There is little doubt that marketplace is changing and that merger and acquisition will alter the landscape. There are a number of market trends that stand to significantly alter the NVO (non vessel common carrier) and IFF (international freight forwarder) sectors within the 3PL [third-party-logistics] space of international trade and transportation. While many of these trends are directly related to the economic environment that the BCOs (beneficial cargo owners) and transportation providers operate within, other aspects represent a shifting of operations, and in some cases a fundamental altering of the basic business proposition itself by redefining the services themselves. Market Share Freight Rates One common denominator in the NVO/IFF sector is the overall problem of pricing. To a large degree this begins with carriers. For most of the last three years ocean freight rates have been depressed as larger vessels have entered service out pacing the growth in trade. The result is that ocean freight has become more of spot rate business, and the goal of long-term stable (possibly indexed) freight rates has been washed away. The air cargo side isn’t much better as larger aircraft catering to an increasing number of passengers has added space, and freight rates have been unstable as more belly space arrives and disappears (as more space is dedicated to passenger luggage). Equally, how well all-cargo operations can work with the added global lift is still very uncertain. Highly specialized carriers have managed to do well with their ability to handle oversized freight. This sector is promising as the project sector itself is robust in comparison to other segments. Adding a measure of confusion to the sector is the service side of the business. Neither air nor ocean performance has been very good. In the case of ocean, slow steaming has been a major tool in soaking up slots to help balance the supply and demand equation and consequently boost rates. However, even with slow steaming, on time performance has been poor, making it difficult to maintain a cost efficient supply chain. In the air the problem is similar. On time performance is abysmal and again the supply chain efficiency suffers. Both in air and ocean, one of the prime strategic drivers for cargo service providers is market share. In the case of ocean freight the rise of a new system of alliances, starting with 2M, Maersk Line the largest carrier and MSC (Mediterranean Shipping Company) just slightly smaller, has triggered a re-shuffling of alliances among the steamship lines. Whether this re-shuffling has an impact on freight rates, particularly for NVOs and IFFs, is anyone’s guess? But if history is any guide in these matters, a more likely result will be a consolidation of steamship companies rather than a reduction in slots. With wafer thin margins neither the NVOs, which buy their slots from the steamship lines, nor the IFFs, which represent the BCOs in the purchasing of freight services, have a great deal of space to squeeze a profit margin. Even as the number of transactions increases with improving economies the bottom line is just bumping along. There are exceptions to the drab scenario. Regionalization and specialization have buoyed NVO/IFF performances. Among the larger self-styled 3PL, NVO/IFF new types of services designed around the BCO, particularly data driven services, have had a major impact. On the regional level, economic activity (whether it is the World Cup as was the case in Brazil, trade agreements such as Canada and Europe or simply an uptick in economic performance in Southeast Asia and the Middle East) attracts business-to-business freight forwarding relationships. Among the larger 3PLs there is a desire to own their offices while smaller forwarders tend to have agent relationships. This network of controlled offices enables a 3PL to offer economies of scale, especially on the back room IT side, which cuts costs and improves efficiency and ultimately improves margins for the 3PL. However, “bigger isn’t always better” as the quality of overall “service” to the BCO is often more dependent on outside factors beyond the scope of IT. What IT has become is a cost differentiator and in the very near term an actual arbitrator of business. If the IT isn’t in place, regulatory authorities will simply make it impossible to act as a freight forwarder or NVO. Mid-sized and small forwarders frequently join “networks” like the WCA Family of Logistics Networks to “scale up” to be competitive with the larger 3PLs. Although the size of the networks varies enormously (the WCA is considered the largest and has 5,584 member offices in 190 countries,) the goal is the same. By establishing a network of offices with shared working agreements (and in most cases value added services from the network provider) independent freight forwarders can effectively narrow the service gap between themselves and the larger 3PLs without adding massive costs. Merger & Acquisition: A New Buying Spree The NVO/IFF sector is crowded and consolidation is already underway as organic growth is likely to take a back seat to acquisition strategies. The reasons for adopting a more aggressive market play vary but like their steamship counterparts the larger 3PLs are looking for market share they can leverage into more sustainable profits. There are also some well-heeled Asian logistics companies like Kerry Logistic or even the sourcing giant Li & Fung on the prowl for good buys. The buys can come from unexpected quarters, as witnessed by BNSF Logistics’ purchase of Albacor Shipping in 2012 for the latter’s project cargo expertise. On the other hand, there is also a need for capital among many mid-sized NVO/IFFs to remain competitive in the global market, particularly with the needs for IT upgrades looming on the horizon. Another big driver is “specialties” whether that is a location (often a mid-sized forwarder in an emerging nation is the biggest transportation group in that region, even if it is considered to be mid-sized in a global view), a business segment like clothing or perishables or even specific hard assets like warehousing or trucking. Finally, another push is coming from the institutional investor side as the transportation/infrastructure side of the portfolio has again become attractive. With public banks and financial institutions being pushed for more regulatory visibility, private financing is lucrative for expansion. There have been numerous examples of freight forwarding acquisitions starting with CH Robinson’s purchase of Phoenix International in 2012. Last year Dascher, a German based forwarder acquired two Spanish logistic companies, Azkar and Transunion. While Rhenus, another German logistic company bought Wincanton’s French and German operations. The French forwarder Norbert Dentressangle also took the plunge, buying Fiege’s operations in Italy, Spain and Portugal. More recently, US-based Kane Is Able bought the Southeast and Northeast regional hubs of Nexus Distribution to help build out their contract logistic side. There are some potential game changers in the mix as the XPO Logistics deal shows. XPO recently inked an agreement with PSP Investments, GIC, (Singapore’s sovereign wealth fund) and OTPP (Ontario Teachers’ Pension Plan) to invest a total of $700 million in XPO “to accelerate the company’s growth strategy”. With cash available XPO instantly becomes a player with the capacity to shape M&A market for logistics companies. Another game changer is Hong Kong based mega-sourcing company Li & Fung (LF). LF in March 2014 bought CCL (China Container Line) one of Asia’s largest NVO/IFF. CCL annually handles around 500,000 teus a number set to rise with the LF group. The question is once the purchase is digested, and it will take time to build in the capacity, will Li & Fung be on the hunt for more logistics assets, especially in North America, which accounts for around 60% of the business?