The growing economies in the EU’s ‘accession states’ offer big opportunities to OEMs and suppliers. Ruari McCallion finds out how reliable the supply chain infrastructure is
If you want to go where the action is, look east. The countries in the old Soviet Bloc have been expanding at a rate of knots – as some manufacturing areas in the UK know to their cost. The new markets offer new opportunities but there is a hurdle to overcome – the transport infrastructure.
After the fall of the Berlin wall, the first thing that we saw was the delight of the people at their liberation. Then the images of ordinary folk going about their everyday business with horses and carts started to filter through. The roads were either dust (for which read: mud in winter) or severely potholed. The economies of the Danube Valley (Hungary, Czech Republic, Slovakia, Bulgaria, Romania) and the Baltic countries, including Poland, were so far behind that one wondered what strains would be created in their headlong rush to catch up. Well, not all of the countries have progressed at the same rate, but central Europe is a hotbed of industrial activity. Western companies – especially in the auto sector – have fallen over themselves in their eagerness to set up new plants, or take over and modernise old ones. VW seems to have a plant in every country east of the Elbe; Ford now owns the old Daewoo plant in Romania and has been joined by Peugeot. There are huge opportunities, so long as the hurdles are seen and understood, and right at the top of the list of challenges is infrastructure.
Modern companies aren’t the vertically-integrated single-site behemoths visualised by the old Stalinist regimes, the rusted wrecks of which can still be seen across the region. In the west, the supply chain hums, with vehicles on milk runs zipping up and down highways and motorways that are, generally, in good condition, delivering components from multiple sources to final assembly. There is a solid understanding of concepts like just-in-time, and logistics providers are well geared up to deliver it. That’s not necessarily the case in Poland and its sister states, and the companies have had to adopt different strategies to deal with it.
“There’s definitely more inventory in the supply chain,” said Brad Brennan, managing director of Evolution Time Critical, which provides emergency intervention delivery services to the auto industry. His business has been doing rather well in emerging Europe. “The typical problems our customers encounter are to do with physical conditions – we have severe weather conditions today, for example.” We were speaking in early March when it was raining buckets in the UK and gale-force winds were blowing high-sided vehicles over. “Or we can encounter road blocks and traffic jams. We’re also called in for other reasons, like human error – ordering the wrong part or wrong specifications – or to redress quality issues and a customer who needs an injection of replacement stock.”
Evolution intervenes to get the supplies there on time. It may intercept a vehicle, take the critical stock off and fly it to its destination on a private helicopter or aeroplane.
It’s expensive – but not as costly as a line stoppage. The reality is that the physical infrastructure in central and eastern Europe isn’t as good as it is in the established economies, so the OEMs and their upper-tier suppliers have turned their clocks back a bit.
“Car makers are holding more buffer stock. The suppliers aren’t as well established, nor is the transport infrastructure, so we typically see 10-day stocks held in the supply chain,” he said. It is, however, managed in a more sophisticated manner than when such buffers were commonplace in the west. “They operate supply chain time indicators. They establish the buffer stocks but review the levels and performance regularly. They will be reduced as the emerging markets move towards the established economies and the companies become more confident. The majority are moving to closer monitoring and becoming more agile.”
It’s the experience of visible improvements that will boost confidence levels. Since the accession states joined the EU, construction has been brisk, to say the least. Slovakia has 406 kilometres of highways and 170 kilometres of motorways opening during 2008. Some rural roads in Romania leave a great deal to be desired but the country has committed to improve, with 120 kilometres of new roads opening this year and 1950 kilometres targeted to be built by 2015. Poland has a dual impetus to improving its infrastructure.
In 2012, the same year that London is hosting the Olympics, the European Championships in football will take place in Poland. Visiting UEFA officials last year weren’t impressed with the roads, and the country is committed to improving them.
One of the characteristics of manufacturing in the west is deliveries of quite small amounts through palletised distribution service providers, but although some UK palletised distributors have ‘expanded eastwards’, their idea of eastern Europe turns out to be The Netherlands or Germany – a long way from the growing markets in the Danube Valley and the Baltic states. The UK probably has more experience than any other of this kind of flexible, dependable service, so it’s a bit of a surprise that there is no British presence yet.
“If palletised distribution isn’t there now, it will come. It has to, but the region’s playing catch-up at the moment,” said Brennan. The structure of the industry currently appears to be such that materials and components are being moved long distances, compared with the west, but that isn’t necessarily the case.
The higher tier suppliers are there already; the OEMs require them to be close by, not just for cost reasons but also for reliability of deliveries. Mike Taimiot, of Covpress, told me during my visit to the company’s Coventry plant that OEM customers simply aren’t interested if suppliers don’t have facilities in their developing markets. And the market is expanding further eastwards; the leading auto OEMs are establishing themselves around St Petersburg and buying into the indigenous industry around Moscow. Renault is a 25 per cent partner in a joint venture with AvtoVAZ, which makes Ladas. The venture with Renault is expected to see vastly higher quality vehicles produced, and help Renault’s competitive position in Russia. With cost and wage pressures rising, the infrastructure cannot be an afterthought.
It isn’t an impossible task. Consider Spain as a parallel. Driving from Bilbao to near Alicante in the 1980s took a good 14 hours. Now, you can zip past Ford’s plant at Valencia six hours quicker. Investment from the EU’s coffers transformed Spanish infrastructure and industry with it: the same is happening in the east. Stacks of money from Cohesion Funds, Social Funds and so on are now going eastwards.
So what are the opportunities for UK businesses in the accession states? Clearly, construction – both of infrastructure and of buildings.
The energy exploration business is booming, expanding the long-known, but long-neglected, oil and gas fields in Poland, Romania and the rest of central Europe. Component suppliers have opportunities, too. There may be more than three million auto supply companies registered in Russia, but they aren’t all up to western standards – in reality, very few are, but they’re getting better. However, the OEMs won’t accept a supply chain that stretches back to Coventry, Manchester or wherever, even if cost and quality are top-notch: on-time delivery remains the issue.
“The majority of components are sourced from indigenous companies but a lot of supplies are still required from further afield, in western Europe. I imagine the costs of buffer stocks are shared,” said Brennan. Mayhap. It would be interesting to know to what extent. “It’s a question of establishing a balance between costs and savings – the savings in manufacturing against the costs of inventory and reliability.”
The lack of reliability currently means that making the emergency routine – establishing procedures and structures that will cope with delays and intervene to ensure stocks arrive – becomes necessary. Evolution Time Critical now works with OEMs and high-tier customers from the start of operations, putting in place plans to deal with the unforeseen. Improvements are continuing and palletised distribution companies should be taking notice – it appears to be an untapped market, so far. But what about emergency services: when the highways of Poland are as good as those of France, Italy and Spain, will there be a need for Evolution Time Critical and its competitors?
“You’d think so, but we still have a lot of work in the UK,” said Brennan.