Elsewhere: Loading in White Gloves

Modern work methods and modern technologies help. However their introduction worldwide is non-uniform. In Russia until now logistics has been understood as the primitive warehousing of goods, essentially warehouses and bases (now it is fashionable to use "centers of distribution"), which is absolutely incorrect from a western point of view.

New Sides to a New Art

The term "logistics" became current about 20 years ago, but by all means, this does not mean that logistics - the management of complex chains of deliveries of goods from their production place to the end user - was born only two decades ago. Тео Ming Кian, chairman of the Singapore Counsel for Economic Development, speaking about the importance of logistics, gives an example from ancient history. In 330 BC in the Egyptian march across the desert Alexander the Great organized the continuous supply of his army consisting of 65,000 soldiers and 8,900 animals, food, water, animal feed, ammunition, arms and vehicles. It is a shining example of well thought over logistics whose essence since then has little changed.

Globalization, economic growth, the rapid development of technologies and improving standards of living have caused unprecedented growth in manufacturing and consumption that has simultaneously demanded the addition of new vehicles, warehouses and distributive bases. In turn, this has stimulated, in the last decade, a new view of the transportation, storage and tracking of cargo.

Earlier, according to observations by analysts at IBM Global Business Service (IBM GBS), logistics, in the drawing up of strategic plans by companies, was by and large considered a necessary expense that negatively influenced profitability. Now this has all changed. As Colin Taylor, an adviser at IBM GBS notices, logistics have moved from the basement of a business to the office of the general director. Now logistics are considered not a factor of decreasing margins, but quite the opposite, as a main means of reducing inefficient charges and increasing profits. Companies spend on average 8-12% of turnover on logistics and this trend will become stronger, experts at IBM GBS approve.

Interestingly IBM itself restructured and improved its logistics from 1995 to 2004 and was able to save a total of $1.252 billion.

In the US in 2005 the volume of the logistics market, according to the calculations of American economist Rozalin Wilson, totaled $1.183 trillion, or 9.5% of gross national product. (15.2% more than in 2004) The volume of freight traffic in 2005 in comparison with 2004 increased 14.1%. The index of free warehouses continued to decline, though not at such fast rates as in 2004 - 7.3% against 9.7%.

The role of logistics in the economy of European countries is huge. Last year turnover in this sector in EU countries, according to German professor Dieter Rebizer, an authoritative expert in the sphere of world real estate, reached 900 billion euros. The rapid restructuring of European logistics - from traditionally national levels to pan-European levels is continuing. This promotes the accelerated growth of the West European industry of logistics, which develops 4.8% per year, which, on average, exceeds the growth of GNP in the EU by 2.5 times.

If we are talking only about warehouse logistics, the lion's share is concentrated in the industrial giants including Germany, the UK and France. According to Rebizer, Germany is in the lead in this segment, having more than 3 million sq.m, with France and Britain having an average of 2.5 million sq.m (however British logistics are considered the most advanced in Europe). The share of these three countries in the European market of warehouse logistics is 70-75%, with the Netherlands and Belgium having 10-15%, and the rest is divided between Spain and Italy. Countries of the former socialist camp have an approximately 5-10% share of the warehouse logistics market.

More than 90% of warehousing space is rented by companies from three segments: transportation and storage of cargo (40-60%), trade (30-40%), manufacturing (10-20%). The cost of land for the construction of warehouses in EU countries varies from 10 to 200 euros per sq.m depending on the geographical location and the available infrastructure of the territory.

In developed countries the logistics industry is concentrated in large centers of distribution, or so-called clusters (from the English word cluster, "a bunch, a cluster"). Clusters are located at intersections of the main flows of freight and unite in themselves many types of premises, first of all warehouses. The ranges of clusters of different countries and regions often cross. The largest European centers of distribution in London, Paris and Frankfurt function as global clusters, emphasizes Rebizer. At the same time with the expansion of the EU, there are new prospects for clusters in Poland, Hungary and the Czech Republic.

Logistics, among other things, also provides employment of the population. In Britain, according to King Sturge, in 2006, 1.731 million people (about 7% of the total able-bodied population) were employed in logistics or in spheres, which function because of it. This includes drivers of vehicles, forwarding agents, loaders, accounting clerks, sorters, warehouse and storage terminal workers and employees, postmen, messengers, couriers, etc. In the US in the transportation of freight only, almost 4.5 million people are employed.

A shining example of a functioning full cycle modern logistics model is given by the Financial Times. For the last five years, the newspaper points out, British trading companies have considerably reduced the time of delivery of fresh produce in shops. Now delivery times are very strict, accounts are literally in hours. If we suppose that on the first of the month an application is received in the evening in a southern country, then the next morning the products are collected, sorted, packed and loaded in containers and by planes are forwarded to the UK to centers of distribution. In the morning of the third of the month the Brit can already buy fresh fruit and vegetables in their nearest shop. Due to the automated systems of regulating the temperature, humidity and ventilation in containers, products reach shops without losing their quality of flavor.

Where's my container?

In the modern world there are constant complications and increase in world freight traffic. According to Merge Global World Ocean Supply and Demand, the volume of main container transportation by ground and water between different regions of the world in 2005 was as follows:

Asia - Europe: 16.3 million TEU containers (US standard containers: length- 6.1 meters, width - 2.44 meters, height - 2.59 meters, approximately 38.5 sq.m). Growth compared with 2004 - 10.1%

North America - Europe: 5.9 million containers (3.5%)

Within Asia: 36.8 million containers (6.1%)

North America - Asia: 19.3 million containers (11.6%)

In Europe, according to the forecast of Drewry Shipping Consultants, the volume of containers transported from 2006-2016 will increase on average 121%, and if we take only Eastern Europe growth will be 507%.

Air cargo flows are also constantly growing. Under the forecasts of World Air Freight Forecast, air turnover between North America and Asia (excluding China) in the next eight years will annually grow 6.2%, between Europe and Asia (excluding China) will annually grow 11.7%, between North America and Europe will annually grow 2.1%, between North America and China will annually grow 11.1%, and between Europe and China will annually grow 12.7%. The current annual turnover of air freight traffic stands at $55 billion. 35% of all world freight traffic is carried out by air.

It is clear that with such volumes of global transportation careful control over the passing of goods throughout the whole chain, from the manufacturer to the consumer, is necessary. New technologies, in particular RFID - Radio Frequency Identification Technology (arose during the Second World War) help. Tiny radio transmitter-microcircuits with a built in aerial, measuring 40 х 40 mm (there are different modifications) fasten onto a container (or package). With its help it is possible to trace the movement of a container in real time, and also control different parameters, for example its internal temperature. In the US RFID technology is used by Wal-Mart, and in Germany by Metro.

Similar devices built into containers that work by the same principle, are also capable of immediately transferring a message to the dispatcher board if the container is broken into or attempted to be broken into.

Distance Management

All over the world logistics problems are more often than not solved by outsourcing (the attraction of professional foreign organizations to conduct any area of business, in this case the management of complex deliveries, including the transportation and storage of goods; in logistics such companies are called 3PLs - third party logistics providers; A trend to use the tactics of 4PLs, the essence of which is the strict coordination of all chains of deliveries without physical centralization in any one center of distribution) is also being observed.)

According to the forecasts of Analytiqa, outsourcing in the sphere of European logistics in the next five years will increase 33%, and general outgoings on logistics by automobile, pharmaceutical, trading and hi-tech companies, and also firms that issue consumer goods, will increase by 30 billion euros. This is a profitable opportunity for 3PLs companies.

Moreover some corporations will create their own logistics services. For example, such intentions are slated by West-European trading companies, which in the next five years plan to allocate 15.7 billion euros for logistics. The technology sector (computers, servers, printers, scanners etc) will presumably more often turn to outsourcing, with the share of the services of 3PLs firms in this segment growing up to 58% until 2011. Currently, says Rebizer, in Europe 40% of turnover in the logistics industry is provided by 3PLs operators.

Analysts highlight that large corporations are interested in 3PLs companies with networks prepossessing debugged transport channels and real estate. Possessing good real estate is important, as there is a shortage of modern warehouse buildings.

Rebizer emphasizes that 1-storey buildings with a minimum area of 10 000 sq.m and with ceilings measuring 8-12 meters high are considered the best warehouses. This is because less internal support is needed and the minimum admissible pressure on the floor is 5000 kg/per sq.m. The possibility to divide the area into sections for different users/employers is also advantageous. Moreover a good warehouse should be bilateral, have convenient access to stored goods, heating, a fire signal system and lastly all buildings should be fenced. Naturally, good a warehouse is inconceivable without good transport links and extensive parking for various vehicles. In addition office premises should take up 5-10% of the warehouse building. This is a "perfect warehouse" says Rebizer.

The East Promises Profit

According to the annual report by Cushman & Wakefield/Healey & Baker (C&W/H&B) published last year, Belgium and France take 1st and 2nd places as the best centers of European warehouse logistics from the point of view of the quality of buildings, the availability, rental rates and cost of land. The Netherlands follows with the Czech Republic in 4th place, and Poland and Hungary following. The new members of the EU are especially attractive due to the low cost of rent, work and services.

The most expensive city from the point of view of rent of industrial/warehouse buildings is London. At Heathrow airport the monthly rent per sq.m totals 20.58 euros. This is 30% more expensive than Tokyo, where it costs 13 euros per sq.m per month. The third most expensive city is Dublin where it costs 11.83 euros per sq.m per month and in 4th is Moscow where it costs 11.58 euros (according to consulting agencies, in the Moscow region warehouse rental rates are on average $130 per sq.m per year).

In 2005 the rent of warehousing in the whole world grew 2.6% (in 2004 it grew 1.4%). Growth in rental rates has been observed over a number of successive years, Inga Schwarz, a researcher at the German branch of C&W/H&B points out. Most of all rental rates have risen in Hong Kong - 25.2%, Cape Town - 20% and Los Angeles - 19.3%.

Under forecasts by Arlington, rental rates in old member countries of the EU during 2007 to 2009 will grow up to 0.9 % per year. Higher growth rates are expected in Ireland, the Netherlands and Luxembourg. And in Austria, Greece and Italy rental rates will more than likely fall.

Last year logistics premises remained an attractive choice for investors, analysts at Arlington say. In their opinion, in the near future the prospects of investment in real estate of this sector will increase. The aggregate profit from investments in warehousing real estate in EU countries (excluding new members) in 2007 will average little more than 10% per year (in 2006 - 15%). During 2007 to 2009 average incomes will decrease to 8.5% per year. The best parameters - over 10% - will be in Ireland and Finland, and the worst - 4-6.2% - will be in Austria, the UK, Greece and Belgium.

Analysts assume that in the current year process of mergers and acquisitions on the logistics market will continue, but not in such volumes as in 2005 and 2006. At the same time strict regulation and a lack of suitable sites for building will start to push developers to develop new territories, accordingly the land market in EU member countries will noticeably perk up.

As far as individual cities are concerned during 2007-2009 according to Arlington's forecasts the best returns will be made in Marseilles, Lille and Lyons, and the worst in Budapest, Prague, Berlin and Vienna, as these cities have strong competition with cities in Poland and Slovakia.

In the distant future (after 2009) experts at Arlington see the highest incomes - more than 9 % annual - in the Netherlands, Ireland and Portugal. The worst will be in Austria, Greece and the UK, where they figures will not exceed 6.5%. After 2009 than tenants and developers will more and more turn their sights to Romania and Bulgaria, and also to Ukraine and Russia. The strip of Western Ukraine adjoining Poland, Slovakia, Hungary and Romania, is already interesting to hi-tech and automobile companies, analysts at Arlington remark.

The Features of National Logistics

Vast Russia, following other Eastern European countries is gradually becoming involved in the orbit of world logistics. Abundant capital investments from different sources are helping this. Pyotr Zaritsky, deputy director of the department for warehouses and industrial premises at Jones Lang LaSalle Russia and the CIS, thinks that the Russian logistics market in the last few years has become more and more attractive to foreign investors: "It is possible to judge it on the large foreign investors that have come to Russia, for example, UK funds Fleming Family & Partners and Raven. In addition, in Russia the average period of recovering the outlay of projects is 7-8 years, which is less than in Western Europe, Peter Zaritsky says.

Vladimir Savinov, sales manager at Architek-Engineering agrees with this: "There is currently heightened interest from both profile, and not profile, foreign and domestic investors in the warehousing real estate segment. At the beginning of this year various investors have announced their intentions to invest in 2007 and 2008 in the high quality warehouse real estate segment more than $10 billion in total. There are several reasons for this. Among them is the desire of Russian non-profile investors (power holdings, network operators, pharmaceutical and large alcoholic companies) to diversify their investment portfolios, the substantial excess of demand over supply in the last five years, and the higher returns from investments in comparison with similar foreign projects. The returns from renting out warehouse space in Russia is 12-17%, while abroad it is 5-8%. Also playing a role is the absence of trustworthy information for potential investors about real needs of the warehousing market."

Elena Pechnikova, sales manager at National logistics company, also thinks Russian logistics, in particular warehouse real estate, is attractive: "This is first of all due to the fact that the warehouse real estate market until now has been in a stage of active development as a service for adjacent segment of consumer goods. And the industry of consumer goods is growing very quickly - 20-40% a year depending on the type of goods. Last year became a turning point - foreign developers and investors started to actively invest in the construction and purchase of logistics centers."

However by and large the Russian logistics market is still free. "Last year the Russian companies' attitude to logistics changed radically," Savinov says. "Nevertheless there is no significant competition." "The end user, especially in the regions, does not have such a wide choice," adds Zaritsky. "Only a few multinational or country-wide 3PLs operators work outside of the two capitals."

The quality logistics centers are concentrated in Moscow and St. Petersburg, Zaritsky says. In his opinion, this can be explained by the historical traditions of centralization.

"Since the 19th century when railways were created, Moscow has been the main logistic center of the European part of Russia. Therefore in the near future construction of logistical complexes within the limits of the city or further afield near the Moscow ring, focusing on providing services to the regions, not the capital," predicts Sergey Sviridov, director of the department of development at Sminex. "The one that will provide transport accessibility will win and will cross over to multimodal transportation, i.е. When the delivery of large batches of cargo in logistic complexes will be carried out by rail, instead of by automobile, as is now. It will be complexes that have a total area of some hundred thousand square meters. A small number of such projects have been announced, but they are in the near Moscow suburbs and are aimed at the interests of the inhabitants of the capital."

Nevertheless the most recent trends show a displacement in the near future for the stress to move to dynamically developing regions." Zaritsky explains. "This is connected, first of all, by the fact that the capital market will become saturated by the fast growth rates, though it is already possible to consider it saturated if we assume that all projects that have been announced will be realized. Secondly, cities with a population of one million people will rapidly develop: Yekaterinburg, Novosibirsk, Rostov-on-Don, Kazan and Samara, though, certainly, Moscow will remain the largest center of distribution. I think in the next few years the role of St. Petersburg, not only as a transit center and city with 5-million population, but also as the largest industrial platform for the swiftly growing local regional car market will become bigger."

As in other countries, in Russia outsourcing is developing. "A significant share of large companies working in Russia, transfer or consider the possibility of transferring logistical processes to foreign specialized companies. For example, Eldorado, M.Video, Procter & Gamble, Ford, Metro, Auchan, Danon, etc. Others develop their own logistic projects including Kopeika, Pyaterochka, Adidas, Victoria, Wiimm-Bill-Dann, SportMaster and IKEA. "As a case in point from both sides the well-known companies have achieved strong positions in their markets which confirms the right to existence of both models," Elena Pechnikova points out.

Vladimir Frolov, general director of Espro Consulting, points out the specificity and complexity of the logistics market. "Even large companies do not always have the capacities to construct, for example, their own high quality warehouse and to be engaged in its service. Many large developers from other segments (office buildings, shopping centers), trying to enter the class A warehouse real estate market, meet a multitude of problems and are not always capable of realizing the announced projects. Foreign investors can advise concern more closely to the choice of partner among Russian developers," says Frolov.

Without precise rules

Many analysts agree that volumes on the Russian logistics market could be much larger, and supply much more perfect, if there were no factors strongly putting a brake on the development of the industrial and warehouse real estate. Zaritsky sees the main problem in the opacity of the market, the uncertainty of game rules, including rules on the purchase of land plots, their transfer to a category of industrial purpose (the transfer process of a site from one category to another or the change in the purpose of building can take from 2 years), and the receipt of all permissive documentation.

"The constantly changing approval process and the receipt of the necessary sanctions under the project represent a serious problem," Savinov agrees. "During a year sometimes there are 2-3 basic changes which can lead to serious failures in the approval process." He adds to the list of difficulties the gasification and electrification of premises. Moreover, planned work is mixed with the unpredicted spasmodic growth of the cost of building materials.

Pechnikova considers among the main problems of domestic logistics the backwardness of transport infrastructure, a shortage of classed warehouse areas and suitable land plots for their construction - the majority of offered sites do not meet modern requirements.

There is a big problem with HR. "Recruitment specialists find it extremely difficult to find both directors of a warehouse, and intelligent loaders or stockmen, capable of bearing the responsibility for the goods," emphasizes Pechnikova.

"The appearance on the market of new participants who have come from other sectors of the economy, without operational experience in industrial real estate premises, makes demand unsteady, insofar as it forms virtual offers. The main problem is the growth in real costs of projects for developers (on average 25-40%). For example, prices for land plots in the last few years have almost doubled, the price for the connection of electric power has grown 30-40%, and the cost of building materials has risen 20-40%. In many respects this is a consequence of the boom in housing construction and a result of the monopolization dominating the manufacturing of building materials," summarizes Frolov.

According to Raven Russia, last year in the Moscow Region more than 600,000-700,000 sq.m of quality warehouse premises entered the market. At consulting company DTZ the total deficit in this segment in the Moscow region is estimated to be 3.5 million sq.m.