The automotive warehouse real estate market has taken a major hit, but it remains a dynamic sector where the requirements are becoming more and more specific
The world’s automotive industry has had a torrid three years: demand has plunged, production has been slashed, plants have been shuttered, and once-iconic brands have been sold-off.
But spare a thought for an industry that has had an even tougher time: the providers of warehousing space for automotive logistics.
These are firms that build, develop and lease automotive warehousing space–either speculatively, or to serve specifically-identified client needs. As with other parts of the commercial property market, the industry has a capitalintensive business model, making large bets on land values and the demand for specific locations, banking on making a return from capital appreciation and a steady income stream in the form of lease payments.
Get it right, in short, and there is serious money to be made. Get it wrong, and trouble can loom with shocking speed.
Take Denver, Colorado-headquartered ProLogis. One of the world’s largest global providers of distribution facilities, with operations in markets all across North America, Europe and Asia, it has more than 475m ft2 (44m m2) of space owned, managed and under construction in more than 2,400 facilities worldwide, totalling $34 billion of assets.
But as the credit crunch and recession hit, the company’s share price fell from $72 to $3–a meteoric slump that saw it respond by launching an aggressive plan to reduce debt and lower risk, freezing developments and undertaking asset disposals to take debt off the books. In fiscal 2009, for instance, the company reduced its debt by $2.7 billion and completed $1.53 billion of property dispositions, while also taking the decision to withdraw from a number of Asian markets, including China and India. Share prices, as of June, were around $12.
The automotive industry is just one of several major sectors that ProLogis serves. But there’s little doubt that the sector’s downturn was one of the steepest the company experienced. “There’s been a huge focus on reducing inventories, shortening lead times, and freeing-up cash,” sums up Bob Arndt, vicepresident of distribution management at Ryder System. All of which leads to a lower demand for warehouse space.
“There are many buildings just sitting there on the market,” says Arndt, a 35-year veteran who has worked for Volkswagen, Toyota and General Motors each for ten years or longer. “The price of warehousing has gone down significantly.”
Others say the same. “Currently, there is almost no new demand for vehicle production related facilities in North America–the main reason being the restructuring of logistics processes by relocating, the downsizing of buildings, and consolidation,” confirms Stephan Dalbeck, first vice-president for automotive for Northern Europe at ProLogis Germany. It is a market mostly covered by existing facilities, he notes.
Europe’s experience, meanwhile, has been broadly similar. “The general trend is for the insourcing of warehousing and sequencing, due to the reduction in volumes,” says Martin Fleming, European vice-president of business development at DHL Supply Chain. “We’ve had several instances where mature and well-performing operations have been insourced.”
And in the process, some highly distinctive warehouse space has become vacant. In the UK, for instance, insourcing and in-plant consolidation by General Motors and a number of its key suppliers has freed-up a 405,000ft2 facility at Ellesmere Port, near Liverpool, the largest of four buildings constructed as a supplier park with public funding in 2000 and 2001.
Offered for leasing as a whole, or in two separate sections– capable of being extended to 650,000ft2–the facility is as multimodal is it’s possible to be, adjacent to motorway, ship canal, sea and rail links, with railway tracks in the complex.
And while noting that automotive use remains the most logical purpose for the site, the agents handling the property concede that the planned expansion of the Port of Liverpool, which will enable it to handle post-Panamax vessels currently handled only by Southampton and Felixstowe, raise a number of other interesting alternatives.
That said, the slump in the demand for automotive warehouse space isn’t universal. In North America and Europe, the demand for warehouse space associated with aftermarket parts supply has remained roughly constant. “Business is being driven by the spare parts sector,” says ProLogis’ Dalbeck, which is confirmed by Charlie Podell, senior vice-president responsible for Indiana operations at American warehousing specialist Duke Realty: “The demand for aftermarket parts distribution hasn’t been so badly affected.”
Asia–and several other emerging markets–are also hold-outs from the general trend of contraction and consolidation. There, in contrast to problems with the demand for space, issues are just as likely to be on the supply side of the equation. In India, for instance, “facilities cannot be built as fast as needed due to problems with timing and ownership when it comes to land acquisitions,” says ProLogis’ Dalbeck. What’s more, he adds, “the requirements are far above local building standards and availability: most building concepts are based on imported knowledge from OEMs and suppliers”.
And demand isn’t a problem. Ford, while under pressure in Europe and North America, saw a three-fold jump in sales in India during May 2010, on the back of strong demand for its latest small car, the Ford Figo. In China, meanwhile, May 2010 sales of 1.19m vehicles units were up 34% year on year.
“The emerging market experience is very different,” confirms DHL Supply Chain’s Fleming. “Even though they’ve been hit by the credit crunch, their growth rates are still positive: demand is still there.”
But demand for what, precisely? Not only does warehousing space for automotive applications differ significantly from warehousing space for the other general industrial applications with which it competes, it also differs significantly depending on the precise type of automotive use.
And that’s before considering the question of how location impacts the equation: an otherwise similar warehousing requirement in Asia, Europe and North America might have three different configurations and layouts. The factors influencing the global demand–and supply–of automotive warehousing are deceptively complex. They are also critical, in terms of economics and pricing models. As in other forms of commercial property development, specialisation brings the prospect of premium pricing–but also attendant risks.
The greater the ease with which redundant automotive warehouse space can be re-used as general industrial warehousing, for instance, the lower the strain on warehouse developers’ balance sheets and budgets. When automotive users aren’t leasing space, other users can take up the slack, boosting warehouse leasing firms’ profitability.
Equally, of course, the more difficult it is for automotive warehousing space to find alternative uses, then the harder a bargain automotive users will be able to drive. Demand may be down, but the overhang of warehouse space on the market will almost certainly ensure that supply exceeds that demand.
So how large are the differences between automotive logistics warehousing and general industrial warehousing? Look closely, and it’s not difficult to quickly discern a number of differences that impact a diverse set of variables, including the shape and size of the facility, its location, and how it is configured. Location, for example, is heavily influenced by the part that the operation plays within the overall network.
“Compared with general industrial applications, the automotive inbound supply chain is much more developed,” says DHL Supply Chain’s Fleming. “There’s a more defined supply chain, for instance, with much more repetitive flow. Networks are generally more static than in general industrial applications, and the demand is more stable and easier to work to, with much more repetitive flow. So it’s a lot easier to size the facilities, and decide upon a sensible location.”
That said, reasonable proximity to the requisite assembly plant is vital, which limits the number of potential users any one facility can serve, while running the risk–from the developer’s point of view–of being stuck with an unusable building should a plant close or significantly contract.
In North America, for instance, “you’ve got to be no farther than 30 miles [48km], or an half hour’s drive away,” notes Duke Realty’s Podell, citing instances of hard-to-lease space following plant closures in the American market.
In Europe, while ProLogis’ Dalbeck is less precise–speaking only in terms of a viable and workable just-in-sequence distance–much the same proximity stipulation applies.
In Asia, however, variability in infrastructure could mean 30 minute’s proximity might mean 30 miles–or it might mean much less, especially on the congested roads surrounding major conurbations in Asian economies such as India.
While both state and central governments in India are involved in upgrading roads in the vicinity of Indian automotive plants–especially in the case of export-oriented plants–supplier parks are increasingly seen by some observers as the way forward, with supplier parks already place (Ford) or under development (Tata).
And perversely, supplier parks can in some cases be too close in terms of warehousing, with the close proximity between production and assembly line negating the need for warehousing as storage space, limiting its use to space for sequencing, buffer stocks, and postponement operations.
Warehouse shape, size and configuration also tend to be distinctively different in the automotive warehousing market. “The automotive industry looks for the really big boxes: in the American market, 300,000ft2 is typically the minimum,” says Ryder’s Arndt. “While there are a lot of 300,000-500,000ft2 buildings on the market at the moment, there aren’t that many million square feet buildings going–or customers for them, for that matter.”
Shape and layout, too, tend to be distinctive. “Buildings have to be adapted to the industry’s special logistic processes, such as side loading under huge canopies,” says ProLogis’ Dalbeck. “Facilities for the automotive industry are nearly a 100% ‘build-to-suit’ and are not standardised like the ones for, say, the 3PL business.”
Once built, configuration is distinctive as well as regionally variable. “Europe has a love for robotics, sortation systems, conveyors and automation, which takes up a lot of space, and means a loss of flexibility,” notes Ryder’s Arndt. “Asia tends to prefer the ‘lean and flexible’ approach, with the American market somewhere in the middle.”
That said, inbound automotive logistics applications aren’t the only game in town. As well as holding up reasonably well in the recession, aftermarket parts logistics operations have their own distinctive warehousing characteristics, of which proximity to customers is only one.
Simply put, if proximity to assembly plant is the driving force in terms of inbound automotive logistics, proximity to end customers–in the shape of dealers and third-party stockists–is the driving force in the aftermarket logistics world. It’s a dichotomy, in short, that leads to different warehouse locations: far from assembly plants, and close to consumers.
“There’s an expectation of same-day delivery in major conurbations, and next-day delivery in others,” says Chris Roberts, global account director for Jaguar Land Rover at UK-based Unipart Logistics. “Typically, we see requirements such as ‘Order by 6pm, deliver to a lockup facility by 8am the next day.’ In terms of the logistics, it’s an inventory-holding strategy just as much as a distribution strategy.”
But the scale and complexity of the aftermarket operation are bigger challenges, he adds. For Jaguar alone, it turns out, there are 80,000 SKUs (stock keeping units) to deal with, stored in 13 distribution centres around the world to serve Jaguar’s 850 or so dealers.
“You need strategies for handling fast-moving items, and strategies for handling slow-moving items,” says Roberts. “You need specific storage facilities for the slow movers, and concentrated and efficient storage facilities for the fast-moving items, in order to minimise movement times and waste.”
And this complexity is exacerbated by the need for some facilities to not just store incoming parts, but also carry out work on them, in a process that Roberts characterises as ‘semimanufacturing.’
“Around 90% of the incoming parts that we receive have to be processed,” he explains. “We receive the parts, inspect them, pack them and label them–as well as carry out kitting operations, where we’ll pack several components together as a specific service kit.”
And what of the future for automotive warehousing? Talk to insiders, and some interesting trends are at least partially re-shaping the warehousing landscape.
George Post, director of international marketing and supply chain at UPS, for instance, sees a growing predilection for ‘near-sourcing’, both in North America and in Europe.
“Closeness is coming back as a best practice,” he notes. “There’s this constant need to balance cost, time and days of inventory on hand–and especially in the automotive industry, we’re seeing an uptick in automotive customers switching gears and going back to Mexican suppliers, as opposed to China: wages are low, warehousing is inexpensive, and the country is an awful lot closer than China. In Europe, meanwhile, Poland seems to be the near-sourcing destination of choice.”
And after years of being talked about, it seems that having spent three years staring into the abyss, automotive OEMs are finally becoming willing to embrace innovations such as shared-user networks and shared user warehouse space.
“Lower inventory levels due to lower volumes and more efficient operations mean that many OEMs are now considering shared-user networks and operations, especially in aftermarket,” says Chris Senior, global key account director for automotive at Ceva Logistics.
“You can’t make a sweeping statement, as it varies depending on country, brand and infrastructure, but in many countries in the World, from Australia to the United Kingdom, shared-user automotive networks are a reality,” he says. “We even use the spare warehouse space to store items from outside the automotive sector–it’s simply about making the best use of the space that we and the OEMs have available.”
What’s more, the present trend of a slowing demand for automotive warehousing space looks set to continue, reckons DHL Supply Chain’s Fleming. Despite a growing pressure on space as demand picks up, automotive manufacturers are unlikely to simply recommission warehouse space so relatively recently vacated, he believes. All other avenues will be tried first, he reckons.
“And where there is warehousing, it will be increasingly associated with added value activities such as sequencing and kitting,” he notes. “Previously undertaken at the suppler, it will come closer to the assembly lines for reasons of responsiveness. It will look like warehousing space–but it will have become part of the manufacturing process, rather than space in which to store inventory.”