Are current tensions short or long term ones? How to secure supply chains in this context?

For a long time, the road freight sector was considered a commodity by shippers, a privileged area of ​​their purchasing department, putting a plethora of providers in competition, dragging the market down. The immaturity of the market had led to some suicidal attitudes with carriers reducing their operating margin in an irrational race for volumes or selling off their services in order to reduce their empty mileage.

We had always hoped for a consolidation of the sector which would have favoured a more rational and sustainable offer. This evolution has actually occurred over the past 10 years thanks to the impact of large international groups, but certainly not yet on the expected scale. If the countries of Northern and Central Europe had become wiser, there was still a long way to mature for the countries on the periphery of the European market (Southern and Eastern Europe and the Maghreb region).

The imbalances caused by the Covid crisis and amplified by the war in Ukraine have since changed the situation and certainly accelerated this necessary change:

-  Tension in the transport offer due to shortage of drivers, scarcity of equipment, reduction in the number of service providers undermined by 2 years under Covid

-  Massive increase of fuel price forcing carriers to adjust their prices desperately in a pure logic of survival

-  Reassessment of shippers' supply chain in order to reduce their dependence on Asia and Eastern Europe and also reduce their carbon footprint in a voluntary or forced approach due to the carbon tax which will be implemented in 2027 in the European Union

All of these different elements generated significant inflation in operational costs of around 23 to 27% for road freight, which the service providers were unable to absorb except putting themselves in great financial difficulty. Productivity opportunities being limited, these inflationary factors had to be passed on to the shippers unless being unable to sustain services and to ensure continuity of the supply chain.

So, do we consider a new long-term paradigm is now emerging in the road freight sector ?

LIMITED TRANSPORT CAPACITY

On one hand, the shortage of drivers in Europe is becoming increasingly critical. According to the latest Transport Intelligence report, the European road freight market grew by 9.4% in 2021 and forecasts are for 4.9% growth in 2022. This report also shows a shortage of 380,000 to 425,000 drivers at the end of 2021 amplified by the impact of the war in Ukraine at the beginning of 2022 with 166,000 Ukrainian, Russian or Belarusian drivers returning to their home country. Road transport drivers are therefore increasingly rare on the job market. They are lacking for structural reasons because the profession no longer attracts. The age pyramid has completely changed and Generations X and Y (Digital natives and zapping), who are supposed to take over, prefer jobs that align with their lifestyles and aspirations (work and pleasure of equal value). The adventurous & independent side of the international driver job is no longer a dream. The driver of 2022 wants to return home every evening to ensure a balance in life. It is then up to carriers to be creative in retaining and attracting drivers, an essential element of the supply chain.

On the other hand, the material is also scarce. Two root causes have come together with a significant impact on production costs: the Covid crisis and shortages of semiconductors. The Covid crisis has generated a sharp slowdown in demand for fleet renewal due to the financial difficulties caused to carriers as well as uncertain business outlook. Truck manufacturers also cautiously managed their production schedule following falling demand and activity impacted by multiple lockdowns. Nevertheless, the most important negative factor for the latter has been and still is the shortage of electronic components or semiconductors, largely imported from Asia, which has undermined the production lines causing numerous stoppages and limiting the supply of new vehicles on the market. In the recovery phase of volumes, this shortage of equipment has created an additional inflationary effect both on the new and second-hand markets, which is estimated at between 20 and 30%, with certain manufacturers or leasers taking opportunity to restore their margin.

The spare parts, tires and maintenance market also followed the same trend with an increase estimated between 14 and 16%. Indeed, this segment was strongly impacted by the massive increases in the cost of air and sea freight, the price of raw materials soaring along with the war in Ukraine and the cost of labour following general inflation.

MASSIVE INCREASE OF FUEL PRICE

As any consumer has noticed, fuel price has experienced a dizzying and unprecedented rise in the first two quarters of 2022. Spain, a reference country for flows between Morocco and the EU, has seen its average price of diesel to increase from €1.388 per litre in January 2022 to €2.042 in June, i.e. an increase of 47% in 6 months. What industry could absorb such an increase in its first cost component (30 to 40% of production costs, depending on the distances considered)? The various players in the sector had to react immediately in a logic of pure survival. Fuel compensation mechanisms have therefore been implemented across the industry in addition to the basic tariffs in order to adjust the billing to the evolution of the fuel price. Even if some buyers have tried to put all their weight in these negotiations in order to minimize the cost impact for their organisation, we can say that there has been a general wakeup, which goes well beyond the fuel component, about the fair remuneration of road freight and about unbiased relations between shippers & carriers. To such an extend, we have acknowledged many examples abound carriers shutting down part of their fleet or suspending their service for lack of agreement with a shipper or a transport organizer. Indeed, inflation is such that parking a truck in the garage is cheaper than burning diesel at €2 per litre without compensation. This movement is relatively new and, perhaps, foreshadows a different future with rebalanced relations between the market players.

REASSESSMENT OF SHIPPERS’ SUPPLY CHAIN

The Covid crisis has highlighted, if necessary, the dependence of the European market on imports from Asia. Entire sectors of the continental economy have been damaged due to port closures in Asia and containment of strategic production areas. The increase in the sea and air freight costs also had a significant inflationary impact in an already troubled market.

In addition, the war in Ukraine has only confirmed this fragility, with the automobile industry being particularly harmed by the breakdown of component supplies coming from the great Eastern Europe and forced in a very short period of time to find alternative sources of supply, with of course came with additional costs.

The third element that distributors and manufacturers have to take into account in their supply strategy is the reduction of their carbon footprint. For the most part, this approach was voluntary and initiated several years ago taking into account the consumer expectations in line with their own ethics policy. For others, this will be imposed because from 2027 onwards the EU will introduce a carbon tax which will extend to all sectors of the economy and will penalize companies which have not taken this element into account in their supply chain strategy.

As a result, many groups have launched a strategic overhaul of their Supply Chain to take this new global reality into account. For the most part, they have integrated the principle of nearshoring, i.e. the transition from a global and uniform vision of their supply chain to a more regionalized strategy based on shorter and more responsive circuits. Concerning Europe, some countries with low production costs will have the opportunity to benefit from this new situation: Eastern Europe (a movement that has already been in operation for a long time), Turkey (with some risks and political tensions) as well as Morocco (a country offering guarantees of stability and having a world-class infrastructure).

European road transport will therefore take advantage from this transformation and these new global rebalance coming with certainly increased volumes, which could also accentuate the current supply/demand tensions. Service providers will also have to respond to the environmental challenge with more efficient rail/road solutions, electrical or hydrogen-powered equipment.

TOWARDS NEW SHIPPER / CARRIER RELATIONSHIP

Given these economic upheavals, the opportunity is therefore given to the various players in the freight industry to cooperate and to redesign the future transport plans in a more collaborative mode.

Securing transport capacity is no longer a guarantee as it was in the past with excess supply. The solutions certainly require a more constructive dialogue between the different parties and a pragmatic consideration of the economic factors of this sector, so to ensure a sustained supply chain. Similarly, transport providers owning fleet and having a full control over their capacity will tomorrow have a competitive advantage over pure transport organizers, in a similar logic to what we have recently experienced the ocean freight industry.

There is certainly a lot of added value to be generated through a maturation of the road freight market in Europe, but let’s not be naive. This is a slow process with mindset has to evolve, however the current crises are undeniably accelerating factors and the most proactive organizations of today will certainly be the leaders of tomorrow.