‘SMEs are in a massive hole over electric but the approach is too blinkered’

Q&A

Is the transport industry, and the government, approaching fleet decarbonisation in the right way?

There’s certainly an argument to say they aren’t. Look at air traffic control, for example, where we’re still running the same systems that existed 30 years ago. If air traffic management was optimised, there could be an emissions saving of around 9%, which would have much more impact on reducing carbon than biofuel for planes.

The same goes for trucks, freight, and vehicles. There’s also an oft-quoted fact that 30% of trucks are empty. Can we change that to 20% by using a different approach? LKW Walter, for example, have got a train that transports unaccompanied freight across Europe before the driver picks it up at the other end. Much has been made of making a whole systems move to electric, but if we use what we’ve got now, better, this in itself will already have a huge impact on our carbon output.

We should also use boats more; currently, we have canals and a bit of inland barge and container movement on the Thames. By contrast, you see container barges on the Rhine, the Seine, and the Danube all the time.

How can the new government do more to incentivise operators to decarbonise their fleets?

The whole decarbonisation thing is really interesting. Tesla took an approach to transforming an industry where quarterly returns were not important for circa 20 years as they built the capability and took huge losses – they’re now one of the most valuable companies in the world. Legacy businesses cannot operate this way with quarterly updates for shareholders because you don’t get the same leeway.

It’s a gargantuan change. But when petrol stations were first built, were they government funded or delivered by the private sector? Look at EV charging structure now; should the government be doing that?

How do you see it panning out for smaller HGV fleet operators?

There could well be some longstanding, smaller businesses that wait until the deadline on diesel trucks comes along and then choose to wind the company up.

A very large proportion of truck businesses have got fewer than 10 trucks. So, if we imagine a business that turns over a few million pounds and is run by a third-generation business leader in their fifties, are they likely to get a loan for £10m, purchase some electric trucks, and go again? We saw a lot of people choose to retire when driver CPC first came out, and we could well see a similar situation here.

Can you understand why many SMEs running long-haul HGVs are shying away from decarbonisation? Are they in a bit of a hole?

They’re in a massive hole, and I don’t think they’re shying away from it; rather, the scale is so big that they’re thinking it’s too difficult. For example, how can they justify spending three times as much on an electric truck?

There are other challenges as well. I know of one logistics company, for example, that’s looking at putting solar panels on all its roofs, but they can’t because the local Grid infrastructure simply can’t handle the power intake. Ultimately, local transformers are 40-50 years old. The power structure is fairly linear, but it becomes much more decentralised and web-like if you’re putting in and taking out of the Grid at the same time.

How have other countries tackled fleet decarbonisation?

In the UK, businesses are expected to foot the bill for much of the decarbonisation process, whereas in Europe, governments are much happier to fund these kinds of initiatives and see it as a long-term investment in the country. With the new Labour government, we’ll perhaps see a change in direction.

For example, Japan is looking to bring in a 300-mile conveyor belt that can move freight across the country. They’re faced with a driver shortage, an ageing population, and limited immigration, so the idea is to stick things on conveyors and just use green electric power - and it’s the Japanese government talking about this.

Whereas when the UK government invest in major projects, like HS2, they’re cancelled?

Yes, because people don’t think it’s good value. The tragedy with HS2 is that it’s not just about getting to Birmingham or Manchester 20 minutes quicker. It’s actually about freeing up capacity on the West Coast Mainline for freight, and also creating capacity for commuter trains. So high speed trains get priority over commuter trains and as soon as there’s a problem, all the commuter trains are affected.

What lessons can fleet operators learn from the record amount of administrations we’re seeing?

The problem when volume starts to drop is that the warehouse is much more difficult to ‘turn off’ than a truck. You can park a truck up and save running costs, but with the warehouse, your costs are your costs.

Commercial brokers are now seeing a lot of properties coming back onto the market, but they’re much older so not as energy efficient. So, the first problem is around warehousing and committing to fixed costs. Then, some businesses potentially over-leveraged themselves during the Covid boom and committed to too much - whether it was warehousing or transport.

But they were chasing margin in a notoriously small margin industry…

And that’s the other challenge – you get a decline in rates because volumes start to drop, and margins become even thinner. It applies even more on container shipping. I don’t think there’s another industry which is so supply- and demand- driven in terms of its pricing. What industry can have a long-term average of $2,000 for a container from the far East to Europe or the US that can suddenly jump to $20,000 in a couple of weeks? We even have prices going down to under $1,000 for China to the UK, and now they’re back at $5,000 because of the Red Sea problems and having to travel further.

You see that with warehouse pricing. £2 per pallet per week is a long-term average. We saw it going well over £3 because people were desperate for space. And now, we’re seeing £1.50 per pallet per week in prime locations. What other industry does that when the fixed costs stay the same?

I always joke with finance colleagues that you should look at the price of a container and it will tell you how the economy is going to be performing in nine months’ time. They never believe me, but it’s because product is being moved roughly nine months before it should be bought. So, if container volumes are up, and prices are high, then a lot of stuff is being moved.

Are you expecting more consolidation?

Yes, and I’d argue that the industry needs it. There are tens of thousands of transport and warehousing businesses with an average number of trucks fewer than 10. How do you drive economies of scale? And what about purchasing power dealing with truck manufacturers, or fuel, or recruitment?

GXO have bought Clipper and Wincanton subject to sign off from the CMA. Culina are now a £2.2bn turnover group and have taken on Stobart and iforce to name a few. Then there’s the likes of Malcom Logistics, Howard Tenens, Kinaxia, and more that are a few hundred million turnover. There are tier one multi-billion turnover businesses and now a significant gap to tier two. I think there’s a real opportunity for European players to come into the UK market. Look at businesses like Rhenus, with a 10-billion-euro turnover. These are huge businesses which have perhaps previously looked at the UK market and thought it was a bit too difficult, a bit too competitive, maybe too price driven.

At the top there’s already been consolidation, which gives European players an opportunity if they said they were going to give the UK a real go with a five-year strategy. Iron Mountain has created a warehouse and logistics division, for example. They’re a huge organisation and if they stick it out over a couple of years, they’ve got a real chance of gaining a big market share.

What do you make of Culina?

The business is very interesting in that it takes the opposite approach to GXO. From the outside, it appears Culina keeps businesses almost stand-alone; there’s a bit of harmonisation, and you see a Great Bear truck pulling a Stobart trailer. But broadly, they’ve kept the brands almost as the business unit specialities, similar to Kinaxia who maintain the local identity of companies and implement technology-based common systems and processes at an operational level.

Is Culina likely to make further acquisitions?

I’ve not looked in detail but who’s left to buy? The question is, will they continue to follow the strategy of picking a business which is almost a market leader in that sector, or do they start diversifying and picking up logistics companies who are already more diversified?

Any other new market trends you’ve noticed?

GXO is an interesting one. They’ve recently announced deals with Kellogg’s and Levi in particular, and the Levi deal is for 20 years. Deals like this are almost unheard of. It almost becomes a financial transaction. What’s interesting is that XPO founder, Brad Jacobs, was a financier who happened to choose logistics. He’s got an investment vehicle called QXO, and he wants to look at builders’ merchants, which are incredibly fragmented across Europe. There are tens of thousands of individual businesses, and nobody has any market dominance. They are absolutely ripe for consolidation, so that’s an interesting trend.

On contracts, people want more stability. After Brexit, the pandemic, and now the war in Ukraine, businesses are looking for more resilience in their supply chains. What people are asking is: how do I make sure my business and supply chain deal with disruption better than they have before?