Global Logistics—January 2011

Russia and China: Eurasia’s Odd Couple

For two countries that geographically touch and have historically close trade ties, Russia and China are worlds apart in terms of economic vitality. While Russia idly pumps oil for export, leaving its economy vulnerable to global commodity price fluctuations, China is fastidious to a fault, protecting its own economic interests while controlling everyone else’s. Still, each country has a common interest in the other’s potential, and they both stand to gain from working together— regardless of whether progress is measured in dollars, rubles, or yuan.

China and Russia recently decided to renounce the U.S. dollar and resort to using their own currencies for bilateral trade— a decision that China characterizes not as a challenge to U.S. currency, but rather a reflection of the economic relations between Beijing and Moscow.

The yuan has begun trading against the Russian ruble in the Chinese financial market, while the renminbi (China’s monetary denomination of note) will soon be allowed to trade against the ruble in Russia. In aligning currencies, Premier Wen Jiabao and Prime Minister Vladimir Putin are now engaging in further talks about how both countries can benefit from each other’s resources.

Russia wants China to pay top ruble for oil; China wants a discount. The world’s biggest energy producer and the world’s largest consumer will eventually find common ground— connected by a new trans-Siberian pipeline to China’s border and a fast-growing intermodal landbridge linking Europe to Asia.

Russian Railways is developing infrastructure in Siberia and the Far East to match growing trade volumes to and from China. Direct rail freight volumes with China are expected to increase by as much as 100 percent in the next decade. Russian oil, timber, chemical, and mineral fertilizer exports comprise the majority of cargo. But in 2010, with greater volumes of Chinese machine and technical goods, imports started to gradually increase.

Sensing an opportunity, Russian Railways allocated more than 12 billion rubles (about $390 million) to develop rail infrastructure in its Far East region during 2010; in 2011, that figure is expected to climb.

It may sound like an early 20th-century tale, but Russia hopes that developing terminal infrastructure and distribution facilities along a Eurasian rail line to China could finally connect and develop the country’s hinterland. Such a revolution would mean more freight volume, more border crossings between Russia and China, and more interest from other countries, especially in Europe.

Russian Railways has already reached agreements with Chinese and German partners to create a joint venture for container transport across Eurasia.

German rail carrier Deutsche Bahn (DB) and the Chinese Ministry of Railways have begun an initiative to cooperate closely on rail freight transport, and to enhance Chinese infrastructure. China presents growth potential for DB and its customers; and as the country’s production sites chase cheap labor farther inland, rail becomes more attractive to many European manufacturers.

Germany’s transportation and logistics acumen and market demand, combined with China’s infrastructure needs and abundance of cheap manufacturing capacity, offer complementary value propositions. In between, Russia has everything to gain.

Wen and Vlad… China and Russia… energy supply and consumption demand… Sometimes the oddest couples make perfect sense.

Panama and Georgia Tech Become Classmates

As anticipation builds for the Panama Canal’s 2014 expansion, the country is getting a logistics education. Georgia Tech recently opened the Panama Logistics Innovation & Research Center in Panama City, the latest addition to the university’s global network of innovation clusters focused on improving country-level logistics performance and increasing trade competitiveness.

Under an agreement between Panama’s National Secretariat of Science, Technology, and Innovation, and Georgia Tech’s Supply Chain & Logistics Institute, the research cluster aims to grow applied research, education, and competitiveness within the country. The school’s primary objectives are to improve Panama’s logistics performance and to establish the country as the trade hub of the Americas.

The center will develop formal degree and executive education programs to increase human capital in logistics through creating repositories and models to support trade analytics; developing performance, integration, and visibility systems; facilitating stronger industry and infrastructure linkages to improve Panama’s competitiveness; providing leadership for the development of a national logistics plan and national logistics council; and establishing a foundation for new logistics services and jobs.

U.S. and Brazil Open Skies

The United States and Brazil have agreed to gradually execute an Open Skies aviation regime, significantly liberalizing services for airlines serving both countries. Air transport buyers will benefit from more competitive pricing and convenient services.

The agreement immediately removes restrictions on pricing and the routes that U.S. and Brazilian scheduled and charter airlines currently serve. It also provides for full code-share rights and additional charter flexibility.

Between October 2011 and October 2014, U.S. carriers will be allowed to progressively increase scheduled combination, all-cargo, and charter flights, including additional services to the currently restricted and highly congested São Paulo and Rio de Janeiro airports.

When the Open Skies agreement takes full effect in October 2015, airlines from the United States and Brazil will be allowed to select routes, destinations, and prices for cargo, passenger, and charter services based on consumer demand and market conditions.

UK Copes with Early Winter

A prolonged arctic blast in the United Kingdom and Ireland in fall 2010 put the freeze on transportation and logistics activities— throwing shippers and carriers into a crash course on contingency planning.

Unseasonable heavy snow and icy roads caused chaos for delivery companies while leaving petrol stations short on fuel. The UK motorway system was severely crippled with broken down and abandoned vehicles unable to move along the nation’s snow and ice-laden roads, leading to widespread closures. Area airports and ports experienced similar disruptions, either closing or operating at reduced capacity for long periods.

On the plus side, it was business as usual for some UK ports. Despite treacherous weather conditions, the Port of Teesport remained open for business— which was even more remarkable given the fact that it is located on England’s northeast coast, one of the areas hardest hit by severe snow accumulations.

Teesport implemented a daily, 24-hour snow clearing and gritting operation, enabling it to safely service a significant percentage of shippers.

Asia Tries Local Sourcing

As inflation creeps into China’s economy and domestic food prices rise, authorities are making efforts to shorten the agricultural supply chain. The government plans to boost direct supplies of food products from farmers to supermarkets, increasing the share of local sourcing from current 10-percent levels to more than 30 percent by 2015.

As part of this broad strategy, a pilot project is currently operating between a Walmart store and 10,000 farmers in a Beijing suburb. The move not only increases income for farmers, it also improves quality control and food safety supervision, says China’s Ministry of Commerce.

Local sourcing is gaining traction elsewhere in Asia. Nestlé SA, for instance, plans to invest nearly $100 million in Indonesia to produce Milo chocolate-flavored products and Cerelax weaning formula.

The company estimates that its West Java factory will employ about 300 people and be operational by the end of 2012. Nestlé intends to purchase 10,000 tons of cocoa powder per year directly from local farmers, a move that will increase supply chain efficiency as shipping costs drop.

In terms of strategy, Nestlé will focus on selling to a segment of the Indonesian population whose purchasing power is swiftly growing. By expanding operations on the island, the company hopes to ensure that its supply chain is diversified and can respond quickly to supply and demand changes.

Lufthansa Brings Chill to India

Lufthansa Cargo and GMR Group, the operator of Rajiv Gandhi International Airport in Hyderabad, India, plan to jointly develop the facility as a cargo hub for transporting temperature-sensitive pharmaceuticals in South Asia.

Future efforts entail building out the airport’s infrastructure capabilities to support the complex requirements of providing reliable, temperature-controlled transport solutions.

For its part, Lufthansa Cargo will provide necessary capacity by stationing its own fleet of cooling containers in Hyderabad. In August 2010, the airline debuted its Opticooler cold chain container system, which will play a key part in the joint venture looking to capture business in one of the world’s largest generic pharmaceuticals markets.

Aeromexico Seeks Less Law, More Safety

Mexican laws capping foreign ownership in the airline industry restrict the ability of carriers to team up with Latin American counterparts, explained Andres Conesa, Aeromexico’s chief executive, at the ALTA Airline Leaders Forum in Panama City, Panama. Currently, Mexico requires majority national ownership for airlines.

Criticism from the head of Mexico’s largest carrier comes after a wave of mergers and acquisitions in the Latin American airline industry in 2010, with Colombia’s Avianca joining up with El Salvador’s TACA, and Chile’s LAN Airlines planning to merge with Brazilian carrier TAM.

Conesa’s call for easing limits on foreign investment in Mexico’s air space was overshadowed by the U.S. Federal Aviation Administration’s (FAA) decision to downgrade the country to safety Category 2 in 2010. The FAA’s decision was prompted by concerns about lax government oversight of the country’s airlines, and restricts Mexican carriers from expanding their service to the United States and from code-sharing with U.S. airlines.

Metro Delivers Fish with Chips

Metro Group’s German Cash & Carry operation has concentrated fresh fish logistics at a new distribution center near Frankfurt Airport. The supermarket chain is delivering the catch of the day —275 tons of fresh fish and seafood every week —to wholesale stores in Germany and Austria. Efficiency and sustainability are the main reasons for implementing the new logistics approach.

Metro Cash & Carry is the largest fresh fish distributor in Europe, supplying 70 different species of fish and 300 fresh fish products to wholesalers and consumer plates alike. One principal benefit of bundling logistics in one location is that time- and cost-intensive shipment steps are removed from the process. This means nearly all fish products reach stores within 48 hours after being caught, thus ensuring improved freshness for customers.

From the warehouse to the store, fish shipments are moved via trucks equipped with automatic temperature-monitoring devices. Sensors constantly check product vital signs, which are transmitted to a central database via satellite, then evaluated. If temperatures exceed specified limits, Metro Group can react immediately and reroute shipments to refrigerated facilities.

TNT Splits to Expand

Dutch postal and express group TNT has officially split its express and mail divisions, a move aimed at strengthening the existing express business while enabling the company to expand into adjacent market segments.

TNT, Europe’s number-two expedited delivery company behind DHL, will retain a stake of 29.9 percent in the express unit to cover separation requirements. The divestiture, which was originally announced in August 2010, has brought its share of speculation that UPS or FedEx would make a move to acquire.

The express division will segment reporting into the following regions: Europe and Middle East/Africa; Asian Pacific; and the Americas. Regarding the mail piece, the company plans to expand activities in areas with core competencies such as high-value freight and parcel shipments that demand value-added services. In emerging markets, the express division will continue to develop day-certain services and grow its intercontinental business.