This article first appeared in Digital Edge, The Edge Malaysia Weekly on March 28, 2022 - April 3, 2022

Venture capital (VC) firms have been pouring money into logistics start-ups in the past two years, thanks to the rise in demand for e-commerce and supply chain disruptions due to the pandemic.

This has been happening throughout the world. According to Crunchbase, funding for supply chain management companies (US$11.3 billion) saw a twofold increase in 2021 from the year before and beat the all-time high achieved in 2019.

In Southeast Asia, start-ups in the supply chain space raised US$7.8 billion last year compared with US$1.6 billion in 2020, according to research by Vynn Capital. Most of the funding went to start-ups in the logistics network, followed by sourcing and procurement and last-mile logistics.

Consequently, Singapore’s last-mile delivery company Ninja Van became a unicorn last September, while Thailand’s e-commerce logistics company Flash Group became the country’s first unicorn in June. Indonesia’s last-mile delivery company J&T Express was included in CB Insight’s unicorn list last April.

“Logistics has been around for quite a while but the big difference now is that we know more about it because of Covid-19. The impact of Covid-19 is significant on this industry,” says Jamaludin Bujang, managing director at Gobi Partners.

The boom in the logistics industry follows in the footsteps of the e-commerce industry, which began growing nearly a decade ago, he observes. The pandemic further boosted the demand for e-commerce and as a result, put a strain on the existing logistics infrastructure.

Eight out of 10 internet users in Southeast Asia are now digital consumers, and six in 10 existing users of groceries and food delivery platforms increased their usage during the pandemic, according to Google’s e-Conomy SEA 2021 report.

“The growth has been so fast in the last two years that the industry is still coping with [problems, including] the lack of drivers or people to deliver the goods. There is a shortage of delivery drivers now because the economy has recovered and people who used to do deliveries are going back to their normal jobs,” says Jamaludin.

The logistics industry is still very labour reliant, as it requires people to pack and deliver the orders. The last-mile delivery players also need to cope with thin margins in an extremely competitive space. Yet the demand for e-commerce isn’t expected to cease.

“I think we will see a lot of inefficiencies, especially when it comes to returns [of products]. That’s why there is an emerging trend of re-commerce, to resell e-commerce products that are returned. Quick commerce is also an emerging [trend], given that people are demanding products to come faster. But the overall infrastructure is not ready. Everything is pretty much open for disruption or enablement from technology,” says Victor Chua, founding and managing partner of Vynn Capital.

Many companies are in the last-mile delivery segment currently because it is the easiest to get into. Despite the competition, Chua is seeing start-ups becoming more creative. “There’s the decentralised method [of fulfilment] where instead of having one big warehouse, they are decentralising the warehouses to smaller nodes, so you can enable faster deliveries. There’s still growth in this segment but it’s competitive.”

The start-ups are using technology to overcome problems in the industry, which is not limited to the manpower issue. Traditional and large logistics firms have been approaching tech start-ups to digitalise their processes, Chua observes.

“It could be for things as simple as customs clearance, for instance, that they are still doing on pen and paper. More companies are trying to adopt technology and that’s where we see the growth to be. Start-ups are coming up with software-as-a-service (SaaS) solutions to enable first and mid-mile folks.”

Chua gives as examples of business-to-business (B2B) e-commerce fulfilment companies Epost and Dropee. He has invested in both companies. “They are helping traditional incumbents, brands and logistics players adapt to the new environment. So, while I think consumer-driven solutions are hot, there’s a lot more room for growth in the enterprise space.”

This is echoed by Jamaludin. Boosting last-mile delivery to support the e-commerce trend was the investment theme seven to 10 years ago. Now, these companies have to integrate other functions like e-commerce fulfilment and utilise technology.

“I think companies that don’t rely on automation in this space will lose out because it is getting more expensive [to hire people] and the number of packages is increasing every day. You cannot just simply increase the number of workers. You need technology [like automation]. All the companies we’ve invested in are thinking about squeezing more [efficiency] by using technology,” says Jamaludin.

Gobi has invested in online booking platform for courier services EasyParcel, e-commerce fulfilment company iStore iSend Sdn Bhd and delivery service provider Zoom. “Not long after we invested in EasyParcel, AirAsia invested in them. Now, they are evolving to become bigger by working with others or acquiring them,” says Jamaludin. AirAsia invested in EasyParcel through Teleport, its logistics arm.

“Zoom was one of the earliest ones that we invested in but they didn’t scale fast enough, so they are trapped in the very competitive space now.”

The total investment volume into Malaysian supply chain management start-ups was US$30 million in 2021 compared with US$9.9 million the year before, according to Vynn Capital’s research.

The largest share of the investments went to start-ups in the sourcing and procurement space. This can be attributed to the fundraising rounds by B2B e-procurement and inventory management platform Food Market Hub and Dropee.

The second largest share was in the last-mile delivery segment, thanks to the acquisition of food delivery platform Delivereat by Teleport. Following that is the warehousing and e-fulfilment segment, due to the fundraising rounds of iStore iSend and Epost.

While there isn’t a unicorn in Malaysia from the logistics sector, Jamaludin and Chua are confident that we could see one in the future. The industry is big, and the start-ups can expand to other countries in the region.

“I would envision this company (a unicorn in Malaysia) to have a regional footprint, just like Carsome and Grab … Malaysia is a good and safe market but it isn’t exciting enough for people to put all their money here. What we have is the ability to scale across the region. Singapore’s role is a financial hub but Malaysia is a strong operational hub,” says Chua.

It could be difficult for logistics start-ups to navigate the varying conditions in other countries, whether it is the lack of infrastructure, strength of incumbents or regulations. But if the start-up provides services that can help incumbents transform, there could be great opportunities to scale, he notes.

The start-ups could also follow their international clients. “For instance, you’re already working with Unilever in Malaysia. They can introduce you to the other markets. In short, if you’re doing it from an enabling perspective, I see advantages there,” says Chua.

The biggest opportunity within Malaysia, however, is in helping companies digitalise, he believes, so they can jump on the e-commerce bandwagon. This, in turn, boosts the demand for logistics services. That’s why Chua likes Dropee, which gives its clients access to data while enabling them to sell online.

“Dropee went from being a marketplace to an SaaS company that helps small and medium enterprises (SMEs). Now, they also do financing because it’s a pain point for SMEs. Dropee’s business model is very expandable, which means they can grow from vertical to another easily,” says Chua.

“That’s also why we went into Epost in Sabah. When there is growth in e-commerce, there will be more demand for the infrastructure, and logistics becomes part of the growth story. It’s all interrelated.”

Jamaludin has a similar view. Logistics start-ups, going forward, will not only be just ferrying products from one party to another.

“If there is a technology that helps businesses know, track and access where the product goes, when it’s used and who uses it, it is good. Look at the companies in the space who provide the data to brand owners. I think these will be the ones we’re looking for,” says Jamaludin.

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