DRIVERS OF THE INDUSTRY

Logistics Insight Asia, 1/5/2008

Along with design and production excellence, logistics is increasingly recognized as a factor in the success of the world's automotive manufacturers.

By TRANSPORT INTELLIGENCE (Ti).

Over recent years, logistics has risen up the corporate agenda of almost all vehicle manufacturers (VMs). Most now either have programs in place or are working on projects to develop their logisticssystems.

It has been realized by most VMs that logistics is fundamental not only to the efficient working of their assembly plants but is also key to the management of their markets, whether through the avoidance of overstocking or the prompt and accurate fulfillment of customer orders.

The consequence of this is that both the sophistication of logistics systems and the power and coherence of management structures at VMs has increased over the past two years. In parallel with the greater sophistication of logistics systems inside VMs, is an increasing need for more sophisticated services from LSPs. This is seen particularly in finished vehicle logistics, where capabilities such as “track and trace” and greater visibility of inventory are now essential.

2006 and 2007 were notably eventful years for the automotive sector, as it saw a huge amount of restructuring not only in its “supply chain” but also amongst the vehicle manufacturers themselves. A large proportion of the US component suppliers remain in bankruptcy protection, with Delphi no longer the leading force in the component sector it once was.

The implications of these changes for logistics are not immediately obvious, however in truth they are substantial. In the case of VW, the headline issues have been concerned with the change in personalities at the top of the company, although there appear to have been substantial organizational changes directed in part to creating new logistics systems; a response to the success of the KOVP logistics system at BMW, a major competitor to VW and its AUDI brand. Along with the legendary Toyota Production System (TPS) KOVP is probably the most effective production system in the auto sector.

This illustrates that logistics is increasingly recognized as central to the success of any VM, although this is often not widely realized outside the more technically orientated areas of the VMs’ management.

As for the logistics service providers (LSPs), there have been important developments but not as torrid as those amongst their customers. In addition to the existing big global LSPs – Ceva, Schenker, DHL Exel – a new entrant to the big league is Kuehne + Nagel, through its purchase of ACR Logistics.

Elsewhere the Deep Sea Car Carriers have been one of the few really profitable parts of the automotive logistics market with a shortage of capacity and rising demand fuelling excellent profits. In contrast, many land based operators flirt with bankruptcy.

Like the global automotive sector itself, the market for automotive logistics worldwide is fragmented, with variable growth levels and very large. Whilst the automotive logistics markets is mature in the traditional markets of Japan, Western Europe and North America it is growing vigorously in the new markets such as China, Central Europe, Russia and Turkey.

Overall Transport Intelligence (Ti) has estimated the size of the market (in the traditional areas of car production and consumption) for all types of logistics services to the automotive sector as being €27.7 billion (US$43.1 billion) in 2007, comprising Europe – €14.1 billion; Japan – €7.4 billion; NAFTA – €6.2 billion.

However this is a highly equivocal figure when applied outside the traditional markets, with spending and operational patterns outside these areas being highly variable.

GLOBAL BUSINESS?
It is often said that the automotive sector is a global business. This is true only to an extent. While most of the largest VMs market vehicles on a global scale, vehicle production is not a “globalized” activity as compared to industries such as electronics or clothing, where raw materials, semi-finished goods and finished product are sourced on a global scale.

In contrast, most passenger vehicles are made near the market where they will be sold. Even components are manufactured near the assembly plant. The automotive sector does not have the geographically extended supply chain seen in many other sectors. Within Europe, for example, it is quite usual for 90 percent of component suppliers to be located within 100 km of the assembly plant.

This supply chain geography is so pronounced that the car industry has created specific locations for suppliers next to its assembly plants. Known as supplier parks, these are areas of land next to the assembly plant, set aside for major component supplier’s manufacturing facilities. These components are then fed directly into the assembly plant often using conveyer belts or small tug trucks/ fork lift trucks.

Supplier parks are often used for locating the assembly of bulky components such as car seating. The use of supplier parks also improves communication between the component supplier and the vehicle manufacturers’ assembly plant, easing the implementation of systems such as just-in-time (JIT) production techniques.

An exception to this local supply geography is China, which imports large quantities of car components as domestic suppliers cannot provide VMs (Chinese and Western) with the quality of parts required. This is changing as large component suppliers open facilities in China.

However the impetus for local production is substantial. Key to this is the need to reduce foreign exchange fluctuations. The automotive sector finds it hard to manage fluctuations in the value of finished product as it is so focused on the management of capital investment. Therefore it strongly prefers to locate assembly facilities in areas of the same currency as it is selling its products.

Hence, the automotive sectors’ material flows remain predominantly local or intra-continental. Inter-continental and global material flow is likely to remain a much smaller proportion of traffic.

TYPES OF LOGISTICS OPERATIONS
There is considerable variation over the types of logistics services Tier 1 (T1) suppliers require. All need transport and some warehousing services. Beyond that, T1 suppliers need a capability that manages the interface with their VM customers. This requirement however is variable in nature.

Suppliers feeding into German VMs in Germany tend to have a requirement for consolidation centers near the VM assembly plant. This is very much the case with Daimler Chrysler/Mercedes Benz Passenger Car plants where suppliers usually opt to hold inventory in a consolidation centre near the plant to facilitate immediate availability of stock. This is further complicated by some major suppliers having assembly facilities within the MB plant In contrast, in Toyota plants this is not the case. Toyota’s LSPs will collect from suppliers and consolidate components at a dedicated facility at the plant. Toyota will require the supplier to set aside part of his loading bay for Toyota destined supplies, but the supplier should be operating under the kanban system and therefore should not need any further inventory management systems.

T1 suppliers are also faced with the contradictory demands from vehicle manufacturers. On the one hand VMs want suppliers to invest in logistics or assembly facilities near assembly plants, which requires investment by suppliers. However, VMs are unwilling to commit themselves to suppliers for long enough to ensure that the investment is covered. Consequently, there is a danger that suppliers will be left with facilities at or near the VM’s assembly plant which are redundant or underused.

Many LSPs view this as an opportunity for outsourcing; with several suppliers sharing facilities owned and run by the LSP. This appears logical, however, it conflicts with the unwillingness of many T1 suppliers to outsource assembly operations which they regard as core competencies.

Logistics is usually one of the core functions of such near-plant facilities. For example, Sequencing Centers Inline (SILS) main function is to breakbulk, and feed components into the VM’s assembly plant in sequence dictated by the production schedule. This would suggest that LSPs are well positioned to off er such services within shared user facilities.

However, many larger T1 suppliers are very aware of the importance of logistics as a core-competency and are unwilling to relinquish it to LSPs on a large scale. As a consequence the market for such centers may appear more promising for LSPs than in reality.

PROVIDER PROFILES
DHL Exel Supply Chain DHL’s position in the automotive logistics market was transformed by the Exel purchase, going from nowhere into being a leading player. DHL Exel is now one of the automotive sector’s most important players with high volume and sophisticated operational capability. In contrast to many of its rivals, it has also been able to manage its business with a high degree of profitability. This is due to both its skill in managing its portfolio of contracts and the soundness of its strategic approach.

While it would be very wrong to describe DHL Exel as being wholly a non-asset based company, its differentiation does depend on having customers who are comfortable with more advanced outsourcing concepts. In the automotive sector, particularly amongst the German and Japanese VMs, this is far from the case. Indeed, Exel’s strongest automotive business is probably in the US where it does inbound logistics business with the big three and others on a considerable scale.

The other pillar of DHL Exel’s strategy is its geographical reach, which gives larger companies – including VMs and larger suppliers – access to highly skilled logistics capabilities in locations where such capabilities are much harder to access than in traditional production locations. DHL Exel has developed strong capabilities in Central Europe and the China/SE Asia and now has expanded into Japan.

These are likely to provide it with considerable opportunities for growth as these locations grow above trend. It is also likely that the proportion of automotive business that DHL Exel has outside both Central and Western Europe – particularly in China – will grow. The VMs are more vulnerable in these areas and DHL Exel’s strategy is strong on global capabilities. This may for example, position itself well for any possible sourcing of components in China for European and North American production.

Ceva Logistics
Ceva Logistics was originally the logistics arm of the Express/Mail company TNT but was sold to private equity in 2006. The automotive sector remains the largest segment of Ceva Logistics’ business. At one time the sector accounted for more than half of the former TNT Logistics’ business but, importantly, this has declined steadily.

Ceva’s approach to the automotive market is based on a mixture of management and physical asset resources, and its business is dominated by contract logistics. The company at present concentrates on two principal parts of the sector: inbound logistics and aftermarket.

Ceva has sizeable warehousing capacity throughout Europe, North America, South America and Asia Pacifi c, which is used for a variety of automotive and non-automotive business and this is a major competitive advantage. profitability in the aftermarket is driven by the effective utilization of warehousing capacity and is distinctly different from the management of inbound logistics, which draws on management skill and is less demanding in terms of capital investment.

Ceva Logistics also has important operations associated with the automotive sector. Most notable of these is the tires business. Vehicle tires have particular handling characteristics and being bulky and heavy need particular types of warehousing and transport provision. Tire sales are dominated by the aftermarket, but have a distinct sales channel. This may make the tires business an attractive niche, removed from the aggressive purchasing policies of the VMs and exposed to less powerful retailers and suppliers.

Ceva is a global company with automotive businesses in Europe, North America, South America, and a very strong business in China through a joint venture, Anji-TNT, the leading LSP to the automotive sector in China with both a national presence and a high level of provision.

In Europe it provides inbound and aftermarket logistics services to almost all VMs particularly in the UK and Spain although its German business is weak. But it is in Italy where it dominates, having a unique relationship with Fiat.

Ceva’s position in North America is also very strong with a broad customer base but in particular an excellent position with Honda where it provides much if not most of inbound and aftermarket logistics for Honda in the US.

Schenker
Schenker operates as an independent service brand within DB Logistics (the Transportation and Logistics division of Deutsche Bahn), providing ground, air and sea freight forwarding products. It is one of the largest logistics players in the world, but most of its revenues (80 percent) are generated through its mainland European operations.

Schenker has a complex and extensive automotive business with a turnover of over €1 billion. This includes rail, road and sea transport of all types of automotive material/ product as well as other logistics activities. With an estimated 15 percent of sales, the automotive sector is the most important customer group for the Schenker business as a whole and particularly for its logistics business.

It has a number of state-of-the-art logistics operations, particularly focused on the control of inbound materials. A good example of this is the operation at VW Nutzverzeuge plant in Hannover, where Schenker established the adjacent park for VW’s suppliers. Schenker controls the material flow into the park and then onward to the VW assembly line. Such an operation is as ambitious as any in the sector and illustrates the confidence that VW has in Schenker.

With the DB takeover, rail has obviously become more important for Schenker. One of DB’s most important businesses was the automotive sector and it has taken the opportunity to merge its automotive freight business into Schenker. Therefore Schenker has a business that embraces the whole of the automotive sector, from inbound components to finished vehicle logistics.

Although there are other vehicle manufacturers, Schenker’s strength and growth has been based on the success of the German VMs. If Schenker is to develop its product offering it will also have to develop its customer base.

VW Group, BMW and DC all resist moves towards “Lead Logistics Provider” concepts, as they look to encourage competition amongst suppliers and retain a high degree of control over the management of logistics. This has to be an obstacle for Schenker. It might lessen somewhat as all three continue to expand production outside Western Europe - to Central Europe, North America and to China (Schenker is expanding into China assisted by its relationship with VW), however this is only a question of degree.

Its presence in Asia is not huge; however, it has an important relationship with VW and BMW in Shanghai and a substantial spares operation out of Singapore.

The prospects of Schenker are wholly tied-up with the ambitions of Deutsche Bahn to become the leading global logistics company.

Almost inevitably Schenker will expand through acquisition if only as a consequence of DB’s huge appetite for acquisition. However, although Schenker’s results continue to be good, its contract logistics business in the automotive sector appears to be overshadowed by the huge efforts in the transport parts of the company.

Transport Intelligence is a provider of expert research and analysis on the global logistics industry. The full 223-page report, “Global Automotive Logistics 2007”, can be purchased online through www.transportintelligence.com.