CEE: the next logistics hotspot?

A fast-improving transport infrastructure could help the Central and Eastern European region become a hub for the logistics industry.

“With rising private consumption and fast-growing external and internal trade, the CEE region has displayed high potential for the sustained growth of the transportation and logistics market”
-Praveen Ojha, Datamonitor

The logistics industry in Central and Eastern Europe and Russia is set to experience substantial growth over the next five years. Datamonitor predicts that nominal spend on logistics and storage in the region will grow from around €184 billion in 2008 to just under €250 billion by 2012. This will primarily be derived from fast growing domestic country-markets, as well as increasing merchandise exports.

The overall Central and Eastern Europe (CEE) economy is estimated to grow at an average growth rate of five percent during 2007-2012, with strong contribution from the automotive, consumer goods, electronics and machinery, retail and telecom industries. This is also paving the way forward for increased development and outsourcing of contract logistics in the region.

On the whole, CEE has a relatively under-developed transportation network but is attracting increasing amounts of investment flows from the EU, local government and large foreign and domestic private players in the logistics sector. Praveen Ojha, Senior Logistics Analyst with Datamonitor, says: “The lenient tax policies and moves for privatisation have also helped attract a good amount of foreign direct investment funds into the region. With rising private consumption and fast-growing external and internal trade, the CEE region has displayed high-potential for the sustained growth of the transportation and logistics market.”

Infrastructure: under-developed but fast improving
Railways have become an expensive transport mode. Railway infrastructure, monopolised by local governments, is relatively under-developed in the region. Only 50% of the railway tracks are operative due to poor investment and maintenance. Consequently, the intermodal capabilities are limited and a majority of the gross tonnage, which could ideally be transported by rail, is being transported via trucks as road infrastructure is quite well developed. Governments are encouraging private participation, especially in railways, to attract more foreign investments in order to improve overall transport infrastructure.

Maritime transport plays a major role in the transportation of bulk and dry cargo, but is not a preferred transport mode across the region. Air transport is still the costliest transport mode due to its efficiency and timely deliveries. Maritime and rail transport have together lost a significant market share of 10 percent to road freight over the last decade. However, in Poland, Bulgaria and Latvia there has been an increase in rail freight volumes over the same period.

Another problem is the congestion of logistics networks and warehousing in and around the major trading centres. As the manufacturing and distribution activity is concentrated in a few major centres (Prague, Warsaw, Budapest, Bucharest, Sofia, Poznan, Kiev, Moscow and St Petersburg), other cities in CEE need to develop as distribution and logistics hubs in the coming five years. This will create new opportunities to leverage the existing space, labour and logistics infrastructure and result in the creation of new transport networks, distribution and warehousing facilities.

Small but fast-growing contract logistics market
The contract logistics market is still under-developed due to the highly fragmented nature of both the freight forwarding industry and the road freight industry. With the rapidly growing economy, an ever-expanding manufacturing industry, increased international trade and foreign investments in transport infrastructure, this sector is set to undergo a positive transition over the next five years.

The small number of large logistics service providers (LSPs) in the CEE region is steadily increasing, especially in the larger markets of the Czech Republic, Hungary, Poland and Russia. Both large local and foreign LSPs are actively pursuing the outsourced logistics business (especially in the automotive, electronics, machinery and retail industry verticals) and are thus the major contributors to the contract logistics market in the region. These players continue to invest in both their local divisions as well as an expanded portfolio of logistics services.

Logistics services providers are in for a boost
Datamonitor expects third-party logistics services to receive a boost due to the increased focus on contract logistics activities, both from the local strategic partnerships as well as consumer industries such as automotive, electronics, machinery and retail, among others.

The CEE region is also experiencing high demand for warehousing of agricultural and perishable products. However, inventory management, supply chain management consultancy and IT solutions are some key areas of greater growth in the future. Going forward, all this, along with the EU accession of the region, will result in an increasing number of international freight forwarders and large LSPs scaling-up their investments and activities to exploit the logistics outsourcing market, particularly in the Czech Republic, Hungary, Poland and Russia.

“Until recently, the major weaknesses of the CEE countries were their economic instability and low quality of overall transport infrastructure,” says Ojha. “However, following the EU accession for most CEE countries (and imminent accession for others), improved fiscal management by the governments and increased mobilisation of capital (especially foreign direct investments) for infrastructure investment has helped in successfully tackling these challenges.”