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Intensive structural changes in the European transport business

Will the State Posts take over this field of activity?

The following is an extract of a speech delivered by Klaus-Michael Kuehne, executive chairman of Kuehne & Nagel International AG, Switzerland, at "Forum Logistica" Transport Conference at Finlandia Hall, Helsinki in mid-January.

Kuehne & Nagel is one of the world's leading transport and logistics groups with some 13,000 staff employed at 500 locations in over 80 countries provide services covering every aspect of international forwarding. K&N's 1998 turnover amounted to more than 6.6bn Swiss francs. With almost 700,000 TEUs shipped during the past year, it seems to be quite successfully defending its top position in the international seafreight forwarding market. Its core business consists of ocean freight, airfreight, overland transportation, warehousing and distribution, and particular attention is being paid to expanding system logistics. "Our strategy calls for the speedy further development and consequent pursuit of the so-called supply chain management as an integrated, global transport and logistics service package," said Kuehne. "This strategy 苛 based on high-class products and qualified management and staff 苛 is equally aimed at counteracting the pressure exerted by the Post administrations' and their subsidiaries' market penetration, and thus at maintaining a free and pluralist competitive environment."

I want to share with you my views on an interesting and controversial topic, namely the effects of commercialisation of the postal sector in the European and global transport and logistics industry.

Before going into detail, let me give you two typical examples of today's different schools of opinion on mega merger and acquisition deals that recently made news around the world.

Under the provocative headline "Global Monopoly", the influential German weekly magazine Der Spiegel wrote: "The concern chiefs of the 21st Century do not consider national sentimentalities. International capital investors want to see yields. Boundless markets, the Internet and a gigantic boom in shares drive them to ever more daring mergers. The 倌World Corporation' comes into being 苛 but will it stand its ground?"

Quite a different approach was taken by the conservative Swiss daily Neue Zrcher Zeitung. In a story headlined "Does industrial largeness make happy?" it sounded a warning: "Investors have become suspicious. They are no longer delighted about announcements of mega mergers in the industrial sector without a closer look. They want solid advance proof that the mergers of big concerns or the take-overs of big ones by big ones really bring a brighter future."

As you can see, the enthusiasm of the past is increasingly giving way to a new scepticism about giant mergers and acquisitions, particularly about those on a transnational or even transcontinental basis. Whereas conventional scepticism about industrial largeness mainly revolved around considerations regarding market and competition issues, the new scepticism foots on three additional factors which seem to gain momentum.

These are: firstly, the possibility of wrong strategic decisions at concern level, secondly, operational problems due to the complexity of the integration and, thirdly, a visible trend of companies trying to retain their independence.

For a number of decades, most forwarding services were rendered by pure agency or intermediary firms between shippers and carriers. International forwarding, in the true sense of network activities, had already successfully been established by a few large specialist companies some 30 years ago 苛 that is to say, long before the term "globalisation" was introduced.

Then, around the mid-80s, endeavours by certain carriers to handle forwarding services themselves had a major impact on the international transport and logistics service industry which additionally became to feel the pressure exerted upon the market by the so-called integrators.

At about the same time the logistics sector, a considerably more sophisticated field of services than the forwarding industry, began to take shape. The demands on the staff of logistics companies proved to be much higher than those on the formerly hands-on forwarders.

A number of forwarding companies have successfully completed their "metamorphosis" to logistics services provider. The real internationals among them benefitted handsomely from their network operations. During the past five to 10 years, rapidly growing internationalisation led to considerable changes.

The Europe-oriented forwarding organisations, which had previously controlled much of the worldwide market, increasingly had to put up with overseas competitors. Especially a number of US companies, which until that time had merely pursued domestic business interests as customs agents and the like, began to heavily invest in global networks. But as yet, their fortunes in Europe are mixed.

More recently, we found ourselves confronted by a totally new dimension: Postal administrations have identified forwarding and logistics as being attractive additional fields of operation. This is a surprising move indeed, for postal administrations have quite a clear assignment, namely to dispatch letters and parcels for the general public. As State institutions 苛 and thus as "monopolists" 苛 they partially drew high revenues from postage and associated activities.

While the liberalisation of European postal services has brought about competition to the former postal institutions, these by all means desirable developments had a major deficiency: They afforded the State Posts prior to their denationalisation the chance to invest money monopolistically earned from the public (that is to say, from "Johnny Taxpayer") to force their way into the purely free-enterprise-oriented forwarding and logistics industry, partially with an excessive expansionistic appetite.

Regrettably, this type of unsound development, which adversely affects free competition, is not being identified and counteracted expeditiously enough by the appropriate European Union authorities.

Let us take a closer look at the different strategies of Europe's major six postal services. These strategies range from global to national set-ups via a total integration of services right down to service offers focused on niche segments.

The Dutch Model
The Dutch PTT KPN (now: TPG) was a pioneer in large-scale acquisitions when it took over the global network of TNT Worldwide Express and the German NET Nachtexpress in 1996. From the beginning, TPG's declared goal was to become a global player. These deals were followed by several further acquisitions, including that of Technologistica, an Italian contract logistics company.

TPG, employing some 100,000 staff in more than 200 countries, is expanding into strategic co-operations. The most recent ones involved Kintetsu, Japan, and the Swiss Post. Although aiming at providing integrated logistics solutions on a global basis, both TPG's core business and profitability are sourced from national operations. Last year, it delivered some seven billion postal items within the Netherlands alone.

The German Model
The German Post is establishing a comprehensive network by acquiring local and international companies. While most of them belong to the transport industry, the number of those active in logistics is on the increase. The extraordinary pace of the realisation of the German Post's expansion programme has been caused by the time window before liberalisation of the letter business and its privatisation, due this year: It went onto a shopping tour unique in our industry, investing more than 10 billion German marks.

These acquisitions are in line with the group's strategy to internationalise, expand its product base from letter mail into parcel mail, and to develop added-value logistics products including warehousing. The German Post's ultimate aim is a balanced global presence, enabling it to offer world-wide logistics solutions.

This is the first case in which (German) taxpayers' money flows into taking a huge portfolio comprising public competitors such as Danzas, the Nedlloyd group, ASG and AEI off the market. To say it bluntly: The postal administrations nationalise public companies to compete in the free-market sector. Needless say, that this makes them objects of desire in financial circles.

Let me give you another example: In airfreight forwarding, which traditionally is dominated by small and medium-sized entrepreneurial firms, the Deutsche Post has managed in less than two years to rocket from nowhere to number one position among the world's airfreight players thanks to the purchase of several leading air cargo agents as well as a 25% stake in the express company DHL.

The British and French Models
The Royal Mail's distribution solutions are mostly tailored to meet specific international mailing needs. Its network, currently spanning 13 countries, is rather limited. At this stage, the Royal Mail has no logistics operations. Due to financial restrictions its transactions, involving Selectfracht and German Parcel, were comparatively small.

The French Post's activities still firmly rest upon its inland clientele in the letter and parcel businesses, including logistics. There is a visible trend towards europeanisation and globalisation. Despite this, nearly a 100% of its total turnover is derived from domestic business.

Within the next three years the French Post wants to increase its business generated abroad to over 10%. Compared with the scope of other European postal services, this volume is quite insignificant.

First concrete expansionist moves were two acquisitions during 1998 and 1999: So far, one involved Denkhaus, a member of the German Parcel Service, the other a company in Spain. Rumours have it that La Poste, Geodis and Sernam 苛 the latter two being associated with the French Railways 苛 are to be integrated into one powerful organisation, and that similar major European transactions are in the pipeline.

Further international alliances of the French Post include co-operations with the United States Postal Service and the Société Canadienne des Postes. In September last year, the spectrum of products was considerably widened by the Publitrans and Eurodespatch merger.

The Italian Model
Following a reorganisation period that had been initiated in 1994, Poste Italiane was finally transformed into a State-owned joint-stock company on 1 March 1998. Its major focal points are the financial turnaround, higher quality levels in the local network as well as the development of added-value products such as express deliveries and so-called hybrid electronic mail services.

Poste Italiane's recent take-over of the SDA group and its participation in Bartolini more than anything else serve to defend its national position against new market entries. This clearly indicates that the Italian Post has no ambitions to become a driving force in the European transportation arena 苛 at least not in the foreseeable future.

The Nordic Model
The Sweden Post has recently sold all of its ASG shares to the Deutsche Post/Danzas. Since last summer, both parties have repeatedly held discussions about the future of ASG. But they obviously failed to come to an agreement on a joint ownership.

From a strategic point of view, the formation of a strong Nordic alliance, initially perhaps with access to the networks of global partners, at a later stage probably in liaison with one of the global market leaders 苛 be it the US State Post, or UPS for that matter 苛 buying into the Nordic market might be a feasible solution.

In spite of some of the alarming aspects resulting from the European postal administrations flexing their muscles in the logistics market: This market is too huge苛and the individual customer demands are too manifold苛to be covered by the companies of the different postal administrations, provided they operate on a fair free-enterprise basis.

But let me sound a warning: Any manipulation aimed at distorting competition can lead to grave consequences to the "free" forwarding and logistics industry as a whole.

As to my question "Intensive structural changes in European transport business: Will the State Posts take over this field of activity?" My clear answer is "no".

Swisscargo, Kuehne & Nagel Key Account Agreement

Following the lanuch of Swisscargo's Customer Relationship Program (CRP) in December, the company has signed a coopoeration agreement with Kuehne & Nagel Management AG. The Swisscargo CRP is geared to the individual needs of forwarders both large and small international forwarders with regular freight volumes on selected routes. Swisscargo is the airfreight arm of SAirLogistics, a division on SAirGroup.

Kuehne & Nagel is one of the world's top logistics and freight forwarding service providers. Along with developing logistics solutions for air, sea and land transportation of goods, the company's core competencies include warehousing and distribution.

Present at the contract signing of the agreement are (seated, from left) Ludwig Bertsch, president & CEO, Swisscargo, and Reinhard Lange, COO, K&N; (standing, from left) Peter Widmer, director, K&N, Klaus Herms, director, K&N, Klaus Knappik, president & CEO, SAirLogistics; Klaus-Michael Kuehne, executive chairman, K&N; Francis Ramuz, Key Account Manager, Swisscargo; Peter Bachofner, head of Global Key Account Management, Swisscarog.