White paper: Building the Blockchain Logistics Protocol
1.1 Market Overview
Emerging markets in this context refers to the developing economies of Asia. The consumer class in emerging markets is growing at an unprecedented pace (the retail markets where we operate are worth over 6 trillion USD) (PwC, 2016) and projections through 2050 put emerging market growth, led by China, India, and Indonesia, at twice that of developed economies (PwC, 2017). Companies attempting to meet this demand are facing extraordinary logistics challenges. The shift to domestic raw material sourcing, manufacturing and distribution to meet growth in consumer demand exceeds the capacity of current supply chain infrastructure and supply of logistics services, creating challenges related to cost, performance and sustainability as the cost of logistics rises at the same rate or faster than new sales.
Buoyed by demographic growth in the consumer class, GDP growth in many of our targeted markets is 5% or greater (International Monetary Fund, 2017), which when combined with the opening of new sales channels in the same countries results in Fast Moving Consumer Goods companies (FMCGs) and distributors experiencing steady growth in their base sales. The growth in topline sales leads to a similar growth rate in transportation volumes and spending. This demand is not well met by existing supply chains, driving up cost in developing economies where transport spend can reach as high as 25% of GDP (The World Bank, 2016).
We estimate the current outsourced spend on trucking in Asia is over 143 billion USD per year₁ and the world’s largest FMCGs are paying for this through a manual process that is weighed down by a slow cash flow process, lack of visibility and procurement inefficiency. Adding to this challenge, paper-based proof of delivery exacerbates payment disputes, delays both the invoicing and payment between retailers, brand owners (shippers) and transporters, and impacts overall customer service.
The reliance of global consumer goods manufacturers on sales in emerging markets is reflected by sales levels for the three largest companies (excluding electronics makers): Nestlé, Procter and Gamble (P&G) and Unilever. About 42% of Nestlé’s annual sales of $93.75 billion in 2016 were in emerging markets (Nestlé, 2017), with 35% of P&G’s (P&G, 2017) and 57% of Unilever’s sales (Unilever, 2017) in 2016 also coming from emerging market economies. While the current growth level varies amongst different emerging market countries, overall consumption of consumer products is growing much faster than in the developed world.
₁ PwC Retail in Asia 2015-16 report puts retail sales in OpenPort’s markets at 6.3 trillion USD. Transport spend is 3% on average of sales (191 bn), of which 75% (143 bn) is outsourced – OpenPort’s addressable market.
Current Focus on Fast Moving Consumer Goods (FMCG’s) and Road Freight
FMCG products are items that are relatively inexpensive, purchased frequently, consumed quickly, and sold from retail outlets that are easily accessible by consumers. Examples include soft drinks, toiletries, grocery items and cleaning products. In emerging markets, increased turnover of merchandise in retail outlets has resulted in over-extended distribution networks.
Due to their relatively low manufacturing cost, distribution costs are a more significant portion of the total delivered cost to the retailer than is the case with other higher-price product offerings. Lack of secure supply chain control in the distribution channel, particularly in less developed markets, can drive distribution costs up due to lost sales, penalties from later delivery, theft or pilferage, and product damage.
Practically all emerging market FMCG demand is fulfilled through domestic sourcing and manufacturing. Transport of raw materials to manufacturing sites, and of finished goods to primary distribution centers, secondary distributors and retailers (point-of-sale or tertiary distributors, the bulk of OpenPort’s current business) is done through road freight. These high volumes of road freight are outsourced to local asset owners in a process that is made more efficient by OpenPort’s rapidly expanding digital solutions for road procurement, POD and settlement. We believe most deliveries to distributors and retailers in Asia are negatively impacted (delayed, disputed, short paid, or not settled) because of problems related to the paper process, easily a 1 trillion USD business problem as part of Asia’s 6 trillion USD annual retail sales market. OpenPort’s innovative and trusted ePOD solution has already begun to solve this problem in China, India, Indonesia, Pakistan, and other Asian countries.
Road freight forms the core of all logistics movements, and the path to digitalization is easier than international ocean or air freight which involve more participants and complexity. Extension of OpenPort’s business model to cover international freight transactions is something we envision once we have begun to generate several million USD of gross revenue per month (early to mid-2019 at current growth rates).