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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.

Jan Veselý

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.

Aleš Trnečka

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.

David Svatoš

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 Martin Felix 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 Ferdinand Hlobil 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 local developers. 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. Tim Gosling