Logistics: serving the supply chain
Written by: Jason Hovet, Tim Gosling
Photo by: Tomáš Kubeš
With the Czech Republic entering
the new year as one of the freshest members of the EU, it's still
business as usual for forwarders and logistics providers. While
new membership has brought some changes, main players are yet
to see any big surprises.
THE FALLING of virtual borders has been the biggest change on
the road, says Martin Felix from Česmad Bohemia, a road transporters'
association, which represents 80% of transporters on the market.
While the amount of border crossings was restricted before, Felix
says, "now transporters can make an unlimited number of transits.“
Long lines at borders have also disappeared. "This has helped
increase turnaround,“ Felix says, mentioning that some trucks before
accession were waiting at border areas for a total equal to four
working days each month. With faster transit, the natural result
is that costs are dropping a little while traffic going in and
out is jumping. Most refuse to take a guess, but the number most
heard is that road traffic is up about 30%, which isn't necessarily
a good thing.
Border times have been cut,“ says DHL spokesman Jan Veselý, "but
the benefits are lost to a large extent because of the rise in
the number of trucks going through.“ He is referring to the not-so-secret
fact that the country was and is now increasingly used as throughway
for transit vehicles - which is one reason why the government is
now planning to introduce a new electronic tolling system as of
2006. While the decision has not exactly been applauded by transporters
(see sidebar, p. 38), it's hard to deny that the roads will continue
to be crowded, especially with the number of investment projects
and distribution centers now setting up shop here. "The construction
of new production plants will generate more demand for transport
and general logistic services,“ observes David Svatoš, from logistics
consulting firm Logitec. Most companies, especially in retail and
consumer goods, also see logistics as the area of business which
could be streamlined the most to reduce costs, and so are opting
for assistance. As an example, there are already a few international
companies using DHL in the Czech Republic to operate as regional
hubs in central Europe. "We have a dedicated warehouse for
Sony in Řičany, just outside Prague, that services central and
eastern Europe,“ says Veselý, mentioning Bosch is another big client. "The
logistics operations have to be tailor-made for each client; we
just manage the process,“ he adds.
Still, some companies are keeping logistics in-house. "We
have a strong company culture that we wanted to have in our warehouse,“
says Sean Feeny, European logistics director of Electroworld. "We
couldn't get that from a third party.“ Electroworld recently opened
its central European distribution in Brno and cites a number of
reasons for its decision: location, low costs, good city organization,
as well as the availability of more space for expansion. Electroworld
also sees the importance of an efficient supply chain and has been
concentrating on it in the last few years by reducing stock and
introducing new systems, processes and techniques to improve flow. "It's
part of our competitive advantage to maintain a lean and efficient
supply chain - from factory to customer,“ says Feeny.
Logistics specialists, however, are betting that companies will
more often choose to pass their supply chain work to them. "In
the following years it will be necessary to continue in the trend
of delivering services with added value,“ Čechofracht's Trnečka
explains, adding, "it's essential to invest in employee know-how,
IT and marketing.“ Čechofracht's understanding of this philosophy
is one reason it became the largest Czech-owned logistics provider,
doing well on a market dominated by large international players.
But according to Svatoš from Logitec, more Czech companies are
starting to hold their own. "The increasing confidence in
the quality of Czech logistics providers is an important change
in the market,“ he opines.
But with increased competition after EU entry, the structure of
the market will probably change. One indicator is the large consolidations
on an international level, such as Deutsche Post's recent integration
of its three subsidiaries - DHL Worldwide Express, Deutsche Post
Euro Express and Danzas - into the mega-company DHL. In the Czech
market for road transport, 91% of current firms operate less than
five vehicles, according to a study by the Transport Research Center. "This
is typical in all of Europe,“ says Felix of Česmad, who doesn't
foresee a big shakeup in the structure of the market. For the time
being, things are stable, and Jiří Kladiva, head of the Association
of Forwarding and Logistics (Svaz spedice a logistiky - SSL), reports
that only two from the group's nearly 200 member companies have
encountered "impossible“ financial situations this year. But
Logitec's Svatoš predicts that smaller firms will have bigger economic
problems in the future. While higher fuel prices haven't yet been
a significant factor, they could eventually lead to smaller companies
going bankrupt. Most insiders also expect consolidation to continue.
As Čechofracht's Trnečka concisely notes, "Consolidation is
one way to face increased competition after EU entry.“
Pay up, or get out
With increased traffic on the road, the government plans to
introduce electronic tolling starting in 2006. The money should ostensibly
help with infrastructure costs. It should also force truckers using
Czech highways as throughways to open their wallets a little wider.
"It's known throughout the industry that the Czech police don't
bother about overloaded trucks,“ admits DHL spokesman Jan Veselý. "So
[truckers] route through [the country] and the damage to the highways
is high.“ As a result, despite spending on road stamps, fuel and food
on the way through, the effect on the economy is actually negative. Following
a general EU trend, the government is planning to introduce electronic
tolling for vehicles over 12 tons - and eventually for vehicles over
3.5 tons. "The electronic tolling system is a fairer system because
road users pay for the factual distance that they use,“ argues Viktor
Meca from the Ministry of Transportation. With the technical implementation
still in the tender stage, electronic tolling will be done in three stages
over three years and will cover around 3,000 kilometers by 2008.
While accepting something needs to be done to maintain and improve Czech
motorways, reactions from the industry have been less than receptive.
For one, some see 2006 as an unrealistic starting point. "We expect
a later time,“ says Aleš Trnečka, Čechofracht's marketing director, indicating
that technical solutions are still "where we see the problem.“ Whenever
tolling is put in place, the ministry is counting on an extra CZK 4 billion
for road costs. Martin Felix from Česmad Bohemia, a road transporters'
association, wonders what impact that could really have. "I think
road transport already covers infrastructure costs sufficiently,“ Felix
says. He claims that from taxes connected to transport the state receives
CZK 100 billion annually, but only returns CZK 20 billion to the state
fund for transport infrastructure. "With our highways underfunded
by around a trillion crowns,“ Felix argues, "it's naive to think
that three or four billion crowns will help.“ Furthermore, he reasons
that the costs are eventually going to hurt consumers. "It's obvious
that transporters aren't hiding four billion crowns under their pillows,“
he says, highlighting that 90% of goods are transported by road.
Jason Hovet, Tim Gosling
The missing link
Connected to the debate over the
new toll system is the lack of spending on infrastructure
for maintaining current roads and building new ones. With
these, the Czech Republic could better use its natural advantages
- such as a close proximity to Germany, Europe's biggest
economy - to become more of a logistics hub. This problem
also helps shine a brighter light on one region which is
still not being fully utilized: Ostrava.
"We hope the [planned] highway to Ostrava will be near
the top of the government's to-do list,“ says DHL spokesman
Jan Veselý. "It's a political problem.“ And one that has
been ongoing for awhile with no clear action prepared yet.
A new highway, says Veselý, would not only help transport but
development, which would relieve the area's high unemployment. "Ostrava
is cut off from the rest of the country,“ he complains. "The
main route from Austria to Poland crosses Ostrava so it could
be a great hub.“ He says transport to the city is such a problem
that DHL has started with flights from Prague to Přerov to
achieve shorter cut-off times.
Ferdinand Hlobil, from Cushman & Wakefield Healey & Baker,
also feels Ostrava is underutilized. "We see much more
activity in logistics in Plzeň,“ he says, noting it's half
the size of Ostrava in terms of consumers. As far as hubs go,
Visegrad is increasingly seen as one region for logistics.
The question then becomes whether to include Poland or not.
If it is included, then the area of Silesia is a strong contender
for new projects because of its more central location. While
Hlobil doesn't specifically point to Ostrava, distribution
centers in this region could spell potential for the city.
However, Hlobil says, "some say Poland is so big and the
roads are so underdeveloped that we're going to keep it separate.“
If this is the case, then Brno looks best-positioned with its
major road and rail connections to be a regional hub. But Brno
will have competition from Bratislava in Slovakia and Györ
in Hungary. According to Hlobil, "They are already in
competition with each other [to be a main regional hub].“
Tim Gosling, Jason Hovet
A developer's market
Modern development space for the logistics industry
is set to double in the region in the next three years or
so, according to Ferdinand Hlobil of Cushman & Wakefield
Healey & Baker. Increased competition has meant making
concessions - such as building warehouses on spec - for complacent
Warehousing in the Czech Republic has been in short supply
over the last few years, which has driven prices artificially
high. Vacancy rates have hovered around 1-3% at most. The supply
squeeze is because there are so few developers on the Czech
market, says Richard Curran, head of agency & corporate
services at CB Richard Ellis. "None of them has had to
develop speculatively. Their prices are similar,“ he explains, "so
anyone who wants to come has to talk to these developers and
sign a pre-lease before they'll put up the building“.
In Prague however, this is set to change. New developers are
starting to arrive, forcing the hand of the old guard: "North
Point have just started a 15,000 square-meter warehouse on
spec. Without a doubt, we are going to be seeing speculative
warehousing around Prague in 2005,“ continues Curran. Financing
is also central to this change. A consistently under-supplied
market over the years is enough to persuade the banks to cough
up funds for on-spec development. However, this is not the
case in a potential regional hub such as Brno.
Few companies considering a regional set-up - Curran mentions
a number of international brands and logistics operators as
possibilities - have made a move. Therefore, demand in south
Moravia is not yet driving the developers in the same way as
in central Bohemia. Curran compares the situation in Brno to
Prague three years ago. He says that a select group of developers
are now readying plots with zoning and permits, but will wait
until they lease the space before starting to build. Although
logistics operators want to have a facility inside three months,
they'll have to wait the six it takes to throw a warehouse
together because they have no real alternatives.
And if speculative building were to begin in Slovakia or Hungary?
Developers would have to keep an eye on this, admits Curran,
but for now the issue isn't significant. However, the developers
are not having it entirely their way. With logistics operators
winning shorter contracts these days, Curran says that developers
are being forced to offer shorter, more flexible leases to
bigger companies no longer willing to accept the risks alone.