IF YOU DO NOT DISRUPT YOUR BUSINESS, SOMEONE ELSE WILL!
Even though it appears conventional, the logistics industry is indeed among the areas in which technological distruption has been slowly emerging. And this industry presents various challenges due to its asset-intensive character and dispersed structure, along with opportunities as well. General Manager of Borusan Lojistik, Mehmet Kalay, talked to HBR Turkey on prominent trends in the logistics industry, the eTA platform which has enabled them to become more than a "logistics company", and the company's future plans.
How would you describe the latest changes and transformations which have occurred in the logistics industry? How does Borusan Lojistik position itself in this picture?
The logistics industry has a volume around 4 trillion dollars in a world economy of 86 trillion dollars. And in the Turkish economy, which is 800 billion dollars, the logistics has a strong position as a major industry with a value of around 53 billion dollars. The growth over 10 years has always been around twice the gross domestic product (GDP) but in recent years the growth rate has been the same as GDP. We are talking about an industry which has grown and has had a volume greater than the Turkish GDP growth for a considerable amount of time. On the other hand, the logistics industry is highly dispersed both in Turkey and around the world. The top ten actors in the industry account for 20% of the market share. The remaining 80% is shared among thousands of actors. This inevitably creates an extremely competitive environment, in which we can say that the customer side is commodified. When there is an improvement on costs to be made, logistics is one of the first areas we consider. Strong price competition is possible due to its dispersed nature. All of these factors combined pose significant challenges to the logistics industry, and the actors in the industry respond to these challenges in three different ways: consolidation, vertical integration, and digitalization. The actors unite together in the dispersed-structured industry and form consolidated entities. The consolidation trend, first seen in maritime transport, allows companies to establish partnerships or big actors buy the smaller ones. A similar trend has begun to emerge in Third Party Logistics (3PL) practices. For example, land transport companies have started to consolidate among themselves. In Turkey, we are currently unable to see this consolidation clearly. However, firms with financially weak structures have started to leave the industry slowly. Although some acquisitions have taken place, they are unlike the significant acquisitions that we have seen happen abroad.
The second trend I have been observing is the vertical integration, taking consolidation one step further. Examples of this are the acquisition of CEVA Logistics by CMA CGM, or DP World acquiring Unifeeder. Within vertical integration, there may be objectives such as increasing contact with customers and taking margins under control by offering value-added services. Maersk's disintegration of Damco and then relaunching it under its name, after integrating 3PL within Damco, is one of the finest examples of vertical integration.
And, finally, the third trend, digitalization: it is now obvious that we cannot obtain different results by doing the same things.
Everyone is questioning whether they can make a difference with digitalization, but in the end, the prominent logistics companies have started digitalizing in different shapes and forms within their customer experience process. One reason for this is to be better positioned by digitalizing fundamental processes. Maersk is a nice example of this. Since 2013, they have successfully improved their internal processes and launched Maersk Spot in order to develop a new business model. Borusan eTA is also another successful example. When we saw that some things were not as they were supposed to be and that we needed to do them in different ways, we started to ask ourselves whether we could transform land transport, which is the biggest thing we do in Turkey. We then faced the dilemma of any innovator: should I disrupt my own business? When faced with such a dilemma, you realize that if you do not disrupt your own business, someone else will come and disrupt it for you. And hence you start your journey. As a result, today we are starting to see new models emerge, especially in last mile logistics. Even though Maersk developed Spot, there are also independent platforms emerging. Companies from outside of the industry which do not know logistics and therefore do not have any loads to carry start to get a share of the profit margin. In short, a threat is coming. For instance, a recently established software company can disrupt the business model of hundreds of years. Of course, a giant like Maersk should position itself against this, through Maersk Spot. In other words, they need to be an innovator.
What is the status quo in the Turkish logistics industry?
The logistics industry in Turkey is way more dispersed than in Europe or America. Entering the industry is not hard at all and, therefore, we can say that one can buy a couple of trucks through loans or investments and enter into business. Think of an industry where you do not have any protection, neither on the customer side nor on the supplier side, since there is no differentiation in customers and the customers are open to this situation. Two types of actors have emerged in such an environment. The first type of actor is the "boss companies" which typically started their business maybe one generation or more ago, buying a few trucks, with the second generation progressing and serving big projects during economic growth periods in Turkey, and which have continued to grow and accomplish many things.
These companies have satisfied their customers and managed their assets well: they bought trucks and warehouses, invested by wisely using their capital and building good fleets, and they have continued doing this for years in an asset-intensive way with a good level of assets. The second type of company is one like Borusan Lojistik, which started its journey with the thought of "investing in people and in software instead of assets." We started by saying "We will do the right thing by our customers while performing this task and meanwhile we will manage our suppliers successfully so that we avoid an asset-intensive business model." This has an advantage: the investment return for the first type is around 5-6% while for the latter model this rises to 20%. This is a huge benefit since the private capital companies which have actively dominated our lives in the last 10 years expect the investment return to be above 20%. You will be able to get satisfying results if you manage to create a business with an investment return over 20%. The companies which are not asset-intensive have grown rapidly in an environment where the "boss companies" and asset-intensive companies are structured this way.
During the last three years, with increasing costs, diminishing demand, and the downsizing economy, asset-intensive companies have found themselves with empty trucks and this could be one of the significant reasons behind falling profitability. In such a structure, in which the competition has risen and companies which are not asset-intensive have gained advantage, we have taken one step forward towards destruction with eTA.
Could you tell us the story of eTA in detail?
eTA started by taking the problems of customers and the logistics industry into consideration. The most important problem was beyond the cost. In the logistics industry, the probability of finding a truck varies between 60 to 90%. Therefore, when one of our customers asks for a truck (generally the busiest time is summer, also called the season of watermelons) there is a 60% chance that they will find a truck available. In this case, each truck that cannot be sent to the customer means a great loss of income and profit. Being unable to find available trucks due to rising demand was a critical issue that needed to be solved. The second problem was on the supplier side; not being able to find loads to transport. This is a problem present both in high and low seasons. The supplier wants to go to a place where they are likely to find a load for the return journey, but since there is nothing that can show them the best location for suitable opportunities, maybe they end up not being able to find the load they wanted.
With the pressure of cost and competition, we have seen the number of truck drivers falling in recent years in Turkey, as we have observed around the world. At this point, eTA decided to dive in and create a market place where everyone can see the loads and truck drivers available. There are 135 thousand of 220 thousand registered trucks in Turkey currently subscribed to the eTA platform. The system is also legal: everyone's license is registered, they are all insured, and they were accepted into the system after checking and verifying their documents. All jobs are invoiced, with dispatch notes, and their use of fuel is legal.
The eTA platform brings a whole new structure since the complete cycle can be managed and monitored due to the fact that customers, truck drivers, and governmental agencies are among the stakeholders. Today, empty trip rates in Turkey are around 18%. According to our calculations, eTA can bring this rate down to 12%. This contributes to environmental protection as well since the use of a smaller number of trucks reduces carbon emissions.
All of these factors combined evidently bring one question to mind: "Why was this never done before?" The eTA platform is actually a journey which we embarked on eight years ago. The reason why we realized it in 2019 is that we wanted to integrate Borusan customers into the eTA system. At the point when we asked ourselves "Shall we disrupt our own business?" We had various fears and concerns. For instance, we were afraid of being unable to serve our customers. What if the platform collapsed, what would happen if we failed our customers, being unable to transport their products? We were also afraid of the possibility of harming the relationships with intermediaries in our supplier network, which we have been successfully managing for years. These fears made us reluctant about moving forward. But with the use of mobile technology reaching a certain level, the platform becoming more mature, and our knowledge expanding, we decided to include all our customers in the eTA platform in May 2019, before the watermelon season. The timing was indeed a highly debated issue among our members, but we knew we could not attain our target volume if we did not work at the toughest times. So we took a leap of faith and we succeeded. There were over 45 thousand trips done through the eTA last month and now the platform is the third biggest platform in Europe.
From three thousand trips per month, we jumped to 45 thousand trips. Even though the startups have an undeniable advantage in finding talent, accessing capital, and agility, the more established companies, on the other hand, have the advantage of possessing a ready customer portfolio and being able to upsize rapidly. And what took us further was that we were able to understand this portfolio well and transition into the right technology at the right time.
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