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Latvian logistics industry faces challenges

  • 2009-08-19
  • By Olga James

BUILDING BLOCKS: Latvia needs to invest more to develop its capabilities as a fast and efficient transit hub.

RIGA - Historically the Baltic States, and Latvia in particular, have acted as proactive players in the evolving world of international transportation and logistics, and for good reason. In the pre-crisis years, the U.S./European markets were estimated to be worth almost 1.5 trillion dollars, or about 5 percent of the global GDP. Due to its geographic location and well-developed transport infrastructure Latvia is very well poised to acquire a significant share of this highly lucrative business.

Logistics has always been an integral part in the composition of Latvian economics (according to Reuters, transit, transport and storage contribute as much as 10 percent of the country's GDP). The industry has become even more important for Latvia's macroeconomic makeup nowadays, as the Baltic republic is grappling with the negative effects of the international financial crisis, and the GDP decrease has reached double digits. While the business environment remains extremely challenging around the world, Latvia strives to maintain and further expand the portfolio of international business clients across all major industries and regions.

Several factors are necessary to succeed in the logistics business at the international level, notably the efficiency of the transportation infrastructure, the regulatory and institutional frameworks and the level of distribution systems. Latvia is striving to create comprehensive services addressing all aspects of the logistics process including transportation, storage, packaging, administration, management and the legislative base in order to attract global companies that offer high profit margins and gain access to long-term projects providing sustained recurring revenues. Even though the progress had been somewhat stalled in recent months, the government has been working on  modernizing the road infrastructure, to raise it to EU norms, and updating the legislative base to facilitate the development of the logistics sector.

Logistics companies in Latvia, which is favorably positioned in relation to the core pan-European transit routes, primarily specialize in the transportation of coal, oil and oil products, metal, timber, cotton as well as chemical and perishable goods. 
According to statistics by the Transit Division under the Latvian Ministry of Transport, in the period from 1999 to 2008 cargo turnover at Latvian ports rose from 45 million tons, to 63.6 million tons, with the ports of Riga and Ventspils leading the way. Railway cargo turnover of the state-owned company Latvijas Dzelzcels (the largest transport company in the Baltic states) jumped from 28.8 million tons in 1999 to 56 million tons in 2008. Riga International Airport reported 4.4 million tons of transported cargo in 1999 and this figure almost doubled by 2008, while the number of flights in the reporting period rose from 19,387 to 57,230. Private companies specializing in providing logistics' services have also done well in recent years and a wide range of service providers are looking confidently into the future.

This year saw a dramatic drop in the sector's growth due to the effect of the global economic downturn. Since the beginning of this year the market players have been facing some of the most difficult market conditions in their history.  However, analysts report that overall, the logistics industry is in considerably better shape than other sectors of the Latvian economy.

Just like most of the business operators in the Baltic States, logistics companies are currently facing a diminishing customer purchasing capacity, which is reflected in dwindling profit margins. When the credit crunch squeezed interbank liquidity, credit tightened and logistics' companies saw their customer base shrink dramatically. There are clients that have declared bankruptcy and were forced to liquidate; there are those businesses that are facing short-term financial constraints and therefore their cash resources are very limited. Even large corporations that are sitting on pools of liquidity are hesitant to spend money since they don't know what the next turn of financial crisis is going to bring.

However, a big advantage of the logistics companies in this particular market environment is that they are able to offer clients customized solutions to operational problems and offer tangible benefits that continue to be a source of competitive advantage for the struggling companies, even in difficult times. The benefits of using logistics services, such as reduction of capital expenditures, enhanced customer service capabilities and improved functional efficiencies are generally obvious to every business owner. As a rule, logistics managers do not have to invest a lot of time in convincing a client to develop a business relationship, on some level. Therefore, the more proactive the logistics service provider is in updating the service offering, and reaching out to potential customers, the more clients he will attract and the more revenue he is going to generate in the long run.

There are two core ways that a successful logistics company can go in order to stay afloat in the current market environment. The most obvious way is reducing prices without compromising quality, which is primarily achieved by carefully planned cost reductions. The second method is in extending the coverage of the territorial network, offering clients access to a wider variety of markets. Companies that are able to find business partners in Lithuania, Estonia or Russia will arguably have a competitive advantage over the operators that are only covering Latvia.

Even though Latvia, without exaggeration, is a bridge between the East and the West, this favorable factor has not been fully utilized yet. Admittedly, at the present time the level of recognition of Latvia in the international business arena is still rather low. Even though the country has achieved wide recognition in the cultural sense - as the home of the Latvian Song and Dance Festival and, as of recently, the home of the Blondes Festival, on the business level recognition and awareness remains low. The countries that are Latvia's competitors in the sphere, such as Finland, Germany or Poland, have been much more active in attracting foreign investors and business partners. Even though these are difficult times for promotional activities, undoubtedly the Latvian logistics industry cannot thrive without extensive support at the state level.

The same principle that is relevant at the government level is true for the company level. Establishing business relationships sometimes is a rather costly enterprise that involves financial resources as well as time. Making investments in this situation means balancing on the survival line, and might seem risky, but new markets offer new business opportunities that cannot be ignored. It is virtually impossible to put a business on the international map without participating in industry conferences or exhibitions, fostering business relationships with international counterparts and making cautious investments in promotional activities.

Extensive development of Latvia's infrastructure facilities and logistics systems is crucial for establishing the Baltic country as a major pan-European transit point. Its favorable geographic location, an undoubtedly great advantage that Latvia has been able to capitalize on in the past, does not by itself guarantee the steady and sustainable client flows in today's world of cutthroat competition between logistics centers. It is necessary to create the environment that is supportive of global logistics activities, thus inducing businesses to use Latvia as the intra-regional value-added transshipment base. Implementing efficient market mechanisms covering all aspects of logistics: distribution, warehousing, materials handling and packaging, will ensure a high degree of facilities for the goods transshipments, resulting in a sustainable competitive advantage in the modern market place.