Sales in Eastern Europe and Russia have generally been decimated, although with manufacturers taking a long view, logistics has a critical role to play in making or breaking the recovery
The past 18 months have been grim for Eastern Europe and Russia. However, as most manufacturers have a long-term investment here, they continue to give serious thought to logistics strategies as manufacturing and the local market continue to evolve. At the recent Automotive Logistics Europe conference, for example, an electronic survey found that, taken together, Eastern Europe and Russian top the list of locations for expansion among European OEM and logistics providers, at 18% each, while India was next at 30%.
According to figures from the European Automobile Manufacturers’ Association, there was a 26.6% fall in new passenger car registrations in 2009 compared with 2008 for the ten new EU states in Central and Eastern Europe (CEE), and a similar drop of 24% year on year for January 2010. The region has not, by and large, benefited from the scrappage schemes that wealthier Western European Governments have used to shore up demand.
But it is not universal gloom, as there were some positive performances alongside the clunkers, particularly in larger markets such as the Czech Republic (+12.5%) and Poland (+0.1%) although a 50% fall in the relatively large Hungarian market is worrying, as is the 60% drop-off in Romania.
Here too there was some good news as Romania’s Dacia– owned by Renault–saw sales rise 20.5% to more than 300,000 vehicles in 2009 on the back of a 56% surge in exports.
Figures from international transport consultancy MDS Transmodal (Table A) suggest that imports of vehicles by tonnes into some Eastern European countries declined as well–Poland was down 37% in 2009, Slovakia was down 12%, while there was a slight rise in the Czech Republic.
Exports of vehicles from these countries dropped in 2009 but some have fared better than others. The Czech Republic held up well at over 1.74m tonnes but Poland’s total fell away more sharply, from close on 2m in 2008 to 1.34m in 2009.
The imports of vehicle parts and accessories (table C) into most Eastern European countries also declined in 2009. Poland was down 23%, Czech Republic down 8%, Slovakia 21%, but they have not exactly fallen off a cliff, a sign perhaps that the production and aftermarket volume in the region currently has a better outlook than sales. But in economicallytroubled Hungary, imports of parts fell by 38%.
The Association of European Businesses predicts that Russian car sales will be flat in 2010 after more than halving in 2009, to 1.46m units. January sales fell 37% year on year.
MDS Transmodal’s figures point to a dramatic slump in vehicles imports into Russia (Table A), from over 6.3m tonnes in 2008 to a mere 2m in 2009. There was also a near 50% decline in parts imported into Russia.
However, the global car industry has invested a great deal of money and effort here and the Russian government is keen to drag its domestic carmakers into the 21st century. In February 2010, Vladimir Putin, the Prime Minster, said he would back a new joint venture between Fiat and Russia’s Sollers in the central Russian car producing city of Naberezhnye Chelny.
Other manufacturers are also pursuing long-term plans to set up production. Nissan, among others, has its St Petersburg plant in operation to cater for the local Russian market.
The Russian government is expected to introduce a car scrappage scheme in 2010, expected to go into operation around May. Details, however, are still hazy, but it is likely to apply only to cars below a threshold price, which will exclude most non-Russian manufacturers or imported vehicles.
Kaluga, southwest of Moscow, is turning into a manufacturing hub, says vice president in charge of international development at Gefco, Christian Zbylut. “It’s a dynamic region and has seen very significant growth in foreign investment. While it is close to Moscow, it is not as expensive.”
Gefco, which was deeply involved setting up the PSA plant there, recently signed a letter of intent with the regional government to develop supply chain services for local manufacturers and suppliers.
Jan Bures, head of group service at VW Russia says that one of the biggest logistics problems is the Russian customs and state entities. “Regulations change overnight,” he says. “Last year there was an increase in customs tariffs, for which we had a lead time of only three weeks”–not long enough for dealers and manufacturers to change pricing. These changes also have an effect on queuing times for trucks at Russia’s borders.
Peter Van Vliet, director of new business development at exhaust and towbar specialist Bosal says his company switched its delivery terms into Russia. “Our Russian customers used to collect themselves from our warehouse in Belgium, but since the law changed there have been huge delays at the border as the customs authorities have started demanding all sorts of information–for instance, that you register an official price list. So we switched to deliveries direct to our customers.”
Van Vliet says that the Russian customs authorities tend to hassle foreign trucks less than Russian ones, who they automatically assume are trying to bend or break the rules.
That at least is the theory. While the DDU (delivered duty unpaid) system has generally worked well, it has led to disputes over who pays demurrage or other costs incurred by Bosal delivering to Russia. Ultimately, Bosal will have to open a warehouse in Russia and hold buffer stocks in the country. “However, the problem then is how to cost it,” says Van Vliet.
Bosal also has some manufacturing operations in Russia. It makes towbars near Orsk, supported by a warehouse close to Moscow. Bosal also makes exhaust systems in a factory at Kaluga to support Renualt’s Logan manufacturing in Moscow.
Gefco’s Zbylut says that as well as customs paperwork, the distances involved make logistics into and within Russia more complex. While more high quality components are being sourced within Russia, a large proportion come from elsewhere. And even if parts are sourced in Russia, they may be coming from 700km away. “Sequencing to plants is undoubtedly more difficult for that reason, and inevitably there has to be more stock in the supply chain.”
That distance is rarely covered by rail transport, particularly for finished vehicles. VW Russia’s vehicle logistics operation is overwhelmingly road-based, Jan Bures says. “We did have some test shipments on rail but even though the railways have reduced their prices, it is still more expensive than road. To make rail viable you have to fill a complete train and that would require a pooling arrangement with other OEMs.”
The weather is another inevitable part of Russian logistics, says Bures. While it is rare that trucks fail to arrive because of snow and ice, when temperatures drop below -25C degree it can be impossible to unload trailers. Power blackouts can also cause problems in the winter.
Logistics facilities usually have emergency generators but these can fail, so sometimes there is no power to run essential systems. Spring brings its own problems when unsealed roads dissolve in the rain. Trucks or their loads are sometimes transferred to rail to bypass the worst stretches.
However, Van Vliet says, compared with importing parts into Russia, domestic logistics is less of a worry. “There’s no paperwork involved, there are plenty of trucks available and fuel and haulage rates are cheap.” Tachographs and driver’s hours rules are unknown in domestic transport. The main problem, in his view, is the appalling safety standards.
Arguably, the logistics system works well considering its many problems. Some service providers have gone out of business, but plenty of others remain and the survivors “are more service-orientated and have a better understanding of customer needs”, Jan Bures says.
However, Zbylut counsels caution. “Because the market is down, the total logistics capacity is sufficient, but as soon as it goes up, there could be a shortage.” Many road hauliers ordered trucks during the boom years but later couldn’t pay for them. And while there are plenty of trucks in Russia, many lie unused in freezing temperatures, scattered throughout the country, and are often subject to legal wrangles.
While logistics in Central and Eastern Europe is closer to what might be expected in Western Europe, the logistics industry is in a state of considerable flux.
At Ceva Logistics, director of automotive and tyres for Northern Europe, Stefan Brunner estimates that 20-25% of trucking companies collapsed as rates plummeted from around 90 cents per km to 60-70 cents. However, he hopes that companies that survive the recession will emerge stronger.
The region was originally favoured as a base for automotive manufacturing because of low labour costs, and to a large extent this still holds true, explains Brunner. “Blue collar wage costs can still be very much lower–by perhaps six or seven times–but in and around big cities like Prague, there may not be much of a gap at all compared with Western Europe. Top managers tend to cost the same, or even slightly more, and there is little difference in warehousing costs.”
Gefco had temporarily put its expansion plans in Eastern Europe on ice, but these are back on the agenda again with new operations planned for Bulgaria and Kazhakstan this year. As in other new markets, Gefco will start with finished vehicles before moving on to other aspects of the automotive supply chain including inbound logistics and spare parts.
It is not only the cost structure that is different from the rest of Europe. Most car production is relatively recent, and as a result it has been easier for manufacturers to outsource here than in places where the industry is longer established.
Stefan Brunner says that plants tend to attract clusters of nearby suppliers, perhaps to a greater extent than elsewhere in Europe. Not only is this more efficient, but in many cases it is a necessity. “Poland only has 120km of motorways, for instance, so you must be close to your customer to deliver on a just-intime basis. In this part of the world, a 50km journey can take two hours and have a major impact on cost per piece.”
When they started out, suppliers in Eastern Europe tended to produce less sophisticated products with more complex and valuable assemblies imported, but that is changing. Production is now, by and large, as lean as in Western Europe, allowing for geographical factors–most parts of the region are a long way from major airports and seaports, so buffer stocks of parts imported from Asia or North America are higher.
Logistics property is for the most part reasonably modern and efficient, though it varies. Away from the major cities and industrial centres, which benefited from the boom in logistics property a few years ago, buildings tend to be much older.
As in other parts of the world, carmakers are more willing to contemplate shared user warehousing and transport, including movement of spare parts to dealers, particularly as many dealers in the region are multi-franchise.
Christian Mardrus, managing director of Renault-Nissan Global Alliance logistics, a new team set up by the two manufacturers, says that the recession has added a new urgency to the efficiency drive. “Our focus since we set up the new structure last year has been to identify those areas where we can build stronger synergies–in logistics and elsewhere.”
For logistics, Europe will be the main battleground. “That’s the reason why we have created a new structure in November 2009 called Alliance Logistics Europe. Renault and Nissan logistics teams have been combined and cover all Europe, including Romania, Bulgaria, Russia and North Africa and are now re-engineering logistics flows throughout the region.”
However, the east is different from the rest of Europe. There is little overlap between Renault and Nissan here, where Nissan’s activitives have been relatively low-key compared to Renault. However, in Russia, where Nissan has its St Petersburg plant and Renault its plant near Moscow (as well as investment in Avtovaz), there are “huge opportunities” for the two carmakers to work together for inbound and outbound logistics, according to Mardrus.
Besides its manufacturing in Turkey and Romania, Renault has its important parts logistics centre in Pitesti, Romania, the largest facility of its kind anywhere for Renault. It consolidates parts and feeds not only to Renault’s plant at nearby Mioveni but also Logan production in Russia and elsewhere.
The Romanian capital, Bucharest is home to the Alliance’s logistics operations team of around 150 people who manage all flows in and out of Europe. “These people know the logistics issue in Eastern Europe better than anyone else and work closely with the Paris team,” explains Mardrus.
More similar to Renault’s inbound logistics approach than Nissan’s, the Alliance deals in Eastern Europe directly with transport companies rather than through a 3PL. “It allows us to monitor compliance better and to develop links with new transport companies. Also, while in the rest of Europe our logistics is mainly truck-based, in Eastern Europe it’s much more varied, with short-sea, train as well as trucks.”
Finding transport suppliers has not been a problem, says Mardrus. “The only difference is that we deal with many more companies. Another issue, perhaps, is that they can be too dependent on us–we would in fact welcome it if they were to take on more customers, including rival car manufacturers.”
While Eastern Europe’s roads are underdeveloped, in practice this has little effect on costs and lead times, and the region performs similarly to the west in terms of Renault and Nissan’s ‘Production Way’ indicators. “When we look at our lead times, say, factory to dealer, transport is not the main factor. In fact, only about a third of our lead time are incurred in transport, but two thirds in the distribution centres–and we will be working with Nissan in this area to improve efficiency and realise synergies.”
There could be a case for reducing the number of vehicle distribution centres across the network. While having a large number improves resilience there is a penalty to be paid in terms of higher inventory. “However, I don’t think it concerns Eastern Europe so much because it is mainly a Renault region.”
Mardrus would use more short-sea services to and from ports such as Constanza in Romania, but at the moment, “the reliability is not there yet, either from the shipping lines or the ports. For transport of vehicles it’s not too bad, but for parts [which move on regular container liner services] the problem is that we don’t seem to be much of a priority.” If the service was available, he concedes, the Alliance would happily switch more volume to shipping especially if other countries follow the German lead and impose heavy taxes on road transport.
He adds that Nissan’s wide-ranging experience in deep- and short-sea transport will be invaluable for the Alliance.
Rail is also used, mainly on flows from East to Central Europe and to Northern Europe while rail is important on the long hauls to Russia. However, a new mode has been barges on the Danube between Romania, Hungary and Austria. “We have only just started this experiment, for both parts and vehicles, and we will see in 2010 whether it is reliable and gives good performance,” Mardrus states.