The ‘tectonic plates’ of industrial geography are shifting and changing as never before, and nowhere is this more apparent than in the European automotive industry. As usual, automotive is a special case: where in most sectors production is moving to get closer to markets, automotive relocations are almost exclusively about reducing input costs – or at least prices.
European demand for new vehicles is still focused on the ‘rich West’ – UK, France, Germany – as, while car ownership in Eastern Europe has soared in recent years, a very large proportion of this is met by used vehicles (Spanish taxis, for example, resold in Poland at the end of the summer season). But component production and vehicle assembly is relentlessly moving East, to Poland, Hungary, Slovakia now, Bulgaria, Romania, Turkey and perhaps even further East in the future as manufacturers chase the low cost dream. Meanwhile assembly operations in the ‘peripheral West’, such as the UK, are under threat, along with their local supply bases – Ford at Dagenham, GM at Luton and now Ellesmere Port, Peugeot at Ryton are recent UK examples and one has to ask whether similar industrial logic will soon impact on operations like SEAT. Spain is no longer a low labour cost country, and Valencia is a long way from suppliers in Katowice.
This is having a significant impact on logistics operations, in vehicle distribution, the aftermarket and in inbound supply. Some of the established orthodoxies are being turned on their heads, and logistics partners are having to learn new tricks, or re-learn some old approaches.
Michael Storey, commercial director of NYK Logistics’ automotive division, says that the story at Peugeot illustrates the point. ‘Although the UK can equal the productivity levels of others, it can only sustain assembly of a certain value of car. Labour costs are driving production of cheaper vehicles to cheaper countries. We are mostly running supply for the upper end of the market, for instance Jaguar and Bentley, but even here supplies are coming from further afield and manufacturers are rethinking the concept of “lean”.
Supply moving East
‘Road-based logistics plans centred on JIT or direct next-day delivery are being superseded: as supply moves East we are into consolidation and cross-docking. And for much of the mass market, component supply is moving out of Europe entirely, to China, India, North Africa and this invokes different principles. You can still, in theory, do milk runs among suppliers in Slovakia; you can’t do this in the same way if there is a sea leg involved. We need to consolidate, then ship, and the lean process starts once we’ve reached Europe.
‘We’re trying to adapt the old principles, but we have to deal with a two or three week transit, not three or four days, and the operating systems we develop require a different approach: there is a large element of freight forwarding and on top of this we have to bolt on some system for maintaining parts integrity that wasn’t required to the same extent with individual truck-loads’.
Other problems arise for manufacturers, logistics partners, and the relationship between the two. Storey says, ‘These trends are forcing manufacturers to put inventory back into the system. At the same time, although freight ratesare low, supply chain costs are the last area left to control, and we are under pressure to control them. To make a return, we need to be offering additional services, not just basic trucking’.
Who pays for extra inventory?
The question remains – who is picking up the tab for extended supply chains and increased inventory? Storey says there is a real mix of approaches depending on how lenient or aggressive suppliers and manufacturers are. ‘All the OEMs have the same strategy – to make acheaper vehicle – but people are trying to achieve that differently. We see factory gate pricing; we see “pay on production”, we see firms taking ex works collection responsibility away from the supplier and saying “We’ll pick it up [or get our 3PL to collect]and we’ll pay you when we use the bits”. Three or 4PLs are being required to put transport against a price: it hasn’t happened yet but it could be we would be asked to buy the parts and own the inventory. It’s a trend in other industries such as retail and it could well happen with specialist marques and with the aftermarket – which is itself essentially a retail operation’.
3PLs now face more complex management tasks. For example, Storey says that they are having to relearn old skills such as Customs paperwork, as supply moves from (theoretically paper-free) EU to North Africa or Turkey. Obsolescence and change is a greater issue – the source of supply now changes within the life of a vehicle. Initial supply may be from a trusted local factory that can offer an agile response to teething problems; when production has stabilised the supplier may shift production to a lower-cost, far distant plant.
Storey says this requires 3/4PLs to be far more flexible and pro-active than in the past. ‘Expectations are still driven by the “12 delivery a day” model, even if it is now once every three weeks from China. ‘We also need a greater investment in capital assets to accommodate consolidation and crossdocking operations, and that means we have to wring out all the synergies and achieve as high a utilisation of resource as we can’.
On the plus side, longer supply chains are making collaborative approaches more acceptable. ‘With longer chains the constraints are diluted. A half-day extra on a 35 day journey doesn’t sound quite so critical and so people are happier to share facilities, especially when they realise that with more distant and dispersed supply locations there may not be the critical density of suppliers that would support a dedicated supply chain operation’.
Extended supply chains may also promote modal shift. The former Iron Curtain countries are more rail-oriented, which could lead to greater use of rail in Europe, although there are congestion issues and Storey warns that you really need round-trip loading to be viable. Development of supply bases in North Africa is inevitably increasing the use of short-sea – mostly containerised although there are some Ro-Ro ferries into, for example, Italy. Storey points out that the cost model here is completely different. If demand on a road route from, say, Ukraine, increases, you can throw another truck on at pretty well the same unit price; by sea, the carrier will charge what the market will bear, and you don’t see economies of scale until a lot of people are using the route.
Although the point-to-point distance from a North African supplier to a Western European plant may be much less than from, say, the Ukraine, the sea leg of the journey inevitably means that the logistics process has more in common with Far Eastern supply.
Moving to intermodal
It is interesting in this context that some of the logistics operators based in the new supply countries are taking a more aggressive stance on intermodal transport. Omsan Lojistik in Turkey, for example, is making great use of block trains from Turkey and neighbouring East European countries to supply Ford in Germany, reducing both road congestion and overall costs. Hakan Ertik, Omsan’s general manager, says ‘My advice to other European logistics companies is to start using alternative methods of transport that can provide a strong basis on which an efficient European logistics supply chain can be built’.
Danny Hughes, global key account manager, automotive, at Kuehne + Nagel, would doubtless agree. ‘A positive side [to the new geography]is that we are tapping into intermodal opportunities such as rail, canal and short sea. For example, we are using ships from manufacturers in Iberia to customers in Scandinavia. This does add time, but there are fast and reliable services at lower overall cost’. Sea legs help address problems of road congestion and driver shortages, but Hughes points out that for some destinations, including the UK, there are serious problems with port congestion.
Generally, Hughes says, ‘The OEMs are going for lower labour cost, but they are increasing the front-end outlay, for themselves and for us, andthis isn’t necessarily recovered before the game moves on. Poland, for example, is now a mature location, so platforms are going on to Latvia, the Ukraine – ever Eastwards.
‘The challenge for us as a company is that this can give us the opportunity to develop our infrastructure in a country but when the automotive bandwagon rolls on, can we be sure we can find alternative users?’ K+N is necessarily investing much more these days in shared user facilities. As Hughes says, ‘When the OEMs and T1s move on, we have to make sure they haven’t left carnage behind’.
The challenge is not just one of return on capital. Hughes points out that creating a trained logistics labour force, usually from scratch, takes time in these territories, almost as long in some cases as the dwell time of the industry in a particular location. Additionally, extended supply chains inevitably imply increases in premium (air) freight, especially for the aftermarket, but OEMs naturally don’t want to pay for this. ‘They are driven by manufacturing needs but they don’t seem to consider factors like warranty cover’, says Hughes.
Like Michael Storey, Danny Hughes believes that the relationship between 3/4PLs and OEMs/T1s needs to get smarter. ‘Traditionally we’ve worked on a gainshare basis, but we need to be offering more of a value proposition – improved processes, reverse logistics capabilities and so on. Unfortunately a lot of OEMs and T1s don’t understand their own supply chains: they spend a lot of time firefighting and don’t look at things rationally’.
A similar picture is presented by Andrew Leahy, senior sales director, automotive and industrial, EMEA for DHL-Exel Supply Chain. He says that the changing geography is presenting ‘more opportunities for express, freight forwarding and advanced logistics services and increased requests for us to act as an LLP (Lead Logistics Provider). It is a continually changing market and we think we are well placed’ – in part because DHL-Exel typically has existing infrastructure or relationships in the ‘new’ territory and ‘we are building operational capabilities in countries across all sectors, not just automotive so we have quality workforces that we can bring together with the technical expertise of the automotive team. Thus we can replicate solutions that have been successful across Europe’.
But costs are still a challenge. Quality labour may have a low (by Western standards) cost, but there will usually be a need for extensive IT and system support investment and ‘the overall turnover of the businesses is lower so the need to control costs even greater’. DHL-Exel is also decentralising some of the management teams themselves into lower cost economies (one of its three global data centres is in Prague).
Investment decisions are not easy. Clearly DHL-Exel, like any other logistics provider, has to follow its customers or lose the business. But, says Leahy, the current hotspots like Poland are ‘never going to be big enough to drive our business, although they are important. We have to look beyond that, to Russia and the CIS states, the Middle East, South Africa, Turkey – they are all coming more and more into play’.
The search for low cost
DHL-Exel is well aware of the risks of the automotive industry moving on in its restless search for low cost. Hughes has seen firms spend just two years in the Czech Republic before shifting to China. ‘We have to create shared usage opportunities across all sectors with an integrated business plan’. Ideally, the temporary presence of automotive, he says, helps boost the wealth of the country, which then creates the need for consumer and retail distribution, using the former automotive infrastructure.
An additional, and familiar, gripe from Hughes is the ‘disconnect’ between Purchasing and Logistics or logistics providers. Not only does this lead to the non-recognition of ‘invisible’ costs, but as Hughes says ‘We can only tell you the future if you tell us what your future is. OEMs and T1s need to focus on their core competences and let people like K+N focus on ours. It’s time to share the vision’.
That vision, comments Leahy of DHL-Exel, may sometimes be ‘Another day – another country. But it’s fascinating, and there is still growth for the automotive logistics business as new supply and demand markets open up’.