sharing of idle or empty truck capacity, and provide value-added services such as real-time matching and instant price quotations. The fragmented and inefficient market structure, dominated by small and medium-sized trucking companies, could be consolidated. Even in Europe and the United States, where the logistics industry is more modernized than in China, there was significant market consolidation in 2007 when market conditions deteriorated.
By 2008, more than 2,000 European trucking companies operating fleets of five or fewer trucks went bankrupt. In the United States, thousands of trucking firms, most of them with 25 or fewer trucks, went under. In China, the rise of leading online platforms can spur similar consolidation, eliminating unprofitable and inefficient small-sized truckers.