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04/27/2017

The World in Upheaval

Globalisation is coming up against regionalisation and, in some cases, even nationalisation. And, in this mega global election year, political unknowns are bringing added uncertainty. What does this mean for logistics providers in trade and industry and service enterprises?

Logistics is one of the biggest winners in globalisation. Unabated high demand means prospects look good for this sector, with any restriction to growth more likely to be associated with a scarcity of resources. But: if the order book position is good, then this period of political uncertainty is the time to set the right course for the future. “A lack of certainty leads to delays in investment decisions”, explains Dirk Schäfer, Chairman of the Management Board at supply chain management consultancy firm Kerkhoff Consulting GmbH. “This doesn’t go unnoticed in order books in the manufacturing industry - nor, consequently, in the logistics sector.” There is, according to him, a great deal of speculation at the moment and, depending on which risk scenarios are more likely, the emphasis should be on readying the right plans of action and ensuring a process-reliable implementation of measures. “The flexibility embodied by the logistics sector will continue to be of paramount importance to firms in this industry. This is something which is indispensable when it comes to retaining the ability to adapt quickly to changing markets and the economic consequences of political decisions”, explains Schäfer. “For logistics companies, adaptability is the entrepreneurial factor that makes the difference between success and failure.”

Brexit Sees a Change in Conditions for German Logistics Companies
The UK’s impending exit from the single European market is, for example, an immense source of uncertainty at the moment. According to a recent study by consultancy firm Deloitte, transport and logistics are among the sectors which will be most heavily affected by Brexit, and the initial effects are already being felt. In consultation with its head office in Rochester in the UK, consumer electronics manufacturer Convar for instance has suspended the expansion of its service centre at its German office in Pirmasens until further notice. A press release states the reason for halting construction as being the uncertain situation with regard to Brexit and its consequences. According to this, the suspended building project is not expected to be resumed within the next six to twelve months.

“The British decision to exit the European Union in roughly two years poses enormous challenges for German transport and logistics companies operating within the UK”, says Annika Pattberg, United Kingdom Director at Germany Trade 81 Invest (GTAI). “One already apparent effect of the EU referendum is the considerable weakening of the Pound Sterling.” She goes on to stress that not only does the British currency exchange rate loss make German goods and services comparatively more expensive, it is also contributing to a general price rise. German companies should take both inflation and the volatile exchange rate into consideration when it comes to concluding new contracts, continues Pattberg. “The actual exit from the EU will likely entail far greater challenges”, says Pattberg. “At this stage we are very likely to see the disappearance of the so-called basic freedoms of the European single market, including the free movement of goods and services without customs and border controls as well as free movement of people.” The terms under which German haulage and logistics companies will be able to supply goods to the British Isles in future, are still yet to be disclosed, continues Pattberg. Haulage and logistics firms are also apparently expressing concern as to how the border crossing between Northern Ireland and the Republic of Ireland will be regulated in future if Northern Ireland is no longer part of the EU. She says that German hauliers operating in the UK need to keep a cool head, while at the same time getting used to the fact that the uncertainties will continue for quite a while yet. “Contracts with shorter terms which factor in future price and exchange rate developments are worth considering”, says Pattberg. “The good news is that Germany was by far and away Britain’s biggest trading partner in 2016: After all, almost 15 per cent of British goods imports in 2016 came from Germany, with only 9.3 per cent from People’s Republic of China.”

US Market Under Scrutiny
Likewise, in the US, the impact of Donald Trump’s election to President is already being felt on the market. “The impact of the current situation on German companies depends on their portfolio of activity and their geographical and operational footprint”, explains Wolfgang Lehmacher, Head of Supply Chain and Transport Industry at the World Economic Forum. “Even though German foreign trade policy has drawn sharp criticism from Trump, this is unlikely to result in any changes to the flow of goods and transport between the US and Europe.” There may however very probably be adverse effects for flows between the US and Asia, says Lehmacher. China in particular may be affected, he continues. In this area, but also with regard to the NAFTA free trade agreement, logistics companies should monitor developments closely and prepare for a potential decline in business volumes, he says. He goes on to stress that German logistics firms should monitor the national logistics market in the US too. “This applies particularly to those who have already established themselves on the American market”, explains Lehmacher.

“Here I am thinking of companies like DB Schenker or Hellmann. If they react to changes promptly, they could profit from developments there.” But has happened so far? The USA has opted to withdraw from the Transpacific Partnership (TPP). “This opens up new opportunities for China, but is of less relevance to German logistics companies”, explains Lehmacher. “As announced back in the US selection campaign, TTIP has been put on ice - damage has been limited here too.” Other trade policy-related topics in the US election campaign included an import duty of up to 45 per cent for goods from China and a review of NAFTA. German logistics companies would however only be directly affected by this if they ran transport operations between the US and China or within the North American economic bloc, says Lehmacher. “The reduction in import volumes from China and the search for a replacement could however lead to an expansion of other international transport operations and the transport volume within the USA. Globally-operating German logistics companies could for example benefit from both scenarios outside of US-China transport operations and in the USA.” According to him, if trade with the USA should decline considerably, China will engage more actively with and more openly towards other countries and regions, including Europe. Careful observation and prompt action are keywords for all companies. “The transport sector and the logistics industry have their finger on the pulse of time and the global economy”, says Lehmacher.

“They have at their disposal transparency and insight into global transport flows, allowing them to draw conclusions quicker than many other players.” He goes on to stress that the current situation requires close communication with customers on a regular basis. After all, it is they who determine the nature of future goods flows with their decisions. Lehmacher is convinced that “working closely with one another and working together to develop preventative strategies and measures will allow strong and innovative haulage and logistics companies to differentiate themselves from their peers”.

China, the Big Winner in all this?
According to him, the extent to which China can benefit from protectionist measures in the USA is heavily dependent on how international companies deal with the specific requirements on the ground. After all, let us not forget: China has itself tried to use protectionist measures to protect its domestic economy for many years.

The Chinese government has for years now been expressing its intention to strengthen trade between Asia and Europe with the revival of the old trade routes via the Silk Road.  This is part of China’s strategy to open up Central Asia to transport operations over land (the “New Silk Road”) and via sea (the “Maritime Silk Road”). The aim of the project, also known as ‘One Belt, One Road’(OBOR), is to connect 65 countries and 4.4 billion people through rail and road links as well as a maritime route with deep-water ports from China and East Africa right through to the North Sea. Internationally-active service providers like DHL are also seeing great growth potential in China and the region of Central/ Eastern Asia. If interests thus far have been more focused on Europe-China relations, the future could see neighbouring states such as Vietnam, Taiwan or South Korea also profit from multimodal logistics operations.

The transport sector in China itself is very complex in any case. Double-digit annual wage increases as well high fluctuation levels make the search for suitable personnel on the ground more difficult. “It should also be stressed that the direct German approach to communication doesn’t necessarily work in the Middle Kingdom”, says Dominik Bühring, Managing Director of the corporate consultancy firm Miebach in Shanghai. “It takes a lot longer.” This applies in particular to carrying out projects with Chinese customers. He stresses that the preliminary stages and the negotiations take a lot of time — but once a contract has been signed, everything must move very quickly.

Likewise, language barriers make acting efficiently on site more difficult too. “That is why I would advise German logistics companies to hire at least one experienced Chinese staff member - even if that can sometimes be very expensive”, explains Bühring. “Furthermore, it is important to plan in enough time and resources for the expansion of business activities in China.” The transport sector has another distinctive feature too: when procuring transportation services externally, German logistics firms must be prepared for regular re-tendering. The big consumer markets are located in the coastal areas in the East of the country too - that is why the majority of logistics activities take place in these regions. He goes on to say that German haulage and logistics providers too should concentrate on these areas first.

Overcoming Financial Constraints in Turkey
Turkey is another place where the current situation is anything but simple. Beyond the political differences, the economic situation poses challenges of its own. “The Turkish logistics market has long since been divvied up”, explains Prof. Stefan Iskan. Holder of the Chair for Logistics and Business Informatics at the Ludwigshafen on the Rhine University of Applied Sciences. “It is firmly under the control of Turkish stakeholders, who have at their disposal some of the largest and most up-to-date overland fleets in Europe.”

He maintains that German companies wishing to expand their footprint in Turkey must buy up a larger market share or become more heavily involved in production-related contract logistics activities.
“Further growth could emerge in future from the energy, automotive, defence and aviation, project logistics, construction materials or even e-commerce sectors”, says Iskan.

“The Turkish economy will play a crucial role in the rebuilding of Syria and Iraq - and, with regard to Iran, the Turkish-Iranian trade agreement should open up new opportunities for German logisticians with their existing customers from Turkey.“ However, according to him, this would require thorough examination since the customs union between the EU and Turkey will also play a role.

Both local and international logistics companies operating in Turkey are confronted with the same challenges at present. “That is just the nature of our business”, says Emre Eldener, President of the Board of Directors of the Turkish haulage association Utikad since November 2016. “The close global interlinking of local markets means that, these days, events in one market impact the rest of the world too.” The greatest challenges currently faced by the logistics sector include the extension of payment terms from weeks to months, the devaluation of the Turkish Lira against the Euro and the US Dollar and declining price and profit margin levels. He goes on to stress a need to overcome these financial constraints on the market.

Turkey’s geographical position as a bridging point between Asia, Europe, Africa, the Caucasus, South East Europe and the Middle East means that its logistics market is bustling. According to Eldener, “transit links, the Baku-Tbilisi-Kars rail line for example, are transforming Turkey into a connecting arm, linking routes from Asia right through to the United Kingdom”. “What’s more, exports are being pushed even further to the forefront.” This will again boost the demand for transport and logistics, says Eldener.

Russia between Opportunities and Risks
German logistics providers in particular are dealing with a decline in growth opportunities on the Russian market. “Shipment volumes as well as logistics companies’ rates and commissions for instance have seen a reduction”, says Dmitry Vasilyev, Managing Director at Hamburg-based Grimex Trade & Logistics GmbH and deputy spokesperson of the BVL’s Moscow Chapter. “The increasing competition for every potential haulage contract adds further pressure.” He goes on to add that the measures of Russia’s central bank in relation to foreign currency regulation as well as controls over transfers abroad in particular have had a considerable impact on the logistics market, an additional factor being the import substitution policy. “The main challenge is therefore finding a way of continuing work in Russia in the face of the more difficult conditions posed by tougher competition and reduced profit margins”, explains Vasilyev.

On top of the decline of the Russian Ruble, complicated document handling processes in customs clearance, for example, as well as increasing competition from the Baltic states, are making life very difficult for logistics providers in Russia at the moment. “Considerable added costs are now cropping up in the haulage process too: these are upwards of 30 per cent, borne for example out of the introduction of the Platon Russian lorry toll system, tachographs and weight checks”, adds fellow BVL spokesperson Mirco Nowak, Managing Director of Hamburg- and Moscow-based Luno Export & Logistic Services GmbH. “This is however a problem faced by all hauliers, as well as the generally poor road conditions and restricted access zones - e.g. after 10 pm in Moscow." He goes on to say that, likewise, there still exists the potential for expanding the network of logistics distribution centres in Russia. Furthermore, numerous smaller Russian hauliers continue to offer their services tax- and duty-free, making it more difficult to compete with them in more remote Russian regions, says Nowak.

“My advice to German companies would be not to leave the market, but rather to set about securing market penetration on the domestic Russian market”. “After all, there is great potential for logistics in Russia and, despite the dampers of the last two years, development will continue to press ahead.”
Despite ongoing sanctions, the German economy as a whole obviously anticipates considerable growth in Russian business. According to the German-Russian Chamber of Foreign Trade and the German Committee on Eastern European Economic Relations, the entrepreneurial climate and business expectations of German companies are seeing an improvement. 190 companies employing a total of 122,000 staff and turning over a total of 29 billion Euros are said have taken part in the survey.
Last year China became Germany’s most important trading partner. According to the German Federal Statistical Office, goods amounting to almost 170 billion Euros were traded between the two countries, which sees China already superseding the US.

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