Transportation & Logistics Analysis

The resumption of activity in European supply chains and transport

May 18 2020

A long-lasting slump, rapid recovery or a series of highs and lows? Let us look together at the different possible economic scenarios following the end of the first wave of the Covid-19 pandemic and consider their consequences for the European transport and logistics sectors.

Lockdown measures are gradually being lifted all over Europe. Austria began the trend, followed by Denmark and Germany. Italy, Spain and France followed in their footsteps in May. The resumption of commercial and industrial activity all over Europe (or nearly) marks the end of the period of strict lockdown even though there has not been a return to full freedom of movement in the European Union.

A transitional period, which can be called a period of resumption of activity, is therefore beginning. But the path promises to be difficult, given that the pandemic has "severely affected consumer spending, industrial output, investment, trade, capital flows and supply chains", according to the economic forecast published by the European Commission on May 6. GDP is set to contract by 7.4% in the European Union in 2020 but with major variations, since the reduction in GDP is expected to reach 9.7% in Greece but only 4.3% in Poland. The commission also draws attention to a number of major ongoing uncertainties, indicating that a new wave of infection could result in a further 3% reduction in GDP. Worldwide, the fall in GDP is likely to be 8%.

In the meantime, according to figures from the International Road Transport Union (IRU), the road transport industry saw its revenues plummet 40% worldwide during the lockdown period by comparison with last year. In some sectors, including, notably, automobiles, textiles, flowers and construction materials, operations were reduced to virtually nothing. Voyages made without loads increased by 40% and the number of new contracts fell by 60-90%.

It would be illusory to try to describe all the possible economic scenarios. We will concentrate, therefore, on three reference scenarios - the worst, the best and the most likely - to describe the possible consequences of the crisis on the supply chain and transport and to draw out some practical ideas which can serve to guide us through them.

> Worst case scenario

Let us suppose that we are unable to stop the spread of Covid-19, that no vaccine or other treatment is available for a long time and that social-distancing needs to be maintained over a long period. Under such a scenario, we can expect many companies to go under. The first to suffer will inevitably be those companies which have not been able or are not able to adapt to social distancing. For the others, there would be a significant fall in demand and productivity. This would leave some of them unable to cover their fixed costs, opening the way to a possible second wave of company failures.

Under this scenario, transport companies will handle 50% of their normal freight volumes, as they did under lockdown. Among shippers, companies producing non-essential products will see their revenues collapse; the others will see their turnover fall and their profit margins collapse. Holding on to cash will be the key to survival. Investment will be reduced to zero, leading to bankruptcies among suppliers.

The economic hibernation experienced during the lockdown will continue. The return to normal will therefore be a highly painful process for clients, service providers and manufacturers. This scenario is the one based on the co-called L-curve.

> Best case scenario

The European Union succeeds in controlling and reducing the spread of the pandemic thanks to tests and social distancing. Life returns virtually to normal in July 2020.

Construction sites re-open. Factories, including automobile plants, resume production. Companies organise themselves to increase production and make up for lost time to fulfill orders put on hold and reduce delays which built up during lockdown. For intermediary companies, the watchword will be to replenish inventories, given that some supplies will have become obsolete.

Capacity to provide services and products will then become crucial but also problematic, first because demand will be very strong and secondly because some service providers will not have survived the impact of the first wave of the pandemic on their businesses.

The transport sector will then find itself returning to its structural concerns like the shortage of drivers. The European Union will extend the flexibility measures it adopted during the lockdown to enable transporters to continue operating. Some countries or regions like Schleswig-Holstein in Germany will maintain the right of goods vehicles to travel on Sundays.

This scenario is the one referred to as the V-curve scenario. It can legitimately be estimated that, under this scenario, there will be a very strong increase - more than 20% - in the price of transport services and load preparation activities in logistics depots.

> Gradual recovery scenario

The peaks of the pandemic and their timing and scale vary from country to country. The fear that a violent second wave could arrive from elsewhere is present in everyone's mind. The effect of the pandemic on the economy extend beyond the second quarter.

Demand is weakened over the long term. Suppliers' factories can operate for several weeks and then cease operating again for several more weeks. From one country to another, borders can open and close.

The automobile sector is seriously affected because its supply chain is global. This means that producers need to be able to change their sourcing to take account of unexpected occurrences. Reducing production range could be a solution to reduce the risk of production breakdowns.

All other sectors are also affected but the extent depends on their exposure to worldwide and European supply sources. The European economy is largely global, but, even within Europe, manufacturing industry has shifted towards central and eastern Europe. The same goes for international transport, which makes extensive use of Polish, Romanian, Bulgarian, Hungarian and Lithuanian trucks.

Any closing of borders, as was the case at the Czech border during the first wave of the pandemic, will lead to breaks in supplies of finished and intermediate products but will also prevent drivers from returning and leaving home to drive trucks in other countries.

The V/L scenario is the most likely one. Under it, the V and L scenarios will alternate several times as the virus reappears and disappears.

The lessons

Careful cash management, tight control of the supply chain and preservation of the eco-system while, at the same time, protecting partners are going to be primordial.

  • Limiting the use of cash for what is strictly necessary would seem to be good housekeeping. No one knows how the pandemic will evolve in the future. It would be best to show caution, therefore. Moreover, helping partners to reduce their cash consumption, particularly in logistics, can enable them to avoid the worst effects of the cost increases which will inevitably result when too many other contractors have gone out of business.
  • Adapting one's supply chain to conditions by ensuring it is flexible and able to react to restrictions on traffic movements and breakdowns in the flow of goods is indispensable if one wants to continue meeting clients' needs in the best possible conditions. Increasing stocks, diversifying sources and ensuring that transport capacity is adequate, while at the same time improving checking procedures to limit risk, seem to be important.
  • Finally, preserving and reinforcing the ecosystem means working with suppliers and fellow producers to improve one's own efficiency. For example, the collective chartering of transport equipment would be a way of reducing distances covered without loads and, by the same token, increasing transport capacity. In this respect, the use of digital tools to reduce paperwork and win new clients and suppliers needs to be given more urgent consideration.

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With more than 20 years of experience in the international supply chain, William works as a road transportation expert for Upply. Entrepreneur by nature, he has successively worked in operational and functional management among various industries, such as chemistry, automotive and building materials; alternately shipper and service provider.
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