Top 25 Trans-Pacific NVOs

Special Report

Large forwarder acquisitions , AI put pressure on midsize NVOs

By Eric Johnson

Midsize non-vessel-operating common carriers ( NVOs ) face an uncertain path when it comes to the future of their businesses , with pressure coming from the top end of the market and the future impact of artificial intelligence ( AI ).

According to a range of experts in forwarder and NVO mergers and acquisitions ( M & A ), the challenge for midsize NVOs centers around keeping up with efficiency gains that come from large forwarders consolidating their positions through acquisitions and introducing process automation that keeps operating costs in check .

“ The bigger are getting bigger , and SMEs [ small and midsize businesses ] have to keep up ,” said Mikael Olesen , managing director of M & A firm Logisyn Advisors . “ And AI is coming up . More and more we ’ re starting to see it will have a major impact .”

Those pressures mean that midsize forwarders and NVOs have a choice .

“ Either they have to make significant investments because they can ’ t grow fast enough organically , so they make acquisitions , or they make an exit ” Olesen said . “ And it ’ s a good time to exit because valuations are reasonable .”

That comes as the Journal of Commerce rankings for the Top 25 NVOs by US imports from Asia through the first five months of 2024 show Kerry Apex in the top spot by a comfortable margin , with 186,678 TEUs handled , up more than 30 % from the same period last year .

Many NVOs are still benefiting from pandemic-era profits , but last year ’ s lean freight market accelerated the market ’ s move to control costs or drive broader economies of scale through acquisitions .

In addition , forwarders and NVOs are being squeezed on space by certain container lines aiming to develop more direct relationships with shippers and , in some cases , acquiring forwarders themselves .

Missed opportunity ?

“ A lot of companies are thinking , ‘ I should have sold earlier ,’” said Mark Motschmann , a managing partner at Edelweiss Corporate Finance specializing in logistics M & A . “ Now , it ’ s becoming a big challenge . Most companies didn ’ t have a good ’ 23 result , and most won ’ t have a good ’ 24 result .”

The financial challenge of investing to stay relevant in the market is hefty for smaller NVOs .

“ If they want to get to next level , they ’ re likely to have to invest $ 2 million to $ 5 million [ in technology ], which means they need to work for another 10 years because their EBITDA [ earnings before interest , taxes , depreciation and amortization ] is maybe $ 500,000 ,” Motschmann said . There is more scope for NVOs catering to lucrative niches , like pharmaceuticals or technology , to remain profitable with a defensible business model , he added . Those companies will struggle if they only work in general cargo because larger forwarders have the economy of scale , “ and size matters .”

Further , larger forwarders have the free cash to invest in AI to automate processes and reduce headcount to improve their efficiency per file handled , Olesen said . They also have the financial buffer to fail at such projects and still prosper , whereas midsize forwarders and NVOs generally don ’ t have that luxury .

Rate revenue dependence

The extent to which the current state of the market matters to midsize NVOs when it comes to their valuation and viability is underscored by how dependent most intermediaries are on freight rate revenue .

22 Journal of Commerce | July 29 , 2024 www . joc . com