by Marc Huijgen, Managing Director, LHC Consulting (a CLX Logistics company)
Shipping freight across Europe can be an expensive and complex business for most U.S. companies. Composed of 2.3 million square miles and 50 separate countries with their own laws, border controls and language, transporting products across the continent of Europe by many U.S. companies can be a daunting task. Add to that rising fuel costs, and it’s no wonder that domestic companies with operations in Europe question what happens to their bottom line when shipping through the continent.
To get a deeper understanding of the mysteries of European shipping, you must delve into the effects that gasoline prices, green initiatives, capacity shortages, and labor laws have on U.S. transportation requirements and costs when shipping products throughout Europe.
European Diversity on Gas Prices and Road Restrictions
Gasoline prices are obviously a key factor in overall freight rates, since fuel is typically responsible for around 25% of transportation costs. As in the rest of the world, Europe suffers from the impact of rising barrel costs and, depending on where you do business that impact has wide variations.
In the U.K., a key destination and customer base for U.S. companies, fuel costs are above the European average and fluctuate from country to country. For example, gas costs more than $8 a gallon in Italy and closer to $7 in Luxemburg. 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 considerations when 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; 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, green initiatives increasingly focus on the type of fuel used by hauliers or carriers. The EU administration in Brussels already decreed it will ban vehicles running on fossil fuels from entering European cities by 2050. Although this seems a long way off, it will, nonetheless, significantly impact any company with customers in the capital city or routes running through it.
The green logistics trend is widespread and will continue to grow as stakeholders and customers of multinationals put on the pressure to conform to “green” ideals. While current focus is on products and manufacturing processes, customers are increasingly demanding that companies initiate a green philosophy for their supply chain, from end to end. For hauliers, this means operating a “green fleet,” with lightweight vehicles and “Euro 6″ engines to reduce emissions.
This raises the prospect of a transportation mode 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: will there be capacity in these alternative modes? 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.
The majority of the hauliers in Europe today are small and midsize companies; 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 as a substantial portion of currently available drivers come from the post-WWII Baby Boom generation and will soon reach retirement. When these drivers started their careers, requirements were relatively low, with no minimum educational requirements for entry. Today, as in most jobs, drivers must meet a range of standards before suitably certified. 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
While labor laws in Europe are famously complicated, with differing legislation from country to country, labor cost has been a major influence in recent years on company profitability. Until as recently as 2005, a goldmine of cheap labor was available 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 overseas 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 as 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.
CLX Logistics LLC, parent company of ChemLogix LLC, established international operations with the acquisition of Netherlands-based LHC Consulting, a consultancy firm offering supply chain management and logistics services to multiple industries throughout Europe.