Top Manager in Discussion: Árpád Vásárhelyi, CEO of Schenker, on maintaining profitability
Schenker is one of the few logistics companies in Hungary that are still turning a profit. CEO Árpád Vásárhely explained to The Budapest Times how they do it. Despite a great number of imponderables, he is confident his firm will record a profit in 2012 too.
Schenker CEO Árpád Vásárhelyi said a rising number of firms are in the strange situation where exchange rate fluctuations will have a greater affect on profitability than actual performance.
How is the Christmas trade this year, as far as you can see?
Retail trade now accounts for roughly a quarter of our turnover, so we can certainly comment on the Christmas business. In terms of products that come by container from abroad, I can barely observe any differences in terms of quantities. The only difference is that while Christmas deliveries were here in the middle of October this year, last year they only arrived one month later.
So in terms of quantities is the mood of traders similar to that last year?
No, it is considerably worse. That is chiefly because of the imminent rise in VAT to 27 per cent on 1 January and the poor exchange rate for traders importing goods. As a result of the weaker forint alone, products have become more expensive by roughly a fifth in the course of the year, which is far too much for the change to be simply passed on to customers. As a result margins have evaporated. They have now reached a level at which traders are forced to sell the goods that they have ordered for Christmas this year to the very greatest extent possible, because they are no longer in the position, like last year, of being able to give large discounts in January to free up the space in their warehouses. It is also doubtful whether there will be large numbers of shoppers in January at all.
Because of the additional two per cent in VAT?
No, not directly because of the actual additional costs for customers but above all because of the resulting psychological effect. While Hungarian consumers might just about be willing to put up with the VAT rate of 25 per cent, which is in any case very high, 27 per cent is a step too far. Clothing, household electronic items and other durable consumer goods will simply no longer be purchased in Hungary. The tolerance of consumers is not without limits and they are aware of the alternatives. Just recall the booming shopping tourism to Austria at the beginning of the 1990s. If they can no longer purchase at reasonable prices in Hungary, consumers have no reservations about taking their custom elsewhere. The Austrian retail trade can rub its hands in glee even now. Thanks to the difference in VAT rates alone, it has a price advantage of almost 10 per cent. Hungarian retail trade will draw the short straw. I think the first quarter of 2012 will be particularly difficult, especially since there are also other challenges such as increased diesel prices and large retailers are hit by special taxes. Regarding the VAT rise, I don’t expect that the Hungarian treasury will really have much joy of it. Despite the record level, VAT revenues are likely to be lower in the end because of the reduction in spending power and shoppers going elsewhere.
The increase in diesel prices is supposedly softened by the state through compensation payments.
Yes, there are compensation payments but only for lorries over 7.5 tons. That virtually excludes the distribution of goods, which takes place almost entirely using smaller lorries and delivery vans. That is both because of the relatively small quantities delivered per shop and the statutory regulations. Around two-thirds of the Budapest city area is only permitted to be used by lorries under 7.5 tons. Only large lorries, which are predominantly involved in international transport or supply large depots, can benefit from the compensation regulation.
Why wasn’t consideration given to small lorries?
Unlike the large carriers, the small ones, to which the small vehicles mainly belong, are very fragmented and have correspondingly less lobbying power. These companies were chiefly established by lorry drivers who went independent in the 1990s with their own vehicles and later purchased some additional lorries. Most of these carriers have fewer than ten vehicles. The decision to discriminate against small lorries was almost certainly also based on the fact that small vehicles, which are mostly used locally, cannot fill up as easily abroad as large lorries, which cross country borders almost every day and can more easily refuel where it’s cheaper.
What options are there?
The normal solution would be for logistics companies to increase the prices of distribution and to compensate the carriers, which are suffering both from the massive increase in the price of diesel and the higher minimum wage, from those additional revenues. The problem, however, is that it would not be tolerated by retailers. As soon as there is talk of increasing the prices, they would immediately announce a tender. Since there are still significantly more lorries than goods, in that case they would immediately have the real possibility of finding cheaper contractors.
What will be the result of small carriers being left high and dry both by the state and by the retail trade?
Many will give up their job and there will be fewer lorries. The retail trade would then be forced to accept higher prices because of the lowered supply of lorries. At present, however, because of the burdens that I mentioned earlier and the difficulty of passing on higher prices to customers, there isn’t the leeway for that. The result will inevitably be a worsening of the service level, for example a decrease in delivery frequency. Or retailers will pay more but they will reduce the range of products that they offer outside Budapest.
What consequences would that have?
Hungary is a small, centralised country. Around 60 per cent of purchasing power is in Budapest and its metropolitan area. All retail traders have the problem in any case that products are more expensive outside of Budapest because of the lower quantities per delivery location and because of the distribution costs, but in reality prices have to be kept artificially lower than in Budapest because of the lower purchasing power in the countryside. Essentially, business in Budapest supplies funds for the country-wide distribution structures. If that financing dries up, retail traders in the provinces will have only one option: offering fewer products over a smaller area. That would lead to products gradually disappearing from shop windows outside Budapest. As a result, Hungarians living outside of the capital would increasingly travel to Budapest or Austria to purchase durable consumer goods. And while they are shopping in Austria anyway, they will also buy things that are cheap in Hungary or at least not so expensive that it would be worth making a special shopping trip for that reason. That is a great risk to the Hungarian economy. As a consequence of various overlapping and reinforcing effects, consumption could suffer a much greater hit than predicted even now, with the end result that the state revenues decrease rather than increase despite the various higher taxes and contributions.
What alternative would you suggest?
Instead of placing increasing burdens on Hungarian logistics companies and traders, other sources of revenue need to be tapped into. I cannot understand, for example, why the introduction of the toll system is taking so long. If it took around a year and a half in Germany for such a system to be developed with its huge motorway network, then it should be possible in Hungary in a much shorter time. However, there is still little progress. At the moment it looks as though we will have to wait at least three or four years for a functioning toll system, while the state is letting HUF 100-200 billion (EUR 328-656.01 million) a year slip through its hands. Two-thirds of Europe’s international corridors run through Hungary. That excellent transit position, however, is simply not being made the most of. In addition, the toll fees could also be used to make rail transport competitive again. Even for cheap products with large volumes it is often no longer worthwhile to use rail transport. This year, for example, more grain was transported to Italy by road than by train. That is absurd from an economic point of view, not to mention the environmental costs.
How has Schenker managed to end this year too with a profit despite the difficult conditions?
We managed to make up for losses of customers and volumes with new business. In overland transport, in which we have become considerably stronger, we manage to complete some optimisation processes. In addition to the reorganisation of routes we have opened new routes to southern Europe predominantly. We’ve expanded our presence in Romania and started operating in Bulgaria. For DB Schenker, Hungary is increasingly a well-functioning hub. Our Germany-related transport has also increased, mainly due to increased industrial exports. We also benefited economically from our merger with four different former Masped holdings, which was completed on an operative level this year. Overall, however, I have to say that although we are doing significantly more business our profit is lower and lower. To put it another way we transport significantly more goods to obtain the same margin.
You say that you benefited from the merger in the very first year. Typically mergers cost more in the beginning than they bring.
That’s true but our merger is not a typical one. It’s the result of cooperation for many years between the five units. Many mergers come with nasty surprises because the partners don’t know each other well enough and the acquisition happens too fast. With us it was different. Remarkably both the turnover and the profit of the consolidated company are higher than the respective sums of the separate five units. Incidentally, apart from our merger there were also two other mergers on our market this year and I am expecting to see two more in the near future. The logistics market is becoming increasingly concentrated. It is now the case that the five larger players on the market account for roughly 60 per cent of transport volume.
Did the merger result in job losses?
I am very proud that that was not the case. In fact, with a staff of around 400 we now have roughly 80 more employees than at the beginning of the year. That is due in large part to the opening of our new Szombathely site, which created 68 jobs. In addition, we have strengthened some administrative areas such as finance, accounts and IT as a result of various insourcing measures. That’s not because we wanted to create jobs at all costs, but because thanks to the merger we have now reached a size at which it makes economic sense to perform more of these activities internally.
In what ways are you feeling the effects of the weak forint?
The main problem is not the expensive euro but the unpredictability of the situation. Because the fluctuations are so great it is very difficult to make precise plans. In spring most companies wrote their 2012 budgets with a euro-forint exchange rate of 1:268. After just six months those budgets have to be consigned to the wastepaper bin. We need to be able to plan ahead again. It is not normal for there to be an increasing number of companies whose annual profit or loss depends not on their performance primarily but on the performance of the forint during the year and where it stands on 31 December.
What would you recommend to those deciding economic policy?
Sometimes I have the impression that Hungary regards itself as the centre of the universe and believes that it needs to reinvent the wheel here. The reality is that Hungary is a small country that needs to adapt and follow the general trends. Hungary’s room for ambitious self-fulfilment is very small. It’s also important to bear in mind that Hungary depends to a great extent on the German economy. It would be advisable to follow the broad tendencies there. Currently, however, the two countries are drifting apart. It should not be the case that our model country has a VAT rate of 18 per cent while Hungary is raising its VAT rate from 25 to 27 per cent.
What aspects of government policy in Hungary are to your liking?
We have great hopes for the China-friendly policy. Currently goods flow chiefly from China to Hungary. There are barely any goods going in the opposite direction. As a result we have considerable dead freight in that direction. That could perhaps be reduced somewhat through more intensive economic cooperation with China. I am also very optimistic regarding the opening of the Cargo Base 1 at Budapest Airport scheduled for next year, which could enable Hungary to become a hub for air freight. That business interests us a lot, given that DB Schenker is number two worldwide in air transport.
