Marc Huijgen is a logistics consultant with LHC Consulting (www.lhc.nl), which offers benchmarking for global ocean/full container load, global parcel/express, global air transportation and European full truck load transportation. Huijgen can be reached at email@example.com.
With a landmass of 2.3 million square miles, the continent of Europe has more than 50 separate countries, each with its own laws and border controls, as well as more than 200 distinct languages. Little wonder then, that this complex maze of countries is often seen as a closed system by many U.S. companies with dealings there. With so many differences in such a relatively small area, it's understandably overwhelming to try to comprehend. Yet ultimately every U.S. company with operations in Europe faces the same question: "What happens to my bottom line when I ship through the continent?"
Supply & Demand Chain Executive asked an expert in the field to help unravel the mysteries of European shipping. Marc Huijgen is managing director of LHC Consulting, a leading logistics consultancy in the Netherlands. LHC offers a unique service, Transportation Benchmark, which compares contracted freight rates of more than 60 global companies. The rates in the LHC Benchmark database are based largely on long-term contracts with an average annual spend of 35 million dollars.
Here, Huijgen explains some of the issues currently facing U.S. companies in Europe, gives us some insight into what's on the horizon and highlights some of the differences found across some of the continent's many borders.
Gasoline prices are obviously a key factor in overall freight rates, since fuel is typically responsible for around 25 percent of overall transportation costs. As in the rest of the world, Europe will suffer the impact of rising barrel cost, and depending on where you do business, that impact can have wide variations.
In the U.K., a key destination and customer base for U.S. companies, fuel costs are 13 percent above the European average. To take another example, in Italy gas costs around $8 a gallon. In Luxemburg it's closer to $7, and elsewhere the price swing is even more pronounced. When you consider that it's just over 550 miles from the center of Luxemburg to Milan, you start to see the scale of the maze of considerations when shipping across Europe.
Further facts for shipping through Europe include weekend restrictions on road freight, with 12 countries (including France, Switzerland, Austria and Hungary) only allowing weekday shipping. In Switzerland and Austria, freight vehicles above a certain capacity are not allowed to transit, enter or leave the country at night. And there is clearly one other issue to add: road tax. Some European countries levy it, while others are planning to introduce it soon.
A Green Europe Is a Costly Prospect for U.S. Companies
As if these issues weren't complex enough, there will be increasing focus on the type of fuel used by hauliers, or carriers. As recently as March of this year, the EU administration in Brussels announced a 2050 ban on vehicles running on fossil fuels from entering European cities. Although this seems a long way off, it will nonetheless be a massive blow for any company with customers in the capital city or routes running through it.
This trend towards green logistics is widespread and will continue to grow as stakeholders and customers of multinationals lay on the pressure to conform to "green" ideals. Whereas recently it was only about the products, customers are increasingly demanding that companies follow a green philosophy throughout their supply chain, end to end. For hauliers, this means operating a "green fleet," with lightweight vehicles and "Euro 6" engines to reduce emissions. [Euro 6 emissions standards will require all vehicles equipped with a diesel engine to substantially reduce their emissions of nitrogen oxides as soon as the standard enters into force, on January 1, 2014. — Ed.]
This raises the prospect of a shift in volume from roads onto train, short sea and intermodal transport. While this may seem like a simple and logical solution, these transport models vary vastly from country to country. It is often said that the only thing the rail infrastructure across European countries has as a common factor is the distance between the rails. Added to this, the pertinent question asked about these alternatives to road haulage is one of capacity. If there is a sudden shift away from the roads, will short sea, train and intermodal networks be ready to cope with demand? At present, there is no definitive answer, but the consensus is that it's a situation that could benefit from rapid and urgent improvement
Today in Europe the majority of the hauliers are small and midsize companies, of which a substantial number are family owned. For these companies there is a growing problem: succession. With no one available (or willing) to carry on the family business, a general shakeout is expected in the next two to five years, with large and financially stable hauliers acquiring some smaller family companies. This in turn will lead to a more dominant position for a small number of big European players. Compounding this position is the question of fleet finance: in such a small-margin industry, there is little capital available (and fewer willing lenders), which reduces the capacity of the smaller hauliers, further increasing the influence of the largest players.
What this means of course, is that the negotiating power of these players will become bigger, making it increasingly challenging for shippers to secure beneficial rates.
Another concern is a shortage of drivers, with a substantial portion of currently available drivers coming from the post-WWII Baby Boom generation and soon to reach retirement. When they started as a driver, the requirements were relatively low, with no minimum educational requirements in place for entry. Today, as in most jobs, drivers have to meet a range of standards before they are certified as suitable. For many young people, the prospect of becoming an international driver simply isn't attractive enough, leading to declining numbers of people entering the trade, which will cause a capacity shortage within the next couple of years.
Labor Costs and Tightening Regulations
Labor laws in Europe are famously complicated, with differing legislation from country to country, but labor cost has been a major influence in recent years on company profitability. Until as recently as 2005, there was a goldmine of cheap labor in Europe, with East European countries offering workers at a fraction of the cost of their Western counterparts. This disparity is almost gone, as Eastern countries raise their minimum wage to encourage a flourishing economy, minimize emigration and bring their residents' quality of life more in line with neighboring countries. Those companies employing or subcontracting East European drivers are already noticing a rise in costs, and in a few years the days of low cost labor will be gone completely.
So What Does All This Mean for the U.S.?
Every U.S. company with operations in Europe will see an increase in transport costs, as the transportation market here increasingly moves to a sellers' market, with a smaller number of hauliers gaining increasing influence as they expand. Even under normal conditions, with no global economic crisis to consider, shippers would face a hike in transportation spend.
Many of the clients I work with at LHC — leading blue-chip and Fortune 500 companies — are already preparing themselves for the imminent rise. They are securing transport capacity as far into the future as they can, while changing their procurement strategy towards cost avoidance. Above all, they are studying distribution changes. With smarter distribution (optimizing routes and consolidating shipments to locations in close proximity, increasing shipment volume, improving forecasting), annual logistics expenditure can be improved or maintained, actually offsetting the rise in transport rates.
U.S. companies are already questioning European transport rates, which rose by 7.9 percent in 2010. For many, the Continent is seen as a single unknown quantity in transport cost calculations, and that will only continue when even minor changes in one territory can have an impact on overall transport network cost. For companies with existing dealings in Europe, or those expecting to launch on the Continent, it has never been more important to find out the real market trend, and to face the reality that those costs are about to rise for the unprepared.
About the Author: Marc Huijgen is a logistics consultant with LHC Consulting (www.lhc.nl), which offers benchmarking for global ocean/full container load, global parcel/express, global air transportation and European full truck load transportation. Huijgen can be reached at firstname.lastname@example.org.