The Gefco Group has revealed that the contract signed at the end of June with General Motors will make it the carmaker’s fully fledged fourth party logistics provider (4PL) in Europe, including Russia and Turkey. The seven year contract, which kicks off next year and includes a five year exclusivity clause, is estimated to be worth around €900m ($1.1 billion) per year and will encompass the distribution of around 1.2m vehicles across GM’s brands. Under its terms, GM will outsource its design and procurement functions for inbound and outbound logistics to Gefco in the region.
Speaking at a press conference this week in Paris, Luc Nadal, Gefco’s general director, said that under the terms of this “mega” contract, Gefco will become GM’s “logistics architect” in Europe, managing the logistics budget, planning and design of transport for inbound and outbound logistics, including the control of inbound material from European suppliers or ports to GM’s eight assembly and powertrain plants in Germany, Poland, Spain, the UK and Russia.
Gefco will also control outbound parts and vehicle logistics from these plants as well as a larger network of around 20 factories that will include GM’s partner, joint venture and contract manufacturing sites, such as Nissan in Barcelona, Fiat in Turkey and Avtovaz in Russia, with the sole exception of Avtotor's contract manufacturing plant in Kaliningrad. Gefco will not have inbound responsibility to these additional partner plants.
Gefco will also manage the distribution of finished vehicle imports across Europe, such as Cadillac and Corvette from North America and Chevrolet from South Korea, and will have global responsibility for vehicle exports from European, Russian and Turkish assembly plants.
Furthermore, Gefco will be responsible for the transport of aftermarket service parts from suppliers and plants to GM warehouses, but not for final distribution to dealers.
According to Nadal, the purchase spend for inbound logistics will be slightly larger than for outbound, with a ratio of about 55:45 between the two.
In total, the network comprises nearly 30 sites between GM and partner assembly and powertrain plants, aftermarket warehouses and ports of discharge. Gefco expects to handle around 1.2m vehicles based on current volume. In 2011, the company transported around 4m vehicles globally.
“Combined with our current volumes, Gefco will become the leader in vehicle distribution,” said Antoine Redier, who has become programme director for the GM project at Gefco, having previously served as vice president for vehicle logistics.
The agreement – which Gefco and GM have called the largest in history for the European automotive logistics industry – is the first major development to be announced following the alliance in Europe agreed earlier this year between GM and PSA Peugeot Citroën, which owns Gefco, in which the OEMs said they would cooperate to reduce costs in areas of shared purchasing, logistics and platform sharing. Both OEMs are struggling with mounting losses in Europe.
PSA also announced earlier this year that it plans to sell a stake in Gefco.
Gefco as 4PL: a ‘transformational’ deal
Nadal said that the GM deal was “transformational” for Gefco in terms of its expansion and diversification. The company, which had revenue of €3.8 billion last year (with more than 60% coming from PSA-related business), would see about €800m in new revenue from GM per year, excluding roughly €100m of existing business with GM in Russia, the UK, Poland and Portugal, according to Nadal.
But besides expanding revenue, Nadal pointed to the significance of the “4PL” aspects of the deal. “GM’s choice of Gefco is transformational because it not only confirms our strong performance and diversifies our portfolio, but it is also a new step for us into the 4PL market,” said Nadal, who added that there were few such providers on the market.
A ‘4PL’ is industry jargon for a provider taking over management functions across most or all of a manufacturer’s supply chain, rather than arranging transport for specific transport lanes. The providers managing these individual lanes or collection of lanes for manufacturers are called ‘3PLs’, or third party logistics providers, a role Gefco has played for GM since 2005.
In practical terms, the 4PL arrangement means that GM is transferring much of its in-house logistics management control to Gefco, leaving the provider to manage the carmaker’s transport in much the same way that it already does for PSA.
Lowering the cost of logistics per vehicle
While the deal is undoubtedly a significant gain for Gefco, particularly with a decision expected on its future shareholder in the coming months, it is important to remember that it was born out of an alliance between two carmakers searching feverishly to reduce costs. GM has already planned to stop production at its Bochum plant in Germany by 2016, while PSA is expected to announce further job losses and a potential plant closure this week during a special meeting with its unions.
PSA’s partial sale of Gefco, a highly profitable unit, is itself a sign of the carmaker’s need to raise cash in the crisis.
In that context, a move to restructure the logistics aspect of the supply chain should be viewed as a cost-saving exercise for GM. Indeed, Nadal pointed out that the costs for logistics and supply chain remain extremely sensitive for OEMs, with constant downward pressure. Nadal made it clear that Gefco’s overall objective would be to lower the overall share of logistics costs per vehicle.
“As a 4PL, the main driver is no longer the price of transport itself, but to reduce the total cost of logistics per vehicle,” he said. “Gefco’s goal will be nothing short of lowering GM’s logistics costs.”
While Nadal did not specify specific cost reduction targets, he estimated the total costs for inbound and outbound logistics, calculated ‘ex-works’ (when OEMs pay for inbound transport from suppliers), at around €500 per vehicle, although such a number varies widely depending on distance and vehicle size, as well as if there was post-production work carried out by logistics providers.
Combining purchasing and flows
Gefco and GM appear to be counting on Gefco being able to make a large amount of savings by combining purchasing and logistics flows with that of PSA’s, which Redier said would be more important than Gefco’s ability to negotiate cheaper tariffs and rates with providers.
“We don’t want to compare Gefco’s ability to purchase and negotiate with that of GM’s, which is undeniably very strong, but we know that our advantage is the engineering and optimisation of flows,” said Redier.
GM is likely to pay close attention to such savings – and indeed, Gefco’s own compensation – to determine the success of the 4PL arrangement. It is technically the carmaker’s second such experiment in outsourcing logistics management. In 2001, GM spun off its logistics and transport operations into a joint venture 4PL with Conway Logistics' Menlo Worldwide, creating a business called Vector SCM. However, GM eventually decided that logistics was a core competency and bought out Conway from the joint venture in 2006, eventually taking the operations back in-house.
Sources familiar with the Vector deal have previously said that GM lost considerable sums of money in the Vector experiment, although Conway had called it a success.
In choosing Gefco as a 4PL, GM appears to see benefit in the provider's current operations with other customers, mainly PSA. While Gefco did not give details of its financial compensation with GM, its profits appear to depend on how much it can find savings in combining purchasing and transport. “The success of this operation will be based on how well Gefco can organise and optimise GM’s flows,” said Redier.
Nadal pointed to clear opportunities where Gefco would have the opportunity to better balance flows, including between France and Germany, the UK, Spain and Poland. Redier also noted that such engineering was important for unbalanced flows as well. “Where possible, we can also triangulate routes to minimise the empty mileage,” Redier said. “That is where the real benefit of logistics engineering comes in.”
A rupture – but not a replacement – for GM’s LSPs
The move to a 4PL will also represent a significant shift in management and logistics strategy for both companies, as well as for GM’s current logistics providers, who will fall under Gefco’s responsibility. “This change to being a 4PL represents a fundamental rupture, as the LSPs who work for GM today will be working for Gefco from 1st January 2013,” said Nadal.
According to Nadal, Gefco will create a central, dedicated team of between 100-150 personnel, some of which will come from GM, with teams based close to GM’s manufacturing plants, although he admitted that these decisions would vary by country and by site.
GM has yet to confirm the extent of its own internal changes following the agreement, however it has already appointed Andreas Ginkel as Redier’s counterpart to lead the GM-Gefco alliance. Ginkel, a German, had previously been the director of logistics for GM’s International Operations, based in South Korea.
Nadal added that negotiations, contract terms, tariffs and other adaptations to Gefco’s control of the network were still to be determined over the coming six months. However, he and Redier said that Gefco had no intention of replacing the current supplier base or of transferring most work from current providers.
“There are many important LSPs for GM and we have no intention of replacing the entire set of 3PLs that currently work for GM,” said Nadal. “In certain cases, Gefco will seek to find better quality and synergies, but we have no intentions of just making substitutions. We’ll have the discussion with each provider.”
Nadal and Redier also rejected the idea that Gefco would be making large-scale investments in new equipment and infrastructure, particularly with the European market suffering sales declines in many countries.
“It’s not a question of increasing our infrastructure. Gefco is asset light and will remain asset light,” said Nadal.
However, the degree to which Gefco could shift more GM volumes onto its own assets – which are considerable on the outbound side, including control of around 3,800 trucks and 3,500 rail wagons, with a large concentration in Western Europe – remains to be determined, but would again appear to be a potential benefit of the deal.
Gefco’s global ambitions
While the current contract covers Europe, Russia and Turkey, Gefco’s Christian Zbylut, director of international development, indicated that the company’s global network was a strong determining factor in GM’s decision to choose the provider. With operations in India, China (where it has recently created a new joint venture for outbound distribution), the Middle East, South America and Central Asian countries, such as Kazakhstan and Uzbekistan, Zbylut said that Gefco’s network was developing in the same locations as GM.
“It’s important to GM to know that Gefco is present in these locations,” said Zbylut.
To that end, Gefco’s next phase of global development seems to move partly in parallel to GM. Zbylut pointed to Gefco’s plans to open a subsidiary in Uzbekistan, where GM has a partner factory, as an example of the future growth of the relationship with the carmaker. He also said that the company had recently opened subsidiaries or offices in South Africa and Iraq, with plans to expand in North America as well. A small office has been setup in Detroit to work with GM, Ford and other tier suppliers, while the company has ambitious plans to manage material flows from Mexico to Latin America, as well as the domestic Mexican market.
Nadal and Zbylut told Automotive Logistics News that they hope to see the 4PL relationship extended with GM beyond Europe and Russia, whether to Central Asia, India or South America, as well as to other OEMs.
“My own personal vision for the company for 2016 would be to construct other contracts with OEMs in the vein of being logistical architects,” he said.
The future of Gefco is secured
That is a vision that bears consequence in light of PSA’s current plans to sell a stake in Gefco. While the company had initially announced plans to keep a majority share in the company, Nadal acknowledged that his current understanding was that PSA would sell a majority stake, while still keeping a “strategic interest” in Gefco.
Media reports, including Bloomberg, have cited potential bids for up to 90% of the company for €800-€1.2 billion, mainly from private equity companies.
While Nadal said that the GM contract had nothing to do with the sale, he acknowledged that it should strengthen and “secure” Gefco’s position in the views of both an investor as well as the company’s employees.
“PSA wants us to develop and diversify, and it is opening up our capital. [The GM contract] reinforces our position,” he said.
He acknowledged that Gefco’s unions had expressed some concern, particularly in France, while the entire company was in a period of “uncertainty”, owing to the pending change in ownership.
“While I don’t have information on what will happen to our employees [after the sale], I’m not worried about the future of Gefco, and I think the GM contract should reassure some of the worry that might be out there.”
Referring to his preference for what a future stakeholder in Gefco might look like, whether an OEM, provider or private equity company, Nadal made it clear that he did not wish to see Gefco combined with another European logistics provider. He cited negative consequences in such a case for Gefco’s current network in Europe, and thought such a merger would limit the company’s international groupage and overseas freight forwarding ambitions.
While he did not mention the company by name, Geodis, the freight-forwarding arm of France’s state railway provider SNCF, had been among the initial companies rumoured to be making a bid. Media reports have since suggested that Geodis would not bid.
While Nadal – who has previously worked at SNCF before joining Gefco, including as deputy CEO of Geodis – said that more details on a future investor was likely to be released in October, he said that he had been glad to see the prospects of another European provider buying Gefco growing dimmer.
“The goal is for Gefco to develop its international ‘B to B’ network and services,” he said. “From this point of view, a large Asian, American or Russian logistics company would pose no difficulties, nor would a private equity investor looking to develop the company.”