The Netherlands. A profitable location for long-term logistics operations

The Netherlands A profitable location for long-term logistics operations

The Netherlands: A long-term profitable location for logistics operations Published by Holland International Distribution Council (NDL/HIDC) Zoetermeer, February 2012 ISBN-number is 978-90-810838-0-5 Investment Consulting Associates (ICA), Groenewout Consultants & Engineers, Mazars Paardekooper Hoffman N.V., Holland International Distribution Council (NDL/HIDC), The Netherlands: A long-term profitable location for logistics operations, November 2012.

Colophon Author A. Beerens, Groenewout Consultants & Engineers M. Weeink, Investment Consulting Associates Final editing Holland International Distribution Council (NDL/HIDC) Publisher Holland International Distribution Council (NDL/HIDC) The Netherlands: A long-term profitable location for logistics operations

Contents Page Summary 1 1. Background and relevance of this study 3 2. Business case model 5 3. Operational excellence 6 4. Start-up Costs 7 5. Total Inbound freight costs 9 6. Total outbound freight costs 10 7. Exit costs 13 8. Total Net Present Value (NPV) 14 9. What if Analysis 16 10. Qualitative analysis Results 17 11. Conclusions and final remarks 19 12. Annex 20 The Netherlands: A long-term profitable location for logistics operations

The Netherlands: A long-term profitable location for logistics operations

Summary In Europe the present period of uncertainty leads corporations to exercise caution in their investment strategies. Although statistics confirm a decline in foreign direct investment projects within Europe, any conclusions that companies have stopped approving new investment projects would be premature. To attract new investment projects, countries will need a sensible and distinctive national policy of promoting investments. This report demonstrates a business case methodology adopted by many internationally operating companies when considering multiple locations. The assumptions and industry figures used in the business case are based on actual investment cases and best practices to ensure reliable and consistent results. Approach and Methodology This report benchmarks and ranks four countries (Belgium, France, Germany, and the Netherlands) in terms of their attractiveness as the site for a new European Distribution Center in the Electronics Industry. The corporate business case technique incorporates real estate and supply chain modeling, inbound and outbound product flows to various European regions, operational cost modeling, regional incentive schemes, and exit costs presented in a 10-year net present value model. To make this business case as comprehensive as possible, we have also included direct and indirect tax (i.e. VAT) considerations. Results Belgium and the Netherlands are on par in terms of net present value (NPV) calculations, yet for very different regions. The incentives offered in Belgium (i.e. Wallonia) are significant, resulting in a favorable cash flow position in the first year; however, higher operating costs than in the Netherlands yield a similar NPV result. Although regions in France and Belgium offer appealing incentives, the terms and conditions are less flexible in practice, due to penalty costs when considering an early exit (i.e. within 5 years). In today s volatile market, such a lack of operational flexibility to adapt your supply chain footprint presents a profound business risk. France s NPV score is impacted by higher logistics costs due to its remote location, while Germany s labor cost means that annual operating costs are slightly higher. In our qualitative evaluation, we benchmarked and ranked the competitiveness of the four countries based on business environment, infrastructure quality, and taxation factors. This analysis places the Netherlands and Germany slightly ahead of France and Belgium. Overall, the Netherlands has a strong location value proposition, supported by a neutral, objective position between a company s different operating units. This relatively small market is positioned strategically and has a good logistics infrastructure (i.e. lead times) between main markets such as the United Kingdom, Germany, and France. This makes The Netherlands easy to accept as a new investment location for the EDC, for example because in times of shortages inventory assignments to main markets will be impartial. The Netherlands: A long-term profitable location for logistics operations 1

The Netherlands: A long-term profitable location for logistics operations 2

1. Background and relevance of this study Introduction The Netherlands has long been committed to economic growth and, more specifically, to marketing its competitive value in logistics and distribution. For decades, the Netherlands has obtained and benefited from significant inward investments from corporate investors, especially in logistics and centralized warehousing facilities. Yet, investment locations are increasingly selling their proposition to potential investors, and competition for inward investments is rising. The window of opportunity is therefore expanding, as is the complexity of foreign direct investment (FDI) decisions. Examples of location value propositions marketed by different Investment Promotion Agencies This raises the question of how investors currently deal with this complexity in selecting a carefully considered winning location. Understanding the assorted drivers that relate to different phases in corporate site selection projects is essential in all investment promotions. Investor point of view Various boardroom dynamics drive investment decisions. While a Chief Financial Officer focuses on potential cost savings, a Chief Executive Officer might be targeting risk mitigation and long-term corporate strategy. These complementary and in some cases diverging views might even interfere with a Chief Operations Officer s perspective, looking to optimize the global corporate footprint and synchronize supply chains. It is fair to say that investment decisions are based on a manifold of business perspectives, all with different business drivers. In this benchmark report, we will use the following three business perspectives to assess the attractiveness of the Netherlands, compared to regions in Germany, Belgium, and France: 1. Operational excellence 2. Financial and tax excellence 3. Risk mitigation perspective The Netherlands: A long-term profitable location for logistics operations 3

By using a corporate business case technique, Investment Consulting Associates (ICA), Groenewout Consultants and Engineers, and Mazars Accountants incorporated these three different aspects into this 2011 NDL/HIDC Benchmark Report. This technique applies facility and supply chain modeling, financial cost modeling, regional incentive estimates, 10-year net present value modeling including exit costs, and direct and indirect tax considerations. All these quantitative results are then leveraged and weighed against a business climate risk appraisal. The Netherlands: A long-term profitable location for logistics operations 4

2. Business case model Before reviewing the details of the business case model, a few important items need to be addressed. First, assumptions in the business case model are derived from actual logistics investment projects or recent transactions. This means that the model is based on best practices and actual case study materials. Second, the business case simulates a new inward investment in the electronics industry. This particular sector has been chosen because of its supply chain characteristics. Until recently, the most optimal supply chain design in the electronics industry often proved to be highly centralized. Production was outsourced to Asia in many cases. Typically, most of the European market was served via one or a few major distribution centers, with a few local warehouses at the edge of Europe. More recently, determining factors such as decreasing product value, increasing transportation costs, sustainable supply chain and IT solutions have reshaped the industry supply chain and have made for a more decentralized footprint. The changing dynamics within this industry, with new rules of the game, makes this an interesting industry to focus on. The Netherlands: A long-term profitable location for logistics operations 5

3. Operational excellence The first pillar is based on the operational aspects of this simulated investment project. Our investment project is a European Distribution Center (EDC) with the following characteristics: In this business case we will calculate a 10-year Net Present Value (NPV), based on the start-up costs, annual operating costs, and exit costs for each of the four alternative locations in this benchmark. The Netherlands: A long-term profitable location for logistics operations 6

4. Start-up Costs In selecting the location, investors will evaluate and assess the different start-up costs for the regions considered. Start-up costs are costs that are required for becoming operational. In this perspective we have simplified the business case and have included only the following cost items: Capital Expenses on land, buildings, and equipment Recruitment costs based on total annual labor cost Costs of training staff at the EDC National and/or regional incentives (i.e. negative costs) CAPEX The first observation is that land costs are significantly higher in the Netherlands than in surrounding European regions, especially compared to certain areas in Belgium (i.e. 300%). In the Ruhr area and logistics parks near Le Havre land costs are similar to those in Belgium. Table 1 Land costs in the different regions in 2011 Total capital expenditure for the respective regions is calculated by multiplying the land prices per square meter by the land required and then adding the construction and equipment costs multiplied by the desired facility size. Table 2 Total capital expenditure Recruitment and training costs Recruitment costs are calculated as a share of the annual total labor costs for blue and white-collar workers, i.e. two months of total labor costs. Total annual labor costs comprise the gross annual salary costs for workers plus overhead (e.g. sickness, disability, pension plan) payable by employers. Table 3 indicates the respective labor costs in the four countries. The Netherlands: A long-term profitable location for logistics operations 7

Table 3 Total labor cost per type of EDC worker For training costs we assumed a fixed budget of 500,00 per Full Time Equivalent (FTE) per year. National and regional incentives The Netherlands and Germany offer modest incentives to promote training services (e.g. 50% of training costs are subsidized). Belgium and France offer far more substantial incentives with regard to the Capital Expenditures of the investment project. In both countries, large companies may apply for a 15% refund of the total capital expenditure 1. Table 4 Overview of start-up costs In this example, the incentive would amount to 4.9 and 5.1 million for Belgium and France, respectively (see Table 4). Yearly operating expenditures (OPEX) Understanding the annual operating expenditures associated with each location is a key exercise in selecting the location. In this case, total annual operating expenses of an EDC comprise of the following elements: Transport costs o Inbound freight o Outbound freight Warehousing & utility costs Taxes and VAT Each element will be outlined in the sections below. 1 Thirty percent of the eligible capital expenditure is refundable to Small and Medium-sized. The Netherlands: A long-term profitable location for logistics operations 8

5. Total Inbound freight costs In the business case we assume that all inbound logistics involve the use of 40-foot containers handled and shipped through the nearest port directly to the EDC. In general, transportation of a 40 ft container costs 1.20 per kilometer. Table 5 Inbound freight costs Table 6 lists total handling cost (THC) by port in 2011. The port of Antwerp offers the lowest THC per 40 ft container (e.g. 150,00 per 40 ft container), followed by Rotterdam and the French ports of Dunkerque / Le Havre. Table 6 Total Handling Costs per port in the respective countries Given the geographic proximity to the port of Le Havre, locating an EDC there will entail relatively low inbound freight costs compared to the other locations, which require inland transportation across greater distances. This is why locating the EDC in Germany would entail the highest inbound freight costs, while Belgium and the Netherlands are cost-competitive, at 1.7 and 2.0 million annually. Yet, inbound shipping costs are low compared to total outbound costs. The Netherlands: A long-term profitable location for logistics operations 9

6. Total outbound freight costs Total outbound freight costs are a major recurring cost driver that significantly impacts total logistics costs and therefore influences the final decision regarding the EDC location. We have based our calculation of the total outbound freight costs on the following assumptions. The most important product shipment locations are Germany, France, and Central Europe, followed by Scandinavia and Spain. This market segmentation is based on actual cases and reflects Europe s most important consumer markets. Table 7 Sales volumes and associated number of truckloads per country We have used a distance matrix (see Table 8) and the assumed price per kilometer to calculate total annual outbound freight costs. Table 8 Distance Matrix The Netherlands: A long-term profitable location for logistics operations 10

In terms of outbound costs, Germany s location is clearly the most strategic for serving the major European markets. These costs are similar for the Netherlands and Belgium, while the remote location of Le Havre leads to significantly higher outbound transportation costs. Warehouse & Utility Costs Besides the outbound freight costs, total operational expenditures, also referred to as annual warehousing costs, are decisive in selecting the location. In this category we have considered the following cost drivers for this business case: Maintenance costs are estimated as a fixed amount per year based on the value of the initial capital investment in the facility (5%) and the EDC equipment (10%). Although labor turnover rates are assumed to be constant for all locations at 8%, these costs nonetheless vary by country due to different total labor costs and different termination costs. Labor law regulations are another important variable depending on the country. In the electronics industry labor needs peak during the summer and December periods. Although working-hour regulations for staff are somewhat more flexible in Belgium, hiring temporary workers is difficult, if the peak in workload is structural and predictable. Conversely, the Netherlands and Germany offer more flexible terms and conditions for recruiting temporary workers. To factor this into the business case, we allowed for 10% more blue-collar FTEs in Belgium to achieve peak output. In the Netherlands and Germany 3.3 additional FTEs would be recruited as temporary workers during the peak months. Table 9 Human resource requirements, given national labor regulations Utility costs are included in the overall warehousing costs. Table 10 shows the different electricity and gas rates in the respective countries. France is particularly attractive in terms of electricity rates, whereas gas rates are lowest in Belgium. The Netherlands follows closely with relatively low rates for both types of utilities. The Netherlands: A long-term profitable location for logistics operations 11

Table 10 Utility costs in the respective countries Incorporating all annual warehousing costs results in the annual cost overview below. Figure 1 shows that the Netherlands ranks first, due mainly to the modest labor costs there compared to those at the alternative locations. Conversely Belgium has fairly high warehousing costs because of reduced, productivity, due to the lack of temporary staff flexibility in busy and slow months. Figure 1 Overview of total warehousing costs Taxes & VAT The variable tax factors for each of the four alternative locations are corporate tax rates and VAT deferment. Whereas the national corporate tax rate in The Netherlands is 25%, this same tax exceeds 33% in France and Belgium. While the national corporate tax rate in Germany is 15%, local corporate tax (Solidaritätszuschlag) is payable as well, bringing the total corporate tax rate above 35%. The Netherlands has clear agreements on VAT deferment. Payment of VAT may be deferred from the time of import to the periodic VAT filing, which is generally monthly. VAT due for import will be reported at the time of filing, when any amounts prepaid will be subtracted as well. The other three countries have less sophisticated VAT arrangements, automatically leading to higher costs as a result of the requirement to pre-finance VAT fees that are not offset. To prevent this, one may open a bonded warehouse, which will result in additional administrative burdens and costs to operations. The Netherlands: A long-term profitable location for logistics operations 12

7. Exit costs After 10 years the residual value of the initial investment in France and Belgium will be significantly lower than in the Netherlands and Germany, where, on the other hand, far fewer incentives are available. Apparently, the higher incentives offered (i.e. Belgium and France) are offset by a much lower residual value of the warehouse after ten years. The residual value assumptions are based on recent transaction deals and existing distribution facilities currently offered on the market. Based on current labor laws, dismissing all staff members after ten years would result in termination costs of 1.7 million in the Netherlands. This severance amount is based on the various labor costs multiplied by the number of months payable by the employer. France and Belgium both have relatively low termination costs, followed by the Netherlands and Germany. Table 11 Overview of total exit costs per country after a ten-year period At -/- 11.2 million, total exit costs are lowest for the Netherlands, compared with the other countries (i.e. highest net revenue). This is due mainly to the relatively high residual value, based on the highest initial capital investment. The Netherlands: A long-term profitable location for logistics operations 13

8. Total Net Present Value (NPV) The final result of this business case approach with detailed financial cost modeling is the ten-year Net Present Value, which provides an overall summary of the start-up costs, operating costs (including taxes) and exit costs over a 10-year operational period. Each component represents one year, starting with year zero which reflects the investment costs and the incentives. Wallonia 223,7 The Netherlands South 223,7 North West of France 230,3 Ruhr Area via Rotterdam 233,3 Ruhr Area via Hamburg 240,0 0,0 50,0 100,0 150,0 200,0 250,0 in mio EUR Both Wallonia and the Netherlands rank first with a total NPV of 223.7 million Euros. These identical NPVs are based on very different assumptions. Wallonia offers substantial incentives that result in low start-up costs but entail various rules and regulations. On the other hand, the Netherlands has relatively low warehousing costs and the lowest exit costs, given the high residual value of the property. The cost differentials with France and Germany are 3% and 4.2% respectively. The Netherlands: A long-term profitable location for logistics operations 14

The graph shows the yearly operational logistics costs for each of the potential locations. Last-mile transport from logistics hub to end-customer is not represented, as this is the same for each location. Variations in transport costs due to a difference in average customer distance are therefore represented exclusively as the outbound freight. Given the strategic logistics position of the Netherlands in the European market and the relatively high labor output, yearly operational costs in the Netherlands are lower than at the other locations. This graph depicts cash flow during the last year of the operation, meaning operational costs (transport & warehousing) + exit costs e.g. labor remuneration sales of logistics property. Final-year costs are clearly lowest in The Netherlands, due to the high residual value of the logistics property when selling it in Year 10. This final year benefit in the Netherlands fully offsets the initial start-up incentives awarded in regions such as Wallonia and Northern France. The Netherlands: A long-term profitable location for logistics operations 15

9. What if Analysis As the Net Present Value calculation shows, the two dominant financial differentiators are (1) national incentives on the CAPEX and (2) the residual value of the logistics property after 10 years. For the what-if analysis, both parameters are considered in conjunction with or separate from the NPV calculations, leading to 4 what-ifs. Although the differences are small, the Netherlands ranks first for warehouse location in 3 of the 4 what-ifs. Only when residual value is not considered does Belgium rank first, provided that the national incentives are granted. 250,0 250,0 240,0 240,0 230,0 230,0 220,0 220,0 YES 210,0 200,0 210,0 200,0 190,0 190,0 180,0 180,0 170,0 170,0 160,0 160,0 CLOSING COSTS 150,0 250,0 5 6 7 8 9 10 150,0 250,0 5 6 7 8 9 10 240,0 240,0 230,0 230,0 220,0 220,0 NO 210,0 200,0 190,0 210,0 200,0 190,0 180,0 170,0 160,0 150,0 180,0 170,0 160,0 150,0 5 6 7 8 9 10 5 6 7 8 9 10 NO YES REGIONAL INCENTIVES Wallonia North West of France Ruhr Area via Hamburg Ruhr Area via Rotterdam South of The Netherlands The Netherlands: A long-term profitable location for logistics operations 16

10. Qualitative analysis Results As mentioned in the introduction, different drivers and opinions of the respective boardroom members will influence the ultimate location decision. In many cases, companies focus too much on short-term cost advantages and overlook potential risk factors and qualitative aspects that may lead to costly mistakes in the long run. Table 12 Qualitative assessment based on a weighted multi-criteria analysis Table 12 shows the different scores for each location group. Each one is comprised of a number of location factors (see annex), on which the overall location group score is based. To prioritize certain location groups (and location factors), different weights have been allocated to the three respective location groups. In terms of Business Environment, Germany and the Netherlands rank first and second, respectively. This location group reflects ease of doing business and offers an initial indication of the risk proxy. Infrastructure quality differences between the countries are relatively small. Yet taxation factors clearly favor the Netherlands. In addition to the modest total corporate income tax in the Netherlands, paying taxes is less cumbersome there than elsewhere, and personal income taxes are relatively low as well. Given the current selection of location groups and the weights allocated, the Netherlands ranks first in this qualitative assessment,, with a total score of 27.08, slightly ahead of Germany. France and Belgium rank third and fourth, with competitiveness scores of 24.34 and 24.16 respectively. The Netherlands: A long-term profitable location for logistics operations 17

Below are the summary and index scores relating to the Net Present Value (NPV). Belgium and the Netherlands have similar NPVs and therefore have an index score of 100. The index scores other countries are based on the respective NPV differentials. Qualitative Score Higher score indicates lower risk levels and ease of doing business Cost score there is an inverse with 100 reflecting the lowest cost level Figure 2 Cost Quality Benchmark Study The Netherlands: A long-term profitable location for logistics operations 18

11. Conclusions and final remarks Although different regions in France and Belgium offer appealing incentives, this also means less flexible terms and conditions, due to penalty costs when considering an early exit, for example (e.g. within 5 years). In today s volatile market, such a lack of operational flexibility to adapt your supply-chain footprint presents a profound business risk. In terms of cost and quality factors, the Netherlands provides a powerful location value proposition. Instead of focusing on incentives and modest land costs, the Netherlands has relatively low operating costs and a high residual value of the initial investment. Furthermore, the Netherlands has a neutral, objective position between the different country operating units within a company. It is a relatively small market, is positioned strategically, and has a good logistics infrastructure (i.e. short lead times) between main markets, such as the UK, Germany, and France. This makes the Netherlands politically acceptable as a new investment location for a EDC, e.g. decisions concerning inventory assignment to main markets in times of shortages will be impartial. So although today s operational and financial differences between the four countries considered for locating an EDC seem relatively small, the Netherlands offers a substantial advantage in terms of transparency and accommodation of logistics. A new competitive landscape is developing, based on technical revolution and increasing globalization, where such logistics flexibility will prove to be invaluable. The Netherlands: A long-term profitable location for logistics operations 19

12. Annex List of qualitative location criteria BUSINESS ENVIRONMENT - 30% Location Factors Closing a business Ranking Dealing with construction permits Ranking Employing workers Ranking Enforcing contracts Ranking Getting credit Ranking Paying taxes Ranking Protecting investors Ranking Registering property Ranking Starting a business Ranking Trading across borders Ranking Global Competitiveness Score (GCI) WEF IMD Competitiveness Index INFRASTRUCTURE - 40% Location Factors Quality of Overall Infrastructure Quality of Port Infrastructure Quality of Railroad Infrastructure TAX - 30% Location Factors Ease of paying taxes Resident individuals, Income tax rates Total Tax Rate Turnover taxes, VAT/GST (standard) The Netherlands: A long-term profitable location for logistics operations 20