Logistics Clusters in the Era of Disruption

Dozens of vessels queuing up at the world’s largest maritime ports. A shortage of shipping containers, dockworkers, warehousing operators, and truck drivers. Factory closures across Asia’s manufacturing landscape. Significantly longer supplier delivery times. Higher fuel prices. A persistent consumption shift away from services and toward goods, increasingly delivered at customers’ doorsteps through e-commerce in the high-income markets of North America, Western Europe, and Northeast Asia. Significantly more expensive transport and logistics services, which eventually made their way into overall inflation—and therefore into ordinary people’s daily lives. 

These are some of the manifestations of global supply chain disruptions brought about by the COVID-19 pandemic, further exacerbated by extreme weather events linked to climate change, lingering infrastructure and structural bottlenecks in major trade lanes and corridors, such as the Suez Canal, and, most recently, Russia’s invasion of Ukraine.  

The surging role of resilience in supply chains

Supply chains—the intricately planned choreography of transportation, storage, and hand-over of raw materials and finished products as they make their way to final destinations, often across borders—have always been subject to uncertainty.  

Resilience in supply chains has long been recognized by academics and practitioners as a source of enterprise value. However, the events of the past few years may have created a turning point in supply chain management practice , from an efficiency-based paradigm to one in which resilience is at least as important as a driver of logistics performance. 

In this context, logistics clusters—the co-location of value-added logistics services at scale—have become more relevant than ever. Although clusters have long been recognized as facilitators of economic activity, current levels of uncertainty up and down the supply chain are increasingly highlighting clusters’ broader impacts on such dimensions as connectivity, business continuity, logistics multimodality, decarbonization, small- and medium-sized business growth, and more. This is being particularly felt in places that lack modern logistics clusters.   

There’s a need for logistics clusters, particularly in middle-income countries

Our recent report, Competing with Logistics Clusters, makes the case for greater and more geographically diverse development of logistics clusters as a way for countries to boost their competitiveness through logistics efficiency and resilience gains. 

Historically, the international experience with large, modern, multimodally-connected logistics clusters—such as integrated logistics centers (ILCs), dry ports, freight villages, and extended port complexes—has largely been confined to high-income countries. Western and Central Europe boasts the world’s highest incidence of logistics clusters per land area; the United States is home to some of the largest, best-connected, and most efficient clustered logistics facilities on the planet; Singapore is the world’s largest transshipment hub port.  Among the 30 best performers identified by the World Bank’s Logistics Performance Index (LPI), more than half are in Western and Central Europe; all except China are high-income economies; and all have developed logistics clusters. 

In contrast, aside from a few notable examples—in Latin America, Mexico above all, and to a lesser extent Brazil; in Asia, China, Malaysia, and Thailand—the practice of deploying well-connected logistics clusters with significant activity co-location in middle-income countries remains fledgling, particularly when it comes to networks of clusters.  

This includes countries that prima facie are good candidates for the provision of clustered logistics services. For example, countries with economic geographies that favor multimodality, such as Turkey, Kazakhstan, Vietnam, Indonesia, and Argentina; and countries located along major international or intercontinental corridors, such as Georgia, Azerbaijan, and Serbia. 

In low-income countries, logistics clusters are even less common. Where viable, their deployment can become an ‘early intervention’ economic catalyst for those countries to embed themselves in global value chains.

 Why deploying logistics clusters is challenging

Whether or not they are part of a network, the implementation of large-scale logistics clusters comes with many challenges. This partly explains the stark income spectrum divide.

First, international experience shows that successful clusters tend to be public-private partnerships (PPPs), where the participation of the public sector is essential despite clustered service provision being almost entirely provided by private subject matter expert firms. This requires the existence of a regulatory framework for PPPs, as well as a willingness for policy trial-and-error and learning-by-doing on the part of public sector institutions. 

Second, while any given economy can only justify a finite (typically modest) number of large-scale, integrated logistics clusters, these are rarely the result of top-down, pre-determined master planning. Instead, their development typically involves supply-demand risk taking and a long-term market outlook on the part of committed investors, such as real estate developers. 

Third, access to multimodal connectivity at the last mile, coupled with well-functioning long-haul multimodal networks, is essential, and their development requires investment and upkeep by engaged public (and public-private) institutions and operators. 

Lastly, the ‘location, location, location’ cliché applies well to clusters. Successful clusters typically are located at major gateways, near major consumption/production and population centers, and/or at waypoints within major freight corridors. Therefore, to avoid the risk of development white elephants, the deployment of well-located clusters should be based on careful analysis and driven by market demand. 

While challenging, these and other requirements remain within reach, particularly in middle-income countries

Logistics clusters, where justified, were already a potent way of boosting logistics efficiency before COVID-19. In the post-pandemic new normal, where resilience and decarbonization impacts are expected to be paramount, they may very well become indispensable.