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The road freight industry is on the verge of being transformed by improvements in efficiency delivered by digitization and artificial intelligence. By accessing route planning and freight data and using AI-based matching models, digital marketplaces can identify optimal routes and reduce the number of trucks making empty or half-empty journeys. This offers an opportunity for the sector to both significantly cut costs and to reduce its carbon emissions: In the European Union, trucks are empty for around 20% of the distance they travel each year. If the use of digital marketplaces can reduce this by 10-20%, we estimate the industry could save €1-2bn and cut CO2 emissions by 1-2 megatons.
However, there are complex issues to address, both for established transport and logistics companies and tech entrants seeking to digitize the market before software-enabled marketplaces can reach their full transformational potential. The road freight sector in Europe was worth around €355bn in 2019, and has played a pivotal role delivering goods door-to-door and handling erratic patterns of demand during the Covid-19 crisis. Yet margins are (still) low, it is a deeply fragmented industry, and many parts of it remain offline and relationship-based.
The market is also facing another significantly disruptive force, in the shape of autonomous trucks. Using digital marketplaces to match supply and demand via algorithms will become even more effective, because automation will remove driver-related restrictions including availability, qualifications and rest times, as well as unexpected complications such as drivers falling ill or having accidents. We expect automotive manufacturers (OEMs) to offer ‘trucking as a service’ via their automated vehicles, and to gain access to shippers and freight, OEMs may look to form strategic partnerships with digital road freight platforms, or buy them outright, creating powerful rivals to established transport and logistics companies.
With all these factors in mind, we have identified a model for success for software-enabled platforms and set out the key considerations for incumbents, tech companies and OEMs:
- Disruptive levels of efficiency improvements are captured by a combination of liquidity and scale, which depend on customer coverage, with data and technology, which depend on data depth and superior algorithms for freight matching
- To achieve this, incumbent transport and logistics companies need to adopt the mindset and ways of working of software enabled marketplaces, while leveraging their customer access and presence on the ground
- Digital entrants meanwhile need to develop scale in customer coverage by focusing on specific segments or geographies, and take into account the digital capability gap faced by smaller trucking companies
How software-enabled marketplaces can unlock unprecedented efficiency gains
Software-enabled marketplaces will generate unprecedented efficiency gains, reducing costs throughout the value chain of road freight, by designing and enabling transactions more efficiently than the intermediaries that currently exist. The gains fall into two fundamentally different buckets:
Linear efficiency
The improvements in linear efficiency focus on processes, not on transport itself, and the associated gains are not a long-term differentiator. Potential levers include more efficient pricing and quotation processes using algorithmic pricing, streamlined booking processes through customer interfaces that are faster and easier to use and with the possibility of further integration with the customer’s own systems, better communication during booking and execution, and faster documentation and invoicing.
Wider-reaching network effects
Disruptive efficiency gains, or network effects, are achievable if software-enabled marketplaces succeed in producing a qualitatively "better" match than traditional freight forwarders or any of the other intermediaries in the market today. This form of improvement is defensible and lies at the core of the vision of marketplace operators. In the case of road freight transport, the quality of the match is measured primarily in terms of freight consolidation and optimal routing: reducing empty runs between loading points by means of optimized journeys and increasing the degree of utilization, creating a high amount of added value.
The key to better matches lies in marketplace liquidity, or customer access, on the supply side, and the highest quality matching algorithms, plus control over freight and planning data. The two categories, linear efficiencies and network effects, combine to create a virtuous circle in which the former helps to fuel substantial gains in the latter:
Conclusion
While online freight exchanges have existed for years without radically altering the industry, software-enabled marketplaces now have the technological capability to transform trucking, providing significantly better matches than the existing intermediaries. At the same time, ongoing cost pressures, emissions regulation and the eventual transition to autonomous trucks will also spur demand for a new generation of more efficient marketplaces. The industry is at an inflexion point, and both incumbents and new entrants must make changes now to capture the opportunities.
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