RFA 2009: Survival of the future

RFA Road Freight Association

Bad era – but exciting times – There’s just no getting around the recession and its impact on various industries around the world – commercial transport included. However, all can’t be doom and gloom, so this year’s Road Freight Association’s (RFA) conference focused on survival into the future, rather than lamenting where we were a mere year and a half ago.

“Today, business is about survival,” said Sharmini Naidoo, chairman of the RFA. “We believe it is the RFA’s duty to offer insight and advice during these trying times, not only for the commercial transport industry, but local industry as a whole.

“Trucking is the lifeblood of the South African economy; so, as long as we keep the wheels turning, we’ll keep the economy moving – but to achieve this we need to stand together as an industry.”

Naidoo’s statements set the tone for the entire conference. The predominant message became: yes, things are tough, but there are ways to get through the current crisis, and possibly even benefit from the tough times.

TALKING CENTS

“I’ve been an economist since 1971, and I have never experienced or even seen something like this,” said Rudolf Gouws, chief economist at Rand Merchant Bank (RMB). “So it’s not so simple for any of us to state categorically why this has happened, and where it will end.”

What is clear, however, is that we are not only facing a crisis, but a new reality. Times are getting tougher, and they will continue to do so. Things need to change. Many of the old ways of doing business are gone.

Not all is negative, however. In fact, guest speakers went out of their way to draw attention to the good as well as the bad. “Right now we are in the eye of the storm,” pointed out Gary Wels, chief economist at First National Bank. “The economy is dynamic and the worst of this crisis will pass over – although it is safe to assume that things won’t go back to exactly how they were.”

Why not? According to Wels, over the last decade South Africa has enjoyed an unprecedented growth period. “It’s been both the longest and the biggest growth period we have ever experienced – it was bound to end at some point, just maybe not quite so dramatically.”

And ended dramatically it has. Manual manufacturing was down by 15% in year-onyear figures in February. Real-value building plans had dropped by 52.4% in January 2009 compared to January 2008. Mining output was down by 11%.

“All these things impact on the economy, and translate directly into poor vehicle sales,” reminded Wels.

But all is not lost. Trucking is linked to the success of other industries, and while they are suffering, commercial transport will suffer too. As things get better, the truck market will naturally follow suit.

“Passenger car dealers (also known as manic depressives) are facing far bleaker prospects,” confided Gouws. “From a 100% business confidence indicator rating conducted by RMB over a year ago, the same respondents now report a zero per cent confidence in their market.

“That is such a complete reversal; it actually indicates that something was wrong while things were good. Businesses were being unrealistic and possibly taking unnecessary risks based on a completely over-inflated confidence.”

Commercial transport remained more grounded initially – possibly because it is an industry invested in the bottom line, rather than emotional sales. Calmer heads prevailed in the banking industry as well, which is why – despite a tightening economy – local banks look positively robust in comparison to the international banking world.

South Africa’s larger financial institutions announced earlier this year that they would no longer finance smaller commercial vehicle operators. While the result has been devastating for many smaller companies, Wels drew attention to the pros of having such a strict banking system.

“The sole obligation of banks is to provide funding,” he explained. “When this funding is no longer available, people and companies understandably get upset.

“But what we need to remember is that, in order to provide funding, banks must remain solvent and liquid, and in South Africa, they have achieved just this. Unlike the United States and the United Kingdom, our local banks have not needed an injection of state funds. South Africa is heavily regulated and the result is that we are in a far better financial position than many of our Western brethren.”

Unfortunately, South Africa is part of the global economy, which means that we are intimately affected by the state of other economies. As a result, by March 2009, local credit growth was down by 60%, with levels of credit default growing at a rapid pace. “Word-of-mouth rumours put truck repossessions at around 50%,” revealed Wels.

“A glut of second-hand trucks on the market has also devalued this sector. All in all, banks would rather play it safe right now – it is essential they remain solvent.”

While this is bad news for the trucking industry, keeping the local economy stable is in the best interests of everyone. Wels refers to the situation as ‘umbrellanism’ – a term which aptly describes how banks are protecting themselves simply by staying out of the rain.

“Unfortunately, there is no quick fix,” said Gouws. “Once we start recovering, we will still need to eat into the debt we have accumulated before growth can resume. In the first phases of recovery we will some return again, but this will level off as debts are paid.”

The good news is that, while the status quo is expected to stay the same for at least four to eight months, 2010 and 2011 should see a gradual recovery, although this is dependant on both local and international developments.

“When the crisis hit, industries around the world had a knee-jerk reaction. The shock was immediate and palpable,” Wels pointed out.

“As liquidations ease off and repossession rates come down, perhaps credit policies will be reviewed and lending will begin to pick up again. We won’t return to business as usual, but as the panic subsides we will be able get back to business.”

AN INDUSTRY PERSPECTIVE

From an economist’s point of view, the clever thing to do is to invest now for later, rather than the other way around. “Companies should not be cutting back if they can possibly help it,” insisted Gouws. “Having said that, all the excesses built up during the upswing period must be removed.

“It’s time to become efficient and lean, while still investing in vital areas of growth and improvement. It’s a fine balance, but an important one, and excellent in terms of strategy. Once things get better – and they will – the companies that have prepared for an upswing will be operating from a far better place.”

And industry agrees. The panel discussion held during the first day of conferencing included some of the bigger names in commercial transport and there seemed to be an overwhelming agreement that now was the time to tighten the reins while still keeping a firm eye on the future.

“We must realise that this is a global cycle, and that in all cycles there are ups and downs,” stated Stephen Gottschalk, Value Group’s chief executive officer. “The good times were not going to last forever, and neither will the bad times.

“The challenge now is for operators to manage their assets well and control costs and the pricing offered to customers, as well as keep an open mind. We for example have even branched into using rail rather than seeing it as a threat, and it’s working very well for us.”

“None of us has any experience in dealing with a situation like this,” admitted Jo Grové, CEO of Unitrans. “The speed at which it’s all happened has also been incredibly fast. Basically, we’re all just winging it.” The future for many local manufacturers and operators lies in just how well companies can wing it.

“Our approach has been to go back to the basics,” he continued. “I believe that things are going to get worse before they get better, and if it comes down to survival, those who are able to cut back on unnecessary expense will weather the storm.” In other words, invest where needed, but do not spend where added expenses are preventable. “For example, we have shifted to cash wherever possible, so as to avoid extra debt, and we are far more conservative in our spending,” said Grové.

Peter Mountford, CEO of Super Group’s Supply Chain Division, expanded on this idea by explaining that 50% of a weighted average on capital investment is a high interest rate – and the interest rate in South Africa is high, even if it has dropped by 300 basis points of late.

“Companies need to be managing costs during these times, not servicing unnecessary debt.”

How can such debt be avoided, though? First off, trucks now need to be driven for longer. “A year ago, residuals of 45 to 50% were expected. This has proven unrealistic and trucks can now maybe recuperate 30% of their replacement costs,” said Thinus Erasmus, CEO of Imperial Logistics Transport and Warehousing. “This means that operators need to sweat things out a bit more, sell later and operate their vehicles far more efficiently. Trucks need to last longer than they did before.”

This means better service schedules and maintenance programmes, as well as a greater concentration on how trucks are being driven. A good driver can make a huge difference in terms of fuel and maintenance costs.

Another key area that operators need to focus on is contracts. “While the coal and minerals industries were booming, trucks sales – particularly for tippers – were doing phenomenally well,” said Terry Bantock, CEO of Value Added Logistics Solutions.

“With those sectors crashing, what else can tippers be used for? Not much,” added Grové. “That’s why it is vitally important for operators to secure good, long-term contracts with both their manufacturers and their customers. “Short-term contracts while waiting for a better job are a thing of the past. Security is now of the utmost importance, as well as good working relationships.”

This same attitude is vital for operators transporting commodities throughout Africa. “The commodities market is down by between 45 and 50%,” said Mountford. “Transport contracts are extremely hard hit by such a loss. Operators working in these areas should secure longterm contracts. Things will be tight while commodities are down, but at least contracts are in place to get through the tougher times.”

Mountford also drew attention to the importance of portfolio diversity and not keeping all one’s eggs in one basket. “Try operating across a number of different industries. Some will always do better than others.”

“Don’t be shy to renegotiate with clients when necessary either,” advised Grové. “They want certainty as well, which includes their operators not going out of business. If operators are upfront and realistic about costs, they will respond to contract negotiations favourably.”

Said Garth Bolton, CEO of Cargo Carriers, “Trucks are reliable. Yes, rail is cheaper, but our clients are guaranteed their loads will arrive when and where they need them. We need to play on these strengths and our clients will pay for this reliability.”

Eric Gower-Winter, Barloworld Logistics’ CEO, rounded off the discussion by pointing out that investment is still happening, and will continue to happen. “We need to take this into account,” he said, “and not just concentrate on now, but look to the future. How can we as an industry best position ourselves for the upswing when it comes?”

The first step is of course to still be operating. Profits will come again, but only for those who survive the tough times, and if companies succeed in trimming all excesses and operating more effectively and efficiently, they might just end up in a better position than when they started.

As Gerhard van der Horst, CEO of Crossroads Distribution so aptly stated: “A crisis is a terrible thing to waste. Take the knocks. Absorb them. And then take advantage of what the crisis creates. We can go forward and actually build from where we are.”

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