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SEE – Europe’s emerging logistics hotspot

by Tsvetan Ivanov, business consultant, SeeNews
Miroslava Rakovska, University of National and World Economy – Department of Logistics, Bulgarian Logistics Association

The logistics sector in Southeast Europe (SEE) is relatively underdeveloped as compared to the rest of Europe. However, the region’s location determines its strategic role in trade within the continent, as well as between Europe, the Middle East and Asia. In addition, it is unmatched in Europe in terms of labour costs and real estate rents, and benefits from favourable government policies.

The region is also among the best-rated as far as goods distribution is concerned, though its benefits remain of local or sub-regional nature. Strategically located hubs in SEE, such as Istanbul, are increasingly integrated in the global supply chain and will gain further importance as trade links with the Far East and the Middle East strengthen.

Ongoing infrastructure development and increasing consumer demand in SEE have led to a shift in distribution patterns in Europe and the development of new freight traffic routes. This in turn is impacting the European logistics markets and has brought about new distribution hubs, some of which are competing with established centres in Western Europe as alternative locations for pan-European distribution activities.

The risk factors for logistics in SEE, according to a 2015 research conducted by the German Logistics Union BVL, are above all related to demographic and workforce trends, whose impact on the sector is estimated as strong. The state of the infrastructure and the development of specialised software are seen as having a moderate impact, while geopolitical events are considered by logistic providers to have a limited impact, but consumers of logistic services, i.e. industrial and trade enterprises, estimate their impact as moderate to strong.

Location factors

The factors that determine the strength of a logistic hub generally fall into one of the following groups:

  • Infrastructure and Accessibility
  • Market Access
  • Operational Base Costs
  • Labour Market Capacity
  • Logistics Competence
  • Business Environment

The best combination of these is the ultimate criterion that determines the location of a strong logistics hub. As far as intercontinental trade is concerned, locations in SEE fall into four groups:

  • Existing distribution hubs – Istanbul, Athens
  • Emerging distribution hubs – Izmir
  • Potential distribution hubs – Bucharest, Belgrade
  • Other auxiliary distribution centres – Sofia, Thessaloniki, Skopje, Nis, Constanta, Zagreb, Sarajevo

According to a survey conducted by Prologis, a company operating in industrial logistics, which aimed to determine the most attractive locations for logistic centres in Europe in 2013 and in 2018, nine of the top ten locations were in Western Europe and one was in SEE – the region of Western Romania was ranked eighth in 2013 and fifth for 2018, and seen as playing a vital role in pan-European logistic flows. Its comparative strengths were considered to be the state of the real estate and the labour markets and favourable government regulations, while its main weak point was the absence of first-class logistics facilities. The survey was conducted among companies operating in different sectors of the economy across Europe.

One clearly visible difference between the rankings for 2013 and 2018 is the expected improvement of SEE locations, including Western Romania, Bucharest and Istanbul which report the highest growth among all European locations in the five-year period.
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Locations in SEE place among the top European logistics hubs in a survey conducted by consultancy company Colliers International, as well. The survey ranks 40 European cities according to their suitability as logistics hubs.

The criteria used for evaluation of the logistics hubs by Colliers are divided into five major groups, each consisting of two to four indicators:

  • Infrastructure & Accessibility – Quality of infrastructure; Air freight capacity of airports within 1-hour; Container capacity of seaports within 1-hour; Rail accessibility
  • Market Access – Current GDP; Population; GDP in 2017
  • Operational Costs – Rental cost; Land cost; Labour cost
  • Labour Market Capacity – Workforce; Unemployment
  • Logistics Competence – Labour market specialisation; Logistics competence

Colliers Top European Logistics Hubs

Seven SEE cities in Bulgaria, Romania, Serbia, Slovenia, Croatia, Greece and Turkey are included in the pool. In each of the five groups different SEE locations are placed among the top European logistics hubs – Sofia, Bucharest and Belgrade are among the top ten in terms of operational costs, the Turkish cities excel in the labour force and logistics competence group, and the busy ports of Istanbul and Rijeka/Koper are evaluated highly in terms of infrastructure and accessibility. Only in terms of market access the region’s main hubs lag far behind in the European ranking due to their location far from the large consumer centres in Western Europe.

Country comparison based on the Logistics Performance Index

An extremely valuable source for international comparisons in the field of logistics is the Logistics Performance Index (LPI), published by the World Bank once every two years. It has six components – efficiency of customs and border management clearance, quality of trade and transport infrastructure, ease of arranging competitively priced shipments, competence and quality of logistics services, ability to track and trace consignments and delivery timeliness and reliability.

Most SEE countries have shown volatile performance since the creation of the index in 2007. Turkey and Slovenia maintain their top positions in the region and are among the leading 40 countries in the world. Greece, Bulgaria and Croatia are also invariably in the first half of the ranking, although each of them had its ups and downs over the years. Bulgaria and Croatia climbed sharply in 2012 but fell again in 2014. The only three countries in SEE to show a sustainable trend of improving logistic performance are Romania, Serbia and Montenegro. Albania also improved significantly in the 2007-2012 period before being omitted from the index in the 2014 edition. The other three countries in the region rank among the less impressive performers worldwide. Bosnia and Herzegovina and Moldova are generally ranked between positions 80 and 100, except for 2012, when Bosnia reached the 55th place, while Moldova slipped to the bottom of the table. Macedonia is the only country in the region whose standings in the ranking deteriorate every year.

Logistics Performance Index

In a breakdown by indicators, SEE sees sharpest improvement in terms of timeliness and ease of arranging shipments. The accession of three Balkan countries to the EU after 2007 and their tighter integration with the other countries in the region has led to wider access to European markets for the whole region. To survive in these markets, SEE companies had to adjust to the requirements of their European partners for timely and reliable shipments. The ease of arranging shipments has also improved throughout the region.

On the other hand, the weak points of the SEE countries lie in the quality of infrastructure and efficiency of customs clearance procedures. In these two areas the performance of the SEE countries is most volatile, triggering sharp changes in the overall index. The deterioration of infrastructure and customs clearance procedures, along with competence and quality of logistics services, tracking and tracing of consignments, led to a decline in the ranking for Turkey, Slovenia, Bulgaria, Croatia, Macedonia and Bosnia and Herzegovina in 2014.

The key LPI indicators affecting logistics in developed countries are competence, quality of logistic services and investment in state-of-the-art technologies. By contrast, logistics in lower income countries, including most SEE states, are greatly impacted by infrastructure and customs clearance procedures – issues resolved long ago in Western Europe.
It should be noted that the countries with steadiest growth in the region – Turkey, Serbia and Montenegro – are all non-EU members, which indicates favourable prospects for the future development of logistics in the SEE region and acceleration of international trade with other regions.

Development potential in some SEE countries

Bulgaria
Much of the existing stock in Bulgaria is old and outdated. Development is slow and large companies prefer to build warehouses themselves. New industrial zones are forming throughout the country. Bulgaria’s major advantage over the other countries in the region is its location on the crossroads of major routes in SEE.

Greece
Logistics property is almost entirely located in and around Athens, reflecting the strong dominance of the region. Outside of Athens, Thessaloniki in northern Greece has the potential to develop into a major distribution hub for the Balkans. But this will require an increase in modern stock. Transport infrastructure is better in Greece compared to its neighbours, but political instability is rapidly driving international logistics companies that have established their SEE logistics hubs in Greece away.

Romania
A strong point of Romanian logistics is that almost all major European logistics providers have subsidiaries or branches.

Bucharest dominates the country’s industrial and logistics sectors and is popular due to its strategic location close to the port of Constanta, to the major central European logistics centre Budapest in Hungary, and at the junction of two Pan-European corridors. Other secondary locations are becoming popular, such as Timisoara, Cluj, Arad and Sibiu in western and northwestern Romania, Brasov in the central part of the country and Constanta on the Black Sea coast.

An important factor for the development of the logistics sector in Romania is the concentration of the automotive industry in the west and northwest of the country. This allocation is due to the proximity to other production centres in Hungary and Central Europe, as well as relatively low labour costs and rents compared to Bucharest.

Turkey
Demand in logistics primarily comes from the expanding manufacturing and retail warehousing sectors. Whilst low-quality warehousing space is in abundance, there is a severe shortage of modern space.

Some of the key industrial locations include Istanbul, the capital city Ankara, Izmir and Mersin. Areas surrounding major container ports and airports are also key logistics locations with increasing importance.

Forecast

In the short run, logistics in SEE will suffer from the Ukrainian crisis and the uncertainty in economic relations between European countries and Russia, as well as the stability issues in Greece, which is one of the main destinations of cargo flows passing through the SEE countries. The crisis in Ukraine and Russia hit hard SEE exports which affected negatively SEE logistics. On the other hand, crisis events in neighbouring countries could benefit logistics in SEE, as is the case with Bulgarian sea ports which took over some of the traffic from Greek ports.

Integration of the Balkan Peninsula into modern European supply chains represents one of the most important objectives of the countries which are situated in this area.

The expansion of cargo flows between Western Europe and Asia creates new challenges for the SEE region. The Balkans in particular are considered the weakest link in the distribution network between Central Europe and the Middle East. As a consequence of permanently increasing cargo flows, there is a trend for building logistic centres, predominantly by international logistic companies, to reduce transportation time and cost and to improve customer service.

The Balkan countries may also benefit from plans announced by Chinese investors to support financially the construction and rehabilitation of the transport infrastructure in the region.

As seen from the LPI Global Rankings for 2014, the state of logistics in SEE is gradually improving. However, the slower development of logistics in the rest of the region and signs of further deterioration in some countries can prove an obstacle to cargo flows passing through SEE.

The generally better logistics performance of SEE’s neighbouring regions and trade partners means that the region’s development in logistics could be easier and smoother, taking example and copying good practices from them.

Another key to logistics development in SEE is the application of public policies. Targeted reforms and proper investment in one or more areas in less developed countries can significantly improve their logistics performance. Such policies in SEE need to include easing customs clearance procedures and improving infrastructure, but the focus should be shifted on the development of quality logistic services by introducing new technologies and improving training, all of which would reflect on delivery timeliness and reliability and the positive development of logistics.

As global economic dynamics change, emerging markets and changes in trading patterns are having a direct impact on the major trade hubs in Europe. Factors influencing manufacturing and logistics (including external and internal macroeconomic conditions, infrastructure investments and shifts in supply chains) determine Europe’s emerging logistics hubs.

Colliers points out the birth of a new logistic area of European importance in SEE. Historically the so called Blue Banana, a continuous area stretching between Manchester in northern England and Milan in northern Italy and comprising the most densely populated territories in Europe, has been the dominating hub in European distribution, production and logistics operations. This dominance is supported by the intensive global trade via North Sea ports, high GDP and population density. The process of new infrastructure construction, evolving technology, rapid penetration of E-commerce, improvements in supply chain efficiency and demand growth from Central and Eastern Europe is altering the focus of European goods distribution. Simultaneously, a manufacturing belt running from Poland to Turkey via Hungary, Serbia, Romania and Bulgaria emerges and necessitates the evolving of a network of major, modern hubs able to facilitate European wide customers in this part of Europe.

The most important sectors driving logistics services demand are wholesale, retail and trade, followed by manufacturing. There is potential for new market players and retail and e-commerce operators to enter this market sphere. As a result, we expect increased demand for both large regional distribution hubs and the rapid growth of smaller locations.

Given the increasing need to be closer to consumers and customers, this trend is likely to be accelerated in future. The current lack of such existing facilities illustrates that we are only in the very early phases of adapting to this structural change and growth of the e-commerce sector in the SEE region. The emergence of next day delivery in particular could change the entire distribution pattern in the region.