Shipping without borders

The European Union was supposed to erase borders, making it easier to ship products across national boundaries. Five years later, European distribution practices have changed substantially.

By Toby B Gooley -- Logistics Management, 1/1/1998

Where were you on Jan. 1, 1993? If you were in Europe, you probably were celebrating not only a new year, but the advent of a new age of cooperation among European nations.

That was the day when the European Community became an official political entity, with an executive body, a council of ministers, a legislative body, and a judicial branch. After the Treaty of Maastricht, which strengthened economic centralization and adopted plans for a monetary union, the organization was renamed the European Union (EU).

The formation of the European Union out of 13 often fractious states was an act fraught with political risks. Today, the agreement's impact on the current 15 members is as much economic as political, pervading every aspect of daily business. Harmonization of product standards, streamlined customs procedures, and investment in regional infrastructure projects are just a few of the factors that continue to change European business life.

Logistics is one of the biggest beneficiaries of these and other changes in Europe. European Union policies are greatly influencing the way companies distribute their products on the Continent. The following is a look at the most important of these factors and what they mean for logistics operations.

Political Environment

The European Union political structure has not replaced national legal systems. Therefore, it is no easy task for the European Commission and Parliament to implement their policies throughout the union. The success of pan-European policymaking depends on lawmakers' ability to craft rules that appeal to all of the member states more than their own laws do. It's often a tough sell.

The EU bodies that exercise the greatest influence over logistics in Europe are the European Commission, the Transport Council, the Transportation Directorate, and the Competition Directorate. The European Commission, the EU's executive body, is charged with developing pan-European policies, including those affecting transportation. The Transport Council, composed of transport ministers of all the member states, negotiates and approves adoption by national legislatures of laws affecting transportation, such as harmonization of truck-weight limits and pricing of truck operating licenses.

The Transportation and Competition Directorates, meanwhile, conduct research, make policy recommendations to the European Commission, and work through the EU legal system to enforce laws. The Transportation Directorate, for example, is developing economic and legal incentives to promote intermodal transportation across Europe. The Competition Directorate, meanwhile, is investigating whether international airline alliances and ocean-shipping conferences' pricing for inland transportation violate EU competition laws. The outcomes of those investigations will greatly affect the cost and availability of shippers' transport options.

Transportation Infrastructure

Although individual countries still design and fund their own domestic infrastructure improvements, the EU supports projects that will have regional or pan-European benefits. To gain EU funding, the projects must promise benefits for several member states and promote official policy goals, such as transferring freight from congested roads to rail.

Intermodal transportation is likely to be the big winner when it comes to infrastructure improvements. A series of 14 priority transportation projects, known as trans-European networks (TENs), includes endeavors such as the Betuwe Line, which will create a high-speed rail corridor between the Port of Rotterdam and the German industrial heartland. The Transport Council also has called for the creation of "rail-freight freeways," which would revise rail schedules to speed freight trains between major EU cities.

Although rails will get the lion's share of the funding, road transport also will benefit from EU oversight. The TENs projects include highway construction in Greece, Portugal, and Spain, and a road/rail link between Sweden and Denmark is scheduled for completion by the end of the decade. In the long term, EU member countries like Greece, Italy, Spain, and Portugal, which have less-developed road systems, have the most to gain from EU infrastructure projects--as do companies that locate manufacturing and distribution facilities in these low-cost countries.

Transport Deregulation

Transport deregulation in some countries already was well under way before 1993, but the advent of the European Union has quickened the pace of change while casting a broader deregulatory net. The European Commission's goal is to open member states' markets to competition and eliminate conflicting national regulations that hinder the free flow of freight.

One of the most controversial regulatory changes under the European Union is the introduction of "cabotage" in road transport. Cabotage allows a carrier of one nationality that is licensed for cabotage to pick up freight in any EU country and deliver it in another; carriers also may handle domestic shipments in another country. Because it introduces more competitors to national markets, cabotage is expected to bring freight rates down somewhat. Ford Motor Co. is one U.S. manufacturer that is taking advantage of cabotage. "We can now use one carrier from Italy to ship to Germany and Spain. That gives them the opportunity to do more rationalized routing and pickups...and we now tend to enjoy lower and more flexible rates," says a Ford logistics executive.

But cabotage has not had as big an impact as regulators predicted, says Nicholas Seiersen, formerly a logistics manager with Digital Equipment Corp. in Europe and now a consultant with KPMG in Toronto. "Most companies would rather go with a lower-cost local guy than pay for a more expensive multinational trucker," he observes. "Their costs are high because [they have] spent a lot of money putting in place pan-European capabilities, but they're finding there's very little demand for that." And local prejudices still remain, adds the Ford executive. "There's no law that prevents a British truck from handling domestic transportation in Germany, but German shippers won't want to give their business to a British trucker who doesn't know the local market."

The biggest issue in European transport deregulation these days is railroad privatization. European railroads always have been state-owned, which made the European rail "network" more like a crazy quilt of different pricing, scheduling, equipment, and even rail-gauge standards. Clearly, that situation is a deterrent to cross-border intermodal transport.

The European Commission's answer is privatization. EU policy requires countries to separate management of the rail infrastructure from sales and operations. The idea is that low-cost rail-service operators should be able to operate over any railway, as long as they pay the track owner for that right.

An interesting development arising from rail deregulation is the entry of U.S. operators in European markets. Norfolk Southern, for example, has joined a consortium that includes Cemat (Italy), Hupac and Intercontainer/Interfrigo (both Switzerland), and ContainerPort Group (USA) to offer through intermodal service between Europe and the United States. CSX Transportation is involved in a venture with newly privatized rail operators in the Netherlands and Germany, called NDX Intermodal, and Wisconsin Central has a stake in a railroad in the United Kingdom that took over several formerly government-run rail services.

Customs Procedures

Shippers began seeing the benefits of customs harmonization immediately after European unification became official. Before 1993, a truck traveling between Portugal and the Netherlands, for example, had to stop at customs stations to process individual entry and exit documentation in four countries. Typically, this process would add many hours or even days to the journey. Today, a truck makes stops for just a few minutes as it crosses each border, and shipments between EU countries can use a single form for entry, rather than separate documentation for each nation.

This reduction in paperwork has considerably shortened transit times and helped make it more economical for shippers to distribute to multiple countries from a single location. It also cuts costs by making electronic declaration of imports and payment of the value-added tax (VAT) easier and more widespread, says Seiersen. Another effect of customs harmonization has been to reduce the need for both customs personnel and customs brokers. Harmonization of customs procedures has been a key driver of recent changes in the freight-forwarding and customs-brokerage industry, including the decline of local brokers and forwarders; consolidation among both small and large companies; and diversification into other regions or types of services.

Harmonized Product Standards

The harmonization of product standards, packaging, and labeling may well be the Single Market's greatest legacy to logistics in Europe. Previously, each nation had its own regulations regarding product manufacturing, content, safety standards, packaging, and labeling. Now, a company can produce one version of a product, logging in tremendous savings through reduced administrative costs and economies of scale. "Before, everything was different, you had to make different sizes, there were different packaging specs, so [manufacturers needed] a multitude of SKUs (stock-keeping units)," Seiersen notes. "Now, they're using one single SKU [for all of the EU] right into the truck."

Most countries, moreover, obliged manufacturers to have separate operations for making and selling a complete product line in each country. Now, EU member states no longer require such "bricks-and-mortar" investments. That has opened the way for manufacturers to centralize management, production, and distribution--saving millions of dollars in the process.

Some manufacturers have completely centralized, serving all of their customers from a single location. But many have found that market conditions and traffic congestion preclude total centralization. National and regional product preferences often are so strong that true product harmonization is not possible. And a company that promises customers in other European countries quick delivery must contend with unreliable transit times caused by extreme traffic congestion, says Seiersen. That makes it impractical for many companies to serve all of Europe from one distribution location.

Environmental Concerns

Europe has gotten tough on environmental problems of necessity. Overpopulation, traffic congestion, air pollution, and insufficient landfill space are far more pressing in Europe than in the United States. The resulting pan-European movement to improve the environment, supported by EU legislation, already is affecting logistics operations--and it will only intensify as time goes on.

Restrictions on deliveries, insurmountable traffic congestion, and cutbacks on cargo flights in Europe's major population centers are just some of the problems that are limiting shippers' transport options (see "European Laws Further Restrict Transport Options," Page 65A, LM, November 1997). Although many of these restrictive regulations are local, laws developed in one country are likely to be adopted by all member states as the EU seeks to impose pan-European standards.

One example that affects shippers is the spread of mandatory package recycling. The EU's Packaging and Packaging Waste Directive, which requires member states to recover at least 50 percent by weight of consumer and protective packaging, is modeled on similar laws that first were implemented in Germany, says Professor Gunnilla Jönson of Lund University's Institute of Packaging Logistics in Sweden. Not only will EU laws control packaging recovery, they also eventually will standardize package design and quality, she warns.

Layers of Laws

Unification has greatly changed European distribution practices? These permanent changes affect virtually every aspect of transportation and distribution.

European Union regulations and the many local, provincial, and national laws that continue in effect have a profound impact on how a company manages its logistics operations. But shippers need not lose any sleep over it; what they do need is to conduct careful research, seek assistance from experts, and recognize that no matter what they're thinking of doing, the EU probably has passed a law about it.