Armstrong report takes a look at a ‘downshifting’ in the global 3PL market

A recently-released report by Brookfield, Wisc.-based supply chain consultancy Armstrong & Associates highlights the pandemic-driven swings the pandemic has had on the third-party logistics (3PL) sector, from various perspectives, including revenue, costs, and services, among others.

Entitled, “Downshift: Latest Global and Regional Logistics Costs and Third-Party Logistics Market Trends and Outlook,” the report is replete with 3PL market data and analysis, taking a look at the recent past and what may be in store, in the coming years, too.

For example, it observed that 2021 global 3PL revenues saw a 31.5% increase, to $1.4 trillion, in tandem with more developed countries with high COVID-19 vaccination rates opening up concurrently with gains in consumer spending, which benefitted 3PLs, in the form of supply chain management price inflation. Armstrong said this pattern continued into the first half of 2022, but things started trending down in the third quarter, as ocean shipping rates and domestic transportation rates started to “disinflate” in those developed countries, with consumer demand and supply chain operations stabilizing.

As for 2023, the report noted that the tightening monetary policies focused on staving off long-term higher structural inflation are projected to put Europe, the U.S. and the global economy into recession.

“Logistics is a cyclical industry and demand destruction will negatively impact its growth in 2023,” the report stated. “On the plus side, 2022 is ending with China reversing its Zero-COVID policy and many Southeastern Asia countries have opened up. This will drive increased demand in Asia going into 2023 and provide a tailwind to the overall global 3PL industry. It is essentially a COVID-recovery lag and will bring much of the developing world into a higher growth mode versus its developed brethren which saw extraordinary growth in 2021 and 2022. This will lead to more muted global 3PL growth from 2023 through 2025 resulting in a 3.5% CAGR in from 2021-2025E. By 2025, the global 3PL market should reach $1.6 trillion.”

In an interview, Evan Armstrong, president of Armstrong & Associates, explained that when looking at estimated 3PL growth rates, for global logistics costs and 3PL global revenues, from 2023 through 2025, there are some key drivers to keep any eye on.

“A lot of the growth is going to come from China’s reopening,” he said. “There is basically a lag in there. China is not going to come back in the way the U.S. did in June 2020, but it is going to come back, and it is going to increase what is [happening] on the logistics side and also on the 3PL revenue side. And with Asia rejoining the developing world, as well as in North America and Europe, is what is going to drive a lot of the growth.”

He added that it is not likely China will re-emerge economically as quickly as the U.S. did, while, at the same time, it remains a solid global 3PL tailwind, whereas the Russia-Ukraine conflict remains a logistics headwind, but not to the level as it previously was six-to-12 months ago.

On a macroeconomic basis, he said that while consumer demand is dropping, it is still holding somewhat steady, with job growth still solid. And while the possibility of a recession in the U.S. and Europe remains likely, it is not expected to be as severe as was indicated even a few months ago.  

With China expected to see a lag, as it has not come out of the pandemic as quickly as other developed nations, he noted it is likely to increase some logistics costs and 3PL revenues going forward.

“But, first, this year is going to be pretty soft,” he said. “We are already seeing it in domestic truckload volumes and are definitely seeing it in ocean freight rates. The 3PL market was a beneficiary of inflation, and now it is kind time to pay the piper. We are going to see some disinflation in rates, and that will get transferred into lower 3PL revenues and lower logistics costs.”

When looking at the current and future state of the global 3PL market compared to pre-pandemic 2019, Armstrong said it is likely that the market will land at a higher level, in terms of revenue, with rates growing, albeit some of that rate growth is likely to be transitory.”

“After the downshift in 2023, the market will be more in line with more traditional levels,” he said.