Europe’s logistics industry is emerging leaner and fitter from double-digit declines in revenue and earnings spawned by the worst economic and trade recession since World War II.
And that puts industry stalwarts Deutsche Post DHL, Kuehne + Nagel, DB Schenker and Panalpina — the world’s four largest logistics and forwarding operators — along with Denmark’s DSV and France’s Geodis in position to boost market share as the global economy stages a faster-than-expected recovery driven by surging Asian exports to Europe and North America.
Logistics companies will be among the main beneficiaries of a string of stellar trade statistics because they transport an increasing share of global merchandise trade. China’s exports soared 48.5 percent in May from a year earlier and imports were up 48.3 percent. Ocean container traffic on the Asia-Europe trade grew more than 25 percent in April. Air cargo volume surged 37 percent at Hong Kong International Airport in May.
Yet air and ocean carriers have not returned capacity at anything close to the level of recovering demand, pressing more shippers to seek help from third parties in finding available capacity. Key industries that rely heavily on third-party logistics also are growing faster than the most optimistic forecasts just a few months ago, and some are poised to match or even surpass pre-crisis levels, in large part because of strong demand in emerging markets.
Carlos Ghosn, CEO of Renault and Nissan, predicts the automotive industry, a key 3PL customer, will bounce back to a record year in 2010 with global sales of 70 million units, up from an estimated 57 million in 2009.
Companies such as Deutsche Post and Deutsche Bahn are focusing on expanding their logistics units, DHL and DB Schenker, respectively, because their core mail and railroad operations are shrinking or flat-lining.
DB Schenker is in the first year of its four-year “Go for Growth” program, focusing on investments in standardized logistics services and industrial processes for the automotive, consumer, electronics industries and mid-sized machine manufacturers and on expanding its global network.
“The aim … is to grow the company at a significantly faster pace than the market,” said Detlef Trefzger, the Schenker management board member responsible for contract logistics and supply chain management.
The year began with a bang for Europe’s largest 3PLs. Deutsche Post DHL’s first quarter earnings soared 82 percent to $679 million, and Kuehne + Nagel’s net profit grew 2.3 percent as containerized ocean traffic climbed 17 percent and air cargo volume rebounded 31 percent from a year earlier.
Contract logistics, however, is proving tougher than other business lines, especially express delivery, which is driving growth in the logistics sector. DHL’s express revenue increased 9 percent in the first quarter and forwarding revenue jumped 13.5 percent, but contract logistics was flat, largely because of last June’s closure of German mail order retailer Arcandor and an underperforming U.S. contract that was terminated in the second quarter of 2009.
But contract logistics is big business for Deutsche Post, generating $15 billion in revenue last year, just 8.7 percent less than the year before despite the deep decline in business that reduced forwarding revenue by more than 23 percent from 2008. The company signed new business worth
$1.5 billion and achieved a 90 percent contract renewal rate.
Contract logistics revenue will pick up as the global economy recovers, but profits will be tougher to generate, particularly for 3PLs, as customers continue to cut costs and drive efficiencies throughout their supply chains. Customers want lower shipping prices, quicker turnaround times, better order accuracy, slimmer inventories, guaranteed deliveries and more.
Shippers praised the big logistics companies for their nimble response to April’s weeklong closure of a large swath of European airspace after ash from an Icelandic volcano filled the air. But they face new challenges from surging ocean and air cargo rates, and tightening capacity on Asia-Europe ocean routes exacerbated by a shortage of containers caused by a collapse in production of boxes during the recession.
Logistics companies also are tracking an emerging trend among shippers to switch from a just-in-time delivery model and assign a bigger role to inventories in their supply chain strategies that means switching from air to ocean transport. Computer giant Dell, for example, is moving toward shipping more products by sea as it adds retail outlets to its sales strategy. (http://www.joc.com/maritime/dell-looks-ocean)
European logistics companies are leading the way in providing value-added services to increase revenue because there is little more they can do to cut costs from supply chains.
DHL’s Supply Chain division is investing some $60 million to increase its share of the $3.6 billion-a-year outsourced serviced logistics market in the Asia-Pacific region. In May, it opened its first Asia Technical Services Competency Center in Malaysia to spearhead a bid to bridge the market gap between companies offering technical services and logistics providers.
“By our estimates, the market is growing at about 25 percent” a year, said Paul Graham, DHL Supply Chain’s CEO for Asia. “Of that, service logistics, especially technical services and repairs, account for up to 60 percent” of overall spending.
“Our focus in this sector will be an industry game-changer,” he said. “The next time you drop off your laptop at the manufacturer’s service center, don’t be surprised if you’re serviced by DHL staff.”
Closer to home, DHL recently signed a five-year contract with Volkswagen to manage in-plant logistics at the German automaker’s Bratislava, Slovakia, factory, which provides engines, gearboxes and windscreens for the Audi Q7, Porsche Cayenne and Volkswagen Touareg.
Some 800 DHL employees will manage the logistics for 50 percent of the plant’s output, providing inbound receiving, storage, picking and kitting, sequence and line-side deliveries directly to production lines.
European logistics providers also are leveraging their global reach to win big-ticket infrastructure deals. DB Schenker in January won a four-year, $420 million contract to provide worldwide and national transport for Australia’s Gorgon gas project. DB Schenker will provide integrated logistical support to transport more than 2 million metric tons of freight to module production plants in Asia and/or directly to Australia.
European companies are investing in new facilities, further widening the competitive gap with medium-sized rivals that are finding it increasingly difficult to keep pace with the demands of multinational customers. Panalpina, for example, opened a 450,000-square-foot multimodal transit and logistics hub in the Dubai Logistics free trade zone. The facility, adjacent to the new Al Maktoum International Airport and the Jebel Ali port, “will allow us to significantly increase our service offerings in supply chain management by providing a seamless integration of international air, ocean and trucking services with our logistics and order fulfilment services,” said Claus Schmidt, Panalpina’s managing director for the Arabian Belt region.
European 3PLs aren’t ignoring the opportunities on their doorstep. DB Schenker in April completed an expansion of handling and storage capacity at its Moscow facility, which already had 25,000 square meters of warehousing for contract logistics and a 6,000-square-meter cross-docking terminal.
“We are experiencing rapid market growth in Russia in a strong economy,” Karl Nutzinger, Schenker’s CEO for Europe, said in announcing the project. “The expansion of trading and manufacturing companies in Russia that we are now seeing is driving logistics outsourcing, since these companies would like to reduce their logistics costs. The demand for services with a higher level of integration is increasing.”
Logistics companies also are eyeing a potentially lucrative market emerging from attempts by European governments to slash their yawning budget deficits running into hundreds of billions of dollars.
DHL in May launched a procurement outsourcing service designed to help public- and private-sector organizations cut costs. The company estimates it has saved the U.K.’s National Health Service more than $145 million in the past three years running its logistics operations.
Roger West, head of U.K.-based DHL Procurement Outsourcing, said central procurement programs “will really only effectively target some 25 percent of government spend. In the U.K.’s case, this would still leave some $220 billion worth “of long tail purchasing savings that could be delivered at lower cost from more intelligent procurement outsourcing,” he said. “Governments need to set aside ideological or political differences and ally with the private sectors in using procurement to help tackle the debt crisis.”
Contact Bruce Barnard at email@example.com.