The Association of European Vehicle Logistics (ECG) published a report this week that aims to convince banks that the European outbound vehicle logistics is a credit- and investment-worthy sector.
The report highlights that, while fundamentally linked to the wider automotive industry, companies working in outbound vehicle logistics generally benefit from a more flexible business model than carmakers, including the ability to quickly offload or shift transport assets, and that ongoing globalisation in the automotive industry is strengthening the long-term demand for vehicle logistics.
Speaking at a launch party for the report at the European Parliament in Brussels – hosted by Malcolm Harbour, a conservative MEP from the UK – Costantino Baldissara, president of the ECG (and commercial and logistics director of the Grimaldi Group) said that the reluctance of banks to lend to automotive-related industries was a threat to economic recovery, and in particular to the logistics sector, whose capital intensive transport assets, such as car carrier ships, trucks or railwagons, require financing over the long term.
Estimating that the vehicle logistics sector would need in the range of €4 billion - €7 billion to rebuild the assets scrapped since the onset of the recession, Baldissara said: “The vehicle logistics sector should not be allowed to become a bottleneck industry. Our assets cannot be rebuilt in the blink of an eye. For example, it takes up to three years and tens of millions of Euros to build a vessel.”
Banks have apparently shied away from lending to the sector, associating it with the highly volatile automotive industry, which has generally seen companies fall into great financial distress, with high debt-to-equity ratios and downgraded credit ratings. The report, titled “Financing the Recovery: A Comprehensive Analysis in Support of Sustainable Growth,” seeks to outline a different risk assessment for logistics service providers than carmakers. The report asserts that, while dependent on the sales and success of OEMs, vehicle logistics companies are generally more flexible than carmakers themselves when it comes to managing assets or profit segments.
“Flexibility is the secret to the sector’s survival,” said Baldissara. He and the reports’ authors highlight, for example, that vehicle logistics companies have a relatively low percentage of fixed assets, and can more easily scrap or reallocate their transport fleets. While the European automotive industry had an excess production capacity of about 25% even before the downturn, which both government protection and labour agreements make relatively difficult to reduce, the vehicle logistics sector scrapped between 20-30% of capacity since the onset of the downturn. The report also suggests that few assets are fixed geographically, and can be moved quickly to service rising demand.
Further, in a counter to what is normally considered the sector’s weakest feature, the report points to diversification as well as higher stability in sales than is generally the case for the automotive industry. It points to the sector’s involvement in the used and fleet vehicle segment, which is less correlated to economic growth or contraction than new vehicle sales.
Stability is also aided by the tendency for manufacturers to overproduce vehicles, the report says. The overproduction leads to cycles of stocking and destocking that generate demand for transport and storage despite, or in some cases because of, periods of heavy decline in sales. An obvious example of this scenario was in late 2008 and early 2009, when many thousands of excess vehicle stock clogged Europe’s ports, storage centres and factory yards, all depending on the service of logistics companies.
Baldissara called on both the banks and European legislation to work together with the sector. He suggested, for example, that a ban on vessels that are more than 30 years old would bring benefits both in terms of fuel usage and carbon emissions, as would a similar ban on older trucks. “Investment today will bring many economic and environmental benefits for the industry,” he said.
His words, of course, are controversial. The European vehicle sales outlook remains uncertain, with decline forecasted following the end of incentive programmes. “The crisis is not over,” said Ruth Paserman, a member of the cabinet of Antonio Tajani, vice president for transport policy at the European Commission. “Credit remains difficult and there will likely be a payback for scrappage.”
Despite the call for financing and investment few companies are likely to be in a spending mood given the sales outlook, as well as the fact that the long-term purchasing policies of carmakers have put price pressure on logistics companies, leaving their margins thin, typically.
However, the report makes a point of noting that logistics companies generally have a better debt-to-equity ratio than carmakers do, and that they are also more nimble in re-orientating their business around profitable segments as they emerge, be that in regions, storage or different modes of transport. In making such a distinction, the ECG hopes that banks will look more favourably on its members than they have recently for carmakers.
From the point of view of new investment, Paserman echoed Baldissara's visions for the future of transport, highlighting the importance that new technology, equipment and standards will play, particularly in the "decarbonisation" of transport, which is expected to be a major part of the Commission's forthcoming white paper for transport, due out this year.
