CEVA CEO looks to the future following record revenue in 2011
March 07, 2012 - LM Editorial
While 2011 may eventually prove to be the year things got better for the global economy, it certainly proved to be a strong year for global third-party logistics (3PL) services provider CEVA Logistics.
Earlier this week, CEVA reported record annual revenue of $6.9 billion Euro or about $9.1 billion, which was up 0.7 percent annually and up 2.9 percent in constant exchange rates. CEVA’s Freight Management business, which is comprised of air, ocean and customs brokerage, was down 2 percent annually, while its Contract Logistics business, which includes warehousing and dedicated transport, was up 8 percent.
As the fourth largest global 3PL player, CEVA has presences throughout the world and is active in various modes. This is evident with its foray into the ocean brokerage market and through its LCL offerings, as well as its very strong Contract Logistics business. LM Group News Editor Jeff Berman recently spoke with CEVA CEO John Pattullo about the company’s first half performance and other industry-related items. A transcript of their conversation is below.
Logistics Management: What were the primary growth engines at CEVA for a very strong 2011 performance?
John Pattullo: We have been making a number of important structural changes inside the company to help us run more efficiently, and those are starting to pay dividends. And we have made a major effort in what we call “impeccable execution” which really focuses on our operations agenda and tremendous progress has been made there.
LM: Can you please provide some examples of the progress?
Pattullo: We delivered over 11,000 Kaizen in 2011, which are continuous improvement projects. We had a 70 percent reduction in our IT downtime and a 16 percent improvement in our operations index, which is a basket of operations measures that we track. The operations agenda is critical. We have also done well with a couple of products, one of which is ocean which has grown 17 percent year-over-year and is way ahead of market. In the past, we were a very modest player in ocean forwarding and have moved from number 35 five years ago to number 12 now and want to get into the top five.
LM: It seems like the capacity surplus on the ocean side is still intact to a large degree. What are you seeing there and, also, what are you seeing in the ocean rate environment? It seems like many carrier lines did not see attempts at rate increases sticking during Peak Season because of excess capacity.
Pattullo: There is still significant overcapacity with about 5 percent of global ocean tonnage idle and there is a lot of new capacity coming on for various carriers like MSC. For pricing, various attempts have failed. There has been a very significant wave of price increases effective from March 1, which are now in a “testing” period, with the market indicating if those prices will stick or not. It is a work in progress at this point and we will know more in a few weeks.
LM: While the global recovery is slowly recovering, there are still significant issues in Europe at the moment. What are some of the core things CEVA is focusing on in Europe?
Pattullo: With regard to our business portfolio, we are [based] in Europe, but less than half of our business is in Europe, and more than 40 percent of our business is in so-called high-growth economies in markets like China, Eastern Europe, and the Middle East. We are well-placed in the stronger-growing economies. What we are seeing in Europe is a bit of a North-South divide. In Northern Europe, the economies are generally modestly growing, with Germany showing slight GDP growth of about 1 percent. Southern Europe, however, is different, with the economy still in decline in markets like Italy, Spain, and Greece, which remain quite challenging. That does not need to be a disaster for a company like CEVA as our global market share is only 2 percent, which is a lot of volume to go for even if the markets are a little depressed. Secondly, sometimes in these situations what you see is customers reaching out for more radical solutions in the form of more end-to-end supply chain thinking because they are trying to find ways of gaining new volume. That is the situation and is something we like to think we are good at—bringing new volume proposals to our customers.
LM: In the first half of both 2010 and 2011, especially in North America, there was strong activity relating to inventory rebuilds, which in turn led to increased volumes and manufacturing activity. But in the second half of each year it proved not to be sustainable as it was followed by second half slowdowns. Do you see that possibly happening again in 2012?
Pattullo: We don’t really see accurate customer inventory levels so we have to make some judgment calls on what we think is going on. My view is there was a massive inventory drawdown in 2009 with a significant recovery of that in 2010. And since then globally at least inventory levels have been in control at somewhat less than pre-2009 levels but at levels that leave manufacturers possibly able to support growth without totally being burdened by the cash of the inventory levels so they have kind of optimized with the global level not seeing much movement in inventory levels since the 2010 rebuild.
LM: Oil and gasoline prices are definitely heading up again. As a 3PL, most of these increases get passed through to shippers, of course, but it still impacts how shippers approach doing business. What do you think about the increasing energy prices?
Pattullo: For our industry, it is a pass through, so we suffer a little bit when prices are going up and benefit a little when prices are going down. It is not material in either direction. I think what tends to happen when fuel prices spike is that there is a positive to it in that customers look hard at their supply chains and look hard at it from an environmental point of view, in terms of CO2 measurements and costs, as it might be better for them to reduce the amount of money they are spending on moving goods around the world by doing things like changing the manufacturing source or location. That type of study can be aided by a company like CEVA that can help shippers with their value chain analysis and help to re-design the supply chain. But I guess my general view would be that oil and fuel price increases have to be sustained for a while before shippers will make manufacturing sourcing changes based upon them. Those sourcing changes could involve shutting down factories or redeploying machinery. Those decisions are not made until people are certain that price increases are permanent.
LM: Aside from oil and gas prices, there has been some talk lately of more companies considering near-shoring manufacturing operations. Are you seeing or hearing that from customers?
Pattullo: Over the last couple of years there have been a number of substantial interruptions for global supply chains like volcanic ash, the Japanese tsunami, and Thailand flooding. All of these things have caused shippers to say “is it OK that we have a substantial amount of my products shipping intercontinental and perhaps be exposed to these events?” For sure, they are talking about it. What we see happening, though, is much more fraught to risk mitigation, so we don’t really see much evidence of customers near-shoring. Instead we are seeing them thinking harder about where and how they off-shore. So maybe instead of having two factories in Thailand subject to the same climatic conditions, they may put one in Thailand and one in Vietnam or Japan. It is that type of thinking to build a robust supply chain, rather than moving away from a global supply chain to a domestic supply chain. We see a lot of evidence of customers trying to make their supply chains more robust and better able to withstand natural disasters.
LM: Let’s shift gears to the air business for CEVA. How was it in 2011?
Pattullo: On the air side, we underperformed the market primarily because our air business is strongest when the market is weakest. The market was particularly weak for technology and on TransPacific airfreight, and that is CEVA’s strength. In other parts of the world for airfreight exports from Northern Europe to the U.S. for example, the market was quite strong. We underperformed the market and our game plan for 2012 is to strengthen our portfolio in those areas where the market is strong and we have been a bit underrepresented. Overall, air is flat to down in those markets with peaks and troughs and is a flat market globally at the moment.
LM: Regarding working with shippers, what in the last year has changed with the shipper-3PL relationship dynamic, in terms of collaboration and meeting customers’ needs? Have there been any shifts regarding what customers are looking for?
Pattullo: One thing which is loud and clear is the huge shipper interest, driven in part by things like natural disasters, in control and visibility of freight movements, particularly when those freight movements are intercontinental. At a conference of global supply chain officers last year, it was said the biggest most unmet need has been a real high quality of control and visibility for intercontinental shipments. That has become an important piece of dialogue now between us and our customers, as well as the sub-topic of customers wanting to be with the same provider in multiple markets. They want to have good control and visibility and figure rightly that to do that they want to have the same system with the same provider in optimal markets.
LM: There have been mixed signals about the economy with some good growth signs. How far along do you think we are?
Pattullo: I think it is great to see the U.S. economy start to pick up a little, but there are certain key regions like Germany slowing down a little. From a macro level, low single digit growth in 2012 sounds right. We might look back on these years as the many years of stagnation in the global economy, with not much of a tailwind from the global economy. But with 2 percent global logistics market share in a very fragmented market, we have room to grow.
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