Global Logistics-January 2008
On the strength of surging Asia-Europe container trade and the strong valuation of the euro, leading North European ports are reporting strong throughput growth for 2007, with annual double-digit percentage increases very much the norm.
Even the region’s largest gateway—the Port of Rotterdam in the Netherlands, where box terminal and overall capacity is under considerable pressure and set to remain so for the near term—notched a 12-percent improvement to pass the 10-million TEU mark for the first time, exceeding its own expectations by some margin.
In fact, at the beginning of 2007, Port of Rotterdam CEO Hans Smits predicted growth for the year only slightly ahead of the four percent achieved in 2006.
“In 2007, container throughput will be limited again physically, so that growth of around six percent is realistic,” he stated then. Commenting recently on prospects for 2008, Smits confirmed that port terminal capacity would remain an issue for Rotterdam but struck a more optimistic note regarding likely cargo throughput growth this year.
“We are balancing on the pivot point, particularly in the oil, container, and other dry bulk sectors and in hinterland transport,” he said. “Although these businesses appear to be skilled tightrope walkers, we still have a few more years to go before we are in the clear.”
Prospects for the Port of Rotterdam, however, remain positive. Smits expects the investment boom will continue and in 2008 throughput will increase by four percent to at least 462 million tons. Within this framework, container throughput will grow by approximately 10 percent.
Meanwhile, Northern Europe’s other container ports are recording similar surges in container volume. Antwerp, for example, recently reported 16-percent growth in 2007—double its 2006 figure of eight percent—to push its annual traffic to more than eight million TEUs. Its neighbor, the Belgian port of Zeebrugge, notched a 24-percent jump to more than two million TEUs.
Latest available statistics published by the French Port of Le Havre for the 11 months up to December, show container traffic more than 25 percent ahead of last year at 2.4 million TEUs.
Hamburg’s 2007 half-year figure was more than 14 percent ahead at 4.8 million TEUs, putting it well on course to substantially exceed the 2006 total of 8.86 million TEUs.
Meanwhile, Bremen/Bremerhaven’s throughput figure for the first nine months of 2007 was 10.5 percent ahead of last year at slightly more than 3.6 million TEUs.
With Asia-Europe container trade expected to hit 35 million TEUs by 2016, according to Drewry Shipping Consultants, Northern European ports are primed for even more growth over the next few years.
Owing to the boom in its economy and the influx of foreign direct investment, China witnessed a surge in demand for logistics services in 2006, evidenced by robust market growth. The Chinese government’s deregulation of foreign-owned logistics companies has boosted opportunities for these companies to penetrate the market further.
As a result, the Chinese logistics market generated revenues of $7.38 trillion in 2006 and is estimated to reach $28.78 trillion in 2013, reports Frost & Sullivan’s Strategic Analysis of the Chinese Logistics Market.
At the completion of the Chinese government’s 10th five-year plan on transportation infrastructure in 2005, its railway length had reached 47,600 miles, while highways eclipsed the one-million-mile mark. Besides government initiatives, the evolution of the logistics and supply chain industry within China has augmented its trade competitiveness as well as its own economic reckoning.
“Improvements to logistics infrastructure such as integrating road and rail networks, constructing airports in second- and third-tier cities, and setting up free trade zones are expected to create better connectivity to link ports and airports,” notes Frost & Sullivan Research Analyst, Amelia Wong.
“The improving IT integration of local 3PL service providers and the ongoing development in transportation infrastructure are expected to aid the growth in this market.”
Still, challenges abound. The market remains highly fragmented, with more than 300,000 registered logistics companies, many of which have transitioned from local transportation and warehousing companies. Complex licensing processes at the national, regional, and local levels of government; bureaucracy; and regional protectionism are also impeding market growth.
Consequently, moving goods among provinces continues to challenge foreign logistics service providers. To the benefit of local governments but the detriment of shippers, each level of state bureacracy levies toll fees on vehicles from outside the province, favoring companies that use locally based logistics service providers.
Therefore, unnecessary unloading and loading cause delays and add to excessive costs.
“Logistics service providers are urged to streamline operations and reengineer management methodology with active technology deployment,” adds Wong. “With higher operational efficiencies and cost reductions, service providers can offer more competitive prices.”
Although service providers are expected to compete on price, prompt delivery, and service quality, they must develop customer-focused solutions and pricing for various services, instead of quoting a common price to all companies.
Logistics service providers can also benefit by establishing a long-term relationship with the public sector, including city transport authorities as well as the central government.
Record-high fuel prices, the spillover of economic problems in the United States, and an apparent modal shift of some air shipments to ocean kept the air cargo industry on edge throughout the year, according to the Air Cargo Management Group’s (ACMG) recent report, International Air Freight & Express Industry Performance Analysis 2007.
The study found last year to be one of significant change within the international airfreight and express industry. Despite their problems, traffic levels in the airfreight and express sectors grew in the mid-single-digit range—only slightly less than the historical average growth rate.
“Given uncertainty in the market, ACMG believes the growth rate for 2008 will be similar to last year—in the four-percent to five-percent range,” says Robert Dahl, ACMG Project Director. “That figure is slightly less than our long-term forecast of six percent annual growth.”
Combined annual revenue for international air cargo participants—airlines, forwarders, and express companies—now exceeds $78 billion. The revenue total was pushed up by traffic growth, higher fuel surcharges, and currency exchange rate trends.
“Key indicators to watch for in 2008 include the degree to which consolidation continues in the airline, freight forwarding, and express sectors, and signs of overcapacity based on the record number of wide-body freighters on order by the world’s airlines,” adds Dahl.
Other key findings:
Not surprisingly, ACMG finds that express companies are playing a more prominent role in the international airfreight market. The latest analysis shows international express volumes grew 6.9 percent from mid-2006 to mid-2007 to reach 2.3 million shipments per day.
The leading participants in terms of market share are DHL, FedEx, UPS, and TNT, all of which are expanding their international freighter networks. Growth in express shipment volume has averaged 10 percent per year since 1992, and express traffic today is more than four times the level recorded 15 years ago.
In addition to innovations introduced by express companies, ACMG finds that leading all-cargo and combination carriers are continuing to employ new strategies such as product segmentation, joint ventures, and alliances to increase market share and profitability.
Leading airlines in Asia generate one-third of their revenue from cargo. Change is particularly evident in China, India, and the Middle East, where airlines are expanding rapidly to meet growing demand for cargo service.
When considering the global trade environment, a number of potential issues can disrupt supply chain management, sourcing strategies, and the flow of working capital.
If these concerns go unaddressed, importers and exporters may face significant unexpected costs and increased supply chain shake-ups. JPMorgan Chase Global Trade Services offers these predictions for 2008.
“Green” Continues to Grow. Public health and environmental concerns will remain a major issue. Continued attention to global warming, lead-based paints, and the contamination of goods will drive businesses toward environmentally friendly packaging, recyclable products, and the enforcement of trade regulations pertaining to the use of toxic electrical and electronic components.
The concept of having a green supply chain will move from being a public relations strategy to a necessary means of deriving real economic value and improving compliance. In turn, environmental compliance will push companies to design products manufactured from recycled materials; strive for “zero waste;” and employ sourcing and fulfillment strategies based on less fuel consumption.
Manufacturers Lag in Environmental Compliance. Though a number of environmental regulations have been implemented globally over the past year, a majority of manufacturers are lagging in terms of demonstrating and maintaining compliance with new trade laws such as the Restriction of Hazardous Substances (RoHS) currently in effect in China, Japan, and the European Union.
Non-compliance with these directives can result in stalled supply chains, lost revenue, fines, and damage to corporate reputations. While many companies claim to have met certification requirements, others may not be up to par and will need to make further adjustments to their manufacturing processes.
Sourcing Shifts from Asia to the Americas. Coinciding with the 2008 Summer Olympics in Beijing, media attention will focus on China as the world’s next potential “bubble” and cause many manufacturers to shift sourcing strategies from Asia to the Americas.
The falling U.S. dollar, limited free trade agreements, high energy costs, and rising production costs in Asia will force companies to reevaluate extended supply chains and move sources closer to their home markets.
Consequently, shareholders and board members might question their company’s reliance on China and the Asia region should any further negative headlines arise regarding quality issues or if China receives bad press surrounding the handling of protestors and dissidents prior to the Olympics.
While opportunities still exist in Asia, Mexico will become an increasingly popular source for manufactured goods as companies compete on time-to-market strategies, seek financial advantages found in Mexico’s multiple free trade agreements, and capitalize on the country’s investment incentives, streamlined customs processes, and abundant English-speaking workforce.
Import Safety Initiatives Increase Burden for U.S. Importers. U.S. consumers purchase approximately $2 trillion worth of products annually, shipped by more than 800,000 importers through more than 300 ports of entry, according to the U.S. Interagency Working Group on Import Safety.
Due to increased product recall issues and the fact that imports are expected to rise, the Import Safety group in November published an action plan that provides specific short- and long-term recommendations to better protect consumers and enhance the safety of inbound cargo movement.
In 2008, importers will find themselves burdened with new requirements and fines. The Import Safety plan, a set of 14 broad recommendations and 50 action steps such as establishing third-party certification, will raise consumer safety penalties and strengthen enforcement actions to ensure accountability.
Supply Chain Security Initiatives Gain “Teeth.” Five years after the introduction of C-TPAT, smaller firms are finding participation critical to the viability of their business. As part of the vendor selection process, more large-scale importers are requiring that vendors become C-TPAT certified or have an equivalent security program in place.
While U.S. law does not mandate C-TPAT certification, current participants are examining their own risk exposure and reassessing whether they should be conducting business with a vendor lacking effective, documented security measures.
As a result, many smaller companies are creating their own security criteria above and beyond the C-TPAT requirement in a bid to maintain or win additional business with large-scale importers.
In the European Union, manufacturers have the Authorized Economic Operator (AEO) global security program to consider. Similar to C-TPAT, AEO extends customs authorization to the financial and security areas of corporate global supply chains. While AEO participation is not mandatory, certified manufacturers will benefit from expedited processes and preferential opportunities.
Trade Compliance Further Scrutinized.
The U.S. government will continue to apply additional resources and emphasis to hold manufacturers, exporters, importers, and brokers in compliance with the letter and spirit of trade control regulations. These efforts will result in even more enforcement, a wider range of mandated corrective measures, and a greater number of negative consequences for those entities that violate the law.
Countries around the world also are focusing on the importance of trade compliance. For example, the United Arab Emirates recently issued Federal Law No. 13 of 2007 on commodities that are subject to import and export control procedures. Non-compliance with its provisions can result in a minimum of one year’s imprisonment, considerable fines, or both.
As global businesses expand their presence across borders and supply chains, contraction within the global logistics industry continues to shake up the market.
Aggressive players such as Deutsche Post, Schenker, UPS, Kuehne + Nagel, and FedEx have raised the stakes and the mergers and acquisitions (M&A) market shows little sign of slowing down, reports Transport Intelligence’s (TI) latest Global Logistics Strategies 2007 study.
The total disclosed value of M&A deals transacted in the global transport and logistics industry rose to US $73.4 billion last year, an increase of 8.6 percent, according to the UK-based think tank.
The contract logistics, freight forwarding, and express sectors accounted for just eight percent of the total. In terms of deal volumes, however, most were transacted in the contract logistics sector—14 percent of the overall total.
Specifically in the contract logistics industry, the top three deals accounted for 82 percent of the total value. This was mainly due to private equity company Apollo’s acquisition of CEVA from TNT and DSV’s purchase of Frans Maas.
“Acquisitions are driven by the ambitious growth plans of large and small companies alike. This will ensure that M&A activity remains at a high rate for the foreseeable future,” says John Manners-Bell, TI’s chief analyst.
An influx of private equity capital, which now accounts for one-third of all deals according to the TI report, will also continue to push contraction in the European, U.S., and Asia-Pacific markets.
Marking yet another milestone in METRO Group’s well-documented Radio Frequency Identification (RFID) pilot programs, the Dysseldorf, Germany-based diversified retail and wholesale chain recently announced a partnership with IBM to take its RFID program to the next level.
The collaborative effort aims to improve the availability of products in METRO Group’s stores as well as boost supply chain performance.
The two companies have partnered to use RFID in a system that tracks shipments from suppliers to warehouses, distribution centers, and stores. They also plan to roll out an innovative customer-focused RFID project in one of METRO Group’s Galeria Kaufhof department stores.
While some global retailers are just beginning to focus on deploying strategies aimed at meeting the needs of increasingly connected and information-hungry customers, METRO Group and IBM are already there.
METRO Group began working with IBM in 2003 to test RFID solutions in its “Future Store.” One year later, it ran its first RFID pilot in 20 wholesale outlets.
Then in 2007, the company decided to extend its use of RFID to all its Cash & Carry and Real stores to track shipments from suppliers to warehouses and DCs to 200 supermarkets and stores across Germany.
Pallets of goods destined for a METRO Cash & Carry or Real store contain an RFID tag when they leave a supplier or the group’s distribution centers.
On delivery, RFID readers at each store location scan the tags and pass along data in real time to METRO’s merchandise information systems using the IBM WebSphere premises server. Once there, RFID information is aggregated and analyzed.
Elsewhere, Galeria Kaufhof, a division of METRO Group, has teamed with IBM to develop and install a new system to enhance customer service in one of its Essen, Germany, department stores.
As part of a pilot program, approximately 30,000 articles in the men’s fashion department have been equipped with ultra-high- frequency second-generation RFID tags. Employees use the system to find articles that shoppers are looking for and to monitor stock to ensure that popular items are always available.
The Galeria Kaufhof project is also one of the first to use the EPCglobal architecture framework, which sets communication standards between hardware and software components while also defining data interfaces. The company can capture this data to make better-informed decisions on products it will sell in the future.
Integrating external business data with internal back-end systems is the single biggest IT challenge affecting trading communications in the supply chain, according to 300 European IT decision-makers responding to a survey performed by independent research company Vanson Bourne on behalf of Sterling Commerce.
Consequently, this lack of integration means retail and manufacturing companies rely heavily on manual communication methods to send and receive order and purchase documents. Companies are also struggling to automate the order-to-cash fulfillment process and electronically enable trading with suppliers and customers quickly and efficiently—leading to lost business opportunities.
“As supply chains continue to grow and extend across geographical boundaries, the challenge of managing the complexity of a growing business community becomes even more critical to achieving profitability and customer satisfaction,” says Dave Carmichael, senior product marketing manager at Sterling Commerce.
But only 50 percent of European trading partners use electronic communication to send and receive order information; and only 26 percent use value-added networks (VANs). UK companies are better equipped to handle electronic trading than their French counterparts, but they fall behind German businesses, the study reports.
Almost half of those questioned (46 percent) report that the process of integrating back-end IT systems places the greatest burden on skilled resources and will be the most costly IT issue to resolve.
Survey respondents identify meeting customer and supplier mandates to handle new EDI requirements as their second-biggest challenge in supporting trading partner communications, suggesting that the problems associated with integration are only likely to get worse as supply chains become more complex and fragmented.
“Global businesses need to manage B2B collaboration with multiple trading partners with often wildly different technical infrastructures, communications standards, and protocols for exchanging electronic data,” Carmichael notes.