Published: September 10, 2020


The shipping industry, historically a laggard when it comes to technology adoption, is on the verge of a wave of digital transformation that will reshape the industry in the wake of COVID-19 and the US-China trade war, among other shocks. This report brings together analyses from S&P Global Market Intelligence's 451 Research and Panjiva Research groups.

The 451 Take

Thus far, the main shipping and logistics firms have focused on investments in booking platforms, blockchain and similar systems to tackle the immediate threat from challenger freight forwarders. Looking ahead, the Internet of Things (IoT) will be a vital linchpin to success because it enables the tracking of vehicles, vessels, shipping containers and the goods the shipping industry holds. We expect that three use cases in particular – cargo tracking, fuel and emissions use, and predictive maintenance – will take top billing in digital transformation projects in this space.


Setting the Scene - Logistics Technology and the Legacy of COVID-19

The global logistics industry has had a wake-up call during COVID-19 with disruptions to production, demand and physical operations all underscoring the need for efficient and resilient operations. Investments in technology that may previously have been considered discretionary are becoming necessary. As discussed in Panjiva's June 30 research, there are four broad phases to the COVID-19 pandemic from a supply chain perspective. Each has generated (or will generate) significant changes for supply chains that create a need for improved visibility, analytics and planning for the logistics industry.

In the first phase, there were widespread supply-side disruptions due to factory closures in China, which then spread globally as more industrial economies entered lockdown. The disruptions were exacerbated by the length of global supply chains that meant, for example, the closure of auto parts manufacturing in China, which rapidly led to plant shutdowns in South Korea but took several weeks to impact US factories. Reduced demand for logistics services and out-of-position challenges for equipment ranging from refrigerated containers to truck chassis rapidly emerged. Airfreight was disrupted by the loss of 'belly-hold' capacity in passenger jets, though the recommissioning of the latter as 'preighters' has helped reduce bottlenecks.

The second phase of demand destruction was caused by industrial production and retail closures globally. A shift in supply chains to favor e-commerce over store locations was handled relatively smoothly, although, as shown by US retail sales declines of 10.5% year-over-year at the trough in April, the slide has been substantial, and sales have been slow to return even after store reopenings. Uncertainty about furlough and unemployment schemes continues to cast a cloud over some consumer durables outside the work- or entertain-at-home sectors. The logistics industry has faced a reduction in activity across both sea- and airfreight, though it has cut capacity significantly in both areas to deal with the loss of demand. Indeed, most firms reported improved earnings despite reduced revenue.

The uneven reopening of industrial facilities globally has led to continued supply chain difficulties in the third phase. One example is the stricter closure of non-essential manufacturing in Mexico and India compared to customer markets such as the US, which has led to plants opening and then having to suspend production. That process has largely been unwound; US seaborne imports in the first half of August have increased by 6.8% year-over-year, including a surge in shipping from China and a return to growth in imports from the EU. A surge in freight rates, particularly on transpacific routes, shows that the prior reductions in capacity have only slowly been reversed while a variety of surcharges are being used in an attempt to rebalance route demand to better match equipment availability.

The fourth stage is the long-term restructuring of supply chains to improve resilience against future shocks. Most firms have yet to announce their plans in that regard, but investments in logistics technology are likely to be a central component in revised operational and capital expenditure budgets. Investments made to increase resilience also have to be made in the context of other long-term supply chain drivers, including the imperative to manage all-in costs, such as shifting production to countries with lower labor costs, as well as mitigating government policy risks. The process in aggregate is proving slow, though for individual products ranging from telecommunications to home appliances, it can happen within two years.

Panjiva's data shows China's share of US imports of all electrical and electronic devices fell to 29.7% of the total in the 12 months to June 30, 2020 from 37.3% in 2017. Over the same period, imports from Europe increased to 16.5% from 15.2% and those from Vietnam to 3.7% from 2.0%. The policy risks have been exemplified by the US-China trade war, and going forward will include a wide range of government reshoring policies. Such policies will initially be focused on medical supply chains but are likely to spread to industrial manufactured goods more broadly. Other regulatory risks for the logistics industry include competition reviews following the aforementioned surge in rates, as well as the imperatives of environmental policy discussed in more detail below.

Build the Case for IoT in Shipping

Several economic factors are disrupting the commercial transportation sector in general – and shipping specifically – increasing the allure of digital transformation. There is greater consumption in a global economy because there are more people on the planet, and each of them has more spending power. As a result, global freight volume is on pace to jump 57% to 170,000 billion tons-kilometers from 2015 to 2030, according to the international Organisation for Economic Co-operation and Development (OECD).

As a result of the growing freight volume, there is increased fuel use. While the total effect of COVID-19 on fuel consumption is still something of an unknown, the US Energy Information Administration (EIA) projects it to increase 7% to 100 million barrels per day in 2021. Behind labor costs, fuel is the top expense for most commercial transportation providers. Shippers and other commercial transportation providers are also under pressure from regulatory agencies and their own internal eco-friendly goals to reduce consumption and use alternative fuels to limit fuel emissions and combat climate change.

The transportation industry has been slow to adopt IoT compared to most other verticals. According to 451 Research's Voice of the Enterprise: IoT, the OT Perspective, only 23% of transportation enterprises have IoT projects in production, not including pilot projects. That's on par with government organizations but behind all other verticals that we track – utilities, healthcare, manufacturing, and oil & gas. The silver lining is that more than half of them have IoT adoption in discovery, proof of concept, or in plan to implement in the next year. This will result in a massive opportunity for IT and OT providers everywhere on the stack, from edge to cloud. According to 451 Research's IoT Market Monitor, the commercial transportation IoT market is set to increase nearly 12x to $308bn by 2024.

Cargo Tracking

Three out of 10 commercial transportation companies gather data from devices – such as shipping containers – in their supply chain as part of IoT deployments, according to 451 Research's Voice of the Enterprise survey. Additionally, 55% of them either have cargo tracking in place or plan to within two years. IoT deployments in this space typically involve an edge device attached to the container that captures data such as location, temperature, humidity and whether the container door is open. These devices are combined with gateways, remote connectivity services, and associated reporting and analytics software. Shippers can use that information to schedule freight travel, relay location data to their customers and prevent problems in refrigerated containers such as food spoilage.

Tracker device and software vendors here include Traxens, ORBCOMM, Globe Tracker, Danelec Marine and Kongsberg Digital. Major shipping companies are also prominent; Maersk, for example, says that nearly all of its 380,000 refrigerated containers (reefers) are equipped with its remote connectivity management software that monitors conditions in each box. Many of these companies are members of the Digital Container Shipping Association, a nonprofit that formed last year to facilitate the digitalization and tracking of shipping containers by developing open source standards that enable interoperability between containers, tracking devices, gateways, data and other systems in the shipping industry.

The Importance of Platforms

A significant part of the investments made by the traditional logistics firms have been defensive and have focused on platforms to tackle immediate competitive concerns. Traditional shipping firms including container lines such as Maersk and freight forwarders ranging from C.H. Robinson to FedEx have to deal with an emergent group of challengers.

In the digital freight forwarding space, Flexport, Forto and iContainers have all made market share inroads, while Amazon has set up a dedicated forwarder to provide services to its Chinese exporting customers. Panjiva's data shows that Flexport and Amazon have reached 26.0% and 16.6%, respectively, of the size of the average of the top five forwarders on US-inbound, seaborne shipping lanes in the three months to July 31 from 2.6% and 2.0%, respectively, in 2018. Both have also continued to grow during the COVID-19 pandemic.

New transportation management systems, including those offered by INTTRA, Haven and Shippabo, make it easier for larger firms to develop their own, in-house freight forwarding operations, while pricing platforms such as Freightos, Xeneta and NYSHEX reduce the negotiating power of the big logistics firms.

The incumbents are rapidly getting up to speed with a series of innovations in the past two years. Freight forwarder C.H. Robinson has integrated 19 transportation management systems into its Navisphere system. CMA CGM's Ceva Logistics has belatedly launched the 'myCeva' platform, which may already be yielding commercial benefits in the form of improved market share. Not all developments are organic – Expeditors acquired Fleet Logistics to bolster its offering, for example – and offerings are also becoming increasingly sophisticated; FedEx launched an Azure-based analytics platform to its freight customers.

Maersk is pushing its customers to use platform bookings, particularly its Flow platform for small and medium-sized enterprises, by applying a manual change fee starting in September. Moving customers into using platforms may also allow firms to leverage in other value-added services, as ZIM Shipping may be looking to do with its newly launched cybersecurity product.

Technological improvements are also being applied within the distribution process. DP-DHL has recently launched an AI-based learning system to improve picking routes within warehouses. Investments are also going beyond software; FedEx has increased its spending on robotics within the dispatch process. Aside from visibility and reliability improvements, the use of platforms and automation may also allow reductions in headcount. C.H. Robinson's CEO, Bob Biesterfeld, indicated that there will be 'permanent cost savings from our investments in tech.'

There are still outstanding questions about the use of blockchain within the logistics industry. One view is that a distributed ledger system isn't needed if all parties involved in the process trust each other. Nonetheless, the rapid expansion of blockchain schemes, led by TradeLens and BiTA as discussed in Panjiva's January 27 report, indicates shipping firms at a minimum are concerned about being left out of developments. Trade Finance startup We.Trade attracted investments from IBM as well as banks, while the Global Shipping Business Network has signed on Cosco Shipping, CMA CGM and Hapag-Lloyd. Notably, CMA CGM and Hapag-Lloyd are also TradeLens partners, indicating that multiple solutions may need to coexist.

TradeLens in particular has added more international ports and companies to its program – the Port of Vladivostok, Yilport and DP World all joined in 2020. Ports that had some TradeLens activity, meaning at least one company working at the port is involved, saw imports fall by 10.9% in the second quarter, while ports without participation saw imports fall by 14.5% – factors other than blockchain may be at play, of course. So far, TradeLens has been exempted from antitrust rules, National Law Review notes, although other consolidated shipping arrangements, including traditional alliances, have seen some volatility in that regard.

Fuel Consumption and Emissions Management

Businesses in the transport sector have two main reasons for wanting to control fuel use. The first is the bottom line. Shipping companies could collectively save billions of dollars by cutting fuel expenses by a couple of percentage points. The second is the desire of organizations and government agencies to control climate change by limiting carbon emissions. The Paris Agreement from the United Nations Framework Convention on Climate Change has a goal of limiting global temperature increases via three targets: curbing carbon dioxide emissions by 20%, increasing use of renewable energy by 20% and increasing energy efficiency by 20%. Many enterprises, including those in the shipping industry, are taking steps to meet the goal of becoming carbon-neutral by 2050, a benchmark set by dozens of countries, including those in the European Union.

More than half of commercial transportation companies either have a fuel consumption and emissions management IoT project in place today or plan to within two years. With the rise of IoT, fuel management has become more sophisticated, incorporating hardware controllers and sensors. While there are some pure-play fuel management vendors out there, fuel management features are often included as part of broader vehicle and vessel performance optimization software. In maritime, vessel operators can collect data from sensors on the vessel as well as third-party data sources. The right software can tap into vessels' navigational software and network of controllers, as well as weather data and ocean conditions to provide insights into the best route to sail for saving fuel. It can connect to a vessel's onboard power system to run at variable speeds depending on the situation. Fuel-consumption analytics can measure and optimize non-technological means of saving energy as well, such as propeller attachments meant to make propulsion more efficient and air bubbles that can be deployed between a ship and the ocean water to reduce friction.

Predictive Maintenance

Availability matters. The more a vehicle or vessel is in service, the more revenue it can generate. Thus, optimizing maintenance can be a key differentiator for manufacturers and operators. Enterprises in the shipping industry realize this – nearly 57% of commercial transportation companies said they have a vehicle diagnostics or predictive maintenance project in place or would within two years, according to 451 Research. Increased maintenance costs have several causes, but major ones are the average age of the fleets, rising maintenance costs related to meeting environmental regulations, and increased maintenance checks required by transporting more cargo via more trips.

Tackling Environmental Challenges Head-on

Meanwhile, fuel management and effective maintenance investments are key to efforts within the industry to reduce their impact on the environment and tackle guidelines and regulations that can take a vehicle out of operation. In maritime, a rule that took effect in January reduces the percentage of sulfur that fuel oil can contain from 3.5% to 0.5% as the industry looks to restrict the amount of environmentally damaging sulfur oxides it emits.

Some operators have combated this new rule, which was initially adopted more than a decade ago, by buying younger, more-fuel-efficient ships. Operators can also use low-sulfur fuels. An alternative option is to install exhaust gas cleaning systems called scrubbers that remove sulfur oxides from higher-sulfur fuels to lower their emissions to acceptable rates. The last option takes vessels out of operation for maintenance while operators install the scrubbers.

The implementation of new sulfur rules provides a test case for how future environmental costs, including mitigating greenhouse gas emissions, might be factored into the transportation industry's economics. The introduction of the new sulfur rules came after a prolonged period of declining profitability for the container lines because of a lack of capacity discipline and just ahead of the disruptions caused by COVID-19.

Yet, bunker-excluded container shipping rates – a proxy for gross profitability – have actually increased in the wake of new sulfur rules that require using more expensive fuels or installation of sulfur scrubbers. Notably, a narrowing of the spread between high- and low-sulfur fuel prices has left many of the scrubber installations out of the money.

Panjiva's analysis of S&P Global Platts data shows the bunker-excluded shipping rate from north Asia to the West Coast of North America reached $2,761/FEU on average in Q3 '20 so far (to August 28) compared to $1,146/FEU in Q3 '19. Similarly, the rate for shipping from north Asia to northern Continental Europe reached $1,303/FEU from $980/FEU a year earlier. That would suggest liners have been more than able to pass along higher costs.

Decarbonization will be more complex than desulfurization. The latter involved essentially two technology choices: scrubbers or low-sulfur fuel. For decarbonization, there are a panoply of options, including:

  • Liquefied natural gas (LNG) bunker fuel, emulating the shift in the power-generation industry from coal/oil to natural gas in both baseload and peaking situations: The technology has the advantage of being able to leverage the LNG supply chain more broadly, yet it is not entirely carbon-free, so may be a bridging technology.
  • Biofuels, ammonia or hydrogen: Alternative fuels used either via direct combustion or jet-engine applications can remove the carbon component on either a net or gross basis. However, the supply chains for such fuels are far away, so it may be a matter for the next-but-one generation of shipping vessels.
  • Hybrid-electric propulsion: Before steam engines, wind provided propulsion for the shipping industry. A return to wind in the form of assistive systems such as kites and rotary sails that bring electrical systems into the equation are in their infancy but hold the promise of clean, free energy. The usage of electric power for short-haul vessels is already underway, while ports are also implementing shore power and electric cranes to cut emissions in the load/unload cycle.

A more radical answer, of course, may come from removing shipping from the equation altogether. The increase in additive manufacturing and robotics combined with the aforementioned push by governments to reshore manufacturing jobs may cut the net length of supply chains with a resulting reduction in emissions.

Mark Fontecchio
Research Analyst

Mark Fontecchio is a Research Analyst for the Internet of Things practice at 451 Research, a part of S&P Global Market Intelligence. He covers horizontal IoT technology, as well as focusing on the commercial transportation vertical. Previously, he was the M&A Research Manager at 451 Research, where he helped direct the firm's coverage of technology mergers and acquisitions, and its M&A KnowledgeBase.

Christopher Rogers
Panjiva Research

Eric Oak
Panjiva Research