Logistics Viewpoints

A complete analysis of logistics trends, technologies, and services

Global Trade Management (GTM) Solutions Mitigate Uncertainty

Global Trade | By •

I recently began the update of ARC Advisory Group’s research on the global trade management solutions market. At the outset, it was unclear to me how (or even if) the increased global trade uncertainty would impact the market for GTM solutions. In early 2017 there were two theses as to how the uncertainty from Brexit and Trump’s rhetoric on trade agreements would affect business activity. One view was that increased uncertainty would hinder trade volumes, put terms of agreements in flux, and cause companies to take a wait-and-see approach toward investments in supply chain software. The other view was that the increased uncertainty came in lock-step with increased media coverage, and therefore increased corporate awareness about the potential impact of changes to trade agreements. It is clear from my recent discussions with GTM suppliers that the latter has occurred. The changes, and potential changes, to trade agreements have catapulted trade management to the top of the list of topics addressed in corporate board meetings. This is occurring at the same time that digital technologies, enabled by the internet, are widely viewed as the catalyst for the next step change in productivity improvements. In fact, the World Trade Organization’s World Trade Report 2018 is titled The Future of World Trade: How Digital Technologies Are Transforming Global Commerce. GTM solutions reside at the nexus of these two trends. These factors have provided GTM solutions with greater consideration by C-level executives than possibly any time in the past.

Short-Term Savings Can’t Wait

It makes sense in retrospect. Multinational companies have made investment and operational decisions to sustain their competitive positions. Proactive organizations are going to evaluate the potential impact of tariff changes on their cost structure and evaluate numerous scenarios to minimize this impact. GTM solutions provide the structured information necessary for contingency planning to evaluate the numerous alternatives available such as increasing output to capture currently available preferential treatment before it expires, the use of foreign trade zones, or even the establishment of alternative supplier and production arrangements.

Digitization Is A Long-Term Investment

Digitization of global commerce is a secular trend that is likely to play out over a number of years as organizations gradually adopt the technologies and practice that will provide the next level of productivity improvements and incremental efficiencies to their operations. Admittedly, I was skeptical of the increase use of the “digitization” buzzword. And it is likely that the term is being overused. However, I do believe that incremental improvements are occurring on a widespread basis that are substantial in aggregate. In fact, I see similarities to the macroeconomic viewpoint that improvements in inventory management practices enabled by IT advances in the 1980s and 1990s have reduced the fluctuation in inventories and in turn stabilized economic growth and reduced the frequency of recessions.

Final Word

Although my research on the worldwide GTM market has just begun, it appears that 2017 and 2018 year-to-date have been strong years for GTM providers. The geopolitical environment has hindered some businesses (think Harley Davidson) but appears to have benefitted the GTM market.

Logistics Technology Industry Research – The Key to Informed Investing

Logistics Software Vendors | By •

My colleagues and I often mention our current research projects in our blog posts, and proceed to note some of the findings or even just some of the considerations at hand. In a recent post, I mentioned “Analysts at ARC Advisory Group receive periodic inquiries from potential investors such as private equity firms and venture capitalists looking to get a better feel for a technology market.” It occurred to me that many Logistics Viewpoints readers may be surprised that private equity firms and other investors would purchase our logistics technology market studies. I personally find the investment research process very interesting, and believe many of you may as well. So I am going to take this opportunity to describe the role our research can play in an investor’s due diligence process.

Industry Research Bridges the Gap

Investors that develop diversified portfolios of securities (think mutual funds) often conduct equity analysis from a top-down perspective. They analyze the economy, then industry prospects, and finally individual companies/equities. Industry insight is critical to understanding the context in which a company operates. However, most investment managers utilize standard industry classification systems such as the GICS to define and analyze markets. These classification systems provide context, but only down to a certain level of specificity. For example, the GICS groups all application software together in its most narrowly defined, sub-industry level. This grouping does not provide the level of detail necessary to distinguish the characteristics of logistics software companies from the larger application software industry. In fact, the logistics software industry is itself a heterogeneous industry with distinct application types. Many equity analysts don’t care to know about these important distinctions. But private equity investors and others interested in purchasing an entire company care greatly about these details.

logistics technology

Industry Insights for Strategic Analysis

Investors looking to purchase a logistics technology company, as opposed to a block of shares, are often doing so as part of a larger growth strategy. They may be looking to enter a strategically important market, enhance or expand a current business with complementary functionality, or substantially change an existing business in some way. To evaluate and maximize growth prospects, they need to determine where opportunities exist. For example, how does the warehouse management systems (WMS) industry growth rate compare to that of the larger application software industry?  What segments of the WMS market are expected to grow at the fastest pace and why? Where is the WMS industry in its industry life cycle and how will general technology trends [SaaS, Cloud computing, modern mobility, connectivity in general (IoT)] impact the industry in the near future? They may also look at the evolution of an industry and determine that logistics application types are merging into logistics technology platforms. For example, an investor may look to combine a transportation management systems (TMS) provider with a WMS provider to create a logistics execution technology company. Or they may be looking to create a next generation warehouse technology provider by purchasing a warehouse automation provider and merging it with a WMS provider. The stakes are clearly high when purchasing an entire company, so the investors typically want to know the factors affecting growth of the market to identify a company that is poised to harness that opportunity.

Industry Insights for Company Valuation

Technology investors have an investment strategy, or “thesis” that they are evaluating. There are numerous scenarios under consideration and the impacts of key assumptions provide valuable insights. Revenue and revenue growth are primary considerations for technology investments. Industry growth forecasts can serve as an anchor for the growth expectations of companies that compete in the market. Furthermore, these growth expectations can be modified according to the position of the company with respect to the demand segments for the industry, such as region (ie EMEA or Latin America) or revenue type (SaaS, software license, maintenance and support). In fact, technology investors often use standard valuation multiples for each revenue type. For example, they may say “SaaS revenues are typically valued at 4x, maintenance at 3x, and perpetual licenses at 2x.” This brings me to another valuation method that is frequently referenced –  comparable company analysis.

Price multiples such as price-to-revenue and price-to-earnings can be calculated quickly. Even the purchase price and revenues of privately-held companies is often available. However, very often these are not “apples to apples” comparisons because companies’ offerings can differ in a number of ways. For example, how can you determine the value of a company that offers TMS, WMS, and global trade management (GTM) solutions in a different mix than any publicly traded company? One answer is to create a “sum of the parts” valuation by taking industry average valuations for each logistics technology then compute a weighted multiple for the company in question. A similar bottom-up method using industry averages can be used for determining proper discount rates used in discounted cash flow analysis.

Final Word

A few years ago a sell-side equity analyst implied to me that proprietary industry research such as ARC’s logistics technology market studies is unnecessary for thorough analysis of a company’s business. He said that he could quickly and easily pull up similar information in the FactSet database. He was mistaken. Common investment tools, including investment databases and standard industry classification systems do not provide the level of distinction that is provided by ARC’s market studies. These distinctions are often unimportant to those that invest in stocks of companies, but these details are critical to investors that buy entire companies.

Global Trade Management (GTM) Technology Market Update

Automotive Industry | By •

Congratulations to me! I have (finally) completed ARC’s Global Trade Management Systems Market Research Study. I will take this opportunity to communicate and consolidate the research findings from the study and the accompanying writing I published over the last few months in Logistics Viewpoints.

The GTM Solutions Market

ARC focuses its GTM research on two high-level functionality sets: Trade Compliance – functionality for managing trade compliance costs and processes like duties, tariffs, restricted party screening, etc., and International Trade Visibility & Execution – functionality that enables companies with geographically dispersed trading partners to collaborate, monitor, and manage the steps within the procurement, production, and delivery processes. In my opinion, trade tariffs often act as a form of tax that disturbs the supply and demand equilibrium, and ends up creating an economic inefficiency known as a tax wedge (see Global Trade Management Software –Execution, Visibility, Compliance …and that Darn Tax Wedge). One part of that wedge is an increased cost of an item that could otherwise be procured more efficiently. The increased cost decreased demand (or shifts it to the next best provider) and increases product costs. In fact, the costs can be so substantial that they can influence entire supply chains. So it’s no wonder that free trade agreements are such hotly debated topics.

Most GTM software vendors currently sell their solutions through the SaaS model. In fact, roughly half of the GTM market’s revenues come in the form of SaaS. This allows for easier adoption of GTM solutions and many vendors are allowing the purchase of subsets of functionality to lower barriers to adoption even further. However,  the overarching adoption trend is that of GTM suppliers expanding their solution footprints, allowing them to sell their solutions as a GTM platform. This allows users to purchase a system that is more standardized, offers greater continuity across the enterprise (i.e. compliance for multiple business units across countries on one platform), and provides customers with integration benefits.

GTM Solutions in Use

Growth in trade and the value and complexity of goods are drivers of GTM solution usage. The WTO shows that 2016 merchandise trade did grow, but at a slow rate of 1.3 percent. Global Trade ManagementFortunately, the WTO is projecting more robust trade volume growth in 2017 and 2018. ARC’s research shows Industrial Machinery, Automotive, Food & Beverage, Electronics, and Household items as leading end-user industries for use of GTM solutions. These industries are well aligned with global merchandise category trade volumes and recent trends in the trade of these items. Worldwide export (value in dollars) of household goods grew by 6% a year between 2010 and 2015. Over the same period, Automotive averaged 4% a year. Telecommunications equipment was the category that experienced the fastest growth in 2015 (for more detailed information, see GTM Research Update: Merchandise Trade Analysis).

The primary incentive for adopting GTM for trade compliance purposes is transitioning from general regulatory compliance, toward the management of regulatory programs to the benefit of the organization. In particular, companies are using GTM solutions to take full advantage of preferential treatment programs. Most notably, they’re using GTM solutions for item classification and other process steps to harness the benefits of FTAs (avoiding the costly tariffs referenced above).

Using GTM to Harness Benefits from Free Trade Agreements

Companies in the automotive industry frequently use GTM solutions to harness the preferential treatment benefits made available through free trade agreements. I had the opportunity to speak with an executive from a large automotive manufacturer that uses MIC’s origin calculation system when analyzing sourcing and production scenarios for new vehicle launches and ongoing production thereafter (for more detailed information, see How Free Trade Influences an Automotive Supply Chain). Local content feasibility and assembly layout are evaluated during the concept phase. But what I found most impressive about this process is that the local content is not only projected for a given make and model, but also subsequently calculated for each vehicle around the time of production. For example, if a plant produces 200 vehicles in a day, the local content calculation is performed 200 times that day.

Corporate Actions in GTM Market (that’s mostly M&A to you and me)

The GTM market is still mostly made up of best-of-breed suppliers. Only a few ERP suppliers offer GTM solutions, but I expect more to acquire providers or build their own solutions in the future. The ERP suppliers that currently offer GTM solutions include SAP, Oracle, Infor (GT Nexus), and QAD. Some of the more prominent best-of-breed GTM suppliers include (in alphabetical order) AEB, Amber Road, BluJay, Descartes, Integration Point, MIC Customs, and WiseTech Global. Amber Road, Descartes, and WiseTech Global are the only best-of-breed GTM suppliers that are currently publicly traded companies. Descartes and WiseTech Global have been periodically acquiring smaller GTM suppliers to expand upon their existing GTM portfolio. The largest acquisition in the market is Infor’s 2015 acquisition of GT Nexus (and GT Nexus merged with TradeCard in 2013). Finally, Thomson Reuters and Livingston both acquired GTM providers in the recent past to expand upon their respective offerings, as well. I expect a number of additional mergers and acquisitions to occur in the near future, driven by the attractive growth rate of GTM solution sales and the broader supply chain technology convergence trend.

For further information on ARC’s Global Trade Management Research, go to https://www.arcweb.com/market-studies/global-trade-management.

Sneak Peak: Global Trade Management (GTM) Market Update

Global Trade | By •

Glbal Trade Management (GTM)ARC Advisory Group conducts an annual in-depth analysis of the worldwide global trade management (GTM) software market. The research process includes the analysis of large amounts of information and interviews with executives from numerous GTM companies. The process concludes with the publication of ARC’s Global Trade Management Market Research Study. I am nearing the end of the study update process and thought I would take this opportunity to discuss some of the GTM market’s current characteristics.

ARC’s Definition of the GTM Software Market

ARC has a broad definition of the GTM software market and we segment it into two high-level solution categories:  Trade Compliance and International Trade Visibility & Execution. Trade compliance functionality helps companies manage trade compliance costs and processes like duties, tariffs and required filings; and regulations such as restricted party screening that are overhead costs and pose risks for regulatory fines by government entities. International trade visibility & execution functionality provides geographically dispersed trading partners with the ability to collaborate, monitor, and manage the steps within the procurement, production, and delivery processes of the extended supply chain. Some GTM providers, such as MIC Customs Solutions, focus solely on trade compliance. Others such as GT Nexus provide visibility and collaboration functionality for global trading partners. And finally, there are several GTM software providers that offer both trade compliance and international trade visibility and execution functionality. These providers include Descartes, BluJay Solutions, and Amber Road. Even within each of the GTM categories there is great variation in the capabilities offered by suppliers. For example, there are niche compliance solution providers that only manage domestic customs regulations. In addition, international trade solutions may vary by mode. For example, INTTRA provides electronic ocean cargo booking, whereas Champ Cargosystems is dedicated to the air cargo industry.  Because of the functional and regional diversity, there is also a diverse range of factors affecting different vendors’ businesses in different ways. In short, the GTM market is very heterogeneous.

GTM Market Characteristics

Many GTM software vendors sell their solutions through the SaaS model. In fact, roughly half of the GTM market’s revenues come in the form of SaaS – with the remainder being perpetual software, implementation, and maintenance services. SaaS makes user adoption an easier decision that can be made through an operating budget rather than a capital budgeting process. This has encouraged the adoption of these solutions by shippers. The systems can be implemented more quickly and usage can be expanded incrementally with lower upfront expenses. But many of the applications have historically been adopted as point solutions. More recently, GTM vendors have expanded their solution footprints, allowing them to sell their solutions as a GTM platform. This allows users to purchase a system that is more standardized, offers greater continuity across the enterprise (i.e. compliance for multiple business units across countries on one platform), and provides integration benefits (for example, visibility into both supplier inventory status and compliance status across the supply chain). This maturation of solutions into larger global deals, with solutions sold as platforms, has contributed to the growth in adoption in GTM solutions. In addition, the incentives for adopting GTM is transitioning from what used to be heavily focused on regulatory compliance, toward the management of regulatory programs to the benefit of the organization. In particular, companies are using GTM solutions for item classification and other process steps to take full advantage of the preferential treatment made available through FTAs. They’re also leveraging duty deferral programs like free/foreign trade zones and bonded warehouses to reduce inventory holding costs. At the same time, secular trends such as outsourcing and increasingly complex international supply chains is supporting the value proposition for supply chain visibility solutions. All of these factors are stimulating the GTM market to grow faster than the more broadly defined supply chain software market. In general, GTM solutions are of greatest interest to companies in industries that have complex supply chains and are subject to high tariff costs or high compliance risks. Some of these industries include automotive, telecom, pharmaceuticals, and household goods (see GTM Merchandise Trade Analysis). However, companies across numerous industries invest in GTM solutions. Of course, logistics service providers are the most prevalent, but other industries such as banking also use GTM solutions to manage compliance risk. GTM software is of interest to a wide range of businesses, and it is supporting the ongoing secular trend of international trade. And despite some of the recent rhetoric, I don’t see this growth trend abating any time soon.

Top Reasons for Denied Party Screening

Global Trade | By •

Although denied party screening (DPS) has been around for 25 years, several recent developments related to U.S. trade sanctions and cybersecurity may be contributing to the increased attention it is garnering on the world stage:

  1. Mega Fines: The huge fines for companies conducting business with denied or restricted parties are making headlines. In the U.S., the largest criminal fine in a sanctions case to date—$1.19 billion—was levied in March of this year.
  2. Strong on Security: The new administration in the U.S. has taken a strong position on national security and protecting American workers, as epitomized in the pledge by Wilbur Ross, the new Secretary of Commerce, to be “aggressively enforcing strong trade policies.”1
  3. Cybersecurity Sanctions: The new administration has also extended cybersecurity-related sanctions controls established in 2015 with the recent release of 44 names—all Russian— on OFAC’s list of Specially Designated Nationals and Blocked Persons (SDN List). The named cybersecurity threats include GRU, Russia’s largest foreign intelligence agency, and FSB, Russia’s security agency responsible for counterintelligence, counterterrorism and surveillance (formerly KGB).

Many different types of sanctions lists are maintained by governments and organizations around the world—and with new entries updated, in some cases, on an hourly basis, DPS becomes essential to mitigating the risk of trading with denied, sanctioned and restricted parties.

Why Denied Party Screening is Critical for Global Commerce

DPS today goes beyond traditional export compliance. With the continued rise of ecommerce, business integration and global connectivity, having a technology-enabled dynamic screening practice to review data at all levels can help to reduce business risk. The top reasons why screening technology is important include:

  1. Continuous changes:  Businesses must keep pace with denied, restricted, and sanctioned lists that are in continuous flux. All are updated regularly—daily and even hourly—and new threats, such as malicious cyber-enabled activities, spur new lists.
  2. Number of lists:  Numerous government agencies and international organizations maintain lists of restricted or sanctioned parties. The sheer number of global lists and entries calls for technology that can screen data and automatically review a number of lists simultaneously.
  3. Historical screening:  The need to periodically review past DPS compliance over a given range of time is critical to minimize risk. Historical screening is also valuable for assessing the compliance history of acquired or merged companies.
  4. Volume of data:  The number of lists and rapid rate of changing entries is compounded by the sheer volume of information and records that must be screened, including large data warehouses housed in ERP and other systems.
  5. Large penalties:  The frequency, number, and amount of DPS fines is increasing. In addition, revocation of export privileges or prison time of up to 20 years per violation are possible outcomes of non-compliance.
  6. Audit trail:  Companies may be required to demonstrate reasonable care in their business transactions to avoid or reduce penalties. With U.S. exporters and agents required to maintain records for five years, leading businesses are implementing solutions that include an audit trail.
  7. Screening financial transactions:  In addition to anti-money laundering (AML) and Combatting Terrorist Financing (CTF) programs, companies must screen transactions to or through financial institutions or face substantial penalties and fines for non-compliance.
  8. Ecommerce:  Commercial transactions conducted online are also subject to trade sanctions and restrictions. With the continued explosion in online shopping, DPS is critical to ensure compliance of ecommerce transactions and shipments, both domestic and international.

Whether companies transact business domestically or across international borders, the need is growing to approach the task of DPS systematically to keep goods flowing, ensure compliance, and mitigate the risk of penalties. What is your company doing to tackle DPS challenges? Let me know.

Ken is the Head of Denied Party Screening at Descartes. Previously, Ken served for nearly 25 years as the Managing Partner for MK Data Services. Prior to that, Ken was an Export Administration Specialist at the U.S. Department of Commerce.

1 https://www.commerce.gov/news/press-releases/2017/03/secretary-commerce-wilbur-l-ross-jr-announces-119-billion-penalty

GTM Research Update: Merchandise Trade Analysis

Automotive Industry | By •

In March I provided a brief overview of the global trade management (GTM) solutions market and discussed some of the factors that encourage companies to invest in these solutions. There are a few “independent variables” that can explain GTM sales. Among them are regulation and compliance complexity, regulatory fine risks, supply chain complexity, and tariff costs. Public policy is a major determinant of trade tariffs and regulatory compliance risks. However, trade volumes affect total tariff and duty exposure, all else left constant. At the same time, preferential treatment for some items can amount to substantial cost savings, but also substantial compliance complexity.

Logically enough, there is a strong relationship between GTM sales and the volume (or value) of trade for a product. But this relationship is also dependent upon product complexity. For example, fuels and mining products accounted for 15% of worldwide merchandise trade in 2015. But this category is represented by commodities that do not have a large degree of heterogeneity. Therefore, GTM solutions are not as critical for commodities companies as they are for companies that export/import discrete manufactured items. Discrete items are more likely to require robust item classification capabilities to manage preferential treatment processes. At the same time, supply chain visibility applications are more applicable to steps within the discrete manufacturing process.

ARC takes into consideration merchandise trade volumes, and trade volume trends, when forecasting the growth of GTM sales.  ARC does not forecast GTM sales by merchandise category, but we do break down GTM sales by end-user industry. ARC’s GTM research shows Industrial Machinery, Automotive, Food & Beverage, Electronics, and Household items as leading end-user industries for GTM sales. I reviewed macroeconomic data on merchandise trade of items within those industries as part of a foundation for determining the current state and potential growth rates in trade and GTM sales. Here are a few historical data points on merchandize exports by product category. They show the high growth product categories by region and time frame (source WTO). These categories align well with ARC’s estimates of the industries that adopt GTM solutions to support their global supply chains.

  • Worldwide export (value in dollars) of household goods grew by 6% a year between 2010 and 2015. Over the same period, Automotive averaged 4% a year. Telecommunications equipment was the category that experienced the fastest growth in 2015.
  • For North American exports, automotive (value in dollars) grew 7% a year between 2010 and 2015, while the other transport category grew by 9% per year. Meanwhile, Pharmaceuticals was the category that experienced the fastest growth in 2015.
  • For European exports, automotive (value in dollars) grew 4% a year between 2010 and 2015, as did the other transport category.
  • For Asian exports, household goods (value in dollars) grew by 9% a year between 2010 and 2015, while telecom equipment grew by 7% a year.

Overall global trade has been weak by historical standards over the last couple years. In 2015, merchandise trade volumes increased by only 2.6%, compared to rates twice as high prior to the great recession. This weakness in volumes is due to a slowdown in China, falling commodity prices, and exchange rate volatility. Meanwhile, trade as measured in US dollars declined in 2015 due to the sharp appreciation in the dollar. Furthermore, the growth rate of merchandise trade slowed in 2016 to only 1.3%. On a more positive note, the WTO is projecting more robust trade volume growth in 2017 (2.4%) and 2018 (2.1 – 4.0%). The WTO outlook mostly discusses growth factors from a macroeconomic perspective, with further details provided by regions and economic categorization such as emerging markets. However, some other factors are discussed such as government trade policies and reductions in investment spending in the US and China.

Conclusion

Overall it appears that global trade is poised to increase at a rate faster than that of 2016 but slower than the 1.5x GDP rate of the past decade. Ultimately, trade volumes are only moderately important determinants of demand for GTM solutions, as trade regulation and supply chain complexity overshadow the financial effects from trade volumes. In my opinion, macroeconomic uncertainty caused by a lack of political direction in the US and Europe as well as trade imbalances caused by commodity price declines are the major inhibitors to worldwide GDP and trade growth. The lack of political direction is especially detrimental to trade, as major supply chain network decisions tend to be investment decisions that require a long-term perspective.

Next on the GTM research to-do list –  ROI of various GTM software functionality and how companies utilize the solutions to drive savings and improve upon internal processes.

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