Janne Mela, freight production manager at DHL International Ukraine, talks to the Post in this exclusive interview.
Janne Mela has been in the freight-forwarding business since 1989. Starting in 1995, he completely devoted himself to the development of this business in the CIS and Baltic countries at a number of logistics companies in top trade and product management positions. Mela frequently traveled to Ukraine when Finland owned a 90 percent stake in what was once Danzas Ukraine, a subsidiary of Swiss-based logistics company Danzas. In May 2004, he moved to Ukraine with his Finnish-Ukrainian family and began working at DHL International Ukraine as freight production manager, in which position he remains today. Mela told the Post in this interview that there are several multinational logistics players currently operating in the country, such as DHL, but the next several years will see many more logistics companies coming to Ukraine.
DHL is a global market leader of the international express and logistics industry with international network links in more than 220 countries and territories worldwide.
KP: Please tell us a bit about DHL’s operations in Ukraine?
JM: DHL has been on the Ukrainian market for over 15 years, since 1991. Freight forwarding started a bit later, in 1993. Locally we have the DHL brands of Freight, Exel Supply Chain, Global Forwarding, all forming the business unit of ‘Logistics.’ Plus, we have a separate ‘Express’ business unit.
Ukraine’s freight forwarding, which I present, belongs to CEE (Central and Eastern Europe) governance, and, more precisely, Poland and Ukraine form a powerful country cluster in this region. Our year-on-year growth in terms of revenues has a pace of 30 to 60 percent, depending on the products we offer.
KP: Tell us about the main tendencies currently taking place on the freight-forwarders’ market in Ukraine. Are there any new trends or services? Have there been any significant changes in the style of running this business lately?
JM: Customers are clearly moving toward third-party logistics solutions, realizing that decentralized models are not necessarily cost-effective in the long run. This means that now, when concluding deals with a client, companies increasingly employ specialized logistics companies that take care of all the logistics operations (like the provision of warehouses, transportation, etc.) for a client, instead of using their own logistics departments, which may not always be able to offer all of the required services.
If you have all the basics in place, for example, facilities, people, IT/S solutions, and if you managed to build a comprehensive network (European coverage of partners, offices, terminals), you can actually gain impressive results in Ukraine. We often hear that the price is the main criterion forcing a customer to choose one or another freight forwarder or logistics company, but recent market research clearly indicates that trustworthiness and quality are the ones that really make a difference.
That is also the reason why we are concentrating in our practice on such directions as linehaul plannings [developing routes throughout Europe], subcontractor management and deployment of common software modules that allow us to monitor shipment movements. As an example, we are practicing a pan-European visibility in full truckloads, when we can monitor any truck being loaded in the EU and know the date of its arrival in Ukraine, so that we can prepare to load the truck back, without having to let it go back to Europe empty.
Nowadays, also the warehousing – as a part of the entire logistics – is seen as a promising field of industry, especially given that the demand for warehouse space significantly exceeds supply in Ukraine. Everyone tends to have concepts of establishing ‘logistics parks’ in the Kyiv area – and I’m not denying that our company wouldn’t have one in the future. Yet the costs for these are extremely high if considering A-class premises, compared to the capitals of other European countries.
KP: Are investments in the Ukrainian freight-forwarding market on the rise now? Is there any increase in interest from Western/international companies to invest in this business in Ukraine?
JM: Except for large integrators or multinational logistics companies, Ukraine is still a blank area for many logistics operators. But I am convinced that many new entrants will evidently land here in the coming years, either starting from scratch or following retail sales-sector clients. Unfortunately, Russia is often considered first as a big opportunity and Ukraine often follows only after.
Business risks in Ukraine are regrettably still rather high. This could hinder the investment willingness of some Western companies. Moreover, companies often practice the so-called “asset light strategy,” when instead of purchasing land or property here, they prefer to lease or rent.
I’m not the best person to judge regarding investments, but taking into consideration the constantly increasing consumption of goods, the need for the development of the infrastructure, and the large share of transportation in Ukraine’s GDP, I would expect that investments will boom in the forthcoming years.
KP: Is the number of international companies using freight forwarders in Ukraine growing? What about Ukrainian clients? And who are your major clients?
JM: I’m delighted to say that our latest customer acquisitions are mainly related to foreign companies. This does not mean that Ukrainian companies do not play an important role in our incomes and target group.
Foreign companies often choose us to provide a full range of services that they request, and because we are governed by business rules that are similar to theirs.
But the main difference is in the way of thinking. International companies want to outsource third-party logistics as much as possible, paying a variable price for our services, depending on our expenses and other factors. Ukrainian companies often tend to in-source these services, that is, get them at a fixed cost by employing their own logistics departments and even their own fleet of vehicles. This is not criticism for or against either direction; both have their pros and cons.
KP: What are the major driving forces that affect the freight-forwarding market in Ukraine today?
JM: I believe that many of the legislative norms need to be transformed, not the least of which, the customs regime, which on a daily basis affects the way this business is run. The imbalance in trade is also effecting freight forwarding, because Ukraine’s exports of goods by overland transports is not showing any signs of recovery and growth, and in fact, the gap between overland export and import volumes is getting greater.
In terms of tonnage, export is growing much slower than import because, for instance, such a large share of Ukrainian exports as steel production or grain is mostly carried by sea, not by trucks, while imports includes a bigger share of products with much smaller unit weight, like consumer goods, for example. Therefore, some supporting mechanisms for the small and middle-sized export sector would be highly welcome. The government could do more in this respect.
KP: What are the main bottlenecks hampering the development of the freight-forwarding market in Ukraine, if any?
JM: My main concern is that this country attracts a small number of investors because of the kind of legislative stagnation that can be observed here. The legislation here is renewed only gradually, or hardly at all.
If you have legislation that is lagging behind the legislation that neighboring countries are practicing, it frightens off the investors. This affects the whole business environment and development in general.
I must say that the list of bottlenecks for our business is almost endless: high inflation; Ukrainian carriers are not considered LCCs (low-cost carriers) like Polish companies, for example; declaration and documentation processes in general involve a lot of bureaucracy; tax revenue collections are carried out in an old-fashioned manner, by customs districts; the infrastructure overall is underdeveloped; the existence of ‘black market’ providers, etc.
It’s amazing, but when you actually compare the logistics cost of almost any single item “from door-to-door” and compare it to some other European country, the difference is huge and not in Ukraine’s favor. For instance, the price for renting warehouse premises in Ukraine is roughly 40 percent higher than in Finland.
KP: How tough is the competition on this market now?
JM: Well, I haven’t noticed such fierce competition as in my home country, where every single action or word said by a competitor could be used against him. What I have also learned is that the competitiveness ranking of Ukraine is quite low, which might be partially connected with the Ukrainian mentality that I’ve experienced while doing various purchasing. “If you don’t like my product and terms, you may ask elsewhere,” is not a rare answer to a client here. It seems that a customer is not a king here. At DHL, we pay very close attention to keep the attitude toward a customer at a decent level.
KP: What are your forecasts regarding the development of this business in the nearest several years?
JM: I would expect that future trends, shall we say, in a five-year prospective, are that freight-forwarding companies locally will integrate with each other, while some might be acquired by international players.
I would also add that contractual terms between market participants will become more stable during their time of validity. The business is already moving into a more legal direction, while corruption is gradually fading. The warehousing business will continue flourishing for some time to come.
In any case, the importance of this industry will remain remarkable, given that the share of the transportation sector in Ukraine’s GDP is 14 percent.
