ECG Conference 2013

Logistics must be ready to react to decline and disruption
The fifth straight year of falling sales, and the first significant drop in production, will have significant impact across the wider continent. Christopher Ludwig of Finished Vehicle Logistics reports from thie 2012 Conference

Presentations, interaction and  social engagement were all included for delegates

 “With no sales growth expected for 2013, we hope to have reached the bottom,” said Jan Maly, director of automotive consulting for PricewaterhouseCoopers (PwC).  “However, that depends very much on the stability of the eurozone and increases in consumer confidence. We currently do not see EU sales recovering to the 2007 high of 16m units before 2018.

The chronic decline was at the centre of discussions among the 200 plus delegates over the pre-conference business dinner, and during an intensive day of presentations, discussions and networking at this year’s annual ECG Conference, held in Prague, in the Czech Republic.  The delegate fee included it all, as well as the opportunity to take in the social programme during the conference and on the Saturday morning afterwards.

Production decline is general across Western Europe but most acute in the south, and is raising important questions about the finished vehicle logistics sector’s ability to invest in new equipment, technology and services in a European automotive industry that is changing quickly.

Geographic shifts in production and consumption, and the rise of new methods of car ownership and sales, make this “the most disruptive period to the automotive industry that we have ever seen,” said Ben Waller, senior researcher at the retail and distribution consultancy ICDP.

ECG’s Baldissara:  coming out hard against government austerity

The president of the Association of European Vehicle Logistics (ECG), Costantino Baldissara, and its vice-president, Wolfgang Göbel, cited ongoing consolidation, mergers and bankruptcies in the vehicle logistics sector. Small truck operators in southern Europe, for example, are among the hardest hit so far. “In Italy, the small family-owned companies or owner operators – what we call padroncini – are disappearing,” said Baldissara, who is also commercial and logistics director for Italy’s Grimaldi Group. There are also changes among medium and large providers, with no better signal for this than PSA Peugeot-Citroën’s current plans to sell a majority stake in its logistics provider, GEFCO, to Russia’s state railway operator, RZD. Even before this, companies such as GEFCO and fellow French provider, Groupe CAT, had been acquiring smaller or weaker vehicle logistics companies.

“We’re beginning to see consolidation among European vehicle logistics providers, and there will certainly be more,” said Göbel, although he admitted that many of the ECG’s members, even in hard-hit markets such as Spain, had been remarkably resilient.

Göbel also pointed to the struggles among car carrier trailer manufacturers, who continue to survive despite a nearly complete freeze on trailer investments in Europe. “These manufacturers, like other companies in this sector, are family owned and thus are not shareholder driven. It makes them more resilient. However, they cannot go much longer like this,” added Göbel, who is also director of marketing and logistics at Horst Mosolf.

Coming together for downstream benefits

Citing devastating macro-economic conditions, Baldissara said the renewed crisis was “well above anything that could be done by LSPs or OEMs”. He came out hard against government austerity measures.

“I’m just a simple guy from Naples but it seems wrong to cut back when the market is already in recession,” he said.

He called instead for a European-wide effort to stimulate the sector, including measures such as tax breaks for car manufacturers and consumers, and the encouragement of alliances to help maintain or bring more production to Europe. Baldissara also renewed a call for scrappage incentives that should be tied more strictly to the exchange of older vehicles. Despite the political difficulty of such a move, Baldissara and Göbel suggested that the VAT revenue and jobs growth that such schemes would bring could make them at least tax neutral for European governments.

“In parts of Europe right now the markets have dropped so low that if we don’t do something to help, [the industry there] won’t come back,” Baldissara said.

Delegates at the conference shared an overriding sense that the only viable way to deal with the downturn would be through a unified approach, including at the European level by co-operation between government and industry, as well as between OEMs and logistics providers.

Growth now all that counts in Brussels

He also suggested that road charging schemes were likely to become more important as Europe looked for ways to bridge its funding gaps and maintain investment in transport infrastructure.

1. Capacity conundrums and collaboration

ECG president Baldissara framed a large amount of the current concerns as being well beyond the scope of ECG and its members, or even its customers. Echoing to some degree Fiat CEO and current ACEA president Sergio Marchionne, he worried that Europe is missing a unified industrial policy to deal with overcapacity and market decline.  “We [in Europe] have all the resources to deal with this crisis ourselves, and we have all the skills and technology we need to continue to build and export vehicles.”

OEMs attending included (from left): Volvo Cars head of outbound strategy Magnus Odling;  Honda Europe  head of logistics Simon Stacy; BYD Europe’s business development director Chen Yongping; Jaguar Land Rover distribution manager Gareth Williams

Though many believe that the only viable path for the industry  is to close under-used plants, Baldissara suggested instead that, with the right help from government, Europe could be as competitive again as the US, and bring volume back to under-utilised plants in markets such as Spain or Italy. He cited Daimler’s recent decision to use contract manufacturer Valmet to build A-class vehicles in Finland as an example of how complex the capacity issue really is.

According to Ben Waller, senior researcher at ICDP, there is no serious consideration in Europe right now to reintroduce scrappage schemes, though there may be the possible exception of France.

An industry speaking with one voice

In the wake of the 2008-09 crisis there were ruptures in relations between OEMs and providers as most carmakers unilaterally ripped up previous contracts or lowered freight rates. ECG vice president Göbel claimed that carmakers had moved away from such approaches as the market heads down again. “OEMs are done with rate cuts,” he told delegates.“They all did it during the last crisis, and most have realised that it won’t work anymore. Any further reduction would drive more providers out of business.”

The conference gave evidence of efforts from carmakers and providers to work in step. Daimler’s Christ, together with Göbel, presented the progress of the joint working group, which meets around three times per year and has between 5-10 companies represented across ACEA and ECG.  Discussions are restricted to non-competitive issues, of course, which means that contracts or price are strictly off the table. Sometimes that is irksome:  “A joint agreement on a standard fuel clause would improve things for everyone,” said  Göbel. “But the legal advice is very firm – we can’t do it.”

2. Europe missing out on global growth

As former President Bill Clinton said: “It’s the economy, stupid.”   And the short-term outlook for the European market remains poor, with sales not expected to rise before 2014, according to PwC. Further declines are not ruled out, particularly if there are further shocks to the eurozone.

In recent years European production had remained fairly strong even as local sales dropped, with markets such as China driving exports, especially from Germany. But PwC’s Maly said that slower global growth, together with the construction of foreign production facilities in Europe, has pushed production into closer alignment with European sales for 2012.

A return to rising inventory levels

The European automotive industry generally is adjusting its production and stock levels more quickly this time round, according to Waller at ICDP. “OEMs have been quicker to slow production or even to temporarily close factories in response to demand, something that had been almost unthinkable a few years ago,” he said.  Indeed, as the conference closed, Volvo announced that it was closing its main plant in Sweden for a week because of poor demand.

Dire market for road transporters

Percht told delegates: “We are selling against the banks [which are disposing of vehicle returned from leases], not our competitor.”

For example, PwC reports that German light vehicle production remains fairly stable, but there have been big drops in France and Italy.  Capacity utilisation is currently more than 80% in Germany, the UK and in the newer EU member states in eastern Europe, but close to 60% in Spain, Portugal and France and below 50% in Italy.

Meanwhile production is seeing a movement to eastern Europe locations and, as has been well reported, a handful of brands emerging as winners since the downturn in 2008, notably the VW group and Hyundai/Kia. 

3. Changing vehicle logistics flows

Among the most pronounced impacts of market shifts has been an increasing imbalance between vehicle logistics flows for imports and exports. In Spain, for example, exports now outnumber imports by around 3:1 and maybe more, according to Manuel Medina, vehicle distribution manager for SEAT. In 2008, the ratio was better than 1.5:1.

Sea transport, previously around 30%, has now reached more than 47% for SEAT, while truck has grown a little from 40% of volume in 2008 to around 45% today.

Rail suffers as inventory and lead times rise

A stronger focus on cost over lead times is another reason for these changes. According to Medina, SEAT now accepts increased lead times and more transhipments if the costs are lower, something which had not been a priority before. The difference in track gauge between Spain and the rest of Europe continues to require cost and time to change equipment.

However, the shift towards more sea has led SEAT to nearly double the vehicle inventory held at Barcelona, to around 7,000 units. “This has come at a high cost for us, and dealing with that is currently our fight,” he said.

SEAT’s changes are a part of the VW Group’s review of its logistics strategy. See the report in Finished Vehicle Logistics.

But like much else in the currently divided European economy and automotive market, the experience of one market or company cannot be generalised across the sector. Mosolf’s Göbel noted a dramatic increase in rail transport for some flows, notably for vehicles produced for export. About 85% of Daimler production out of Hungary, for example, is sent using rail. Mosolf is also moving a significant share of production out of Daimler’s plant in Sindelfingen by rail to Bremerhaven. Even though these rail cars come back empty, it is still viable, said Göbel.

Can outbound react fast enough?

OEMs are not always able to align their order-to-delivery systems quickly, particularly when they have a complex network of plants and markets to serve. In a frank comment during the conference session dedicated to the whole issue of the volatility that affects finished vehicle logistics, Toyota’s general manager of vehicle logistics for Europe, Cyran Vanderhaeghen, told delegates “we still have internal issues to address”.

“Our manufacturing and sales operations are on much better speaking terms [than they used to be],” he said. “But logistics is still not present. We have to put ourselves into the equation internally. We need more planning, not to overcome market volatility – you can’t do that – but to provide more information so we can respond to changes.” Vanderhaeghen also cited production-led factors that increase volatility. In Toyota’s drive for efficiency, factories swapped models and production, including changing production location in response to sales that have been made. All of this leaves outbound logistics “in the middle,” he said.

Volatility is sometimes caused by internal factors:  (from left) Toyota’s Vanderhaeghen, Daimler’s Christ and Nilsson from Volvo Construction

Vanderhaeghen’s internal focus was echoed by Daimler’s Christ, who identified market movements as just one factor in volatility. Others include complex supply chains and global versus regional production.

A more systematic approach in Volvo Construction Equipment’s partnership with its logistics providers is also used, although Nilsson did acknowledge that sometimes this does hamper their creativity.

A report on Toyota Motor Europe’s wider logistics strategy is published in the current issue of Automotive Logistics


4. Potential changes to European transport policy

The conference revealed potentially significant  changes to EU transport policy  on road vehicle lengths and cabotage.

A revision to the weights and measures directive, which is expected either at the end of this year or early next, could pave the way for the use of longer and heavier trucking equipment within member states as well as when crossing borders. The European Commission has already lifted cross-border restrictions on the use of the European Modular System – trucks with a length of 25.5 metres – between countries that have allowed their use.

Harmonisation of minimum allowable loading lengths in the EU has long been an issue, with limits currently varying from 18.75 metres in Greece or parts of east Europe to 25.25 metres in Scandinavia. ECG has recommended a minimum  of 20.75 metres, which would increase load factors without requiring any change to current equipment or infrastructure.

Changes to cabotage rules could help reduce empty mileage by allowing foreign trucking companies to operate longer in different markets, potentially capturing more volume for return loads. “It is a complicated issue,” Hedberg told delegates, “but doing nothing is not an option.”

In fact the European Commission’s vice-president for transport, Siim Kallas, wants to deregulate cabotage altogether. But the Commission has been more cautious due to the potential social, economic and political implications.

Hedberg was hesitant to commit publicly, but said that changes could include extending the lifetime of cabotage operations from seven days to as much as several months or even half a year. Other options are to lift restrictions but to subject foreign operators to local labour laws. Hedberg also pointed to stricter enforcement of cabotage rules through the use of digital and satellite-connected tachographs to monitor truck movements in foreign countries.

Policy headaches

Transport policy remains a thorny issue in European vehicle logistics. Ray MacDowall, managing director of the UK-based ECM (Vehicle Delivery Service), pointed to the many challenges of delivering in urban areas, including congestion zone pricing, low emission areas and restrictions of deliveries and even truck sizes in certain European cities.

Tom Antonissen, EU affairs manager for the ECG, raised a thorny issue for trucks moving into Germany, where customs authorities have been fining operators using ‘non-standard fuel tanks’ on trucks on the basis that they are importing fuel and are subject to excise duties. The tanks are installed by specialised trailer manufacturers rather than by the original truck manufacturer, whose unit would be acceptable.

Antonissen reported that the EC has found German customs to be legally in the right. So the ECG is now attempting to develop a short-term fix by asking OEMs to update their online database of models, or by contacting the German authorities directly. But a long-term change in the law could take years.

5. Better news on Europe’s borders

Turkey moves into Europe’s top 5

Delegates were given an insight into markets on the edge of and outside Europe, in a session on the global perspective, which included reports from Turkey and Russia, and a brief summary of India.

While exports from Turkey to Europe have recently declined, the Turkish domestic market situation is good, and the outlook is positive, according to the supply chain director of Tofas Fiat, Altan Aytac. He said that Turkey is about to overtake Spain as the 5th biggest market in Europe with forecast sales of 1.4m units (including commercial vehicles) this year. Production has been between 1m-1.2m vehicles every year since 2006 except for the downturn year of 2009.

Tofas, the biggest producer in Turkey, builds for PSA and (since 2011) for Opel as well as Fiat, on three shifts. Its plant, like those of Ford, Honda, Hyundai, Isuzu and Toyota in Turkey, is in the western Marmara region, closest to continental Europe, but much of the country’s economic growth is occurring in the east.

A changing Russian market

In Russia the market is booming, with a forecast annual increase of 15% to 3.2m light vehicle sales in 2012. Decree 166 is driving local production, and though the country’s recent accession to the World Trade Organisation reduces tariff barriers to imports, it is being circumvented by the introduction of a scrapping charge on them.

All this means that the country’s logistics sector is growing, with rail in particular enjoying a “second birth”, according to Kirill Petrunkin, chief executive of provider Autotechnoimport. He noted that domestic production of foreign brands has doubled between 2008 and 2012 to 1.2m units, on a total market of similar size for both years. This has been at the expense of imports, reducing by 500,000 units to 1m, and a steady loss of market share by domestic OEMs. Well-known constraints on road transport, which needs double the level of current government investment according to a study by Goldman Sachs, include the annual weight-limit introduced during the spring thaw in April. This year it meant that car transporters could not move even if empty, because they exceeded the 5-tonne allowance. The ECG has written to President Vladimir Putin and the Russian authorities to urge relaxation of the limit in future. “[It was] a letter I delivered myself to his office, though I don’t know if he read it,” joked Petrunkin. Other government restrictions follow from disputes with Poland, so that car deliveries from Germany must by carried all the way by either Russian or German transporters, with no use of Polish trailers in between.

Letter to Putin:  delivered by Petrunkin

Read about the  implications for Russia’s WTO membership and the wider Russian automotive logistics market.

Mosolf’s Göbel treated delegates to a colourful account of logistics conditions in India, in which price dominates and rules on things like maximum trailer length are freely broken by local LSPs.
Read more in Finished Vehicle Logistics about vehicle logistics and yard management challenges in India. See also the upcoming Automotive Logistics India conference in Pune.
 

6. Future trends

The final session of the conference looked at what the future shape of the European vehicle logistics industry might be. ICDP’s Waller pointed to markedly declining car use in Western Europe, and the rise of car-sharing schemes in many cities, as signs that the entire ownership model of vehicles could change.  In future, vehicle logistics companies might deliver substantially more to fleet customers as well as have more involvement in remarketing and de-fleeting, he said.

The transformation of the car into a channel for connectivity – including internet with social media – could also have implications for vehicle logistics, according to Waller. The inclusion of technology within the car which might change new vehicle tracking is an example.

The EC’s  Hedberg warned that significantly more investment in transport infrastructure is needed to maintain for Europe to retain its competitive position. He pointed to a recent German government study that said the country had underinvested in its infrastructure by up to €50 billion.
 

“If Germany, typically considered to have the best infrastructure in Europe, has lacked this much investment, other member states must surely take note,” he said. Meeting the costs of such investment across Europe will be increasingly difficult given current debt and economic woes. Furthermore, if car transport shifts towards hybrid or electric, as the EC expects, than countries would lose a source of financing from taxes on fuel. Hedberg pointed to road pricing as the answer. “Transport users, whether trucking companies or passenger car drivers, will increasingly be called on to pay for the use of infrastructure, in the same way that we pay for telecommunications or electricity networks,” he said.

EC’s Hedberg (left) with Joannes van Osta, head of logistics for JCB

‘Trickle down’ innovation

In a contrasting view from outside of automotive, Björn Klippel, managing founder of TIM Consult, a consultancy working directly for shippers (which does however do work on automotive inbound and outbound) said that vehicle logistics companies currently operate in a “traditional” way, and thought practices used by other industries should “trickle down”.

Among these are the de-coupling of tractor units of cab and driver from the trailer. He pointed to intermodal equipment where a container can be shifted between ships, rail or road equipment, enabling modal and routing efficiencies without the limitations of driver shortage. “The use of such flexible equipment for outbound [vehicle] logistics is a big opportunity,” he said.

Klippel also pointed to the increased distances when production is in the east, and consumers are in the west, as favouring rail and short sea, despite their lesser flexibility.  He predicted that equipment and operational methods to decrease empty miles would become even more important in future, a point also made by Waller when he said that market volatility puts pressure on carmakers and logistics providers to consolidate volumes.

Invest, innovate or lose market opportunities

Both Waller and Klippel echoed Daimler’s Christ by highlighting the dangers when suppliers fail to invest or innovate. Klippel warned that carmakers themselves might  invest. “If no service appear, shippers could move into horizontal collaboration, where they might become operators themselves to some extent,” he said. “We’ve already seen that in some cases.”

Noting the move the other way by GM, Klippel felt that its deal with GEFCO cannot be applied generally. 

As Klippel pointed out, recent advances in the sector have come when larger companies made investments in services that were previously considered inadequate, such as GEFCO, BLG and Mosolf in rail distribution.

Are there any logistics providers willing now to make such moves? “Who is currently planning for the upturn?” asked Waller. “Where will the investment actually come from?”

The message from this year’s ECG Conference is that it’s a question that will  remain unanswered until the region as a whole sees a way towards economic stability and growth.  

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Value for each delegate
 

1) Networking Opportunities Careful scheduling allows interaction between customers and suppliers at: introductory cocktails coffee breaks networking lunches informal meetings within the conference area the pre-conference business dinner
2) Learning A unique and high-level gathering of senior executives and analysts provides:  formal speaker presentations a discussion sessions break-out workshops soft copies of the speaker presentations after the conference.
3) Business and Social environment We recognize the all-important personal dimension to any business relationship, so the event provides a relaxed environment for the mid-conference Gala dinner and the pre-conference cocktail reception.

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In summary, delegates at ECG 2012:

• Heard great presentations from OEMs, tier 1 suppliers and LSPs
• Asked questions in person, and joined round-table discussions
• Networked with the senior executives across the industry
• Made new contacts, gained new introductions and developed new business opportunities
• Benefitted from the interaction at social occasions, including the main conference dinner and  introductory cocktail reception (all included in the delegate fee)
• Receive soft copies of the speaker presentations to download and circulate within their organisations

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