Vision of the Situation in the Market of Transport and Logistics Services in 2017

Joint interview of RBC and experts from TELS Group of companies::

Olga Novik, Forwarding Director at TELS Group of companies

Andrey Abragimovich, Director of Transport Business at TELS CARGO

Elena Sazonchik, Deputy Director for Marketing

2015-2016 proved to be hard years for many companies from both the retail and industrial sectors. The fall in consumer demand, as well as the increase in costs from the devaluation of the ruble, significantly complicated market rules. How can You describe the previous years? How did the company perform in spite of or even due to the current market conditions?

O Novik.jpgOlga Novik, Forwarding Director at TELS Group of companies:

"The 2015-2016 crisis forced all of us to work more intensely – while the international logistics market was contracting rapidly, TELS Group came out achieving positive advantage as larger customers significantly increased the volume of transport and logistics services purchased from us. Early in 2015, we assessed the risks correctly and focused on developing cooperation with transnational and large Russian customers trying to become more a more attractive partner for them. In 2015, which was the most difficult year when the volume of road imports from the EU to Russia decreased by 32% (in physical terms), the volume of our services in this direction decreased only by a few percent, and the number of our transport orders increased by 15% in 2016. Thus, we achieved greater advantage from the crisis in our market sector.".

The counter sanctions adopted in August 2014 made significant adjustments to business of the companies delivering cargoes from the EU, the US and other embargoed countries. How do You assess the consequences of such measures now? How much has the transportation geography changed? Which directions have become more popular in Your business portfolio? How do You assess the probability and consequences of lifting counter-sentences? 

Olga Novik: "The introduction of food embargo against European countries came as quite a shock to the Russian market of international logistics – during the 12 months after the introduction of counter-sanctions, over the 12 months preceding the embargo, the freight volume of imports between the EU and the Russian Federation decreased by 5.76 million tons of cargo (-34%). However, the counter-sanctions did not affect TELS seriously as we had not transported goods, which were banned later, in large volumes from Europe. On the contrary, the demand for the delivery of fruits from Africa and the Middle East increased. We advised our customers to build strong relationships with suppliers from the countries which were not in the sanction list as lifting of sanctions and counter-sanctions was not foreseen in the long run – there were too many events around the globe with irreversible consequences". 

Many bills regulating transport and logistics operators caused a great stir. This includes Plato system, “Yarovaya package” as well as the system regulating driving time and rest period…. How do You generally assess the regulating initiatives? What positive and negative consequences do You expect and have already felt considering the adoption of such bills?

A Abragimovich.jpgAndrey Abragimovich, Director of Transport Business at TELS CARGO:

"The worst thing we expected was the law on compulsory obtaining of Russian driving licenses by foreign professional drivers since we have a lot of drivers from Belarus. Fortunately, this issue was happily resolved for us – Belarusian drivers were allowed to drive in Russia with Belarusian driving licenses. Other bills did not affect us significantly. As an international carrier, we have always complied with the requirements for driving time and rest period, before and after the introduction on the law. By contrast, we welcome the innovation as it aims to improve road safety in Russia. The requirements of “Yarovaya package” also did not pose anything fundamentally new to us. As for the increase of fare in Plato system, it fell on the shoulders of the final consumer.".

How do You assess the level of competition in the Russian market of transport and logistics services? Should we expect mergers and acquisitions, bankruptcies, or are there still opportunities for extensive growth? Which segments of the TLS market show the highest or, by contrast, the lowest growth rates? 

E Sazonchik.jpgElena Sazonchik, Deputy Director for Marketing:

"The TLS segment has always been highly competitive. At the same time, the Russian developing market at the stage of post-crisis growth is developing much faster than the global market. Besides, the common Eurasian market arouses interest among large transnational logistics companies (even those who have not participated in it actively in recent years). Despite the political crisis between Russia and the European Union, large international transport companies are keen to invest in Russia. One of the ways to capture local markets is to buy companies working for them. Perhaps, a wave of mergers and acquisitions should be expected when transnational giants of the logistics market begin their commercialization in Russia.

The market of the Russian Federation has a great potential for consolidation of the logistics industry – currently, large players account for about 20% of the market, while in Germany, for instance, top 10 logistics operators account for 70%. One way or another, we will follow this path. According to World Bank’s LP index, the efficiency of the EEU market is decreasing against the accelerated development of the European and global logistics market requiring the development of modern infrastructure and information technologies in logistics".

Olga Novik: "Against the overall growth of the logistics market, the positive development of rail container transportation is clear. In particular, only manufacturers and importers of car parts increased their cargo transportation via the Russian Railway network by 63.6% in the first half of 2017. Constant increase in the number of routes and the capacity of the high-speed container trains are gradually becoming a competitive factor for road transport as the delivery of goods to/from ports is increasingly performed by rail transport".

What changes may take place in 2017-2018? What factors and how will they affect (positively/negatively) the development of the industry during this period?

Elena Sazonchik: "In 2017, the Russian logistics market showed significant growth, and this trend will continue next year though it will be more quiet. Guided by the trends observed through the fluctuations in traffic volumes within the past 10 years, the volume of road imports from EU to Russia will recover to the level of 2013 only by 2020. The IMF forecasts confirm this – imports to the Russian Federation are expected to increase by 6.9% in 2017 and by 3.1% in 2018, and the sharp decrease in imports in 2015 will be compensated by 2022.

As a result of a significant reduction in exports from Europe to Russia in 2014/16, the internal logistics market of the EU increased considerably, which resulted in the following effect – shortage of qualified drivers along with transport sufficiency (the situation is quite typical for Poland, which is trying to solve the problem by immigrant drivers from Belarus). The struggle for qualified drivers has begun in the Russian market – freight rates for domestic routes are reaching the level of international rates".

Olga Novik: "From the beginning of the year 2017 to May, the freight rates for carriers working with international destinations increased by an average of 25-30% in euro. In summer, the rates stabilized with further slow, gradual increase. However, Russian TLS consumers did not feel the difference given the strengthening of the ruble against the euro.

The growth of rates along with the increased demand for both international and domestic transportation, allowed many transport companies to achieve steady profitability, which fueled the replacement of carriers’ vehicle fleets: according to Autostat, sales of trucks in Russia jumped 44.5% in the first half of 2017 over the same period in the previous year. It is a good sign but the effect will not be seen immediately. During the years of crisis, fleet replacement among Russian carriers decreased more than 2 times – in 2012/13, vehicles up to 3 years old made about 50%, while now – not more than 20%. In fact, the reduction of the fleet engaged in international transportation continues. Perhaps the restoration of carrier’s potential and the growth of their competitiveness in Russia would be faster if the costs required to attract credit resources and various additional costs (recycling taxes, fees) would be less. European and even Kazakhstani transport companies work on much more favorable terms".

Andrei Abrahimovich: "There are serious concerns that the protection of interests of national transport companies will continue, and as a result there might be problems with Polish bilateral permits again early in 2018. The last two times, when the period of the existing Russian-Polish agreements ended at the beginning of 2012 and 2016, Russian carriers had to bypass Poland by ferries becoming less competitive and losing their customers, while transport agencies of the two countries had difficulty in reaching agreements on new quotas of permits to be exchanged. And the anxiously-awaited moment is approaching, so Russian carriers are incorporating the risks of the same situation into their planning.".

Do You feel the tendency for market improvement? Could You share the results for the first half of 2017? What results do You expect in 2017 from the perspective of Your company and the Your segment of the TLS market?

Elena Sazonchik: "We are well aware of the growth in the logistics market in almost all the segments. According to Eurostat statistics, road imports from the EU to Russia increased by 19.6% in the first half of this year over the same period in 2016. Exports without regard to fossil fuels is also growing. Container multimodal cargo traffic also increased significantly – Russian ports handled 15.3% more containers in the first half of the year than in the same period of 2008. Real market growth rates are 14% higher than the figures forecast. The volume of our services is growing along with the market growth – we retain our market share, which was increased in 2015/16.".

Could You share your plans for 2017-2018? Do You intend to expand the transport geography, branch network, introduce smart logistics solutions, upgrade the fleet, or purchase/lease new warehouse space?

Andrei Abragimovich: "The geography of international cargo transportation to the Russian Federation continues to expand in the current year. Previously, almost all cargoes from Europe were transported to the Central and North-Western Federal Districts (Moscow, St. Petersburg), but today the demand for road transportation to remote regions of Russia is growing. The regions are so remote that we could not foresee it – we delivered a cargo from Europe to Komsomolsk-on-Amur recently.

In 2017, we are going to upgrade our fleet by purchasing 70 new cars (as of August, 50 of them have already been put into service). Part of tractors come coupled with MEGA semi-trailers. These semi-trailers have an increased volume of enclosed cargo space, and can be mechanically dismantled to make a platform for transportation of oversized cargoes: by optimizing the transport fleet we have more possibilities for transportation of various cargo types, get higher effect from service, avoid idle time, which is typical for narrowly functional vehicles required only for transportation of specialized cargoes".

What KPIs do You target? Do You invest in employee training to improve the efficiency of the company? What technological innovations, developed or purchased by You, contribute to company’s competitiveness in the market? We mean innovations concerning warehousing, location tracking, monitoring of the condition of trucks and transported goods as well as delivery speed.

Elena Sazonchik: "In the segment of contract logistics (it primarily concerns large customers), the requirements for integrated logistics solutions and strict observance of KPI indicators are growing (some customers may have 5, others – 15). For successful cooperation, we must adapt individually to the requirements of each client, so we develop our business processes and internal information system in this direction – currently, there are 4 automation projects in the company.

Working with large clients, we have learnt that many popular ideas concerning the development of online services aimed to automate logistics processes and allowing, as it’s believed, to do without contractors obviously contradict to real expectations of TLS customers. Firstly, there is a trend towards outsourcing logistics with minimum degree of customer participation in the processes following the principle “I interfere only when there is violation of KPI, I do not want to spend my resources for anything else.” Secondly, customers show growing requirements for the flexibility of logistics contractors and their ability to seek profitable logistics solutions in dynamic environment on a regular basis. The question is which universal system can meet customer’s individual requirements, integrate safely with their information system, comply with the KPI of different customers, build checkpoints, etc.?"

Olga Novik: "Over the past year, a number of new individual logistics solutions were created for the existing customers from food, feed and pharmaceutical industries. The search for new schemes was boosted by complexity of cargo groupage and the shortage of direct transport in the required directions. Eventually, we came up with the solutions enabling to: a) eliminate the risks of shortage of transportation in any situation and for any direction, b) accelerate the delivery by 1.5-2 times. The idea is that if there is no direct transport in the required direction, we use “intermediate” transport and join several transport links in places where there is transportation to the destination region. Owing to well-established infrastructure of Groupage Cargo Department (consolidation warehouses in Europe and a pool of intra-European carriers), this scheme works quickly and clearly. Accelerated Truck scheme comes into effect when accelerated delivery is required – when the driver is obliged to stop to observe rest period regulations, another driver is already waiting for him to continue driving the car from the halting place.

Flexibility in relation to customer’s individual requirements, willingness to seek new solutions and contractor’s reliability in the implementation of new schemes, all this is of no less importance today (if not more) than technological achievements". 

Is transport security of high importance? What measures are taken by You to protect the drivers as well as provide cargo safety?

Andrei Abragimovich: "Our measures ensuring cargo safety have always been “above the average”. The entire fleet has been equipped with satellite tracking system since 2009. To secure cargoes in semi-trailers, we use 14-16 tie belts (12 as a rule), 40 anti-slip mats, 16 edge and corner protectors, 2 load bars to block the cargo. Semi-trailers have higher standards for the rigidity of sideboards. Transportation safety in terms of the “human aspect” is ensured by constant staff training (about 40 hours of training per year) and control (5 KPI of driver’s efficiency, 12 procedures of internal audit). Drivers are provided with additional gear and personal protection equipment (helmet, protective jacket, goggles, leather boots with hard noses)".

Olga Novik: “As early as in 2016, TESL Group of companies increased the limit on forwarder’s liability insurance policy to customers – volumes of valuable cargo transportation increased, so we decided to increase insurance coverage more than 3 times from 750 thousand to 2.5 million Euro. Due to the increase of road crimes (not only in Russia, but also in Europe), selection and monitoring procedures for contractors were tightened.”