The logistics world in 2008!

The fate of the worldwide transport and logistics industry in 2008 will be inextricably linked to the state of the global economy. This makes any sort of prediction very difficult as economists themselves are divided on the outlook. However, most are agreed that industry faces a slowdown; it is the extent to which this will occur that is still uncertain.

The roots of the slowdown lie in the so-called 'credit crunch' in global financial markets, which was triggered by defaults in the 'sub-prime' mortgage sector in the US. The effects of this have yet to unravel – hence widespread uncertainty. In many respects, fear of the unknown is likely to result in a self-fulfilling prophesy. Consumers will reduce their expenditure and manufacturers will put off investment decisions, creating a recession built on lack of confidence. Shipping volumes are bound to be impacted.

In addition to the 'credit crunch', spiralling fuel costs have fanned inflation, leading to rising interest rates worldwide. Many logistics providers have felt the full force of these rises, being unable to pass them on in their entirety and suffering a consequent impact on margins.
If a slowdown is inevitable as economists think, the question remains as to its extent. A recession in the US, the world's largest economy, will of course impact on transpacific volumes. This has already been experienced in the container shipping sector. Maersk Line is reducing its workforce by 2-3,000 jobs (although this is partly the result of internal problems); the president of Japanese global operator Mitsui OSK Lines (MOL), Akimitsu Asida, has said that 2008 "losses on the North America route will be significant"; and NYK has outlined a plan to reduce ship speeds by 10% in order to cut fuel costs. Meanwhile, recent and continuing investment in new capacity by shipping lines has made any slowdown in volume growth all the more critical.

A recession is also likely to badly hit air cargo markets. Traditionally cyclical high-value goods, such as electronics, are amongst the first to see cutbacks in demand. Shippers may decide to migrate some lower value volumes to sea, or within the US from air to road, as traditionally occurs in a weak market.

If a slowdown occurs, 2008 will be characterised by increasing freight capacity and volumes failing to keep pace – certainly in the shipping sector. Freight forwarders will be the major beneficiaries as this scenario would enable them to take a bigger slice of buy-sell revenue. With capacity in some air freight markets also running high, a steep drop in rates in this sector could also be on the cards – which would be further bad news for carriers which have been battling a steady decline in overall yields for some years.

However, there is a chance – even a good chance – that all this talk of global recession is overblown. The Asia Pacific region may well continue its strong growth, with China very much less reliant on the US market than it once was. China's own domestic economy will continue to suck in goods from its neighbours – especially Japan – and those countries will in turn grow in significance as export markets. Likewise, Europe has yet to show any real signs that it has caught the US economic cold, despite slightly wobbly retail figures over Christmas.

It has been said that more efficient supply chains, coupled with more flexible job markets, have made the chances of worldwide recession far less likely than in the past. Economies are now much better able to compensate for the type of financial and commodity pressures that have been seen in the past year. This will hopefully mean that any slowdown experienced in the global economy is far less serious than many analysts currently fear.

Will 2007 prove to be the lull before the storm?

In economic terms, 2007 will be remembered for a shift from a China-fuelled boom to a property-focussed bust. The present crisis in the global banking and credit system is so acute that some more cautious commentators are already describing it as a "blow to the Anglo-Saxon economic model".

Behind the scenes, one of the underlying trends is an 'unwinding' of trading patterns that have been established for several decades. The worrying thing for those in the logistics industry is that such developments are almost certain to affect them during 2008.

The past year has marked a zenith in the boom for logistics services. Freight forwarders, in particular, have seen continued double digit growth during 2007. That trend has been largely fuelled by the demand for container shipping out of China into the US and Europe.

The prosperity in the freight forwarding sector, which has been apparent for over a decade, has both attracted new players into the market such as Geodis and CEVA and underpinned the growth of established major players like Kuehne + Nagel into other segments of logistics.
Contract logistics has continued to perform in a modest way but that market is cautious, emphasising the complexity of the market for outsourcing.

German companies have remained high profile throughout 2007. Deutsche Post World Net has had a quiet crisis in its strategic direction, with the appointment of John Allan as chief financial officer indicating a shift away from 'size at any cost'. Meanwhile, the other German logistics giant, Deutsche Bahn, is stuck in a tunnel of the politicians making, with its privatisation stalled, at least for the moment.

The same forces that have stalled Deutsche Bahn's private sector ambitions have also skewered mail deregulation in Europe. Rail may also be suffering from similar resistance to the consequences of open markets in Europe despite a healthy number of private sector entrants hoping to exploit the potential of that mode – a potential well demonstrated in the US where rail has attracted long-term investment on the back of the promise of sustained high growth in container and energy sector traffic.

Volumes in the container shipping sector have also remained strong but as is so often the case the shipping companies have responded with the purchase of huge new capacity. Maersk, in particular, has suffered badly from its failure to properly manage expansion, illustrating that as in so many transport markets it is remarkably difficult to profit from market dominance.
Air freight is another sector where over-capacity is a traditional weakness. However, in 2007, many airlines could not indulge in their usual habits of creating too much capacity due to so many of them emerging from Chapter 11. This is already set to change in 2008.

Road freight in the US was hit by lower volumes in 2007 as that sector felt the effects of a major downturn. In Europe, growth rates remained flat, with even the biggest network road freight companies returning meagre figures. However, the market for acquisitions in Europe was strong with the UK and Germany seeing big purchases by DPWN, K+N and Norbert Dentressangle.
One sector for which 2007 turned out to be a great year was container ports, which saw their value shoot through the roof as financial investors realised the potential of those businesses for stable yet strong returns.

This year also saw the return of oil prices as a major cost pressure for the logistics industry as a whole. Yet so far it has appeared not to be a constraint on economic activity, in part because many transport providers have increased productivity and improved their fuel efficiency. Higher oil prices have, however, depressed profits in a fewer weaker markets.
In summary, 2007 was a quite good year for the logistics industry despite slower US growth. Volumes remained strong and many logistics providers were able to pass higher costs on to customers. What might be suggested with some degree of confidence is that 2008 will be worse.

Source: Transport Intelligence.

Mueller Drives Logistics Merger

Two medium-sized specialist food and drink logistics providers in the UK are being merged by the owner of Mueller Dairy Group, a large German food company.

The companies concerned are Culina Logistics, which specialises in handling chilled food products, and Baylis Logistics which is largely involved in ambient activities. The merger of their businesses will take effect from January 1, 2008, and the newly-merged company will be known as Culina Logistics Limited.Theo Mueller took a 50% stake in Baylis Logistics last year and the new group will be principally owned by his holding company.

Culina is also owned by Theo Mueller and has played a role in distributing the highly successful range of yoghurt-based products of Mueller's principle investment, Mueller Dairy Group. However, Culina is not a part of Mueller Dairy. Rather, Theo Mueller appears to be making a strategic investment in food logistics, possibly using the considerable volumes of Mueller Dairy to assist Culina.

The former chief executive officer of Culina moved to Baylis Logistics in 2005 and the merger of the two companies and Mueller's previous investment seem linked to this.

Culina is believed to have sales of around £80m(€120million) and Baylis Logistics of around £40m(€55million), with the two companies stating that the new company will have sales of £125m(€180million). Culina Logistics has operations in Italy and Germany. However, it is unknown whether these are particularly substantial or will play a role in the future of the group. In addition to Mueller Dairy Group, Culina has companies such as Danone, Unique and GUI as customers.

What appears notable about this deal is that an investor with a business as dynamic as Theo Mueller is so keen to invest in food logistics. The UK food logistics sector is highly competitive, dominated by large and aggressive retailers. Of course it may be simply an opportunistic move by Mueller, realising the increase in shareholder value that he can achieve through the merger.

Strong Results Position K+N Well for Future Acquisitions

23/Oct/2007

Swiss global logistics provider Kuehne + Nagel has announced yet another strong set of quarterly figures suggesting an acceleration in its already high rate of growth. The company's EBITDA is up 23.2% over the past quarter at CHF241milloin, compared to the past nine months which show a 16% increase. Turnover has increased less vigorously, but is up 17.6% over the quarter compared to 15.7% over the nine month period. EBITDA for the nine months January to September was CHF709million (€426million/$603million).

In seafreight, which is the K+N's biggest business, the company appears to be continuing to gain market share. Container shipping has had a mixed picture over past year, but K+N has recorded an increase of 16% in volumes. At 4.2% margins have remained steady over the period with profits rising in line with volumes at 15.2%. Airfreight too has bucked the trend with a 15% increase in volume. K+N have improved margins here, leading to a 31.5% increase in EBITDA at CHF146.6million.

The area where K+N has faltered is in its rail forwarding and networked road freight. Although turnover was up a remarkable 16%, EBITDA margins are still weak at 1.2 % and the nine month figure is still 18% below the same period in 2006 despite a mild recovery in the past quarter. These figures may be influenced by investment in physical infrastructure.

Contract logistics, in contrast, is in line with the rest of the company's business, growing both sales and profits at a remarkable rate. Turnover grew 20% over the nine month period whilst firming margins to 5%. EBITDA was CHF171million.

With a balance sheet strongly in the black, K+N is clearly in a position to buy whatever is up for sale in the European, and possibly world, logistics market. However the nature of K+N's management suggests that it is keen not to over pay.

Management Secrets of Idea-Friendly Companies

New ideas are the lifeblood of many industries, yet dropping everything to pursue any faint glimmer of genius is no way to run a business. How do smart companies balance the two? By setting up standard procedures for collecting and evaluating good ideas, no matter when or where they strike. Whether it’s a company intranet, a regular meeting, or a full-time department, dedicated resources are the best way to make sure brilliant suggestions don’t slip through the cracks. These are the techniques IBM, Toyota, and Motorola use to nurture their employees’ best new ideas.

Company:

IBM

Goal:
Collaboration among many employees

Technique:
Online platform that acts as a chat room for ideas

To help connect its more than 350,000 employees around the world, IBM uses software called ThinkPlace, a sort of internal chat board and wiki. Anyone can originate an idea by posting it on ThinkPlace, and others can join in with comments, questions, or suggestions at any time. Managers can also pose questions in hopes of generating creative solutions. For example, Mary Sue Rogers, an executive in IBM’s Human Capital Management division, recently asked how the company might support an increasingly aging workforce.

In the past, new ideas were threaded through multiple layers of IBM management. Now, says Gina Poole, vice president of innovation, “There’s a focus on community-driven efforts: people connecting around the world. An idea starts in Australia and gets picked up by someone in Finland.” Today about 100,000 IBM employees use ThinkPlace to discuss ideas at varying stages of development.

ThinkPlace is also invigorated by a volunteer community of “innovation catalysts” — “IBMers with regular day jobs who are looking for ideas to champion,” as Poole puts it. “They help further ideas and get them adopted.” To select which ThinkPlace ideas and initiatives to implement, IBM has created a consortium of executives called the Ideas to Reality board. Apart from deciding which ideas to pursue, the board’s meetings (be they in person or in the virtual world) are also an opportunity to assign responsibility for new initiatives and prevent inter-departmental confusion.

For ideas that get the go-ahead, the company has a unit called Biztech which distributes the budget and expertise needed to create prototypes. Teams of five to ten employees — most of whom have other day-to-day responsibilities within the company — can spend up to 20 percent of their time working on Biztech-backed initiatives.

Company:

Toyota

Goal:
Company-wide participation in efforts to improve operational efficiency

Technique:
Alert systems and meeting templates that empower employees

Toyota has long been recognized as one of the world’s most innovative companies. Its “lean thinking” approach to manufacturing inspired now-common practices such as just-in-time production, which minimizes inventory to keep costs and depreciation down. “The environment inside Toyota’s production system is legendary,” says Tom Kelley, general manager of corporate design and innovation at Ideo. “The leadership says, ‘Show me all your ideas. You’re on the front lines, so you know this stuff better than me.’ Every time workers have an idea, they will have an audience — and they know it’s expected of them.”

Toyota’s management philosophy is based on the Japanese principle of kaizen, which means “continuous improvement.” The basic notion behind kaizen is that progress occurs one tiny step at a time, contrary to the more western notion of producing success in big, bold moves. For kaizen to work, everyone needs to have the authority to help make the company more efficient and prosperous. At Toyota, for example, every employee on the assembly line has the authority to shut the system down using the Andon — a signboard with lights, audio alarms, text, and other displays — to notify management and other workers of quality or process problems.
“The Andon comes on numerous times a day,” explains Mike Morrison, vice president of the University of Toyota, the company’s in-house managerial training facility. “Let’s say you and I are working on one part of the interior, and you detect a rattle of some kind. I stop the line and everyone in our group comes to see how we can resolve it. It’ll be written up and reported.” Such interruptions are viewed as positive, alert moves to assure quality — not as problems that make everybody wait.

The company has also made feedback from its employees a continuous part of the idea-generation process. For example, Toyota utilizes a framework at meetings called a PDCA (for “plan, do, check, act”) cycle. “It’s just a one-page document for displaying problem statements and developing the final move and the result,” Morrison says, “but it’s a useful guide that ensures you don’t skip any steps in the brainstorming process.”

Company:

Motorola

Goal:
Pursuing internal ideas in search of the next big thing

Technique:
A program that functions like a venture-capital firm inside the company

Motorola’s Early Stage Accelerator (ESA) program applies venture-capital methodology to ideas within the company. Started by Jim O’Connor in 2003, the ESA uses portfolio theory to assess in-house proposals, treating them like start-ups. “The core purpose of ESA is to save good ideas from being killed and channel them into products as fast as possible,” O’Connor says.
O’Connor identifies three stages of the program: ideation, where the ESA gathers suggestions from employees, vendors, and customers; commercialization, where promising ideas get funding and testing; and market ready, which prepares the final product for commercial release.
At a tech company like Motorola, ideation is the easy part. “Across a company of 66,000 people, 25,000 of them engineers, there are ideas just all the time,” O’Connor says. “But you can’t spend an inordinate amount of time on thousands of ideas.” The ESA studies close to 100 proposals a year. Roughly 30 of those receive funding, and only 15 of those are eventually released for sale.

O’Connor says many ideas still come from old-fashioned conversation — in meetings with customers, during engineering reviews — but like IBM, Motorola also uses a company intranet to capture new ideas. Promising suggestions are assigned to an ESA team member for evaluation, and those that prove worthy graduate to the commercialization phase, where the ESA dedicates funding, assigns a team of engineers, sets milestones, and monitors progress closely. The program also sets an aggressive timeline: the traditional tech development schedule is three or four years; the ESA averages 18 months.

O’Connor and his team use four criteria to assess each proposal: relevance to Motorola’s long-term strategy and targeted markets; projected financial return; execution risk (projects that are aligned with Motorola’s core business tend to work out better); and the previous success of the team behind it. Within each criterion, the ESA has a set of about 100 questions; senior management evaluates the proposals with a software tool called I-Growth, which generates quantitative analysis.

But qualitative assessment remains important, too. “We ask questions like, ‘What is the relevant problem we’re trying to solve?’” O’Connor says. “Sometimes in tech, the tendency is to get complicated. We could be developing a great technology that no one wants to use.”

What is Supply Chain?

A supply chain, logistics network, or supply network is a coordinated system of organizations, people, activities, information and resources involved in moving a product or service in physical or virtual manner from supplier to customer. Supply chain activities (aka value chains or life cycle processes) transform raw materials and components into a finished product that is delivered to the end customer. Supply chains link value chains.
Today, the ever increasing technical complexity of the distribution of standard consumer goods, combined with the ever increasing size and depth of the global market has meant that the link between consumer and vendor is usually only the final link in a long and complex chain or network of exchanges.
This supply chain begins with the extraction of raw material and includes several production links, for instance; component construction, assembly and merging before moving onto several layers of storage facilities of ever decreasing size and ever more remote geographical locations, and finally reaching the consumer.
Although many companies and corporations today are of importance not just on national or regional but also on global scale, none are of a size that enables them to control the entire supply chain, since no existing company controls every link from raw material extraction to consumer.
Many of the exchanges encountered in the supply chain will therefore be between different companies who will all generally seek to maximize company revenue within their sphere of interest but will have little or no basic knowledge or interest in the remaining players in the supply chain except those to which it is directly linked.

The eight key processes in SCM are:

Customer relationship management
Customer service management
Demand management
Order fulfillment
Manufacturing flow management
Supplier relationship management
Product development and commercialization
Returns management / reverse logistics

The role of Private Equity in Logistics M&A

The proposed takeover of Christian Salvesen by Norbert Dentressangle illustrates that the market for mergers and acquisitions in the logistics sector continues to be strong. The industry's low margins and tough competition is determined by the eagerness of so many small and mid-size hauliers to grow either by cutting margins or by buying their neighbours.
But trade buyers are not alone. Figures available to TI suggest that around a third of the deals (by volume, not value) executed in the road freight and contract logistics sector over 2006 involved private equity (PE). However the nature and size of the PE deals are quite different to the vaulting ambition of the big trade buyers, such as Deutsche Bahn, Kuehne + Nagel (K+N) or DPWN.

Of course there are exceptions, the biggest of which, of course, is Ceva/EGL created by the London based equity firm Apollo. But this highlights why ambition may be so rare in PE deals in the sector. Ceva has a huge debt burden which it has struggled to fund. Whilst its growth and operating profits have been respectable they are swallowed up by the cost of interest.
Ironically the really big deals are dominated by the infrastructure funds, such as the purchase of OOCL's container terminal business by Ontario Teachers Pension Plan or Associated British Ports by Goldman Sachs. But here the criteria are different, with pension plans actually attracted by the size of capital investment required.
What conventional private equity really likes is to take a business with sub-optimised potential and groom it for a sale. A good example of this is Platinum Equity's purchase of Hays Logistics in 2004 and its sale in 2006 to K+N as ACR Logistics. The company was rationalised and put on a sufficiently stable footing for K+N to pay an attractive premium - but essentially it was an 'arbitrage' deal.
Private Equity now dominates a huge part of world's economy, but its nature should be understood. If it is big vision that is required in the logistics sector - look elsewhere.
TI's latest report on Mergers and Acquisitions in the global logistics industry – Global Logistics Strategies 2008 - is published next week. Contact Sarah Smith to reserve a copy. ssmith@transportintelligence.com.