Key takeaways from Morgan Stanley’s Blockchain in Freight report

 The cover image of Morgan Stanley's latest blockchain research report.
The cover image of Morgan Stanley’s latest blockchain research report.

On Black Friday, Morgan Stanley released a 50-page research paper called “Blockchain in Freight Transportation: Early Days Yet but Worth the Hype.” Morgan Stanley expects that blockchain-enabled smart contracts will be widely available for commercial use in 2018 (see: Blockchain in Transport Alliance), with more sophisticated applications coming out in 2020. Morgan Stanley believes the revenue opportunity for blockchain in freight will be around $500B if it succeeds in swallowing global truck brokerage (about $160B), freight forwarding (about $150B), truck fuel spend (about $175B), and supply chain management software (about $10B). We break down the key takeaways from the Morgan Stanley report below.

Middlemen are under threat: asset-light 3PLs like CHRW, Echo, and other shipper-carrier matching services will be the first to come under pressure if blockchain can achieve commercially viable levels of speed, transparency, and security. Stifel’s John Larkin commented that, “We don’t think [3PLs] are eliminated. Rather, we think that they will be early adopters of Blockchain and will squeeze out any remaining small brokers that cannot keep pace with accelerating changes on the technology front in our industry.”

The next segment in the supply chain to feel the threat may be fleet card operators whose virtual card payments will be replaced by auto-executing smart contracts. The key beneficiaries will be asset-based carriers and shippers.

One of the key differences between a publicly distributed cryptocurrency like Bitcoin and potential applications for blockchain in freight transportation is that the transportation industry will likely use a private/shared consensus ledger rather than a public/distributed ledger. A smart contract may only require 50% of the involved parties (plus an optional third party arbitrator) to agree on a transaction’s details, rather than the 50% of the entire network that Bitcoin requires. In practical terms, private/shared consensus ledgers will avoid the massive computing and electricity costs associated with Bitcoin and the applications will be able to scale much more efficiently.

Morgan Stanley compiled a list of blockchain in freight transportation’s current use applications: Maersk built an application to track millions of ocean shipping containers; IBM has over 400 customers for their products enhancing workflow visibility and infrastructure management; Walmart currently uses blockchain to monitor its food delivery supply chain at a granular level to avoid massive recalls, etc. Morgan Stanley’s report digs into the details on many of these use cases, and then goes on to explain exactly how blockchain can address some stubborn problems and inefficiencies that plague the freight transportation industry.

Blockchain’s potential benefits to the supply chain include standardizing payments, verifying product quality, optimizing cargo capacity, and increasing supply chain transparency. Morgan Stanley also goes through how obstacles like accountability, free riding, and scalability can be addressed. 

One of Morgan Stanley’s slides gives background information on the Blockchain in Transport Alliance (BiTA). BiTA is a coalition of manufacturers, shipping companies, and logistics technology companies that aims to develop common standards around blockchain applications in the transportation industry, from speeding up transactions to securing data transfers. Use cases include visibility into truck performance history,  vehicle maintenance, quality assurance, dynamic optimization, capacity monitoring, payment and pricing, fraud detection, and theft prevention. Major BiTA members include McLeod Software, Coyote, Convoy, UPS, DAT, Transfix, SAP, U.S. Xpress, TMW Systems, Polaris, Century, Logiflex, Kamion, Bridgestone, and Triumph. Specific issues BiTA members are addressing range from self-executing smart contracts, freight payment collection, asset maintenance and ownership history that ensures compliance with safety standards, gray trailer pools, and chain of custody. 

Morgan Stanley also forecasts stock implications for freight beneficiaries and entities that face challenges from blockchain. Morgan Stanley thinks that truckload and less-than-truckload carriers stand to benefit from blockchain because they will begin charging customers for assessorials and last minute changes, will be able to source freight directly from shippers without having to pay 3PLs, will get immediate payment settlement instead of waiting for weeks, and will see enhancements in freight security. Blockchain-enabled payment systems should be 200 basis points cheaper than current factoring. 

But 3PLs could stand to lose big: today logistics providers are paid by both sides to find capacity and demand, regardless of the transaction’s quality, they maintain an ‘in-and-out’ ledger, but have no provenance over the supply chain, and are much more expensive than blockchain-enabled solutions will be. Ultimately, Morgan Stanley claims, blockchain will automate the tasks of 3PLs at a lower cost with more security.

Craig Fuller, the Managing Director of BiTA, was not as bearish on 3PLs as Morgan Stanley. Fuller commented, “I actually think the large 3PLs become big beneficiaries because they are able to eliminate armies of people that are not digital. It will hurt their top line and compress their margins on a per-transaction basis, but they will gain a lot of market share over the voice brokers.”

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John Paul Hampstead

John Paul conducts research on multimodal freight markets and holds a Ph.D. in English literature from the University of Michigan. Prior to building a research team at FreightWaves, JP spent two years on the editorial side covering trucking markets, freight brokerage, and M&A.