The failure of European carmakers to agree with logistics providers on how they should address the industry’s outbound capacity problems has left the industry in a rut of its own devising in which returns on asset utilisation are as dangerously unsustainable as the lack of confidence shared by many over which direction to take.
While delegates at this year’s Automotive Logistics Europe conference, held in Bonn, Germany last week, lamented they were still going over the same ground – playing a fruitless blame game over the cost implications of capacity – some said they saw a real threat to a continued failure to collaborate, especially in light of the recent bunker hikes and steel price rises.
The point was made by president of the European Finished Vehicle Logistics Association (ECG), Costantino Baldissara, who noted that while carmakers had already started the process of restructuring and were making very ambitious plans in terms of capacity utilisation in their production plants, the average EBIT margin increases they were seeing–from 4.3% in 2010 to a projected 5.7% in 2012–did not present an accurate picture of the industry as a whole.
The recovery in sales has not fed through to the LSPs according to Baldissara, and little had changed since 2008 when the EBIT figures for its members was down 4.75%. And while the ECG’s last quarterly survey in 2010 showed that 86% of its 100-strong members recognised an increase in fleet utilisation, it also revealed annual cost increases from around 4.3% to 13%. Not least in new ship building costs, which propelled by rising steel prices, have doubled in eight years while freight rates have stagnated, as NYK Line Europe’s marketing director, Phil O’Reilly, made clear.
This was combined with a significant drop in confidence amongst ECG members looking for financial backing, with nearly 70% sceptical of obtaining viable futures rates and more than half showing a lack of faith in obtaining volumes on which to build investment.
But this question of LSP confidence was disputed by Ford’s manager of Vehicle Planning, Logistics and Customs, Bert Bong (pictured), who said a lack of confidence in winning new business came down to the question of having business confidence in the first place.
“Do I have the best in class processes, efficiencies in load building, the best fuel efficiency on my trucks? If you are the most competitive then there is no reason why we wouldn’t source it to you,” Bong told the LSPs gathered. “The answer needs to be within that particular company: are we competitive, otherwise why should we invest in the future?”
The question over European logistics providers’ profit margins compared to those of carmakers is also complicated by the two sides of recovery for the European recovery. While carmakers, particularly in Germany, have seen an export-led boom, most of the major markets including Italy, France, Spain and the UK are still seeing stagnant or negative growth, leaving little room for rising rates, at least for domestic distribution.
The most gains that providers could make should still come from efficiency improvement in the networks, speakers said. According to Brian Bolam, vice chairman, ELUPEG, the European organisation for logistics collaboration, capacity use for car carriers in Europe was as low as 15%. Delegates on the sidelines challenged that the actual figure was so low, but it underscores the inefficiencies that still exist. Woburn Consultancy Group’s chairman, Peter de Rousset-Hall, said that few business could survive such an appalling use of assets.
“If that is the case I would say that there is no problem of capacity whatsoever, or pricing, there is a problem with process, with management and with structure. Any business running at a 15% capacity–bearing in mind that in order to make money a car manufacturer with full installed capacity wants to run at 100%–any business that is running on that sort of capacity has got major problems which it should be addressing.
One of them was through better efficiency in filling empty return legs according to BMW’s Mathias Wellbrock, general manager of vehicle distribution, who turned the demand for financial support back on the LSPs and asked them to take some of the burden of the latest fuel increases by optimising the distribution network and hitting agreed lead times.
Figures provided by European Commission spokesman Pawel Stelmaszczyk indicated that at any given point in time between 24-27 trucks on European roads are running empty and the average load factor in European freight transport is roughly 50%.