Thomas Cullen says automotive is once again a logistics growth driver...for now.
The automotive sector has always been big for logistics providers – big and tough. Car assembly pioneered the outsourcing of transport, warehousing and line feeding, and served as a model for other sectors. Yet from the 1990s, profits fell as OEMs drove down prices. Other sectors became more attractive, fuelled by the growth of trade with China.
The market remains big. Transport Intelligence estimates that the logistics market for passenger cars in the developed economies is worth €22.6 billion ($29 billion) per year, and €57 billion globally. But follow ing years of decline, automotive has re-emerged as a growth driver for contract logistics.
While emerging markets like China and Brazil have driven much growth in the supply chain, recovery in the US, along with production and export increases in smaller emerging economies from Mexico to Thailand, are propelling the sector. German output has decelerated, but as Volkswagen’s recent €50 billion investment illustrates, the country remains a surprisingly attractive place to make cars.
But what about profitability? OEMs have been skilled at compressing the margins of logistics providers, with sectors such as road-based car haulage typically suffering. But on the whole, the evidence amongst the big logistics providers suggests that the sector’s profits are average. For Ceva, where automotive accounts for around half of its contract logistics, margins have been around 5% since 2009 – in line with the sector’s norm. Although automotive has been a strong contributor to Ceva’s contract logistics, its profits have recently been hit by two big automotive contracts in the Americas that went sour and from the decline of its Fiat business in Europe. Yet, Ceva’s portfolio remains promising, w ith a strong presence in China and South America.
Kuehne + Nagel is also a growing player for inbound and aftermarket logistics. At around 4%, its margins are just below the average for contract logistics. Since a large part of Kuehne + Nagel’s business is non-automotive it is hard to be sure about the returns on its automotive business. However, it has pursued the likes of BMW and Mercedes-Benz passenger cars so ardently that the Swiss-based company must see potential.
The importance of markets such as the US and Germany should not be neglected, but it is the promise of production in ‘hard to serve’ markets that offers the prospect of growth for larger logistics providers. Unlike Germany or the US, local providers in such regions are weaker, which gives manufacturers fewer options. However, higher profits in these regions have yet to appear for providers for the most part.
There are exceptional performances. Ro-ro shipping is once again a highly attractive business. One the best performers over recent years has been the Wilh. Wilhelmsen Group, which has significant ownership, together with Wallenius Lines, in WWL, Eukor and ASL. The company now achieves double-digit profit margins. With comparatively high entry barriers, such a business also benefits from the increasing size and complexity of intercontinental vehicle flows.
The sun also sets
Yet before the sector is overwhelmed with optimism, it is necessary to point out that there are losers, especially in the current climate. French and Italian carmakers are facing significant crises. This has already led to the majority sale of the leading French logistics provider for the sector, Gefco, and more fallout is likely.The sun also sets Yet before the sector is overwhelmed with optimism, it is necessary to point out that there are losers, especially in the current climate. French and Italian carmakers are facing significant crises. This has already led to the majority sale of the leading French logistics provider for the sector, Gefco, and more fallout is likely.
There is potential for providers as distressed OEMs adopt more globalised production models and the requisite supply chains to gain economies of scale. These global strategies often require substantial material flow across the globe, particularly during ramp-up periods. But the opportunities here are greater for larger logistics providers who can reach into other continents than they are for smaller companies.
There is also likely to be consolidation among OEMs in the long term. Some medium-sized brands will survive, but in developed and particularly emerging markets like China and India, many producers will fall. This will place more power into the hands of the giants, who will further exploit their economies of scale. Volkswagen in particular appears to be on a charge, with only Toyota rivalling it for profitable size. But Hyundai rivals these carmakers with its aggression and Ford’s recovery has been impressive.
Still, a market dominated by such producers would be a tougher place for even the largest of automotive logistics providers to increase profits. Perhaps the sector ought to enjoy its moment in the sun, however faint it might turn out to be.