Eastern Europe continues to see steady investment in its manufacturing and supply base and with ongoing growth expected in Russia, the region should grow more than Western Europe. But logistics still needs focus, writes Malcolm Wheatley.
The experience will be familiar to anyone who has driven in Eastern Europe. One minute you’re on a reasonable multi-lane freeway, driving at speed and making good progress. The next, you’ve pulled off onto a roughly paved track, stuck behind a horse-drawn cart that appears to have been constructed from pieces of abandoned vehicles.
While a simplification, it’s nevertheless an analogy that summarises aspects of Eastern Europe’s automotive industry and the logistics challenges that it faces, as it is a region that is a distinctly two-speed, twin-track affair.
Christian Zbylut, the chief executive for Eastern European activities at Gefco, the logistics subsidiary of the PSA Group, also divides the region into two distinct halves in terms of logistics maturity and the general ease of doing business.
“Countries such as Poland, the Czech Republic and Hungary, which began their [automotive] westernisation journeys ten years ago, are very different from countries such as Russia, Ukraine, Kazakhstan and the economies of Central Asia, where setting up automotive plants and their logistics operations isn’t easy,” he says. “There’s a big gap between those countries in the region that are in the European Union, and those that are outside it–although the latter are certainly catching up and starting to close the gap.”
A long way to go for logistics
Others agree. Take Jean-Philippe Jouandin, for example, the supply chain director at Renault Russia, whose experience is built not only at Renault Nissan’s factories in Moscow and St Petersburg, but through Renault’s part-ownership of Avtovaz, which builds the Lada and the Niva.
“Localisation is a challenge, not just in terms of component supplies but also logistics services,” he states. “You can find logistics providers but there are questions around the reliability and sustainability of those providers. With some logistics providers, we clearly have not got the same vision of to how to do business, [such as] a shared understanding of what a contract is and the level of commitment that a business relationship requires. They are improving, but we need to work with them to accelerate the rate of improvement.”
Nor is the option of using a major international logistics provider as practical as might be imagined, he adds. “For inland transportation, there isn’t a lot of point using the major international providers, as they subcontract to local suppliers and you end up paying more for the same services. It doesn’t make sense to use international logistics providers for cross-border or mixed-mode logistics, or where brokerage is required.”
There’s also a distinction to be drawn between countries with a significant vehicle or engine assembly footprint in the shape of Western or Asian manufacturers, and those countries where such a footprint is either lacking or is limited to component manufacturers or high-and-heavy output.
Katharina Huth, vice-president of automotive business development at logistics services provider Kuehne + Nagel, for instance, notes that her company has a strong presence throughout the region. But in countries such as Poland, Ukraine and Latvia, she explains, the company’s activities generally revolve around the aftermarket, or component distribution and export, even though the requirements in question might be complex and challenging, and involve tier one manufacturers such as Bosch.
In relatively few countries, in other words, do meaningful opportunities exist for Kuehne + Nagel to exercise its core skills in inbound logistics. It often takes the presence of Western or Asian manufacturers to raise standards to the level of sophistication where Western logistics specialists such as K+N can meaningfully add value, she says.
“In particular, Asian automakers are really demanding customers and expect very high levels of service from logistics service providers,” she notes. “Being able to offer advanced production logistics for tier one suppliers is vital, especially in terms of being able to support ‘just-in-sequence’ manufacture.”
Constraints for vehicle logistics
Remoteness from western export markets is focusing Asian manufacturers’ attention on improving vehicle logistics, too. Glovis, for instance, which supports Hyundai’s and Kia’s operations in Slovakia and the Czech Republic with both inbound and outbound logistics services, suggests that rising levels of car production provides an impetus for changes in vehicle logistics.
“Our aim is to utilise the existing transport capacity more efficiently,” says Frank Schnelle, general manager of development and planning within Glovis Europe. “We’re forcing the consolidation of compounds, which enables us to shift more volume from truck to rail, and secondly, we are searching for possibilities within our network to balance traffic flows, in particular in the West-East corridor.”
Here, too, the region’s geography imposes its own set of unique constraints, reinforcing the ‘twin track’ theme of Eastern European development. Many important national markets and assembly operations are either landlocked or remote relative to the main shipping routes.
Carriers such as deep-sea carrier K-Line and short sea ro-ro specialist United European Car Carriers, for instance, serve the north of the region through ports such as Hanko in Finland, Russia’s St Petersburg and Gdynia in Poland.
The region’s southern flank is more problematic, though. K-Line, for instance, terminates deep-sea services at ports such as Italy’s Sagunto and Piraeus in Greece, with onward transhipment via short-sea carriers.
Nevertheless, says Peter Menzel, director of the company’s car carrier group, rising volumes of Chinese imports into the region are interesting enough for the shipping line to call directly at several Chinese ports. Normally, delivery is to Piraeus, he explains, but calls to Black Sea ports can be arranged on a shipment-by-shipment basis if volumes are appropriate.
For its part, while United European Car Carriers historically visited a number of Black Sea ports until 2009–from which the regional markets of Romania, Bulgaria, Russia and Ukraine could be served–these days it stops just short, at the Turkish port of Borusan, at the very mouth of the Black Sea.
“We visit the Turkish ports of Derince, Yenikoy and Borusan and then turn the vessel around,” says Bjorn Svenningsen, the carrier’s head of car transport. “We no longer go into the Black Sea itself.”
The reason has been lower imports into the immediate region served by Black Sea ports, as well as diminished export volumes. High-and-heavy exports of trucks and buses from the region, for instance, are routinely cross-quoted across both Baltic ports and Ukrainian Black Sea ports such as Illichivsk, seeking the best cost and connections. Another factor, adds Svenningsen, has been the sharp decline in the export of Lada vehicles, which formerly constituted much of the vehicle trade through the Russian port of Novorossiysk.
Indeed, mention of Lada serves as a distinct reminder of just how far the region’s automotive industry has progressed since the low-quality, low-specification norms of the Soviet era.
These days, continuing the trend began when Volkswagen invested in Škoda in 1991, manufacturers such as Renault, Toyota, PSA, Hyundai, Suzuki and Kia all have assembly plants in the region, targeting both export markets and domestic consumption.
The trend continues: Daimler has invested €800m ($1.06 billion) in building a new assembly plant at Kecskemet, Hungary, about 80km southeast of Budapest, which is scheduled to open early in 2012 and is slated to produce 100,000 vehicles a year.
K+N has been awarded the production logistics and inbound line feed contract for the plant, states the company’s Katharina Huth. One of five logistics service providers working at the plant, K+N will provide 65% of the services that Daimler called for in the two packages put out to tender.
“We’re ramping up our organisation in preparation for the ‘go-live’ date,” she explains. “There are over 2,500 part numbers coming from over a hundred suppliers and our organisation will be employing around 400 people to fulfil the contract.”
Audi, meanwhile, has invested €900m to expand its Hungarian engine manufacturing plant in Gyor, in the northwest of the country, and intends an annual production rate of some 125,000 vehicles.
High-and-heavy production also features in the region’s automotive round-up. The major truck manufacturers have plants in the region, with bus assembly featuring too. In markets such as Russia, production is largely aimed at local demand, but in other countries of the region, exports feature as well. The Polish operations of MAN, for instance, assemble buses at Poznan and heavy trucks at Kraków.
According to figures published by the European Automobile Manufacturers’ Association (ACEA) in mid-2010, some 13 Eastern European countries–including six of the ten countries admitted to the European Union in 2004 and 2007–collectively contained some 55 operational vehicle assembly or engine assembly plants, with Russia adding a further 27 plants. These figures exclude recent announcements and plant openings, such as Daimler and Audi’s Hungarian expansion.
Component production has also moved to the region–and not just in the form of satellite operations to support local vehicle manufacture. Low labour costs make Eastern Europe an attractive proposition for tier one suppliers of components, especially those combining a high labour content and relatively low cubic volume.
Poland, for instance, has seven engine assembly plants, reports the country’s Ministry of Foreign Affairs, with components supplied to brands as diverse as Mercedes, Nissan, Opel, Porsche, Toyota, Volkswagen, Fiat, PSA, Honda, Volvo, BMW, Rolls-Royce, Lamborghini and Ferrari.
The picture that emerges is one of a region in flux, with logistics requirements driven by a host of factors–geographic, economic, industry-specific and political.
Yet its prospects, as a low-cost source of supply on the doorstep of Western Europe and Russia–as well as being well positioned to serve the emerging markets of the Middle East and North Africa–remain attractive, especially in the shortto- medium term. Logistics experts, such as BMW’s head of logistics, Dr Karl May, have also predicted that manufacturers in Western Europe will turn increasingly towards sourcing in the east to benefit from lower labour costs as well as a lowerrisk supply chain compared to sourcing in other low-cost markets in Asia.
The latest forecasts from IHS Automotive also expect Central and Eastern European production, including Russia and Turkey, to fare better than Western Europe, remaining stable in 2012 and growing 7% in 2013 to around 4.8m units, while Western Europe is expected to drop 1-2% in 2012 (albeit from much higher levels) and grow 4.5% the following year– although a serious issue in the eurozone could undermine these forecasts.
Stability in production is partly to meet the demands of export markets: the Hyundai plant in Czech Republic, the Magyar Suzuki plant in Hungary and Kia’s plant in Slovakia have all recently upped production to keep up with demand.
Renault’s game-changing, low-cost Logan vehicle is also built in the region, at its Romanian subsidiary Dacia’s automobile plant in Mioveni. Critically, it is also built in nine other assembly plants around the world, with a massive complete knockdown kit (CKD) operation feeding facilities in Russia, Morocco, Colombia, two plants in Iran, India, Brazil, and South Africa.
Although many markets suffered badly in the recession, with some still in decline, Eastern European vehicle sales are also projected to rise. According to ACEA, for the ten new EU states in Central and Eastern Europe, there was a 26.6% fall in new passenger car registrations in 2009 compared with 2008, with only a modest recovery in 2010.
Figures released by ACEA for the first ten months of 2011 continue the trend, although patchily. Sales in the ten newer EU states were collectively up 0.4% to 622,000, although there has been considerable skew in the market. Bulgaria has almost reversed its 28.9% fall in 2010 with a rise of 26.7% in 2011, as have Baltic States that have grown more than 70% in 2011. Hungary and the Czech Republic have seen modest gains, while Poland is down around 7% following resilience during the downturn. Romania is down nearly 10%.
Russia is a different story, of course. The latest figures from the Association of European Businesses (AEB) project that Russia will finish 2011 at around 2.55m units–a 30% rise. The AEB expects sales in 2012 to reach 2.8m, approaching the pre-crisis peak of around 3m.
Consulting firm Boston Consulting Group also expects Russian sales in the passenger car and light commercial vehicle segments to reach 3m units in 2013, and to grow over the next five years at a compound annual growth rate of 8-14%, reaching about 4m units in 2020.
Russian sales obviously dwarf the rest of the Eastern Europe region and have driven the surge of European brands such as Volkswagen and helped offset falls in Western Europe for those such as Renault. Subject to the constraints of localisation, the market is also one where the likes of VW already have an edge.
“Contrary to other BRIC markets where local specificities are key–such as flexible-fuel vehicles in Brazil, or ultra-low-cost cars in India–in the Russian market, drivers look for cars that are very similar to standard Western European models,” says Boston Consulting Group’s automotive localisation expert Nikolaus Lang. “Success in Russia depends not on product adaptation, but on the right pricing.”
Boston Consulting is bullish on the Russian automotive industry’s prospects, explains Ewald Kreid, a London-based analyst with the firm, reckoning that it will become one of the key global growth engines of the industry in the coming decade, making it one of the top six global vehicle markets by 2020. At the time of writing, Russia was also expected to shortly join the World Trade Organisation (WTO).
“A new regulatory environment is leading to a wave of localisation and partnerships of global and Russian companies in the automotive sector and it is critically important to manage those partnerships in a way that fosters modernisation and technology transfer,” says Kreid.
Currently, the jury is out as far as how effectively that will be done (Russia’s WTO terms include some concessions, including a time period before import duties are lowered, designed to protect its domestic manufacturing base). In Eastern Europe’s twin-track world, nothing can be taken for granted. But the long-term prognosis seems good. Barring the unexpected–or the worst case in the eurozone–the region has a great future ahead of it.
