General Motors has said it will transfer the majority of its transport logistics business in Europe and Russia to Gefco starting next year following a long-term exclusive agreement signed this week with the logistics provider's parent company, PSA Peugeot Citroën. The agreement will impact the majority of the Opel/Vauxhall, Chevrolet and Cadillac logistics activities and includes services such as material and component deliveries to manufacturing plants, delivery of finished vehicles to dealerships and the transport of aftersales spare parts to distribution centres.
Gefco is also set to assume fourth party logistics (4PL) responsibilities, according to a GM spokesperson, which include logistics engineering and procurement. These are functions that are currently managed by GM's own logistics teams.
While few details on the specific business that Gefco will take over have been released, GM has nevertheless called the deal one of the largest logistics agreements in the European automotive industry to date. It is the first major development in the alliance that GM and PSA signed in February, which saw GM take a 7% stake in the French carmaker, as both carmakers seek savings as they grapple with financial losses and overcapacity in the troubled European market.
The agreement also comes at a time when PSA is in the process of selling a stake in Gefco, as it announced in February, as part of an asset disposal programme to raise cash.
"This marks the first step in realising benefits from the larger alliance with PSA," said Steve Girsky, GM vice chairman, in a prepared statement. "This logistics agreement will bring operational efficiency and costs savings to GM and allow us to fully utilise the proven expertise of Gefco."
GM and PSA had previously said that the alliance would save each OEM about $1 billion annually within the next five years in areas including logistics, purchasing, platform sharing and joint development, although GM did not specify how much it expected to save from working with Gefco. A GM spokesperson told Automotive Logistics News that the carmaker was looking at gaining network optimisation as well as benefiting from Gefco's expert knowledge and scale. "We are not putting a value on the savings," he added.
Potential for 4PL benefits
For GM, consolidating its logistics operations with Gefco could be an opportunity to find cost savings across the logistic providers' large network of owned and contracted trucks and rail wagons in Europe. With a GM spokesperson confirming that Gefco will operate as a 4PL, the carmaker could also seek to find economies of scale by giving the provider logistics engineering and procurement responsibilities.
While neither GM nor Gefco have as yet provided specific details beyond acknowledging the 4PL arrangement, such a setup would suggest that Gefco could take on activities similar to those it already performs for PSA, including acting as a buyer of transport services on behalf of GM, as well as managing carriers and designing route planning. These are functions currently handled by GM's in-house logistics departments, and in its prepared statement GM indicated that the outsourcing agreement with Gefco would free up more of its internal resources. "[The agreement] allows GM to gain cost savings and focus its internal resources more on GM's core automotive business," said the company, although it has not yet confirmed any internal organisational changes.
The alliance move to make one service provider responsible for nearly the entire transport logistics chain is "quite unprecedented", according to Transport Intelligence analyst Thomas Cullen.
The deal appears to be the most significant move in logistics outsourcing for GM since it spun off its logistics and transport operations into a joint venture 4PL with Conway Logistics' Menlo Worldwide in 2001, creating a business called Vector SCM. That business had been intended to exploit GM's large logistics budget on the market, operating in a similar way to VW Logistics, which handles logistics procurement and engineering for the Volkswagen Group. However, GM eventually decided that logistics was a core competency and bought out Conway from the joint venture in 2006, eventually taking the operations back in-house.
It appears to be too soon to make comparisons between Vector and GM's latest attempt at a 4PL relationship with Gefco. However, Cullen pointed out that in the Vector setup, GM still retained all of the management and purchasing power. While Vector functioned as something of an operational middleman, at least one source familiar with the Gefco agreement suggested that since the LSP would not only focus on operations, but also logistics engineering and procurement, the relationship would be different. While neither company has yet to comment further on these specific activities, giving more control to Gefco in these areas could give it more leeway to find economies of scale in its current logistics procurement with PSA, for example.
However, any agreement is likely to leave the final logistics and purchasing decisions with GM, which would suggest the need for close collaboration between GM's current logistics and purchasing departments and Gefco. Under GM's current structures, logistics engineering and purchasing is divided between different management teams at the Opel/Vauxhall unit, Chevrolet and Cadillac, as well as GM Russia (as part of GM International Operations), meaning Gefco will be operating across multiple management layers.
A potential to act as a 'sister' company
The deal raises questions about what will happen with the current contracts that GM holds with providers extending beyond 2013. While GM's management has previously stated that it would honour all existing contracts, a spokesperson for the carmaker's Opel division would only say that GM was planning to discuss with them the transfer of current contracts. "We expect there is actually growth opportunity for the high-performing service providers," he added.
But according to Carlos Da Silva, senior market analyst for Automotive Analysis and Forecasting at IHS Global Insight, Gefco's role as both a 4PL as well as an asset-owning provider could lead to a large amount of services being "in-sourced" through Gefco that were previously outsourced to other providers, not least since the alliance between PSA and GM positions the provider as a kind of "sister" company to GM.
"From a GM perspective, I think they will be lowering costs with the agreement because they will get a better deal from a sister company," said Da Silva.
He speculated further that this could involve both the decision not to re-contract services but also the severance of existing ones "at a cost".
Gefco said it was too early to provide further details on the agreement at this time, however it said that it would announce further details of GM's logistics transition and the alliance with PSA next week.
Strengthening Gefco's position for investors
However, the status of Gefco as a "sister" company to GM could well depend on the extent of PSA's disposal of Gefco in a sale. PSA had previously announced intentions to sell a stake worth around €500m ($628m) in Gefco, although last month Reuters reported that a number of private equity firms, including Axa, Bain and Apollo (which owns Ceva Logistics) have submitted bids for up to 90% of the provider, with values ranging between €800m and €1.2 billion.
Da Silva suggested that, depending on how much control PSA cedes to an investor, the future role of Gefco as subsidiary provider could change between all three companies.
"[It] means the relationship between the two - or three - would not be exactly the same: being a subsidiary or an exterior provider is slightly different," he said. "But, of course, this varies a lot depending on how much PSA ends its divestiture [and whether or not] it keeps some sort of minimal control over the structure."
Regardless of the future control of Gefco, the agreement with GM should strengthen the appeal of Gefco to potential buyers. "On the one hand it improves Gefco's profile by strengthening its position because it was quite certain to provide most of PSA's transport up to now and the latest move means simply adding GM brands to the list," Da Silva said.
But although Gefco's business with PSA would likely be maintained in some way following a sale, any investor in Gefco would nevertheless raise questions over its dependence on PSA, which represents more than 60% of Gefco's revenue (including around 75% of revenue for outbound logistics). Although Gefco has remained profitable, PSA is expected to announce further restructuring of its operations that would impact its business, including up to 10,000 job cuts in France and the potential shuttering of a plant near Paris.
GM's European operations bring considerably more volume to Gefco. While Opel/Vauxhall is also facing restructuring after more than a decade of losses, including plans to shut the company's factory in Bochum, Germany after 2016, the inclusion of activities of Chevrolet, Cadillac and especially Russia represent growth areas.
Chevrolet is a small but growing brand for GM even amidst the struggles at Opel/Vauxhall. Sales in the EU and EFTA countries grew 14% in the first five months of this year to nearly 84,000 units (imported mainly from South Korea), compared to a drop of 15.6% in the same period for Opel/Vauxhaull (to 369,558), according to ACEA.
GM's sales in Russia, meanwhile, grew 22% in the first five months of 2012 to around 108,000 units, including strong growth for Opel, Chevrolet and Cadillac. After signing agreements with the Russian government last year for preferred import tariffs, known as Decree 166, GM has also committed to expanding its production capacity in the country to 350,000 units per year by 2015. The company broke ground on expansion of its St Petersburg plant two weeks ago, which will more than double in size from producing 97,000 units to 230,000.
Gefco is already active in Russia and Central Asia, including managing the supply chain to PSA's factory in Kaluga, south of Moscow, which is set to switch from semi-knockdown kit (SKD) production to complete-knockdown (CKD) kit today. Gefco recently revealed that the switch from SKD to CKD which involved a more complex supply chain, including rail from France and China, and container imports from South America (read more here). Gefco also has also recently opened a new distribution centre for finished vehicles near to Moscow.
Further details on the agreement from Gefco are expected to be released this month.
