Transportation and Logistics in

Sectoral Analysis

Autumn 2005 ICEG EC Sectoral Analyses – Transportation & Logistics 2

Table of Contents

Executive summary______3

1. Trends in the European Union and in the region ______4

2. Evolution of the sector in Hungary ______6

3. Market structure ______10

4. Regulation and policy measures ______11

5. Short and long term prospects ______13

6. Sectoral SWOT analysis______15

ICEG EC Sectoral Analyses – Transportation & Logistics 3

Executive summary

In the first half of 2005 the positive trend, namely the intensification of foreign trade in the EU started in the second part of 2003, contin- ued. It was supported by the dynamic increase of foreign trade of the NMS, which increased more than the EU average. Thus, the share of this region in foreign trade also grew. The value of the goods exported from the Central and Eastern Euro- pean countries increased and in line with that tendency, the role of logistics services augmented. The transportation and logistics market has grown by double-digit figure for several years which reflects well the dynamism of this market. In line with the increasing oil prices the costs of transporters also grew. The increase of oil prices seems to be a permanent process with which the actors of the sector have to reckon. In the first half of 2005 the transportation sector in Hungary reached a significant growth mainly due to the outstanding performance of the international transportation (approximately +25%). The annual growth of the sector was more than 18% which is significantly higher than the average of the previous years (2.5-4.5%). The role of the road is growing continuously in modal split figure of transportation, in line with the decreasing role of railroads. However, the share of road transportation is still lower than that of the EU- average. In Hungary, the share of road in transportation is 15%- points lower than the EU-average. The increasing role of road transportation is partly due to the signifi- cant investments in the road infrastructure. The length of the motor- ways in Hungary increased significantly in the previous years and that trend is expected to continue in 2006 too. There are four places in Hungary where significant National Logistic Centers are operated (in , , Sopron and Székesfe- hérvár), while in case of the other 7 NLCs more development is needed to enhance the functioning of these places. Mainly because the demand on logistics services close to these places – or far from the capital city - is expected to grow. In case of transportation sector the role of small-sized enterprises is significant, mainly in road transportation. On the other hand, the EU accession and its result, namely the larger competition is expected to decrease the role of these entrepreneurs. Besides that, the large ac- tors of the sector plan to become regional actors, mainly because Hungary has an adequate geographical position. However, we must mention that the competition among transporters of NMS is increasing. In case of the trade between Hungary and Po- land, and Hungary and , the role of those haulers which are operated in the trading partner is dominant. ICEG EC Sectoral Analyses – Transportation & Logistics 4

1. Trends in the European Union and in the region

Positive tendencies In the first half of 2005 the positive trend, namely the intensification in 2004-2005 in of foreign trade in the EU started in the second part of 2003, contin- the EU ued. During the first eight months of the year foreign trade of EU-25 increased by 8% compared to the same period of the previous year in

euro terms.

…and also in the It was supported by the dynamic increase of foreign trade of the NMS, New Member which increased more than the EU average. Thus, the share of this States region in foreign trade also grew. This positive tendency is expected

to continue in the future, thus the trade – and as a result, the trans-

portation - between Western and Central Europe is expected to in- crease further. While the share of the four so-called Visegrad coun- tries (namely the Czech Republic, Hungary, Poland and Slovakia) in the foreign trade of EU-15 was only 2.5% in 1995, this figure in- creased above 4% in 2003.

Modal split figures in case of the transportation of goods in the Visegrad countries and the EU 100%

80%

60%

40%

20%

0% Czech Republic Hungary Poland (2004) Slovakia (2003) V4 EU15 (2002) EU25 (2002) (2005H1) (2005H1) Road Railroad Inland waterways Pipelines

Source: Eurostat, national statistics offices

Road: winner, rail- Regarding the modal split figure in case of the transportation of road: loser goods, one can observe that the share of road transport is increasing

while the share of other transports is decreasing. Accordingly, road transport has a dominant share in the EU. On the other hand, road transport has a much more dominant share

in the old Member States than in the NMS. While in case of the EU-15,

75% of all transport (sea transport is excluded) is road transport, in case of the four Visegrad countries this figure is about 60%. In case of the latter countries, railroad transport still has a bigger role mainly due to the former (communist) regim. On the one hand, it is true that the role of railroad and the length of railways decreased significantly after the transition, on the other hand, the figures of the railroad transport – such as the role of railroad transport or the density of ICEG EC Sectoral Analyses – Transportation & Logistics 5

railways - are generally higher in the NMS than in the EU-15. Anyway, the role of road transport is expected to increase in the future in case of the NMS too, which will result in the further decline of the railroad and other transports. Probably, the biggest adventage of the road

transport is that goods can be transported from house to house. Thus,

despite the fact that the figures of railroad transport improved in many NMS in the first half of 2005 (such as in the Czech Republic or Hungary), the role of road transport increased further. Goods with higher The value of goods transported from Central and Eastern Europe in- values creased continouosly in the last years. In 1999 the average value of a ton of goods was EUR 1000, while this figure increased to EUR 1400 in 2003. This means that these countries export goods with higher and higher values. Among the countries in the region, Hungary exported goods with the highest value (a ton of good was valued at €2700), mainly because of the fact that the share of electronic products is quite high in the export. It is interesting that the figures of the Czech Republic and Slovakia in 2003 were EUR 1600 and EUR 1800, respec-

tively.

Emphasis on trans- Among the important tendencies we have to mention that the EU tries pors that has less to put more emphasis on the dispersion of those modes of transports impact on the envi- that have less negative effect on the environment, such as the inter- ronment modal transportation methods (Ro-LA, Ro-Ro, etc.).

Increasing oil In line with the increasing oil prices the costs of transporters also in- prices creased. The increase of oil prices seems to be a permanent tendency with which the actors of the sector have to reckon.

Infocom technolo- In the global logistics sector one can observe that information and gies in the sector communication technologies has larger and larger role in logistics ser- vices, which make transportation easier and more efficient.

ICEG EC Sectoral Analyses – Transportation & Logistics 6

2. Evolution of the sector in Hungary

2004: a good year In 2004 Hungary joined the EU and this factor influenced the figures in Hungary of transporation too. In 2004 the value of international transports in- creased significantly. Compared to 2003 that figure increased by al- most 17% in terms of tonne-kilometre. Thus, total transport figure –

which includes national transport - increased by more than 10%,

while that figure averaged around 2.5-4.5% in previous years. H1 2005: the good In the first half of 2005, the good tendency continued. The perform- tendency contin- ance of transportation increased by 18.1% compared to the same pe- ued riod of 2004. Basically the road transportation reached an outstanding

growth (+28.3%), while inland water transport also increased signifi- cantly (+23.1%). On the other hand, the performance of railroad and pipeline transport played a less important role in overall growth of the sector. International transport is the In the first half of 2005 international transport remained the main en- main engine of gine of the growth. During the first two quarters of the year interna- growth tional transport increased by almost 25% in terms of tonne-kilometre mainly due to the outstanding performance of road transport. Interna- tional road transport incrased by approximately 50%. Increasing role of road transport Basically due to the aforementioned factor, the share of each mode of transport changed. In the first half of 2005 the share of road transport increased to 58%, which represents a 5%-points jump compared to the same period of the previous year. The share of inland water transport also increased by 0.2%-point (to 4.3%) in the examined pe- riod. The share of the other modes of transport decreased. The role of railroad transport decreased despite the fact that its performance in- creased. The share of pipeline transport also decreased. Significant de- The development of the road infrastructure, namely the increase of velpment of infra- the length of the motorway network had a positive impact on road structure in 2004 transport. In 2004 the (which connects to M3) and 2005 was opened and the was also lengthened by a 12 km

section (between Polgár and Görbeháza). Besides that, in the Western

part of the country two small section of M7-M70 motorways were opened (M7 Becsehely-Letenye 8,7 km, M70 Letenye- Tornyiszentmiklós 18,6 km). In 2004 57 km of motorways was opened which was almost the double of the 2003 figure (29 km). In the summer of 2005 another almost 20 km long section was opened, namely the section of M7 between Balatonszárszó and Ordacsehi. Ac- cordingly, the length of motorways in Hungary reached 668 km.

…which is ex- According to the plans the length of new motorways will reach 95 km pected to continue in 2005. In 2006 the planned length of new motorways is 219 km (in- in the future cluding the lengthening of M3 to Nyíregyháza, the opening of M35 that connects Debrecen to M3, and the will be built to Du- naújváros). In 2005 the longest section that is expected to be opened

is the remaining section of M5 that will reach .

At the end of 2006 we expect that the length of motorways in Hun- gary will reach 963 km in accordance with the plans. This means that the density of motorways, namely the total length of motorways per ICEG EC Sectoral Analyses – Transportation & Logistics 7

100 km2 figure will reach 1 km of motorway.

Increasing tolls At the beginning of 2005 motorway toll fees increased by 15% in av- erage. The increase was explained by the rate of inflation and the in- creasing costs of the infrastructural development.

Decrease of stan- Considering the high oil prices the government decreased the VAT dard VAT rate rate on petrol products to 20% from 25%. Due to the decrease of VAT rate, prices of petrol decreased by around HUF 10-11. However, that decrease has no significant impact on the transport sector mainly ow- ing to the fact that transporters reclaim VAT on gasoline. It means the competitiveness of the Hungarian transporters has not increased by that measure. On the other hand, that measure may have a positive impact on the budget due to the fact that the demand of petrol can increase in the border region and in case of transit traffic.

Pan-European cor- The aforementioned development of infrastructure network is in line ridors with the Pan-European infrastructural development.

Pan-European Transport Corridors

Source: EIU

Due to the good geographical position of Hungary 4 out of the 10 so- called Helsinki corridors crosses the country. These are the following:

ICEG EC Sectoral Analyses – Transportation & Logistics 8

Corridor IV.

Dresden/Nuremberg – Prague – Wien/Bratislava – Győr – Budapest – Bukarest – Craiova/Constanta – Sofia – Thessaloniki/Plovdiv - Istanbul

Corrigdor V.

Venice – Triest/Koper – Ljubjana – Maribor – Budapest – Uzhorod – Lvov

V/A: Bratislava – Zilina – Budapest V/B: Rijeka – Zagreb - Budapest

V/C: Ploce – Sarajevo – Osijek - Budapest

Corridor VII.

Danube

Corridor X.

Salzburg – Villach – Zagreb – Belgrade – Nis – Skopje – Thessaloniki

X/B: Belgrade – Novi Sad – Budapest

Obviously, the Corridors influence the development of the Hungarian infrastructure network, basically the motorway network. Besides that, the development of the inland water transport route, namely the Da- nube, is also needed.

Logistics service Regarding the intersections, there was no significant advance since centres our latest report. Acording to the conception, there are 11 logistics regions in which there are 13 national logistic centres (NLC). How- ever, most NLCs are under planning or development. Among the NLCs the most important centres are in Budapest, Debrecen, Székesfe- hérvár and Sopron. These NLCs increased continuously their capacity. Trans-European Transport Network and National Logistic Cen- tres in Hungary

Source: KTI ICEG EC Sectoral Analyses – Transportation & Logistics 9

There are other smaller logistics centres in the country but those are mainly situated near Budapest and obviously close to motorways.

ICEG EC Sectoral Analyses – Transportation & Logistics 10

3. Market structure

Outsourcing Outsourcing is relevant in the logistics and transportation sector. Two thirds of the largest enterprises in Hungary outsource its storage ac- tivity but the same amount of outsorcing is observable in case of the transportation and customs management services.

Logistics services In Hungary the value of logistics services increases by 20% in average according to estimations. If Hungary was able to be a regional logis- tics centre this figure could be even higher.

About the enter- The majority of logistics enterprises are private entrepreneurs. Their prises share in total number of enterprises reached 60% in the middle of 2005. One can find most private entrepreneurs among road transport- ers where the number of private entrepreneurs is twice as much as the number of companies.

Number of logistics enterprises, by activity and form of enter- prise (30 June 2005) Share of Private Compa- private en- entrepre- Total nies trepreneurs neurs in total (%)

Railroad transport 0 16 16 0.0 Other (scheduled) road 0 141 141 0.0 passenger transport Road transport 16 565 8 481 25 046 66.1 Inland water transport 23 113 136 16.9

Air transport 22 109 131 16.8 Storage services 311 692 1 003 31.0

Transport agent activities 754 2 238 2 992 25.2

TOTAL 17 675 11 790 29 465 60.0 Source: KSH

Decreasing number In the last few years the number of private entrepreneurs decreased of private entre- gradually. This trend is partly due to the accession to the EU which preneurs resulted in growing competition in the sector. Thus, those private en- trepreneurs, which were not able to keep the pace with the competi- tors, ceased to operate.

The biggest play- According to their revenues the biggest actors of the sector are the ers MÁV group, the Magyar Posta (Hungarian Post), the Waberers Group, the MASPED and the Raaberfreight Group. The revenue of these five companies reached about HUF 250-300 billion in 2004.

Foreign actors Among foreign actors the dutch investors (such as Rynart, Vos, Ver- steijnen) have the largest share in the sector. They are followed by the Austrians (e.g. Hödlmayer, Delacher) and the Germans (such as Schenker, DHL-Danzas and Dachser). Besides these investors, Italian

and American investors also play a significant role in the sector.

ICEG EC Sectoral Analyses – Transportation & Logistics 11

4. Regulation and policy measures

Transportation and In the European Union there is no detached common transportation logistics policy in and logistics policy. However the EU has a common transport policy, the EU which includes transportation and logistics. The main features of this transport policy related to transportation and logistics are the follow-

ing.

Road transport The regulation of road transport in the EU defines the conditions of participating in international transportation, while the regulation of national transportation remained in the hand of the governments. In

general the transportation in the EU is bounded to three conditions;

these are the personal reliabilty, the professional competency and the adequate financial safety. The main directives of the regulation of in- ternational road transportation are the following: access to the market of the international road transport; free provision of services; no dis- crimination; equal conditions in the provision of services.

The international road transportation is based on the EU’s quota-free permission system. This activity can be operated in possession of the permission of the Community. Regarding the national transportation, the permission is given to all enterprises that fulfill the aforemen- tioned conditions.

Railroad transport The market liberalisation of the railroad transportation is dual. On the one hand, the liberalisation of trans-European transportation of goods on railroad has been completed in the old Member States until 2003. On the other hand, the entire liberalisation of international transporta- tion is planned to be completed until 2008. Then the real single mar- ket of railroad transportation will be achieved.

Intermodal trans- Regarding the intermodal transportation, the Commission tries to put port more emphasis on the dispersion of these modes of transportation by allowances and by the possibility to give subsidy. The Hungarian regu- lation is harmonised with this regulation. In Hungary those (road)

transport vehicles, which are used in intermodal transport, are

granted rebates of vehicle taxes and these vehicles has an exemption from the weekend restrictions on heavy goods vehicles. Air transport The directive of the EU’s air transport policy is liberalisation which can

enhance further the increase of the air traffic. Regarding the stock of

airplanes, those planes which make heavy noise must be taken out of operation. No customs bor- The EU is a customs union in which the customs duties were abol- ders ished. Accordingly, the products can be transported tax-free within

the European Union. In the destination country (where the product is transported) VAT must be paid on the imported goods. Obviously if the product is imported from a third country (outside the EU) then not only VAT but also customs must be paid on the product.

Derogations As a result of the accession negotiations, Hungary received temoprary derogations in the following cases related to transportation and logis- tics, which are still in effect: ▪ For a maximum of 5 year after accession, Hungary does not need to open its cabotage market, however, according to the agree- ICEG EC Sectoral Analyses – Transportation & Logistics 12

ment, the Hungarian transporters also cannot access to the cabo- tage market of the other Member States. ▪ Until 31 December 2006 Hungary needs to open its Trans- European Rail Freight Network only partly. ▪ Hungary has also been granted transitional arrangement on the maximum authorised weights and dimensions of road vehicles (un- til 31 December 2008).

ICEG EC Sectoral Analyses – Transportation & Logistics 13

5. Short and long term prospects

The effect of the re- It is an interesting process that the increasing wages have a positive location on the sec- impact on the transportation and logistics sector. Since the relocation tor means the companies move their production to another country, mainly situated in the neighbourhood of Hungary, it increases the de-

mand of transportation. On the one hand, Hungary is a significant

market for the neighbouring countries, on the other hand, the good geographical position of Hungary makes the country a good logistics centre towards Southeast and East European region. Thus, the multi- national companies transport back and storage their products in Hun- gary and they can also export it from here. It means the role of Hun- garian transport and storage companies will grow.

Concentration is ex- Most directors of the largest logistics companies believe that concen- pected tration is expected in the logistics sector in the next 1-3 years. In line with the aforementioned factor, namely the process that the assem- bly-based manufacturing is leaving the country, the role of services will increase in the future and in parallel the role of storage and logis- tics services are also expected to grow.

The role of centres Traditionally, Budapest and its region have the leading role in logistics in the country is ex- activites. In the future we expect that the position of Eastern Hungary pected to increase will increase, storage companies will grow their capacity in this region which can result in the increasing prices of building sites. Support of intermo- Regarding the EU tenders, mainly those actors can apply for these dal transportation calls which operate intermodal transport services. In the Community’s policy mainly these enterprises can get support. On the other hand, those companies that cannot provide complex and comprehensive

services will have to face with severe defficulties in the future. Their

hope can be the specialisation rather than a wide service portfolio. Strong competition EU Enlargement certainly has an impact on the previous relationships, the conditions of the competition and the business climate. The chal-

lenges to keep competitiveness and to stay in the market are vital for

the actors in the logistics and transportation sector, which is obvious regarding the market structure of the sector. Several hundreds of thousands enterprises compete in this sector. Single market As a Member State of the Union, Hungary has become a part of a

transport market where Hungarian transporters could have appeared only by special permissions before the accession. Besides that the Hungarian enterprises had to cope with transport enterprises which knew the market better and had international experiences. Although the regulation of freight and passenger transport services is harmo- nised to EU legislation, there are significant differences between the transporters of Hungary and that of the EU-15. Basically, most Hun- garian transporters are capital-scarce and less modern compared to

those operated in the EU-15 both in terms of transport safety and en-

vironmental aspects. “Threats” from According to the view of the Association of Hungarian Forwarding and Visegrad countries Logistic Service Providers (AHFLSP), the majority of the international

transportation became services in the single European market. In that ICEG EC Sectoral Analyses – Transportation & Logistics 14

environment the Hungarian haulers can find good market opportuni- ties if they specialize and focus on a few activities. The large national holdings are expected to cooperate with each other which is more likely than mergers and acquisitions in the market. Those larger Hun-

garian haulers, which can provide adequate, specialised and high

quality services, will be able to cope with the competition even in the single market. However, it also means that those large enterprises have the best chance to survive and grow which have good stock of vehicles and are present in the market for a while.

Unlike the international transport, national transport remains pro- tected from foreign competition for some years. Until 2007 EU pro- tects its market from the Hungarian haulers, while Hungary has worry about the haulers of the other New Member States and it seems it is not an unrealistic fear. In case of the transportation between Hungary and Poland, the Polish transporters’ share reaches 70%, while the fig- ure in case of Slovakia is close to 100%.

Elimination of bor- The elimination of border barriers is a positive factor for the road der barriers haulers, while that is not so positive for those enterprises which pro- vided customs management services. The Hungarian haulers’ share in the transport from and to the European Union is around 54%. Altough that figure decreased by 2%-points in the last 1-2 years, in medium

term the Hungarian haulers can increase their share.

About MÁV… The status of the Hungarian Railroads (MÁV) can be protected only in short or medium term. The company’s future depends on the factor whether the MÁV can get in the dynamically expanding intermodal

transport.

EU enlargement has a positive impact on the railroad transportation too, the time of transport can be decreased and that increases the competitiveness of this mode of transport. We expect that the liberali-

sation of railroad transport will also generate further increase of

trasnportation. The biggest competition is expected in case of interna- tional haulage and intermodal tansport according to international ex- periences. These are the most profitable services and liberalisation influences mainly these activities.

Air transport can be Air transport can be one of the biggest winners of the EU enlarge- a winner ment. The performance of Budapest Airport can be doubled in the next 10 years. It is also a good factor that almost half of the trasnport is transported by Hungarian enterprises. Regarding the potential in- crease of air transport, it is worth mentioning that the share of this mode of transport is significantly higher in the EU15 than in Hungary.

ICEG EC Sectoral Analyses – Transportation & Logistics 15

6. Sectoral SWOT analysis

Strengths Weaknesses

• Good geographical position of Hungary; • The status of road infrastructure is still 4 out of 10 Pan-European corridors run lagged behind the EU average across the country • The national railroad infrastructure is • As a Member State, Hungary is the weak Southeastern border of the EU. Thus, Hungary is the link between Southeast • The cooperation between firms is Europe and the EU and also between smaller in Hungary than in the West- the CIS countries and the EU ern-European countries

• Rapid growth of foreign trade and • There is a duality in the sector: over- transportation in the last years supply of capacity, while shortage of complex, good quality logistics ser- • There are several high-quality logistics vices services centers in Hungary. • The interconnection of SME’s into transportation chains is underdevel- oped Opportunities Threats

• As an EU Member State, Hungary’s • The underdeveloped transport infra- connection with the Union’s logistics structure (underdeveloped compared sector is strengthening, thus, Hungary to the EU average) may hinder the is attractive for investors. The increase further development of the role of the of foreign direct investments is ex- logistics sector. pected, which can spur the growth of competitiveness of the enterprises in • The provision of high quality logistics Hungary. services demands a small number of highly qualified workers, which is • Hungary’s share in international (Euro- against the interest of the workers pean) transportation can grow further due to the developing infrastructure. • Increasing competition in national and international transportation due to EU • Hungary has its strategy to become a membership. This threat mainly con- regional logistics center which can also cerns to those small and medium sized spur the multinational logistics enter- enterprises which are not present in a prises to invest in the country. transportation chain.

• The not adequate level of development of the infrastructure may have a nega- tive impact on transition routes crosses the country

• Without high quality services the coun- try will become only a transit country which has no significant value added but costs.