Groupe PSA report: A partnership of choice for Gefco and PSA

There are many reasons why Groupe PSA chose to sign a new, five-year global exclusivity contract with Gefco late last year. The companies have a common history going back nearly 70 years; they share common systems and IT links, and they have a common footprint, language and culture.

Many of these connections were maintained after PSA sold a majority stake in Gefco to RZD Russian Railways in 2012. Prior to the sale, the companies signed their first contract together, which made Gefco PSA’s main logistics provider. Though the contract was new, it only gave official commercial terms to what effectively was a continuation of the status quo. With PSA contributing nearly 60% of Gefco’s revenue at the time, the contract set out, in part, to remove uncertainty about the provider’s most important customer. PSA was grappling with financial issues and couldn’t afford disruption to its manufacturing or distribution by breaking with Gefco. 

Five years on, much has changed. PSA could have gone in many directions for its logistics. After its near bankruptcy in 2014, it emerged with a new ownership structure and turnaround plan under chief executive Carlos Tavares. It renegotiated labour contracts and cut away unprofitable models. In efforts to reduce cost, it has been ready to slaughter sacred cows.

Francesca Gamboni, who took over as senior vice-president of supply chain in the summer of 2016, says PSA considered all options when it came to reviewing a new contract with Gefco. She already had experience at companies that had exclusive partners like Gefco, and others that sourced from multiple transport companies; she didn’t arrive at PSA with a firm preference. On a pure purchasing basis, exclusive arrangements like those with Gefco may not always result in the cheapest price in every market or area of business, she admits, since no logistics provider “has a monopoly on the best cost practices everywhere”.

However, Gamboni points out that such deep partnerships offer customers the same quality around the globe thanks to a dedication and prioritisation of service. She also asserts that in choosing to work together closely, companies have the opportunity to improve cost and efficiency in any area that may not currently meet expectations.

Fully understanding the benefits and drawbacks of both sides, Gamboni and PSA considered the new relationship with Gefco with an open mind.

“I’ve experienced both types of logistics relationships and I don’t have a religion on what is best. If you put together all the costs, it is difficult to compare,” she says.

Gefco 2.0
Gefco, too, came into the negotiations a different company than it was five years ago. Thanks to several acquisitions and new business, PSA (not counting its pending takeover of Opel/Vauxhall) represented 39% of Gefco’s global revenues of around €4.3 billion ($4.58 billion) in 2016 – still a major share, but no longer the great majority. While the provider wanted to secure as much business with PSA as possible, it would not be at any cost, according to Luc Nadal, Gefco’s chairman of the management board since 2012.

Gefco is today financially strong across much of its business. Though revenues grew just 1% in 2016 compared to 2015, operating profit soared 30% to around €170m; the company has no net debt, while it has trebled free cash flow over the past year. That growth has been supported by PSA’s recovery, but also a diverse set of clients, including new contract wins over the past few years, such as with Jaguar Land Rover. Non-PSA business in Gefco’s finished vehicle logistics division alone grew by €52m in 2016, a 17% increase.

“We decided that customers looking for long-lasting supply chain cooperation, and who would like to work together to eliminate supply chain burdens, would be our priority. On the other hand, customers looking for the lowest daily price should not take too much of our attention” - Luc Nadal, Gefco

In 2015, Gefco bought Dutch freight forwarder IJS, which has increased the provider’s freight forwarding revenue to €400m, spread across multiple industries with little of it exposed to PSA. Nadal reveals that Gefco is also currently looking closely at several possible acquisitions that will diversify it geographically.

Perhaps even more fundamental to developing its client base, Gefco has been in the midst of redefining itself. That has included an internal study into what type of services and customers the company wants to prioritise. After a disappointing 2015, in which Gefco’s revenues stagnated and profits declined, Nadal says the company is now more focused on the business in which it most excels – namely, sophisticated supply chain engineering that requires longer-term contracts and relationships, and more opportunity to add value.

“That focus led in 2016 to ‘portfolio cleaning’,” he says. “We decided that customers looking for long-lasting supply chain cooperation, and who would like to work together to eliminate supply chain burdens, would be our priority.

“On the other hand, customers looking for the lowest daily price should not take too much of our attention,” he adds. “That has driven changes in our attitudes towards customers, inside our group, and to our ways of working.”

The chosen ones
PSA’s aggressive turnaround strategy, combined with Gefco’s changing priorities, could have clashed in negotiations and Nadal does not deny that the discussions were long and complex. However, he is all the more pleased because PSA “has chosen” Gefco – and made that choice in line with Nadal and Gefco’s vision for logistics management.

Nadal thinks the new contract, along with new business developments, marks the “end of an old story” for Gefco, in which it was still seen, and saw itself, as subsidiary of PSA. Nadal is adamant that this should no longer be the case. Even though the carmaker still owns 25% of Gefco, he thinks that any dividend from this stake pales in comparison to the logistics revenue Gefco gains from PSA, which was around €1.6 billion in 2016. The new contract is worth an estimated €8 billion over five years.

“The trade-off in keeping Gefco as a provider is not because PSA owns shares,” says Nadal.

Francesca Gamboni confirms that, although Gefco’s history with PSA is important, the carmaker ultimately decided to renew and extend its logistics setup with Gefco because of the quality of service provided, as well as the opportunity to develop their relationship together for mutual gain. “The fact that Gefco is a top performer in service, flexibility and innovation has been a key factor in our decision process,” says Gamboni. “We have chosen to have a partnership with Gefco.”

This partnership approach manifests itself in numerous ways between PSA and Gefco. For example, Nadal and Gamboni are proud of an innovation laboratory for logistics launched this year, in which managers from both companies consider and develop new ideas. For its expansion into new territories, meanwhile, PSA turns to Gefco to manage its supply chains, provided that Gefco has the resources and capability to operate efficiently there. Current examples include PSA’s upcoming plant in Morocco. The provider is also working on developing vehicle export services between China and South-East Asia. Other opportunities include Iran, Africa and India.

“That is the benefit of working with a close partner,” says Gamboni. “They may not always get you the lowest price, but they limit your emergencies and remain available to you at all times. And in new development areas for our company, it is also worth investing in them and their growth.”

Gamboni also points out that, even where Gefco may not currently operate at the most efficient level, PSA’s approach will be to work with the provider to help improve cost and performance. “That is what it means to be a partner,” she says.

An appreciation for sharing gains is crucial to Nadal, who does not want Gefco to become just a low-cost outsourcer to PSA. While he acknowledges that Gefco must improve productivity for the carmaker, there is no specific percentage commitment to lower costs in the new contract. Nadal maintains that, although Gefco has made such commitments in 1-2 year contracts before, he would not have agreed to it in the PSA deal. He thinks such requirements limit a provider’s ability to invest in high service levels, while removing the incentives for manufacturers to make internal changes.

“If you commit to specific savings per car each year, then you have no chance that the OEM will change anything in their approach,” says Nadal. “Both sides have to put ideas on the table, and 90% of the time changes must also be made from both sides.”

Well placed with Opel
Although it just signed a new contract, Gefco’s relationship with PSA is set to develop even further. With PSA’s recent agreement to acquire Opel/Vauxhall from General Motors, Gefco is in a unique, if not fortuitous position. It is already the exclusive fourth-party logistics provider (4PL) for Opel/Vauxhall, with significant responsibility over procuring and managing logistics operations.

That agreement also dates back to 2012 following an initial alliance between PSA and GM. Part of the strategy was that Gefco could achieve greater scale across the Opel/Vauxhall business, while also diversifying its portfolio ahead of PSA selling a majority stake.

Today, the 4PL division has become an important segment of Gefco’s strategy, both in financial terms and in characterising the company’s expertise. Revenue from 4PL services, of which Opel/Vauxhall makes up a huge majority, was around €750m in 2016. In the 4PL division, which operates with a firewall between Gefco’s equipment and asset-based 3PL business units, the company developed expertise in running tenders, managing freight payments and designing transport networks that go well beyond Gefco’s own network.

The 4PL structure and systems have even influenced how Gefco will manage PSA’s global business, including a switch to a 4PL model for some countries, based on the provider’s experience with GM.

“That is the benefit of working with a close partner. They may not always get you the lowest price, but they limit your emergencies and remain available to you at all times. And in new development areas for our company, it is also worth investing in them and their growth” - Francesca Gamboni, Groupe PSA

“We made the proposal and PSA received it well. Over the next four years, we will migrate some territories to our 4PL business, which will give more clarity to PSA on procurement costs,” says Nadal, who declines to specify which countries will make the change.

While details on how precisely PSA and Opel will share logistics have yet to be determined, Nadal thinks Gefco is well placed between both. Should PSA and Opel call upon it to do so, Gefco is ready to bring their supply chains closer together.

Nadal suggests that the benefits in this combination would be strong for inbound logistics. Up until now, Gefco’s contracts have prevented the disclosure of sensitive information to other companies, such as which suppliers and materials they use. That has made it hard to combine parts deliveries in the same tenders, or on the same transport equipment.

“Imagine we collect material from the same supplier between PSA and Opel/Vauxhall. If we were to do that on the same truck, it would require a full disclosure of their supply chains to each other, which is not the agreement we have with our customers,” says Nadal. “If, however, the two get married, it should give us a nice opportunity to do new things for inbound logistics as well,” he adds.

Vehicle logistics has been easier to combine in some cases. Where Opel/Vauxhall and Gefco 4PL have awarded business to a Gefco 3PL service, such as rail routes, complementary flows with PSA routes or other Gefco customers are identified. “Where we have empty trains, we tell GM and other customers and offer them interesting rates compared to trucking because it is a return flow,” says Nadal.

Risk and patience
Gefco’s relationship with PSA and Opel bodes well for serving both in a combined group. However, the provider still faces risks across its business.

For example, when Opel is folded into PSA, Gefco’s current portfolio will once again have more than 50% of its business concentrated with the group. Although Carlos Tavares has said he wants to avoid plant closures, some rationalisation in the production network and supply base between PSA and Opel may eventually occur – reductions that could impact operations that Gefco handles directly, such as in-plant logistics, or inter-plant transport.

Despite its globalising efforts, Gefco also remains highly exposed in Europe, where it would be especially impacted by further geopolitical or economic ruptures, whether in the upcoming French elections or stumbles in the recovery of southern Europe. Brexit, though not expected to have impacts this year aside from the low value of sterling versus major currencies including the euro, could in two years or less cause big headaches, should tariffs and customs barriers eventually be put back in place.

Gefco’s deal with PSA will allow it to invest and develop alongside the OEM over the next five years

Elsewhere, economic weakness in Russia and South America, as well as uncertainty in the Middle East, including future sanctions in Iran, may slow or halt investment. In India, Nadal recognises a need to “fix” its business, as Gefco has a subsidiary and owns a majority in vehicle carrier Mercurio Pallia but has struggled to earn money.

“We see how tricky the Indian market is, where costs are growing significantly, but it is difficult to pass on price increases to OEMs,” says Nadal. “We are struggling a bit, but the market will mature and we want to stay and develop.”

Such patience is starting to pay off in other markets. In Latin America, recovery in Argentina and some stability in Brazil are helping Gefco grow again. In Russia, a second ‘home market’ thanks to its ownership, Gefco has partly offset steep falls in automotive with business in other sectors, which grew by 46% last year, albeit from a low base.

For the 11,000km specialist rail services between Europe and China, Gefco is now among the top three freight forwarders in an increasingly crowded field, handling freight for multiple sectors and carmakers. “In particular we have seen demand grow from European OEMs to ship luxury cars to China by rail,” Nadal says.

Nadal sees restraints coming off Gefco’s growth for 2017 and beyond. While revenue in 2016 was held back in part by reducing business with some customers, no such restructuring is expected this year. Nadal is budgeting revenue to grow by 3% to €4.35 billion in 2017, while by 2020 the company expects to reach €5 billion, a 17% rise. That is down from earlier forecasts of €8 billion by the end of the decade; however, Gefco has traded revenue for profits – it expects operating profit to increase by a further 12% between 2016 and 2017 alone.“We are positive for the future,” Nadal says.

Gefco is also looking to invest in innovation. As well as the lab with PSA, the company has begun trials in data analytics and big data, partnering with external experts since Gefco’s central IT wasn’t designed to handle such quantities of information. It is also studying areas like 3D printing to see how it could be used in logistics, as well as introducing more automated guided vehicles and automated parts picking systems together with PSA.

Plus ça change…
Gefco’s internal work on redefining its brand and objectives is not entirely over; Nadal wants to finish the story, once and for all, of Gefco as a PSA daughter company. “We intend to make it clear to everyone inside Gefco the significance of this change,” he says.

However, among all the talk of change and rewriting narratives, Nadal points to one thing that isn’t changing, even if he once hoped it would. Gefco’s exposure to the automotive industry today is around 70%, a similar proportion to when he took over as chairman in 2012. Back then, Nadal tasked employees with finding new clients across other sectors to dilute the concentration of automotive.

Gefco is expecting revenue growth of 17% by 2020, with profits rising faster

The company succeeded in some cases, winning clients in retail, aerospace, oil and gas, but Nadal says that he now appreciates that automotive supply chains require precisely what Gefco aims to provide in terms of their complexity, volume and variability.

“New or growing automotive business usually surpasses all other sectors. For us, gaining business with OEMs can easily offset growth in energy, electronics or aerospace combined.”

With its aim to manage complex supply chains, Gefco also sees itself as able to benefit in shared gains and savings with customers; that is one reason why Gefco could be well placed even if there is some rationalisation within the supply chains of PSA and Opel as they are combined.

Rather than trying to reduce automotive exposure, Nadal wants to grow inside and outside the sector, while balancing Gefco’s geographic locations. “If, in five years’ time, Gefco is still 70% automotive, I’m okay with that,” he says. “I have changed my mind over time because I have come to discover and better understand the power of automotive for logistics.”

It’s a power he anticipates will only grow from here.