Change on the horizon
More than 200 delegates at this year’s ECG Conference in Amsterdam heard that sales and production in Europe are on the rise, but that both the economy and the industry suffer from considerable fragmentation, writes Christopher Ludwig.
A market growing, but with wide variation, inconsistency and divergence; an economic region integrated, yet with conflicting policies and legal frameworks; an industry knit tightly together, while still fragmented in its services and connectivity by country.
So it is today for the finished vehicle logistics industry across much of the European Union. While carmakers and logistics providers are on the cusp of the first full year of growth for new vehicle sales since 2007, few companies attending the ECG Conference in Amsterdam will have felt as though they are experiencing a boom. The European economy faces a number of risks, including high sovereign and household debt levels, and moribund economies in a number of large countries that threaten recession and even deflation.
Some markets (the UK, Spain) seem to be pulling ahead more definitively with increasing sales and production than others (Italy, France). Russian sales, meanwhile, are falling fast following the Ukraine crisis and increasing tensions with the West. As Christoph Stürmer, global lead analyst at PwC’s Autofacts research division, said: “There is growth in Europe, but there is no real European growth.”
Larger trends in the European economy also raise questions over what shape the future of the continent’s vehicle logistics will take. Increasing urbanisation and digitalisation, for example, could disrupt the current vehicle ownership model (as urban dwellers are less likely to own a car), and lead to new channels of distribution.
“With more people living in cities, it raises questions over whether we would still be able to go with our trucks into urban areas, or if we need to develop new models altogether, such as large distribution centres outside the city where customers might pick up vehicles,” said Wolfgang Göbel, director of logistics and marketing at German provider Horst Mosolf, and ECG vice-president.
While such changes might be significant in the medium-to-long term, the European sector is also facing immediate changes in regulation. The long-awaited January 1st 2015 deadline for the official start of the Sulphur Emission Control Area (SECA) is fast approaching, when ships in the English Channel, North Sea and Baltic Sea will be required to use fuel that contains less than 0.1% sulphur, compared to 1% currently. The change, which has been in motion since an IMO decision in 2008, later enshrined into EU law in 2012, is expected to raise fuel costs or the required investment to comply with the limits by as much as 30-40%, according to Poul Woodall, director of environment and sustainability at ro-ro shipping line DFDS.
“The balance of cost between shipping and rail or road will change. You will have to expect change three months from now,” he said. “You are already seeing that some shipping routes are being closed, and probably more jobs will be lost. All options will cost more money.”
While shipping lines have no choice but to comply, and customers will either have to pay more or switch transport modes,the issues are nevertheless concerning for a sector that has been shut out from economic recovery for much of the past decade. According to Costantino Baldissara, president of the Association of European Vehicle Logistics (ECG), outbound providers already have among the slimmest profit margins among any OEM suppliers. He maintained that, at such a level, it is difficult for logistics providers to make the necessary investments to maintain transport capacity and quality.
“Even if today we achieve small energy consumption reductions, such changes have no substantial impact on rates,” he said. “For this reason partnership and dialogue with carmakers becomes extremely important in order to join our efforts and to find common efficiencies.”
On that point, Baldissara lamented that an ACEA (association of European vehicle manufacturers) working group on automotive logistics had been cancelled; he announced, however, that ECG would launch its own working groups with both providers and OEMs.
Despite all the complications and uncertainties in the European market, companies can take some comfort in the fact that they are experiencing growth for the first time in seven years. The most recent report from ACEA revealed that September sales were up more than 6%, up for the 13th consecutive month, and up around 6% for the year-to-date compared to 2013. PwC’s Stürmer predicted that, unless any “black swan” appears, sales would be 5.5% higher in 2014 than in 2013, and would increase again by a similar amount in 2015, although that is still going to be well below 2007 peaks. Production across the major producing nations is also expected to rise, and indeed 3m units of incremental production across the EU will be added by 2020.
The macro-economic picture is especially murky, however, and within that murkiness are further risks. Dr Nicoletta Batini, a director of Italy’s ministry of economy and finance, and on temporary leave from the IMF, pointed out that both developed economies and emerging ones had recently seen their growth forecast downgraded in the IMF’s most recent reports.
Europe continues to face an economic drag from high sovereign and household debt, factors that are now in contrast to the US, where the US Federal Reserve Bank has been more accommodating than the European Central Bank (Batini emphasised that the views she expressed were personal and did not reflect those of the IMF or the Italian ministry). And while credit availability was picking up in the US, it was on the decline again in Europe.
“That is bad news for the automotive and logistics sector, as it becomes harder to get access to funds to invest in vehicles or equipment,” she said.
Batini also pointed to recent IMF staff forecasts that saw the risk of deflation in the euro zone to have increased, to around 30%, which is substantially higher than other regions. “This is also bad news as it makes real debt levels higher and consumer purchasing power worse,” she said.
Batini, however, was still relatively optimistic in the longer run. She expected vehicle sales to remain erratic and below pre-crisis levels until 2016, after which point more normal growth should resume. With that in mind, Batini suggested that now was the time for logistics providers to consider investment in equipment to be able to support future demand.
Fragmented, decentralised – but flexible
Besides issues over rates, investment and regulatory costs, the world’s largest regional economy may also be missing out on the potential economies of scale and benefits of a more integrated single market, and a more centralised vehicle logistics network. From the industry perspective, OEM and LSP organisations tend towards fragmentation. Logistics managers from carmakers and logistics providers pointed towards decentralised networks that make the possibility of truly pan-European services (at least for land transport and distribution) more difficult. Even smaller countries, such as Belgium or the Netherlands, for example, may have separate importers or sales companies with their own distribution hubs and local carriers, rather than potentially operating in larger, centralised hubs.
"Even if today we achieve small energy consumption reductions, such changes have no substantial impact on rates" – Costantino Baldissara, ECG
Wolfgang Göbel pointed out that even a larger vehicle logistics provider like Mosolf could not truly offer services at a wider European level, but tended to have strength in domestic markets (in this case, Germany), while building up some presence in other, regional markets. “A mid-size player like ours just can’t offer pan-European services the way that industry is setup today,” he said.
While carmakers may have somewhat different strategies for how they manage their European sales and distribution, even those with more central purchasing and steering organisations, like Honda Europe, tend to see the outbound logistics market fragmented across national borders. “During our last European tender, we tried to centralise our procurement and clear away borders in terms of the services we could use,” revealed Simon Stacy, head of car logistics for Honda Europe. “But we found that the market was still very cut up into national services.
Not everyone believes, of course, that deeper integration and centralisation is necessary across the sector. Rolf Baumann, manager of outbound logistics for the Opel Group at GM Europe, said that the carmaker maintained a certain amount of centralisation through GEFCO, its fourth party logistics provider, but that Opel (via GEFCO) also maintains satellite offices around Europe to help increase flexibility. “We need to keep some people close to the market that are able to make local decisions separate from Paris or formerly Rüsselsheim,” he said. “Of course, more integrated and pan-European services and organisations would be nice, but they are not always necessary.”
There is further fragmentation at the regulatory level. Speakers revealed that despite further efforts at harmonisation, the EU still has considerable internal barriers that stand in the way of more efficient vehicle trade and logistics flows. There are still too many vested interests and resistance to change, according to Maximilian Strotmann, member of the outgoing cabinet of Siim Kallas, vice-president of the European Commission, responsible for transport. He gave as examples the resistance of some to trialling longer truck lengths, as well as the failure of the EU to properly implement a truly customs-free process for moving intra-European goods by sea.
Baldissara also said that the EU was still wrought with so many divisions, including inconsistent truck and loading lengths. “We don’t want any market restrictions as caused by tension among different countries,” he said. “We definitively don’t need import taxes which affect trade balances.”
National fragmentation at both political and industry levels can be inefficient. PwC’s Stürmer pointed out that each country is effectively “doing its own thing” economically and for policies that impact automotive (such as Spain’s current, successful scrappage scheme). “This makes it difficult to really understand what is happening across the region,” he said.
Patrick Verhoeven, secretary general of the European Community Shipowners’ Associations (ECSA), observed that different national rules in the EU around ports could threaten aspects of the scrubber technology that some shipping lines will use to comply with the sulphur regulations.
“There is a legal uncertainty in ports concerning these scrubbers, particularly the wash water that they generate,” he said. “They may not be permitted in some ports, depending on national rules about water quality.
“Such a fragmented setup is not laying the groundwork for a level playing field,” he added.
But it is not all bad news on the regulatory front. ECG’s long-standing campaign to harmonise loading lengths in the EU to at least 20.75 metres has progressed well in recent proposed legislation, having already passed votes in the transport committee and the plenary of the European Parliament. It must now pass through debate among the Council of Transport Ministers.
Combined EU transport funding has also received a boost, with more funds allocated in the current EU budget in its ‘Connecting Europe Facility’ (CEF). Some money from this budget has also been allocated to helping some companies to comply with the SECA requirements. “Under the first call, €250m ($320m) is available for ‘motorways of the sea’ projects, and also relating to upgrading fleets for SECA,” said Verhoeven. “It is a bit late in the day, but there is a development there.”
DFDS’s Woodall said that EU funding has co-financed the upgrading of five of its vessels with the sulphur-removing scrubbers.
And for all the frustrations and shortcoming of European regulation and integration, there is still potential for significant changes and growth opportunities. The proposed free trade agreement between the US and EU for example, “is a once-in-a-lifetime opportunity to bring the EU and US closer” said Erik Jonnaert, secretary-general of ACEA. Jonnaert said that the EU had learned its lessons from a prior failure in negotiation, when there was a push to harmonise EU and US regulatory and safety requirements.
“We want mutual recognition in the first instances, so that each side can accept the other’s standards, as we are both very advanced in safety and other requirements,” said Jonnaert. “We will only look to harmonisation for the future.”
Managing capacity and logistics in such uncertainty was part of the conference theme: ‘Change is the only constant’. Certainly, logistics providers and managers need to be ready to move up and down quickly, as well as to follow their customers in area and services. Baldissara encouraged providers to adapt to new market conditions, and to invest in new services and capacity where needed.
“Relocation of new car production and growing export levels from and to some specific countries has resulted in the reshuffling of logistics schemes creating new opportunities everywhere,” he said. “Change is the only constant! These should be not bad conditions in which to prepare for the meeting with the long awaited upturn. This should be a quite good mood in which to start to reinvest at the right pace to develop the right capacity for the market of tomorrow.”
And indeed, logistics managers at carmakers stressed the importance of adapting to new strategies, and the role that vehicle logistics can play in them. Frank Schnelle, general manager of development and planning for Hyundai Glovis, the logistics management arm of Hyundai and Kia, pointed out that a switch in production at the carmakers from built-to-stock production to more built-to-order processes was driving changes in how to manage inventory and consolidate logistics flows between Hyundai and Kia.
"We also expect further consolidation of logistics providers and suppliers to take place" – Frank Schnelle, Hyundai Glovis
Honda Europe’s Simon Stacy also said that the carmaker’s efforts to centralise more of its stocks in Europe was also having important knock-on effects in consolidating vehicles at distribution centres and managing transport. He also saw reason to look further at alternative technologies, and how they could impact vehicle logistics.
“We see that fuel cell vehicles will eventually arrive, and we have to understand how we manage and handle that for vehicle logistics,” he said.
For Opel’s Baumann, many of the biggest changes have been internal, including closing factories as well as outsourcing logistics management to Gefco as a 4PL. “Our logistics has to adapt to get the most out of our new relationship and our re-emergence as a profitable player in the market.”
Baumann observed that there was an increasing importance of providing customers with accurate delivery estimates, and then sticking to them or adjusting them in close to real time, based on any changes to logistics. “Up to now, we have not been so satisfied with the data and communication reliability, but we have to use new technology to improve planning and visibility across the supply chain,” he said.
Stacy and Schnelle also stressed the importance of giving customers reliable delivery dates – with the reliability more important than speed, in many cases. Schnelle pointed to the possibility of new telematics systems to give more precise and real-time information about vehicle locations and arrivals.
Working better, together
The question of new technology of course prompted questions over investment and contract terms. Baumann admitted that longer contracts could bring more stability and perhaps more scope for investment in technology, but that it was important for manufacturers to keep their options open, and not to commit to one technology or service that may become obsolescent quickly. However, Baumann said that Opel and GM were open to exploring longer contract lengths where they might make sense.
“We have yet to find a better means of finding the best service and cost than by running tenders, although we would be willing to avoid doing these each year if we could,” said Baumann. “However, we are open to working more closely with providers and in some instances we have even recently signed contracts that last as long as five years.”
Both Stacy and Schnelle have said that their companies typically issue two-year contracts, but that they were open to different arrangements if the case were to be compelling. “In our case, we have typically given two year contracts for transport from the factories,” said Schnelle. “But for dealer distribution, we are looking for models that might allow for more stable investment and planning, and have issued contracts that were 3-5 years long.”
The news that OEMs were willing to consider longer relationships with outbound providers could be a sign that some areas of logistics will require more collaboration and strategic planning. Göbel pointed out that where entirely different distribution models might be needed – such as to manage urban deliveries, or support car-sharing models, for example – a longer timeline and investment consideration would be necessary. “We will typically ask for five-year contracts when we know that specific investment is required,” he said.
Looking out, the shifts in the automotive industry could bring logistics providers even closer to OEMs. Christoph Stürmer pointed out that OEMs were increasingly turning more to suppliers to provide both the technology and the service required to produce their products. To that end, he also saw more scope for vehicle logistics providers to take an integral role in the overall chain, including more technical inspections and accessory modifications at distribution yards, as well as managing entire processes such as customs clearance.
“OEMs are still struggling to understand the real value of their non-material suppliers, but you are in the middle, and thoroughly integrated,” he told providers. “The OEMs still have a lot to learn from you. Be creative. Don’t be part of the problem, but be part of the solution.”