Forto CEO Michael Wax gives his thoughts on logistics services market

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Digitized freight forwarding and supply chain solutions provider Forto recently announced it had raised $250 Million in a pre-emptive Series D investment round led by Disruptive. That took the company’s valuation to $2.1 billion some 6 years after Freighthub was founded before being rebranded as Forto in 2020, a change that was initiated to better reflect the business’ activities moving beyond just digital freight forwarding services.

Forto CEO Michael Wax gives his thoughts on logistics services market

The growth of Berlin-based Forto comes at a time of rapid digital transformation in the logistics sector, with many companies expanding their services and operations via the use of digital technologies.

Following Forto’s latest investment announcement, we spoke to CEO and co-founder Michael Wax on a number of pressing issues, including the impact of Russia’s invasion of Ukraine, and how the logistics services market may develop. There was also time to learn about the company’s future plans and what it is doing to help companies be more sustainable.

Hi Michael, thanks for taking the time to talk to Trans.INFO. After the latest investment round, Forto was valued at $2.1 billion. Obviously, yourself and fellow co-founder Erik Muttersbach must have started the business because you were confident it could be successful. Even so, did you really expect to reach this point, and how far could Forto go?

Well, firstly we started Forto with the belief that it could become a $20 billion company. Obviously, you go through a lot of ups and downs when founding and building a company – but looking back 2 or 3 years, ever since we hit a certain inflection point, it was pretty clear to me that Forto was set to become a big success story.

Through your last two investment rounds, you’ve managed to secure almost $500 million in funding in just 8 months. What factors were influential in you managing to achieve this?

So I’d say that there’s two things. Firstly, I think Forto has continued to execute well. We’ve been hitting our budget now for five years in a row, and very much delivering on our business plan. Of course, keeping the promises that you make is something investors like.

Secondly, I think there has been a shift in the industry whereby supply chain logistics has moved from being seen as a pure cost centre, to something that is essential for business. Why? Because if you’re out of stock, you’re out of business. Many customers did not have supply chain resilience at the top of their agenda previously, and were caught by surprise when the Covid pandemic hit. Due to the effects of the pandemic, in the last two years, I think that has moved up from being a housekeeping topic at board meetings, to being discussed at the most strategic levels.

Moreover, I think that this theme of making supply chains more resilient is at the heart of our goals and strategy here at Forto.’This is part of the reason why we have managed to grow so quickly, as our business model matches this major industry shift.

Regarding the Series D investment, the company has said it will partly use the funds to “capitalize on new opportunities as they arise”. Are there any opportunities that Forto is referring to here? Is the business in a position to make any acquisitions if an opportunity comes up for example?

Yes, many opportunities could be very interesting for us – such as fast-tracking our expansion, or expanding our value proposition horizontally by partnering with other companies. We would also potentially look at acquiring smaller businesses.

Now we have the balance sheet to make these kinds of decisions. I think that if you look into the current market environment, there will be companies out there that may not be in a position to fully execute to the degree they’d like to, which opens up a good window of opportunity to aggregate some of the players that are in the market today. Forto would be the perfect platform for this.

FreightHub became Forto after its founders decided to re-brand the company to better reflect its wider offering, which now goes beyond simple transport from A to B and digital freight forwarding services. Nowadays, there appears to be more and more companies with key specialities and competitive advantages branching out to offer more end-to-end supply chain services, a trend that’s arguably been fuelled by advancements in digital technologies. Do you expect to see more blurring of the lines between TMSs, visibility providers, freight forwarders, carriers, tender platforms and freight marketplaces in the future? Are we potentially on the road to a new market whereby companies compete to become the best all-in-one logistics solution provider?

I think that is a likely scenario and outcome. Some players, if not competing with each other or not generating enough overlap in their customer base, will end up working together at some point to try to create more substantial network effects.

Those network effects can be very heavily increased and hardened if you have a bigger, more essential piece of the value chain for the customer that runs through your software. This is something that we are looking closely into. Obviously, there are lots of partnerships in place already, and some of those functionalities we already offer to our clients.

I think it would be interesting to see an analysis of what kind of direction other Supply Chain companies are going in. At some point, not all of them will exist. There will be more aggregation activity over the next one and a half to two years. Ultimately, I think there will be two or three really large companies coming out of this.

When it comes to sustainability, what is Forto doing to help its clients reduce their carbon footprint?

Put simply, we start by providing transparency, and then we go on to help clients reduce their carbon footprint. In the second step, we essentially steer our partnership in a direction where we can significantly avoid emissions through alternative fuels, or let’s say, electrical transport purely powered by renewables.

Right now, we are in the phase of a mix between one and two. So, we provide transparency to our clients by telling them how much they’re actually emitting, meaning they can take action on their side – either by paying for offsetting, or through other measures that help avoid emissions going forward.

At the same time, we are already engaged in very serious partnership talks to allow us to be part of the first cohort of companies that will run alternative fuels in both the sea freight and air freight spaces.

I think what’s most notable for us is that 65% of our clients are already prepared to pay a premium for more carbon friendly transport.

Following Russia’s invasion of Ukraine, you set up a task force with representatives from all corporate functions relevant to rail, air and sea freight. Initial predictions from experts pointed to a lengthening of air freight routes due to airspace restrictions, as well as significantly higher fuel costs. It was also forecast that sea freight rates between Europe and Asia would increase substantially due to the reduction of capacity generated by the loss of rail freight routes. However, there has also been speculation that rates could actually go down due to changes in consumer behaviour among other things. What are the team at Forto seeing at this moment in time regarding sea freight rates?

That’s a tough question. I don’t think anyone can actually predict the market, so I’ll just say what I see right now.

I think that there’s multiple effects that we may not think of at the moment. On the one hand, we still have a situation following the events of last year, which generated and drove a lot of demand and thus a supply constrained environment. That leaves us with elevated rates.

The second thing we do see is that not all of the ships are 100% full anymore. There is currently a slowdown in production primarily in China that started after Chinese New Year.

I’d say, for multiple reasons, including Covid lockdowns in the last two weeks, primarily in Shenzhen and now in Shanghai, there is ultimately a very unpredictable Covid situation in China.

If they decide to stick to a Zero Covid tolerance strategy, let’s say, it would be very hard to tell what would happen there. Ultimately, supply chains today are so interconnected and intertwined that the second and third order effects are very difficult to predict.

To give one example, let’s say that some of the factories remain closed for a larger part of the year. Finding alternatives and a way to harden supply chain resilience for some items as of right now will almost be impossible. That’s something that we need to watch very carefully, in combination with the port and hinterland bottleneck effects that we could already observe last year.

The last part to add is obviously Russia’s invasion of Ukraine, which saw more supply chain ripple effects come into play. Obviously, besides the humanitarian crisis, which has been shocking, there’s barely anyone offering rail transport in the region anymore.

There are quite a few air freighters that have been grounded at a time when a lot of the previous mix of belly freight versus freighters was a bit out of balance. 70% of the cargo was transported via freighter given there was so little passenger travel between China and Europe.

The entire air freight industry was relying more on freighters and now those have to some extent been grounded. Then there’s the Russian airlines and the sanctions that were put in place, so there’s obviously now a capacity shortage.

So, you still have the bullwhip effect out of 2020-2021, primarily backlogs at US ports. Now we also have to cope with the situation in China, India, Russia, Ukraine and other places. For the first time in probably a year, we saw a bit of easing regarding the situation in the US over the last two weeks. On that side, you can clearly see that there’s light at the end of the tunnel, and that in the second half of 2022, it will probably represent a smaller bottleneck in terms of US port traffic.

However, in terms of the Covid situation in China, it’s very difficult to predict. I would not like to make an assumption there. If further lockdowns come, these effects can nonetheless very quickly become much more impactful than the kind of closures we all experienced last year that created severe supply chain shocks around the world.

As for Russia and Ukraine, besides the humanitarian crisis, it is the least impactful in the grand scheme of things, because the Black Sea is not necessarily an important trade corridor. Rail has been responsible for roughly 5% of the volume being shipped between China and Europe so I feel this can be compensated by Seafreight and Sea-Air combinations.

Heavy material shipments and infrastructure transport, for example, will be affected due to the damage of the Antonovs, and while the remaining 25 freighters from VDA and ABC offer meaningful capacity, will not create a crunch that shall be felt around the world for let’s say the next 12-18 months.

So the bottom line is that the biggest effect to carefully watch is the Covid situation in China. We can only hope for the government to go down the route of a more sustainable solution than severe lockdown measures.

One rail freight route that avoids Russia, Belarus and Ukraine is the line that’s part of the Trans-Caspian East-West-Middle Corridor Initiative. How key do you feel this route could become if the war were to continue for a long period?

It’s very difficult to say and judge the reliability of the Caspian route, but I would say that if it hasn’t been pressure tested, it will take at least six to eight months until it really runs smoothly. The same goes in the other direction.

I don’t think this route will provide an alternative option in the short term, but it will eventually make up for some of the capacity shortfall we’ve been talking about.

Finally, in a recent statement, you said you have plans to “further expand its footprint to customers in Poland, Belgium, Sweden and southern Europe”. Could you perhaps elaborate on what you may be looking to do in these countries?

Well, we plan to launch in a lot more European markets over the next 12-18 months. We do already have a strong European footprint, and we want to harden and increase that. Indeed, it is basically our aim to provide our services to any European country over the next two or three years.

Finally, do you feel we will begin to see noticeable consolidation in the sector? As the market develops, how many key players will there be, and what will decide who comes out on top?

I think there are three core messages here. The first is that out of the top 10 players currently, which are the ones that really understand digitization, and that own that technology? The ones that do are the ones that will stay. There are a lot of remarkable players that have been in the space for over 25 years that will remain and provide competitive services.

Secondly, I think there will be a strong consolidation, especially if the smaller players find they no longer have a reason to exist. They could be in a situation whereby they do not offer a superior user experience or any benefits when it comes to pricing. These could be people that have been purely leveraging relationships and proximity in the past, but those times are gone.

Last but not least, I think there will be multiple strong digital players breaking into the top 10. If you look at the players that are most prominent right now, in China, and there’s another player in the US – they all have a strong local DNA.

Nevertheless, they’ve all grown into global businesses, just like Forto is doing. But in 10 years, we will still have the largest share of our revenues primarily generated in Europe.

That will mean that the market is too large for a situation where one winner takes all. Instead, it will consist of let’s say 10-20 leading players in the middle-to-long-term future.

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