What I've Heard about Logistics in Africa

Introduction
Tackling logistics wasn’t part of the original plan for The Engine of African Venture: A Return to First Principles, my sector-specific, deep-dive series for The Trajectory Africa. Focusing on fintech and digital commerce was more than enough. But logistics and digital commerce seemed related to each other, so I decided to explore them together. And I’m glad I did. From my first conversation about what problems in logistics were both credible and monetizable, the utility of understanding fundamental assumptions in these spaces became clear. Digital commerce is tech-enabled trade that is often about increasing the efficiency and reducing the cost of distributing food products. Logistics, as we’ll soon explore, is fundamentally about reducing the cost of critical goods by making it cheaper to move those goods around. So, let’s dive into what I’ve heard about logistics in Africa.

Why Logistics Are So Important
I heard two pretty compelling arguments for the importance of logistics, although one is slightly less direct. Let’s start with that one. My first conversation about logistics was with Samora Kariuki, who walked me through a post-mortem of Sote, a data and analytics fintech company enabling banks to lend to corporates & SMEs based on proprietary trade data, where he’d served as Director. He gave me a primer on logistics supply chains—key stakeholders, their roles, and their relative pricing power. He also explained the basic premise behind Sote’s founding, which also offers a useful framework to understand the role of logistics. Essentially, big economies like those in the US and the UK have huge trade volumes. It follows, then, that growing economies means facilitating and increasing trade. And what type of business would you build if you wanted to make trade easier? It would probably be a freight forwarder, which coordinates the transportation and shipping goods into or out of a country.

The basic idea is that making trade more efficient and sustainable can spur economic development on the continent. If the goal is to facilitate trade, then the focus should be on making it easier and cheaper to transport goods. That’s where freight forwarding comes in. Building a freight forwarder at scale creates primary relationships with manufacturers, as well as other key players in a logistics supply chain, such as shipping lines and ports. These relationships provide access to the data needed to make supply chains more efficient, which in turn, can boost trade.

Let’s say to load one full truckload from Mombasa to Nairobi, you have to pay a thousand dollars to the transporter. And to load cargo from Nairobi back to Mombasa, because there are many more trucks that are empty, it’s only $500. The majority of trucks are only doing one-way trips. So, you can imagine that if they did two trips, it would be $1,500. If we book them for both jobs at once, they will only charge us $1,100 or $1,200. They would charge us less because we’re able to give them both jobs at once. They know that they are going to make more than they usually would because most times they are only getting the thousand dollars for Mombasa to Nairobi. And as I said earlier, 93 % of the time they’re coming back empty.

Before we take a closer look at how tech startups confront these challenges, let’s take a look at the structure of a typical logistics supply chain.

How Logistics Supply Chains are Structured
During our conversation, Samora outlined a typical logistics supply chain, including key stakeholders, their roles, and the power dynamics between them. Here’s a synopsis of what I learned about shippers, the port authority, government inspection bodies, and last mile transporters.

• Shippers include large players like Maersk, but they’re typically family-owned businesses that have been in existence for hundreds of years. They tend to behave like oligopolies. In other words, they have strong pricing power, particularly in Africa, so they can set prices.
  

• Ports are large infrastructure projects that require large capital expenditures, and are typically run by national port authorities. They handle all incoming containers, unloading them from ships and moving them onto the rail or trucks. Ports are monopolies with pricing power because there is a limited number of ports.
  

• Freight forwarders are licensed by local tax and customs authorities to clear cargo. They handle all the shipping documents required to clear goods into the country. Every container or piece of cargo that comes in has to be recognized and declared by the government, which doesn’t have the capacity to deal with millions of businesses who are shipping and receiving cargo. As a result, businesses interact with freight forwarders, who are licensed agents that represent the tax authority. In most cases, freight forwarders offer transport services and sometimes also handle warehousing, e.g. DHL handles freight forwarding, transport, and warehousing.
  

• (Last mile) transportation is what moves goods from the port to a company’s premises. As previously mentioned, last mile transportation in Africa is predominantly done by truck. Although this varies by country, the industry can be competitive because there are plenty of transport companies. Transporters also tend to have very thin margins because transport is a commodity service with high operating costs due to expenses like fuel and salaries.
  

• Government inspection bodies. These are pretty self-explanatory, but include institutions that conduct health and safety inspections.

It’s worth noting that while the stakeholders and functions described above are fairly standard, the way players are organized can change based on context. For example, in Kenya, the transport infrastructure is well-established. As a result, DHL in Kenya only focuses on freight forwarding, and partners to deliver the remaining services. To give another example, in Nigeria, Lori works with brokers in the south representing truck owners in the north. But in Kenya, they work directly with truck owners or with freight forwarders. In general, SME transporters make up a large part of the market in east and west Africa, but there are also large transporters with standing contracts. Either way, shippers often need more capacity, and they have a lot of choices.

A lot of the companies coming into this industry are the tech companies like Flexport, Sote, and Jetstream. They come and solve what you call a visibility problem. And what you’re telling your client (the manufacturer), is that, I’ve got visibility into all your cargo because I have a relationship with the shipping line. I have a relationship with the Port Authority. I have a relationship with the transporters. So, I’m actually coordinating this entire operation for you.
Right now, [with] the traditional freight forwarders, it’s based on calls, texts, and emails to follow up what’s going on. I can give you this visibility platform where you’ll be able to actually track all your containers. If something is happening at the port, you’ll have visibility into this through my platform. It’s very important for the manufacturer because if I have a hundred containers per month coming in, it’s important that my team is able to coordinate what’s happening at all points in time.

The second [problem] is actually costs. One thing that happens in the shipping and logistics industry, is if your container stays too long at the port, there are usually storage charges. If you’ve got a hundred containers per month operation, then you need to be able to track everything and know what needs to be done so that your container doesn’t delay. Because the more it delays, the more you’re going to incur storage charges, and this is going to affect your bottom line.

But there’s another option, as Samora points out. Freight forwarders have a unique opportunity to use AI to solve the so-called “messy inbox” problem. Essentially, manufacturers have to manage a large amount of communication through email and WhatsApp, etc., to understand what’s happening in their supply chains. Freight forwarders could address this by aggregating and integrating the data that results from these communications to deliver a solution. In his words:

I think Anderson Horowitz recently wrote about it. What this messy inbox problem is, is that a lot of the communication is through email, WhatsApp, etc. and it’s very hard to put together all that data so it can tell you as the importer what’s happening in your supply chain.

And I think freight forwarders have a very unique opportunity to integrate AI and solve this messy inbox problem, which is massive in the logistics industry. If I were to think of industries where the messy inbox problem is the biggest, I’d probably put hospitals at number one and logistics at number two. And I think there’s a way you can add some SaaS fees or some other kind of subscription-based income model that would pay for itself and make a manufacturer see enough value to pay for it.

Yet another option is to offer trade finance that leverages visibility into logistics supply chains, i.e. data on customers’ trading patterns. Samora draws from his experience with Sote when he describes how it’s possible to build a logistics business that enables you to originate and underwrite risk, e.g. Amazon has a high-margin services business that was built on its logistics and fulfillment business. The logistics business could eventually break even, and a value-added services, trade-based business could be built on that bedrock. Sote was able to solve a lot of this equation—they’d built a platform that used their customers’ trading data as a basis to underwrite access to trade finance. And they had logistics customers who told banks they would switch to their institutions if they worked with Sote. Unfortunately, integrating Sote’s platform into the underwriting processes of these banks meant reconfiguring them, which was a bridge too far for them to cross.

A case for solving the coordination problem in logistics
Of course, where there’s a point, there’s also a counterpoint. And Jean-Claude has a perspective on why it’s important to solve the coordination problem if you want to reduce the cost of moving goods in Africa. We touched on this at the beginning of the piece, but here’s the essential argument that we’ll build on:

Lori is an asset-light provider that operates at the first and second mile, as mentioned above, which typically involves transporting cargo from the port to a distribution center, a factory, or between distribution centers and factories. This is called long haul, and cargo owners typically want a reliable, cost-effective shipping service because they’re transporting commodities to price-sensitive consumers in competitive markets for low margins. Of course, this means that the cost of all inputs, including moving goods, has to be as low as possible. What Lori does, is provide transporters with jobs. It also ensures that trucks reach 100% utilization by providing round-trip jobs, which increases the utilization and lowers the cost.

But operating a transport business is expensive. As previously mentioned, transporters typically have to wait 60 to 90 days to be paid by a shipper or manufacturer. Meanwhile, 80% of the cost of operating a truck is charged upfront—e.g., fueling and fixing it, and paying the driver. So, Lori offers financing to its drivers. The challenge is that this requires Lori to manage massive amounts of capital, which might not be a core competency. The burden of internalizing a trade finance function (even if it’s through a partnership with a financial institution) can create an existential crisis for a company, as we saw with Kobo360.

Another element of reducing costs is emissions reduction. Companies are starting to think about decarbonizing their supply chains due to taxes, in Europe for example, because governments want to lower carbon emissions. Notably, Lori has saved its customers thousands of metric tons of carbon through backhaul optimization, or making sure trucks don’t return empty.

Leta has been focused on the last mile of food, beverage, and e-commerce supply chains because that’s where most of the inefficiency is. Its goal is to help large enterprises understand and optimize their logistics at the level of cost per delivery, using AI. Ultimately, large manufacturers and distributors like KFC and Diageo want more efficient trips because cost efficiency compounds with scale. For example, if a company saves $1 over 3 to 5 trips, that’s not a lot of money. But spread over 15,000 trips a day, the savings are huge.

Now, although Leta entered the market with a focus on the last mile, it could move into the middle and first miles, presumably to become an end-to-end logistics business. The work at the middle mile would build on their current competencies, because it’s still about efficiency—helping trucks navigate roads that aren’t necessarily marked or traversable, for example. The first mile, taking cargo from a port to a point of distribution, is a different animal. It’s tough for early stage startups to serve this part of the supply chain because it has a political dimension, involving multiple ports and governments.

Revisiting pre- and post-shipment finance
Circling back to the trade finance opportunity that Samora described, Sote’s business model would have been to enable manufacturers to get financing based on their trade data instead of using land and buildings as collateral. Providing access to finance would then allow Sote to charge more per container because the improved payment terms obtained through financing increases margins for the business. (Note: This is the type of solution that addresses the “collateral gridlock” problem that he describes in his piece, Why Scaling Mid-Market Commercial Lending is So Hard in Africa.) Unfortunately, as I noted previously, banks couldn’t adopt Sote’s solution because it required them to change the way they underwrote trade loans.

In retrospect, to make the model work, Samora explained that Sote would have focused on the trade finance opportunity, partnered with a freight forwarder, and acquired it once the model had been proven. Meanwhile, another player took a different approach by raising its own balance sheets to lend directly. The challenge, as Jean-Claude highlighted, is having the right experience to properly manage that amount of cash. If you’re not careful about how you structure your balance sheet strategy, you might not be able to raise more than $20 to $30 million at a time, which is a small amount for trade finance. The typical SME client actually needs a $1 million trade facility while larger players need $20 to $50 million or more.

What happened with this initial cohort of startups is that basically VC funding was subsidizing transporters in Africa. They were taking the money because these guys were paying a higher fee for it. If it costs, say $1,000, to move a container from Mombasa to Nairobi, the logistics startups are happy to pay $1,100, for instance. And these guys were happy to take that work, the extra margin. But the real transporters all knew that this was not a sustainable business.

The link between technology, efficiency, margins and the cost of goods
As Jean-Claude explains it, optimal utilization is what resolves the tension between shippers who want low transportation costs and transporters who want to be paid well. The key to this is load efficiency and backhaul optimization. Essentially, transporters increase the number of jobs they’re doing while reducing the price of each one, rather than increasing the price of each job while doing fewer of them. To accomplish this (as we’ve noted), Lori uses its platform to ensure that transporters are matched with return trips, which ensures they’re paid going and coming. As a result, transporters will offer discounts in both directions. This is how Lori is achieving its mission to decrease the cost of goods in Africa. Logistics-related cost savings are passed on to customers because commodities, e.g. FMCGs, steel, fertilizer, grain, cement, etc. are price competitive. So, commodity producers who save money will pass savings along to customers in order to sell more stuff.

In other words, Lori’s business model works because technology increases Lori’s margin via optimization, or lowering the costs and increasing the efficiency of transporters without taking margin from them. Ultimately, efficiency, cost, and revenue are intertwined because when Lori improves efficiency, this reduces transport costs for shippers, but helps transporters make more money. There’s no room to charge more to transport goods because this is already expensive, so Lori earns its margin from the difference by increasing efficiency.

As alluded to earlier, renewable energy has the potential to not only dramatically reduce costs in Lori’s business model, but also to lower costs in the logistics industry and reduce the cost of goods. Why? Because diesel accounts for close to 70% of the cost of operating trucks. Electrification can lower that cost by 30 to 40%, which can reduce the cost of trucking by 5-10%. This would in turn increase transporters’ margins by 5-10%, leaving enough for an electricity and tech-enabled logistics platform to run a profitable business. But as Jean-Claude notes, the real impact will show up in the cost curve in the next 5 to 10 years. Perhaps obviously, the working capital/payment terms issue he highlighted becomes much less significant if 70% of total costs don’t come from diesel.

With Leta’s business model, a lot of value is captured because of the opportunity to reduce the cost of last mile logistics at scale. First, the high volume, low margin dynamic at the last mile works for Leta because those markets are less crowded re: this service. For example, a single customer like KFC operates in 18 markets. Additionally, key customers who perform well in certain markets are connected to adjacent markets or competitors in other markets.

Further, Leta’s business model is to retain some of the savings that their technology provides. For example, if a company was using 75 trucks to deliver goods, and that drops to only 55 trucks because of Leta, they take a percentage of that savings. Practically speaking, this means that Leta is earning margins that are comparable to the 60 to 70% margins generated in global logistics SaaS. Because the number of deliveries drives margins, Leta aims to do deliveries more efficiently. For example, they can use their technology to batch orders, earning for two deliveries, while using only one vehicle to deliver the goods. Additionally, Leta can increase its margins by prioritizing customers based on their value. They can decide to serve higher margin customers such as hotels and restaurants ahead of smaller merchants and corner stores. These parameters feed into an engine and the software suggests the best assets available along with optimized routes.

It’s also worth noting that solving last mile problems doesn’t require a lot of computational power—the typical scenario is a fairly standardized, small SKU product that’s distributed via a motorbike or a small truck.

Form vs. Function Round II
Reflecting on my conversation with Jean-Claude, the main takeaway was how the dysfunctional nature of capital deployment underlies how the logistics industry functions, driving up costs for key stakeholders, and ultimately, African consumers. The extended payment terms that transporters and freight forwarders have to negotiate are a direct result of the lack of trade finance available in the system. When startups try to fix this problem, they’re crushed under the weight of the responsibility. Surely, working capital (in the form of debt) is needed. But as Jean-Claude acknowledges, the difficulty that young startups would face deploying debt at scale was underestimated.

[But] now we have a better sense for it. Just like you often hear founders say that building a business in Africa is especially complicated because you have to build everything downstream and everything upstream yourself. If your business plan says you’re going to sell croissants, usually three months in, what you realize is that you also need to make the flour, pump the water and start a salt factory and so on. [You] have to do everything that precedes providing and delivering your business plan.

And sometimes the weight of taking on all of that can break your company. All of a sudden [A] doesn’t work the way you said it was going to and investors are looking at you, [asking] why is A not working like it was supposed to. And you’re looking at them like, because I’m doing B, C, D, E, F, and G and I’m not an expert in any of them.