Recent high profile cases stateside involving names like Flexport and Convoy have sparked some uncompromising social media scepticism of digital logistics startups. Flexport is battling on after reducing its workforce and undergoing restructuring, while Convoy dramatically collapsed last month.
The fate of these two companies in particular has had critics of some digital logistics startups speculating who will be the next high profile victim.
In recent weeks, there have also been reports that one Europe-based digital logistics and freight forwarding company would be announcing layoffs and closing down two of its offices. That in turn has had people wondering whether the events we have seen over in the US could be repeated here in Europe.
However, according to someone familiar with the freight forwarding business, such a scenario is unlikely for a number of reasons.
The source, who spoke to trans.iNFO on the condition of anonymity, stressed that the key factors that battered Flexport and brought down Convoy do not apply to the same extent to similar companies based in Europe.
As the freight forwarding insider told trans.iNFO, exposure to rock-bottom rates, particularly in the spot market, has hit entities like Convoy and Flexport hard.
“We have to separate the landscape into road and sea freight, and then make a division again between Europe and the US. These are the four dimensions at play here,” said the source.
Regarding sea freight, the huge rise and fall in rates during and after the pandemic has been well documented. Container prices peaked at around $10,000 for a container from Asia to Europe or to the US. Nowadays they’re below $1,000.
According to the anonymous insider, this has been one of the key factors negatively impacting Flexport. However, the source added that traditional players such as the major shipping companies, as well as forwarders like DB Schenker and Kuehne+Nagel, have also been significantly exposed to volatility in air and sea freight rates:
“They’ve all seen a significant drop in revenue simply because the average container price dropped so much. This is something that affected the traditional players the same way it affected the digital ones,” said the source, who reiterated: “The situation at Flexport and others shouldn’t be seen in the context of a tech space that’s not working, but rather a freight space that’s collapsed. Maersk has announced thousands of job cuts for instance. It’s not only digital players struggling.”
What about road freight then? The problem here, we were told, concerns the reliance on the spot market – particularly in the US.
Rates in the US market have fallen due to a supply/demand imbalance, while despite the European market also suffering economically, a number of factors have prevented rates hitting rock bottom.
“In the US, there are many more owner-operators than in Europe. American trucking is much more entrepreneurial and the competition pushes prices down. In contrast, in Europe, most truck drivers are employed by a small company with a few trucks, but it’s not an owner-operator relationship. It’s an employment relationship, which changes things a lot – especially when it comes to entering and exiting the market,” said the freight forwarding insider.
Elaborating further, the source added:
“In 2023, the US saw the highest registration of owner-operators in its history. The supply side went up massively because rates had been so high. Meanwhile, In Europe, things remained fairly constant because people aren’t keen on becoming truck drivers. They are more likely to work in restaurants, warehouses, or other jobs that may pay a bit less but are perceived as better professions.”
The driver shortage alluded to above has also been exacerbated by Russia’s invasion of Ukraine, which has taken away a significant pool of workers that was being increasingly tapped into in Europe.
Things eventually came to a head when the economic slowdown began after the war, reducing demand for transport. In the opinion of the source, it was at this point when the aforementioned oversupply of truck drivers in the US led to a massive drop in spot transport rates.
This is when Convoy comes into the picture. The company’s business model was mostly focused on a marketplace with optimised spot transactions.
The freight forwarding insider claims that Convoy actually had a fairly advanced marketplace model that could be much more powerful at matching demand and supply in the spot business, especially compared to traditional freight brokers.
However, the economic downturn still left the company massively exposed to the spot market – much more so than traditional players. This resulted in a revenue drop well in excess of 50%.
To make matters worse, contributing to this perfect storm was the fact that the company was also having to deal with over $100m in venture debt it had taken through Hercules Capital.
“These providers act tough, and the plan for Convoy was to raise more cash via another funding round, as there was a positive environment due to revenue growing again,” the anonymous source told trans.iNFO.
There were signs of light at the end of the tunnel too. 2022 had been fairly good financially, at least for the first 6 months. However, things soon turned sour due to the economic turndown. Revenue subsequently plummeted, and so Convoy had to refinance all the venture debt.
As our freight forwarding insider pointed out, this meant that the investors, including existing ones, didn’t want to put more money on the table. Naturally, they had all realised that the first $100m or so would just go back to Hercules, and so it would take at least that just to pay off the venture debt, with a further significant sum required just to keep the lights on for a meaningful period of time.
“Hercules ended up jumping in, took control of bank accounts, stopped payments, and secured as much cash as they could. They were also the driving force behind the sale of Convoy’s tech stack to Flexport,” said the source.
According to the freight business insider, the key takeaway from all of this is that the series of factors that led to Convoy’s downfall have not impacted similar European firms to the same extent – even if the continent has also suffered economically of late.
The source said that as most of Europe’s digital forwarders primarily deal with land transport, they are less susceptible to the recent dramatic fall in sea freight rates. In addition to this, despite the challenging road freight climate, rates have held up here, which is in part due to Europe not having the same oversupply issue as in the US (notwithstanding the obvious inflationary factors such as higher fuel, energy, labour and road toll costs).
Meanwhile, the collapse of Convoy, along with the struggles of Flexport and reported difficulties at the likes of project44, has led to some interesting social media commentary on the state of digital logistics startups – particularly those loudly promoting themselves as disruptors.
One could argue a lot of this commentary is credible. A number of industry insiders have taken the opportunity to promote aspects like the importance of sustainable growth, and highlight the problem of over emphasising on marketing over product.
However, the digital freight industry specialist we talked to had a degree of solidarity with those who have embarked on digital logistics startups in the US, irrespective of their successes or failures.
The source told trans.iNFO that although there has been some ill-informed social media criticism after Convoy’s demise, as well as numerous “I told you so” type posts, plenty of positivity has also been visible on LinkedIn and other platforms.
“There’s always those “I told you so” types. However, if you look beyond those comments on LinkedIn, you’ll also see there’s a lot of people talking about how much good talent Convoy brought into logistics, and how many engineers and people that would have never explored this area or this industry are now there and will create more value there,” said the freight forwarding insider.
The source added that Americans are more risk-taking and are also more likely to bounce back after a failure. Moreover, they also find it easier to get access to funding, which gives some businesses the strength to push on – even in difficult times.
“The US players are much more aggressive in their thinking. Also, If you fail in the US, it’s much easier than in Europe. There’s always something positive to take from a failed venture. I anticipate that in one year’s time or a year later, Convoy’s leadership team will be doing their next startup and raising a lot of money again. If you went to Europe and you failed in a similar fashion, I’m not sure that would happen,” the source told trans.iNFO.
As it turns out, Convoy co-founder and CEO Dan Lewis has actually been tipped to join Flexport. Naturally, he won’t be the only one moving on to pastures new either.
trans.iNFO understands that some of the staff who helped build Convoy are set to make their mark on Europe after being headhunted by at least one logistics company on this side of the Atlantic.