Emerging Market Perspectives: The State of Logistics Technology

In this week’s piece, I interview 6 leaders of logistics technology businesses across emerging markets to share their insights on the state of logistics technology across the globe. I then summarize some of my personal takeaways based on these discussions about the significance of platform offerings, infrastructure constraints, social commerce, existing technology adoption and commerce idiosyncrasies.

Next week’s piece will discuss the potential breakup of big tech and share an interview with a business that is helping empower small businesses and artisans with technology.

India - Akshay Ghulati, Co-Founder & CBO of Shiprocket

Shiprocket is an India-based e-commerce shipping solution used by over 40,000 brands.

SN: What logistics challenges are unique to India that Shiprocket helps solve?

AG: I see three primary challenges unique to India comparing vs. the US. First, differences in carrier coverage. In the US, there are 1-3 major carriers that cover close to the full US market. In India, the largest carrier will cover 27,000 pincodes (postal index numbers). Because of this diffusion of carrier coverage, carrier performance will be so diverse that shippers can’t deliver a good customer experience without using multiple carriers as most will have gaps in coverage. Mail is not an option for e-commerce players because there is no tracking or visibility. Second, the delivery supply chains are very broken. The challenges of delivering parcels in Northeast India (non-metro to metro) are very different than metro to metro (Delhi and Mumbai). There are substantial infrastructure / road network gaps. Outside of major metro cities, goods get lost or damaged in transit and there are issues with service and scanning / tracking. When you try to deal issues on individual shipments as a small business entrepreneur by contacting the carriers, they are next to impossible to resolve. You need an intermediary to bring in that customer service layer, especially for smaller businesses with lower parcel volumes to ensure you are actually treated like a business partner by carriers. Third, the way e-commerce has developed is very different between our countries. In the US, shoppers went from organized retail to e-commerce with the rise of Amazon. Now, independent sellers are selling direct through Shopify as well. In India, it was very different. E-Commerce and offline organized retail basically started a couple of years apart from one another (in the early 2000s) without the decades of development in between that you saw in the US. We never got to the direct selling model. When e-commerce came to India it came as marketplaces. That’s why Shopify couldn’t make a dent in India for ten years because people went from organized retail straight to Flipkart. Instead of adopting a Shopify type model, India transitioned to social commerce, selling via Instagram, WhatsApp, Facebook without official sites or storefronts. Those businesses still need to manage fulfillment and catalogue their products. We cater to people who already have social demand and use us for shipping, catalogue aggregations and customer service. In India, technology businesses need tools to specifically cater to social commerce.

SN: Given the informational fragmentation present in informal social commerce, could you elaborate on the opportunity for product information management across India?

AG: Product information management is critical in social commerce. Customers are buying on a less trusted platform (social) and purchasing based on pictures. Customers need confidence that what they see is what they will get. On WhatsApp, people initially sold via 2nd degree connections but that network is expanding into 3rd and 4th degree. Proper cataloguing instills trust in buyers that you know what you are doing as a business. Second, from a logistics perspective, product information cataloguing is a way to prove that the products a business sent were particular dimensions in order to prevent carriers from charging overage fees based on package size specifications. Businesses can leverage product cataloging to reverse fees based on claims of different weight and package dimensions.

SN: Outside of needing more carriers to offer full coverage, what are other issues in the carrier ecosystem that need improvement and how is Shiprocket helping to solve those?

AG: Technology sophistication is a problem. Some courier companies are good with technology and APIs, but for most, we as an aggregator have to do a lot to translate their data into a readable format, especially for tracking data and notices. Another area is channel integrations. Being able to fulfill orders from a variety of providers (Shopify, Magento, Amazon, WooCommerce), requires a platform to automate management across sources. The last area would be improving performance, specifically in the context of India’s cash on delivery (COD) model. COD is a model whereby customers place an order without a card and commit to paying in cash when the good arrives. 70% of Indian e-commerce happens that way. Because of this model there is a large Return to Origin (RTO) rate, which means the parcel arrives and the customer says I don’t want it without even opening the package because it was delayed and they already found another good. It is important to optimize performance to get a package to customer in the shortest time to minimize RTOs. We found a one day delay can increase RTOs by 10-15%. RTOs are costly for shippers who lose money paying for shipping both ways. We have a proprietary recommendation engine to help improve carrier performance thereby helping decrease RTOs. Also, in rural areas and tier 2 cities, it is fairly common for consumers to list highly informal addresses, i.e. house behind x stall near y junction, instead of a street address. We have predictive tools to determine whether we believe the package will successfully be delivered to this informal address based on our prior transaction data, thereby helping prevent fulfillment to invalid or fraudulent addresses. Outside of cities, we can help predict the outcome of these informal rural deliveries with 80-90% accuracy.

SN: Outside of optimizing RTO rate, if a customer opens and wants to return a product, what is the state of reverse logistics in India and opportunities for improvement?

AG: Automated returns policies are important for generating consumer trust. Especially on the social commerce side, most sellers don’t have this functionality. Even if our sellers don’t have their own websites, customers of our sellers can initiate a return through Shiprocket. Providing automated returns technology is an important reverse logistics innovation area. Quality check is another area where we can improve reverse logistics. Couriers should be able to check whether a feature (color, size, etc.) is wrong on an order and then initiate a refund to the customer on the spot from their mobile device.

Colombia - Brian York, Co-Founder & CEO of Liftit

Liftit is a Colombia-based digital cargo delivery platform focused on the short haul market.

SN: Given your focus on short haul, what are some of the unique complexities around shorter distance trucking in urban areas?

BY: Route optimization can be complex. All of our truck drivers have a native mobile application focused on task management. Drivers are doing 20-30 deliveries per day and they have to provide status updates such as I’m in route, loading, unloading, capturing a signature, etc. While they are doing the delivery, the next stop might no longer be the most optimal next stop relative to traffic in the city. All day long, they go through this task management application and we collect data on how long the truck was idle, how long it took to load / unload, etc. We use all of this data to more optimally assign the next stop.

SN: Within the trucking ecosystem, could you speak more about the mix between larger trucking companies and independent fleet owners and what opportunities are created by this mix?

BY: 2/3 of shippers are already outsourcing logistics but most of the market consists of independent truck drivers. 60% in Brazil, 85% in Colombia and 85% in Mexico are independent truckers. It feels like fishing in the barrel on both sides of the marketplace because there are a lot of independent drivers looking for stability through a platform like ours because they are looking for trust. Many of the brokers or transport service companies are corrupt. They are 3rd generation and have been through the corruption of the country. There still exists fraud and bribery. The person affected the most is the driver. The truck driving market is really informal with a lot of angry drivers because they have had to deal with these brokers for decades. These short haul drivers are seeing technology disrupt other markets like food delivery, which makes the sales conversation with the independent drivers much easier. We are plugging into a market that was already skewed in our favor as it relates to our model given shipper demand to outsource logistics coupled with independent driver fragmentation. 

SN: Given driver fragmentation in the market, in addition to word of mouth marketing, what sales / marketing strategies have you employed to onboard drivers?

BY: Social platforms work incredibly well in Latin America. LinkedIn on the shipper side as most of the shippers we want to do business with are all on there. On the driver side, Facebook works really well. In the beginning of the business, I would use Instagram and post a picture of a truck with an advertisement and would get 15K likes and thousands of comments from truck drivers very quickly. Then, we focused more on word of mouth because many of the drivers are part of these large WhatsApp groups. To tap into these networks, we have also used service referral programs. We are doing 10-12 new operations across 5 countries every month in Latin America. We start with about 5K per month GMV and then ramp up with each shipper. Because we aren’t doing on-demand consumer shipping, worst case scenario, if we were ever short on trucks in a new market, we can just lean in with our existing trucking market with a referral campaign. We also can just go to shipper sites / distribution centers and there are often truck drivers idle that we can have a conversation with to recruit. Most of our engagements start with a pilot and shippers are flexible on the truck commitment initially in a new market. 

SN: What additional areas do you see over the long-term to provide more value to drivers like driver health, fleet management, fuel financing, supply marketplaces, truck tracking, etc?

BY: The legacy system is informal and most drivers have had almost no exposure to technology in and around the truck. Only within the last 18 months, have some drivers leveraged a mobile application. Half of the drivers don’t even have a bank account when we meet with them initially. We have created a benefits / reward program for drivers. Through our existing shareholder base, we were able to launch a group discount buying program for top tier drivers for tires, gas, maintenance and other products / services. We are focused on building that out further over the short-term. In addition, we have the payment information from our drivers to offer financial products. Most of our drivers do 90% of their deliveries through LiftIt. There are a lot of additional Fintech services we can provide because we are basically banking these drivers as-is. Moreover, we are currently in the process of acquiring thousands of trucks from a large consumer shipper. The shippers in the region that have their own fleet are realizing it is not a good model to own a large fleet as a shipper and they want to unload their trucks. We have enlisted a bank to do a lease-to-own program back to our Lifters. We want to capitalize on these unique shipper fleet opportunities to empower and grow the fleet size of our Lifters. 

SN: What is the state of package and delivery visibility in the region? What opportunities are there to improve that for LiftIt shipper clients?

BY: LiftIt provides track and trace functionality to business clients to pass onto their consumer clients. Right now, over 90% of the time, the shipper sends this visibility information through email or WhatsApp to customers. A lot of customers don’t have integrations on their e-commerce sites to push automated track & trace notifications to consumers. 

SN: Is there an opportunity to build an additional commerce layer that more seamlessly sends this product information to customers or predict it pre-purchase to improve cart conversions and optimize the customer experience?

BY: There is an incredible opportunity there. However, the bar is so low right now in Latin America that there isn’t a need to prioritize that right now vs. optimizing the actual truck delivery systems. Even when we started the business, for the first shipper we worked with, we wanted to have an easy connection with the e-commerce checkout page to give consumers seamless visibility. However, most of the shippers aren’t ready to double down or substantially optimize that experience especially in Colombia. 

SN: Even though you are mostly focused on urban and peri-urban areas, what are some of the considerations as you think about scaling further outside cities?

BY: We spent too much time initially focusing on a rural and social impact angle in 2017. It is interesting but very complicated. The mountainous terrain and infrastructure constraints throw off the unit economics for shippers and drivers. For example, drivers would need to receive massive fuel payments to make it work given road infrastructure constraints. We try to minimize rural payments now because it is a disruption to our model. There certainly could be a great business there especially with migration from the city due to coronavirus, but it is not a focus for us at this point.

Indonesia - Tiger Fang, Co-Founder & CEO of Kargo

Kargo is an Indonesia-based a digital freight platform to connect truck operators and 3PLs directly with shippers.

SN: What are the greatest logistical challenges in Indonesia and how are they different than in the US and other more developed markets?

TF: First, the biggest difference is that Indonesia is a developing country and the US has a large headstart on building infrastructure and also digitizing with online infrastructure such as EDI. WhatsApp groups and phone calls have been the largest competitor to our business given limited existing logistics digitization. Second, truck ownership is different. Smaller and medium sized trucking companies are most prevalent in Indonesia whereas there are more self-operators in the US. Because of the high cost of capital of getting started, drivers tend to be workers and paid as employees and the bulk of the value is derived by asset owners. Third, Indonesia is very heavily intermediated by brokers. The market is very fragmented. There are ~7M trucks in Indonesia and most of them are owned by small trucking companies. 90% of the logistics truckers are in groups of companies that own less than 25 or so trucks. Fragmentation on the carrier side has caused fragmentation in middlemen. When we got to a shipper, they may contract a 3PL who then contracts out a carrier and then that carrier sub-contracts out to a different carrier, with up to 4 different brokers in the middle before getting to the driver who provides the ultimate value. Each middleman traditionally takes up to 10-20% of the value. That is one of the reasons why, as a percentage of its GDP, Indonesia spends 25% of its annual GDP on logistics. 

SN: Understanding your initial shipper focus was FMCG, why did you start there and how has that industry mix evolved over time?

TF: In Indonesia, most of the FMCG space uses one truck type, TronTon Wingbox trucks. They are dry van, box trucks that hold about 20 tons. They are the most common trucks and also the most widely shared from a capacity perspective. Beyond FMCG, It is shared with the automotive, textile and e-commerce sectors. FMCG has the most volume within that truck type with blue chip shippers such as Coca-Cola and Unilever. The trucks that can share the most capacity have the greatest potential for higher utilization across shared industries. The proceeds of our Series A round will be used to expand to other industries and truck types. Interestingly, through coronavirus, we have seen the mining industry want to adopt our technology. They want to optimize their trucks to go between mining pits and mining depots. 

SN: Over the long-term, as you expand on the e-commerce side, what differences in e-commerce relative to the US impact your strategy? How do e-commerce systemic differences manifest in supply chain complexities specific to Indonesia?

TF: In Southeast Asia, there is not a clear winner yet in e-commerce like Amazon owning such a massive share of the US market. In Indonesia, it is a 4-way e-commerce race between four technology unicorns. E-commerce as a percentage of total retail is still only 4-5% in Indonesia. Payments is a problem, compounded by cash on delivery models. Lower credit card penetration creates friction relative to US online payments. Moreover, geographically, Indonesia is separated by islands. 50% of the population lives on Java and between the three main islands we service (Java, Sumatra and Bali), it is about 80% of the GDP and 60-70% of the total population. The packages going beyond these islands have costlier shipping. The average package delivery is still more expensive than peers in the US and China. We serve e-commerce from a mid-mile perspective, going from a consolidation center to maybe a regional distribution center. It is a fast growing sector into which we continue to expand.

SN: Outside of the trucking marketplace, what other areas of optimizing technologies for truckers present the greatest future expansion opportunities?

TF: We are in the business today of freight matching and trucking each year is worth $250+ billion per year in Indonesia. Because you control the trucker cash flow and see data, you can build additional ancillary businesses. In the US, factoring is so commonplace. That is not true here and these drivers are under-banked / don’t have bank accounts. We see factoring invoices as a large opportunity and are offering that product to our truckers today. Brokers currently do predatory lending to truckers at extremely high rates like 1% per week. In addition, fuel cards and toll cards present interesting expansion opportunities. On the supply side, we can build additional value-added services like insurance, fuel financing and a full trucker technology stack. On the demand side, there is a great opportunity for us to use the data for LTL and cross-docking, reducing lead times for enterprise level shippers. There are huge lines that shippers are stuck on to load and unload shipments. No one has throughput shipment data currently. As Kargo, if we know the destination has a long line, the trucker could do another job in between and then go back to the destination to further optimize the supply chain for shippers.

Egypt - Hatem Sabry, CFO of Trella

Trella is an Egypt-based digital freight marketplace to provide price transparency and improve efficiency for both carriers and shippers alike.

SN: What are the largest inefficiencies right now in trucking in Egypt and across the broader Middle East?

HS: There is a lot of inefficiency on the shipper side, where each deals with a number of brokers who are opaque on pricing and supply dynamics. There is also a big reliability problem. Shippers only have the capacity to work with a few brokers who can’t necessarily move the volumes they want to move. On the supply side, the individual carrier that owns the vehicle usually works with a bigger offline broker and the amount that actually goes to the carrier as net earnings is much lower. Fleet utilization is also low with suppliers. The larger brokers have a fleet they have to manage and have issues consistently accessing quality loads. Trella is solving for better pricing transparency, fleet efficiency, and reliability across the region.

SN: In the US, the (electronic logging device) ELD mandates are spurring dramatic changes in the trucking landscape. Are there discussions around these issues in Egypt and more broadly what are the relevant trucking regulatory issues? What is the state of fleet management technology?

HS: Egypt is an earlier stage market so questions like ELD aren’t really in focus. The market is more informal for carriers and truckers are not unionized. The government does care about having proper identity documentation for truckers; that is the main issue. Improper identity verifications cause issues with liability assignment when accidents happen. Separately, fleet management visibility and tracking is part of Trella’s value proposition and is an important part of the economic story (even if not driven by regulation). This functionality will allow us to optimize backhauls (matching return legs) more efficiently.

SN: What does the mix of SME vs. enterprise fleet owners look like? How does that mix impact how you engage with customers from a sales / marketing perspective?

HS: We work more with individual owners and operators. The Egyptian market has more individual operators so engaging with this fleet community is an important part of penetrating the ecosystem. Part of our strategy is to try to work less with middlemen. We still work with larger fleet partners though. The strategy long-term is working with independents because that is where you can create more value on the supply side. On the independent business owner side, word of mouth marketing is really effective because the independent operator community is dynamic and tight-knit. 

SN: What is the joint potential for partnerships with other Egyptian transportation modes outside of trucking, i.e. rail and marine terminal operators?

HS: Egypt has the oldest rail network of any country in the region but it is very under-invested. There is very little tech integration or investment that has been made. That will take time. The marine and ports represent a greater opportunity area. We see a lot of synergies with working together with the relevant authorities to automate steps like check-in / out processes and queuing systems. We can help them identify bottlenecks with ground transportation system by plugging into port authority systems to make them more efficient. That will be a win-win as we look for ways to automate flows of cargo in and out of ports..

SN: To what extent do carriers struggle with fuel and other load cost issues when executing loads?

HS: We are working on processes to get carriers early payments. This also enhances retention. For the small brokers that work with us, they usually have finite sources of capital. They don’t have constant working capital financing. Providing them liquidity definitely enables them to keep working and continue to execute loads. We are exploring ways to further extend financing to our carriers.

Kenya - Efayomi Carr, Head of Strategic Finance at Lori Systems

Lori Systems is a Kenya-based provider of trucking technology that provides carriers efficient access to shipper loads, fuel financing and automated invoicing.

SN: What are the major differences in supply chain ecosystems between East Africa and the US?

EC: The whole Lori exists is to lower the cost of goods in Africa. Up to 75% of the cost of a good is the logistics costs where it is closer to 6-7% in more developed markets. The reason this large cost difference exists is: First, inefficient coordination and operations of trucking businesses to improve the overall quality of logistics network. Second, systematic differences like infrastructure and regulation. We work with regulators and local governments (technology upgrades at ports, cross-border transactions) to try to improve these constraints. Many of the latter issues are more focused on more systematic problems whereas the former can be solved by technological coordination.

SN: Given you operate across numerous countries on the African continent, what are some of the complications of coordinating loads cross-border in Africa?

EC: Some logistics and supply chain problems are just rooted in improper coordination of parties. One of the things we noticed early on is this effective coordination does not exist at borders or ports on the continent. The process for crossing a border for a truck is very opaque. We help automate a lot of the more challenging parts of crossing the border, i.e. documentation and approval processes. We have been able to hire field teams that help provide this service at the border. We handle most of those complexities at the border by leveraging our data, relationships and resources. During coronavirus, there has been a ramp up in health screenings cross-border and we have been able to leverage our field operations team to be helpful as part of that process during coronavirus.

SN: Beyond your trucking marketplace, what additional features are you adding as functionality? What distinguishes a “table stakes” feature that is a requirement for executing loads on the continent vs. an optional product cross-sell opportunity?

EC: With scale comes access to data which we can use to offer additional services. This is particularly important for transporters because they often don’t have access to data. Access to capital is one of the largest barriers to these truckers executing loads. We leverage the data we have on these transporters to offer financing products. About half of a trip’s costs are upfront like fuel. Because trucker cash cycles are pretty extended, they may not have enough cash on hand to execute trips effectively. Through our financing product, truckers pay nothing at the pump and we provide easy access to fuel financing. Through our scale, we provide them access to financial products they can’t access individually, which also improves our business by increasing our value to our customers.

Bangladesh - Waseem Alim, Co-Founder & CEO of Chaldal

Chaldal is a Bangladesh-based online grocery shopping and delivery business.

SN: What are the major differences in the logistics ecosystem in Bangladesh vs. the US?

WA: Bangladesh has much poorer infrastructure with needed investment in roads, which complicates ground transportation. It is also a smaller country with a much denser population, so it is expensive to further build out these larger road networks. Trade networks have largely stagnated since the British left the country, but we have a phenomenal river delta system for intra-country marine trade. To solve congestion and overuse impacts to infrastructure, the government strategy has been to limit the number of vehicles that can be on the road and they have also imposed taxes on importing cars. On the trucking side, the ownership of fleets is much more distributed than other countries with smaller owner / operator businesses prevalent. For city transportation, the last mile often can’t be reached on narrow roads and in highly dense areas.

SN: In your opinion, what is the greatest potential area for technology optimization across the supply chain landscape?

WA: There is not yet a robust coordination of movements between trucks. Shippers currently must negotiate rates with trucking companies with large contracts up front with large variability depending on the time of the year. There is limited pricing visibility and inefficiencies for the backhaul and return trips. With investment in trucking technologies, there is the potential to bring down shipping costs in the country by 30-40%. Truck Lagbe and TruckChai are examples of emerging startups to address these problems.

SN: Given the combination of population density / ground infrastructure constraints, what do you think about the potential for drone technology in Bangladesh for the last mile? What is the state of last mile delivery?

WA: For short haul and intra-city delivery, there is nothing like a Postmates that exists and FedEx is prohibitively expensive and is only used when shipping internationally. The postal service has no automation and they have limited incentive to scale to help address last mile issues. Regarding drones, there is theoretically significant potential in Bangladesh given ground infrastructure constraints. There have been discussions at the government level to enable drone development, but not any serious use cases yet. Part of the issue is the large opportunity cost relative to other logistics infrastructure into which one could invest. When choosing to invest in warehouse optimization or drone research, most businesses would choose the former as a better allocation of capital to amass a sustainable logistics-driven competitive advantage in the region.

SN: What is the state of warehousing and what opportunities are there for improvement across the region?

WA: Warehouses are generally shared and rented out on a month-to-month basis, but there is little to no visibility on which warehouses actually have space. Currently, warehouses are primarily used for commodities given online retail’s very limited penetration of retail in the country. On the food side, there is needed investment on cold storage to improve the food supply chain. Population density in urban areas also creates complexities given limitations in available warehouse space. Most of Chaldal’s warehouses are in the city but are converted from old commercial real estate.

Emerging Market Observations

I wanted to leave readers with a few of my own personal thoughts and takeaways based on my interviews with these emerging market logistics technology leaders:

1. Function of Platform Offerings - Relative to the US or more developed markets, it is important to identify which parts of platform product offerings are table stakes for customers to conduct their business vs. optional cross-sell opportunities. For example, in the US, fuel financing and logistics fintech products help make truckers more efficient and execute more loads, but a majority of truckers can still operate without them. In emerging markets, these additional products are mission critical to merely enabling truckers to do their jobs. Functionality that may be considered a cross-sell opportunity in the US could be necessary to create a flourishing logistics ecosystem and market in emerging countries.

2. Infrastructure Constraints & Timing - many emerging markets, especially in rural or peri-urban areas, lack the physical infrastructure investment that facilitates a more seamless flow of good in the US. For logistics technology businesses that rely on ground transportation, it is important to consider these infrastructure constraints when determining both timing of initial investment and go-to-market strategy across the rural to urban spectrum.

3. Social & Informal Commerce - in some emerging markets, social commerce embedded across social media has developed rapidly. While market estimates vary as to the size of the social commerce market across geographies, it represents a sizable opportunity. In markets where social commerce is growing, businesses and investors ought to ensure their model has tools to help professionalize and accommodate more informal social commerce. This is especially important when going after smaller customers further away from enterprise scale.

4. Existing Technology Adoption - it is important to consider the extent of technology sophistication that already exists in an emerging market in order to both execute a more efficient sales and marketing strategy and improve a product’s value proposition by understanding important existing tools with which to integrate. Relative to more developed markets, there will be either limited technology adoption or a less cohesive set of point solutions to which customers are accustomed (vs. more advanced platform offerings). Lastly, the state of e-commerce and logistics will be uniquely different and it is important to not over-develop rich product features too early that may represent a good opportunity in the US, but may be ahead of its time in emerging markets.

5. Commerce Nuances - Commerce is conducted differently across geographies and these differences are especially clear when comparing emerging markets to the US. For example, due to lower adoption / less sophistication in credit card / fintech solutions, the cash on delivery model is a popular form of e-commerce, but effectively non-existent in the US. The product’s value proposition and path to scale must be uniquely tailored to mesh with regional and cultural commerce idiosyncrasies.

All Innovation Armory publications represent expressly my individual views and do not represent the views of companies with which I am currently associated or have previously been associated. These publications are my personal opinions and are not meant to be relied upon as a basis for investment decisions.