LSPs are not too big to fail

Last week, when details were revealed of the Obama administration’s $5 billion financing support package for automotive suppliers of GM and Chrysler, automotive logistics service providers were once again left off the list of those eligible for aid. By now this should come as no surprise, as aid packages across Europe have made no direct provisions for LSPs. While China has included logistics in a stimulus measure, such aid is more directed at infrastructure development than transport providers.

 

It’s questionable whether governments should make such aid available to logistics providers, or include them in automotive aid. Many providers do not only serve the automotive industry, although certainly those that do, including small, local players and finished vehicle logistics providers, are those most in danger of collapse. Meanwhile, the business model of global providers, such as some 3PLs and shipping lines, would be difficult to justify a nationally-based scheme. Since logistics moves at the speed of consumption and production, it would be fair to say that LSPs are best served when governments spur sales or keep local production humming.

 

Government focus on offering insurance to companies that supply goods on credit, following the tightening of such credit by banks, will also help LSPs avoid “cash on delivery” terms that companies’ processes probably could not handle. France did this at the end of 2008, and insiders have said that the UK government will announce a similar programme in the budget next week (read more).

 

More disturbing is that OEMs offer little aid to struggling providers. While some have extended help to key suppliers, such as accelerated payment terms, legal help or even cash injections, sources from Daimler, Renault and Audi have all confirmed in the past months that these initiatives have never been extended to LSPs. Does this suggest the “strategic” importance these providers hold, or rather don’t, for many OEMs?

 

The reason so little help is offered is straightforward – supply chain managagement and transport companies, for all the services they've developed in the last decade, are neither 'too big to fail,' nor provide a product deemed irreplaceable. This view is compounded today by the glut of excess capacity in the market. The collapse of a local, or even regional transport company would rarely threaten production as much as when “single-sourced” suppliers go bust. And for outbound logistics, the US industry managed to get by with the three biggest car hauliers in bankruptcy in recent years.

 

The impact of a “global” or large scale provider collapsing is less clear, however. Michael Druml, Director Global Supply Chain Management at Magna Steyr, has pointed out the Kafkaesque spiral of bureaucracy manufacturers face when a supplier goes into receivership. "In that case, an official receiver could come in, increase prices 80% and change the payment terms to cash on delivery," he said. “I’m not even sure our IT systems could handle that.”

 

If a shipping line were to fail – whether a container line holding a few million euros worth of production material, or a car carrier with valuable finished stock– there could be a similar, nightmarish legal and expensive ordeal of recovering assets.

 

And that is not to say that a “single sourced” transport route carries no risk even without plant closures or recovery expenses. Surely the benefits of reliable, damage free and just-in-time delivery is worth supporting in the long run.

 

If it is deemed not, then shippers will have to accept a reckoning sooner or later. Killing off enough companies will eventually consolidate assets among fewer providers, which will then have more power – the US freight railway industry is a case in a point. This is a scenario that German OEMs have tried to avoid in the transport sector in the recent past. At the Automotive Logistics Europe conference, Audi’s Heiko Schult pointed out the dangers of not supporting logistics providers today. “We’ve never done it before, but perhaps we should think about it,” he said. “We should be afraid of the future too, especially if we want to have the capacity that we’ll be asking for again.”

 

A report released this week by Schneider Logistics warned that “shippers should not be lulled into a false sense of security that there is a lot of capacity,” considering that thousands of transport companies have already gone bankrupt. It recommended establishing long partnership with asset-based companies that have the ability to add capacity.

 

But such a long term view would require support and concessions today. Otherwise, an eventual uptake in demand would mean feeble providers would not be able to add capacity, while stronger providers just won’t be willing – and will be stronger for it.