Shifting balances -The effect of demographics and inefficiencies on logistics
Overall global demographic developments have a big impact on economics and therefore
on trade and transport flows. This will bring opportunities mainly for emerging
economies and challenges for mature economies, especially for Europe, where the
population is ageing.
By 2050 there will be more than 9 billion people on this planet. Taken into account the
current and future economic shift where emerging economies will mature and therefore
global wealth will increase, this implies that the world needs to produce 70% more food
than today. We are already facing difficulties to feed the world population today.
Currently 1 in every 7 persons is hungry worldwide. Hence any improvement in food
logistics would be more than welcome.
According to a study by the UN 1/3 of perishables is lost or wasted globally. This equals
1.3 billion tons per year. Problems in the cool supply chain are a major concern in this
respect. Huge amounts of resources are used in vain to produce and transport these
perishables, which subsequently have a tremendous cost impact. Besides a higher cost
this loss also affects the environment. Agriculture accounts for roughly 14% of all global
CO2 emissions. If 1/3 of the food loss can be eliminated then subsequently this would
result in a large reduction in total global emissions.
Balancing global food supply shortages and surpluses will be the challenge for logistics
service providers and therefore local and global supply chains must be better integrated in
a sustainable way. If losses in the food supply chain are being reduced, these cost savings
will not necessarily result in more profits for certain players within the supply chain but it
most likely will create a level playing field where cost will be reduced and therefore
consumer prices will go down.
A larger global population combined with economic growth is resulting in a wealthier
world where there is more wealth at risk. Natural disasters will therefore have more
impact on global supply chains than in the past. The tsunami and earthquake in Japan and
the flooding in Thailand last year had a tremendous impact on supply chains all over the
world. J.P Morgan estimates that the flooding in Thailand alone decreased global
production by 2.5%. Munich Re, a reinsurer, estimates the total economic cost of last
year’s disaster at USD378 billion, a record number in history and unfortunately an
increasing trend over the last 30 year.
On one hand relief logistics offer opportunities for logistics service providers, since
goods need to be moved to areas sometimes difficult to access at a short term. But on the
other hand the production slowdown and other negative economic effects caused by
natural disasters will eventually outweigh the occasional relief logistics benefits for the
logistics service providers.
Of the 9 billion people in 2050, the share of older people will only increase. In 1970 the
average family had 4 or 5 children, it is now 2.45 worldwide. In general people are living
longer and therefore the dependency ratio (the number non-working people, like children
and seniors per 100 working adults) in many societies will increase, putting a burden on
global social healthcare systems.
The pharmaceutical industry will play a very important role in these demographic
challenges. Since people will live longer and the population will grow in absolute
numbers, the pharmaceutical industry will probably outperform many other industries in
terms of growth. For logistics service providers this industry will be very interesting since
it is demographics and to a lesser extension economic trends that influence the volumes.
Also the effect of seasonality is much less than in other sectors, like perishables where
the seasonality varies much more than in general cargo.
The patents of many blockbuster drugs will expire soon and there seems to be less
development in the pipeline. In the next two years, six of the 10 top-selling drugs will
lose their patents, meaning other companies can make the medications and sell them at
reduced prices. Of course this will benefit the consumers and give a bit of relief to the
social healthcare challenge faced by many debt burden countries.
On the other hand the increase of generic drugs will also increase competition between
pharmaceutical companies where cost differentiation will play a more important role.
Logistics is a small fraction of the total cost for a pharmaceutical company, but is
essential in the supply chain in order to get the products to the end consumer. Any
disruption in this supply chain can have huge consequences for people’s health.
The shift to more generic drugs will most likely not change the high standards required
for logistics, but might have an effect on modality. Where nowadays many of the patent
drugs are transported via airfreight some of the competing generic drugs might chose a
different modality, like sea transport, due to the fact that cost of inventory will be lower.
The increased competition might also force the logistics service providers to cooperate
more closely in order to bring the cost down and be more efficient, of course always
keeping the same high standards of quality required.
Cool chain requirements
In general the reduction in food loss and the improvement of the supply chain of
pharmaceuticals will lead to less hunger, more health, reduction of inflation and therefore
also a contribution to global economic growth.
In order to achieve this, logistic service providers need to cooperate more. This will
require both vertical as horizontal collaboration. However, some supply chain and
purchase managers of the shipping companies should treat logistics less as a cost center
but more as a value center, where value in the combined chain should be achieved and
where this value should be shared amongst all players.
Unfortunately we still need to overcome some inefficiencies in the industry that hinder
further growth and overall prosperity, especially in Europe.
Changes in economic cycles have a leveraged effect on logistics volumes. If trade and
GDP grow, logistics volumes in air, sea, train, and road freight will grow higher but the
opposite is also true. The last years of economic slowdown have had a huge negative
effect on global logistics. It is therefore important to be able to be flexible to react to
these market changes.
Regrettably European labor laws do not allow companies to react quickly to market
changes. The U.S. has much more flexible labor laws, which explains why their economy
is already doing better than Europe’s at this moment. Moreover at the end this is causing
more unemployment because no firm wants to hire if they know it will be too costly to
adjust their labor force in a downturn. This is a vicious circle in Europe and leaves it
uncompetitive against the U.S and especially emerging economies that are much more
adept to changes in the market.
European logistics companies need to able to adjust their operations according to the
economic cycles just like their counterparts in emerging economies.
Bankruptcy laws are another way to accomplish flexibility to market changes.
Unfortunately the European bankruptcy laws are not as flexible as for example in the
U.S. where chapter 11 gives the debtor a fresh start, subject to the debtor’s fulfillment of
its obligations under its plans of reorganization.
Some of Europe’s legacy airlines need to readjust their operational cost at par with the
increased competition from the Middle and Far East. A similar chapter 11 exercise would
help some of these European airlines to bring down for example their crew & other
overhead cost which has increased over many years and is therefore way higher than
many of the younger airlines from the Middle & Far East. If they are not allowed to
reduce these costs they will inevitably lose market share and consequently most likely
more jobs would be lost.
Even though aviation is more liberated through more global access to traffic rights than in
the past, complete open skies will also allow airlines worldwide to make use of all traffic
rights and as a result create a level playing field where cost and prices will come down
and thus will contribute to more economic growth. Since 1992 the inter-European
liberalization caused a rise of 33% in European air travel, which again resulted in 1.4
million extra full-time jobs and a GDP growth of $85 billion.
However there are still some countries in the world that prefer to protect their flag
carriers, rather than improving the overall welfare of the broader public interest. This
places European carriers in a relative competitive disadvantage since Europe is more
deregulated than certain other areas in the world.
Ownership rules in the aviation industry in many countries limit necessary integration
and therefore further growth. For example the U.S, China and Brazil are some of the
large markets that restrict foreign ownership. Eliminating these ownership rules would
result in a unified global and fully liberalized market for the aviation industry. It would
also result in further necessary integration where inefficient national airlines will no
longer distort the mechanisms of an open market economy in which consumers benefit
from better service and lower prices.
Notwithstanding its impact on the European economy, the current air transportation
system is not operating in an efficient way resulting in additional costs, delays, noise and
CO2 emissions. The main reason for this is that the standards and systems are still based
on approximately 50 years ago when the aviation industry was completely different than
it is right now.
Currently the aircraft in Europe are flying pre-defined routes that are managed by air
traffic controllers of each member state. As a consequence of this inefficiency each flight
is about 50 km longer than needed, which again results in unnecessary emissions of
around 5 million tons of CO2 per year.
Fortunately the Single European Sky (SES) initiative and its technological pillar, SESAR,
will address these issues in the future, especially given the fact that demand for air travel
in Europe will grow by over 70% in the next 20 years. The implementation of SESAR
should lead to a reduction of 10% per flight, an equivalent of 9 minutes, as well as 50%
decrease in cancellations and delays within Europe. These reduced flight times will
subsequently result in an elimination of 50 million tons of CO2 during the period of
Another challenge Europe faces, according to the roadmap commissioned by the
European Commission in 2011 is the increased road congestion and hence worsening
accessibility in Europe.
According to this roadmap, congestion costs are projected to increase by about 50% by
2050, to almost € 200 billion per year. In the Netherlands alone congestion caused a cost
of €400 million for transport companies and around €1 billion to businesses in general in
Also the U.S is facing a similar problem. A study by the Texas Transportation Institute
claims that the cost of congestion to hauliers in the US – measured as wasted fuel and
delay – amounted to $23 billion in 2010.
On top of that, according to the World Economic Forum, 24% of all trucks drove empty
within the EU due to positioning and imbalances in 2009. Moreover the average load
factor of the non empty kilometers was just 57%.
This waste of economic resources and CO2 emissions can only be reduced through more
cooperation, extension of cabotage regulation and of course general economic growth.
The EU already has given more access to the domestic market for transport companies
from member states. Currently hauliers from member states are allowed to carry out up to
three domestic transport operations in another country of the EU as long as it is combined
with another international route within a 7 day period.
Ideally cabotage should be allowed without any restriction, resulting in less empty
kilometers, higher load factors and therefore less carbon emission and lower operating
Capital asset management
Unfortunately the order cycle of aircraft and large ships is still far from perfect.
Traditionally aircraft and ships are ordered after some time of economic growth where
first of all management and then after some time shareholder boards are convinced that
the markets are growing. They subsequently order large quantities of aircraft & ships
based on the present facts which will then be delivered some years after, in many
occasions when there is an economic downturn. Ideally these planes and ships should be
ordered in a recession when prices are low and they will be delivered when there is
sufficient growth to make economic use of these expensive assets. However this
countercyclical investment behavior will require different cash flow management where
savings in good times only will be used to acquire assets in an economic slowdown.
Many asset-heavy logistics companies in Europe are still artificially being kept alive.
Many banks are not taking their losses. The banks are hindering the Darwinian effect in
the market by keeping loss making asset heavy transport companies alive instead of
taking the hit and sell devalued assets at even bigger losses. The big question is whether
these banks have made sufficient provisions to eventually cater for these losses;
otherwise this could be another bubble.
Nevertheless S&P predicts that the percentage of European companies going bankrupt
will increase from 4.8% in 2011 to 6.1% in 2012, so hopefully some necessary Darwinian
adjustment will be made in this market.
Studies have shown that when average income reaches a threshold of over USD 16,000
per capita in emerging economies double digit economic growth is no longer achievable.
China is currently close to this threshold and hence consumption will most likely rise, but
production will become increasingly expensive. This will also affect the current (im)
balance in trade where imports to China from the US and Europe will outgrow exports
from China in the future.
The traditional trade lines, like Asia-Europe and Asia-US are shifting towards more
transport volumes between Asia and Africa & Latin America. Hubs in Asia, like
Singapore and in the Middle East, like Dubai, Abu Dhabi, and Doha will benefit from
these trade developments. Near sourcing will also fuel growth in Eastern Europe. More
aircraft and ships are going directly to airports and ports in Eastern Europe instead of via
hubs in Western Europe. Hence Western Europe might lose its position of global logistics
Shift happens; Emerging economies in general will mature undoubtedly. The economic
balance of power will shift and if Europe does not become more competitive on a global
level it risks losing global market share.
Backed by sovereign wealth funds and by more favorable economic conditions in their
home markets, companies in emerging economies will eventually be acquiring more
companies in Europe. If European logistics service providers will not be allowed to be
more competitive on a global scale, in the future the European logistics market could be
dominated by Asian and Middle Eastern companies some of them supported by sovereign
wealth funds. From an open market perspective this is perfectly fine, but an economic
balance of power is also desirable.