By Silpa Paul
Editor’s note: Written by Silpa Paul, a Frost & Sullivan commercial vehicles industry analyst. This is one in a series of periodic guest columns by industry thought leaders.
The trucking industry is in a phase of digital transformation, with connected devices bringing greater visibility and transparency across the supply chain. The installation of telematics devices in trucks has jumped exponentially and will cover nearly half the trucks in operation in North America by 2025.
In an era of smartphones, smart cities and smart mobility, the North American trucking industry is headed toward its “smart” future. This is pushed by the 2017 mandate that heavy-duty trucks be equipped with electronic logging devices that digitally track how long truckers drive each day to make sure they comply with federal rules.
A key segment of the trucking industry that has struggled to digitalize is the brokerage process. Digital brokerage solutions – whether digital load boards DAT or Truckstop.com or automated-on-demand solutions like those offered by Convoy, Uber Freight, Loadsmart, Transfix, Next and Freightera – are modernizing the brokerage process. All are using technology to automate and remove redundancies.
NOT EXACTLY NEW
At least 40 companies are attempting to digitalize and/or automate brokerage in just North America. Yet, digitalization is not new to trucking.
Popular loadboard DAT started in 1978 as dial-a-truck out of a truck stop in Portland, Ore., before it launched its satellite communication-enabled brokerage solution in 1995. The second largest load board in North America, Truckstop.com, launched in 1995.
UShip has connected consumers who need to ship oversized loads to truckers since 2004 and now also brokers palletized commercial goods.
EMPTY MILES, LOW MARGINS INCENTIVIZE DIGITALIZATION
More than 70 percent of all freight is moved via road in North America. Of this, the for-hire market accounts for 60 percent, with nearly 34 percent of that market in turn accounted for by spot brokerage. At present, however, road freight capacity utilization levels are highly inefficient. Commercial long-haul trucks in the region typically operate with 25 percent empty miles – driving without a load – and 56 percent load efficiency which, combined with lengthy asset-idle times, has resulted in low margins for the trucking industry.
Empty miles account for a staggering 25-40 percent, depending on the type of operation, of total road-freight miles every year in North America. This translates to fuel waste, non-productive emissions, lost driver hours, inflated operational costs and unnecessary road congestion.
Such empty miles primarily result from the inherent opacity and slowness of traditional road-freight brokerage processes. The traditional brokerage process is challenged by the sheer magnitude of fragmentation in both demand (over 100,000 shippers and 16,000 brokers) and supply (over 240,000 small-medium carriers plus owner-operators).
Enter digital brokerage solutions. Digital brokerage solutions are of two types: digital loadboards and automated on-demand brokerages. They depend on data exchange between the plethora of connected devices in trucking and top it off with algorithms to provide everything from simple load listing and tracking to advanced instant load/carrier selection, pricing and bidding functionality.
VENTURE CAPITALISTS’ FAVORITE
Venture capital investments have flowed steadily into a slew of technology startups focused on road-freight brokerage solutions. Global funding for digital brokerage solutions crossed $1 billion in 2017. The momentum continued, with investments exceeding $2.33 billion last year.
Among the big-ticket investments in North American digital freight brokerage companies were a $185 million Series C round of funding in Seattle-based Convoy and a $21.6 million Series A round of funding in New York-based Loadsmart. Another digital start-up, New York-based Transfix, claims to have crossed $80 million in annual revenue in 2018 and is looking to raise $100 million in a Series D round. Uber Freight of San Francisco claims to have crossed a $500 million revenue run-rate by the end of 2018.
These startups are primarily based in cities known for their high-technology labor pools because they leverage data science and machine learning to build their services.
In the parallel multimodal freight brokerage industry, digitalization has already created a unicorn start-up: Flexport. The company, founded in 2013, recently closed a $1 billion investment led by SoftBank, which also invested $1 billion in Chinese road freight brokerage giant Manbang in 2018. In North America, Convoy and Transfix are close to achieving unicorn valuations of more than $1 billion.
TRADITIONAL BROKERS’ RESPONSE
Traditional logistics and brokerage companies have also sought to tap into the digital economy. C.H.Robinson acquired digital brokerage solution provider Freightquote for $398.6 million in 2015. UPS shelled out nearly $2 billion to acquire U.S.-based Coyote Logistics in 2015 and Freightex, Europe in 2017. DB Schenker invested $25 million in uShip in 2017.
XPO Logistics, which has a $4 billion brokerage business, said last year that it is working on integrating AI into its brokerage solution. The company claims that its connect dynamic brokerage algorithm boosted trucker revenues by 30 percent. XPO has 13,000 carriers on the platform.
Even small brokers have embraced digitalization strategies. Digital freight brokerage startups like Cargo Chief are transforming their business models from offering digital brokerage to providing digitalization assistance to traditional brokers.
Startups like Parade.ai are also targeting the massive opportunity presented by helping traditional brokers adopt digitalization, rather than trying to replace them by offering an altogether new platform. Other digital freight brokerage startups like Fr8 Star have changed their strategies to focus on brokerage for specialty applications.
The digital brokerage industry is growing rapidly and will generate at least $11.58 billion in revenue in North America by 2025. This figure is close to the 2025 global revenue estimate for telematics services presently, indicating the sheer potential for businesses to succeed in this space.
However, growing in the brokerage space – a business that has traditionally relied on personal relationships and trust – is proving challenging for technology startups. Uber freight is not having the same kind of growth trajectory that Uber’s ride-hailing business experienced. Despite low rates per mile, carriers and shippers don’t focus only on rates. They also analyze payment assurance, cargo safety, service continuity and rate negotiation leverage.
While the highly fragmented freight brokerage market will digitalize, the chances of it delivering on promised efficiency improvements are uncertain unless there is consolidation. If shippers, carriers and brokers are spread across thousands of digital platforms, the trucking industry cannot achieve the type of efficiency improvements envisaged.
China is leading the way, with rivals Yunmanman and Huochebang merging in November 2017 to create the Manbang group, valued at over $2 billion. This will become common in the freight brokerage industry as digital freight brokerage solution providers struggle to achieve scale and maintain differentiation.
It is an exciting time for truck brokerage, and one can expect to see many new business models arise, along with many mergers and acquisitions.
Editor’s note: Silpa Paul is a Frost & Sullivan commercial vehicles industry analyst. Paul has published more than 30 research studies covering trucking and logistics.