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II
List of Abbreviations
3PL Third-Party Logistics
AC Alternating Current
ATC Automatic Train Control
bn billion
CEEC Central and Eastern European Countries
DB Deutsche Bahn
DB ML AG DB Mobility Logistics AG
DB SRP DB Schenker Rail Polska
DC Direct Current
ETCS European Train Control System
EU European Union
EUR Euro (currency)
FDI Foreign Direct Investment
GDP Gross Domestic Product
HHLA Hamburger Hafen und Logistik AG
JIT Just In Time
km kilometer
LIB Index Rail Liberalization Index
LSP Logistics Service Provider
M Million
M&A Merger & Acquisition
mm millimeter
MRO Maintenance, Repair, and Overhaul
NI Net Income
OPM Operating Profit Margin
III
PCC Petro Carbo Chem
PLC Public Limited Company
PM Profit Margin
PKP Polskie Koleje Pa stowe (Polish National Railways)
ROS Return on Sales
RU Railway Undertaking
SCM Supply Chain Management
S.A. Spóáka Akcyjna (see PLC)
t tonne
TERFN Trans European Railway Freight Network
tkm tonne kilometer (unit of measure representing movement of one tonne of
freight over one kilometer)
UTK Urz d Transportu Kolejowego (Office of Rail Transportation, Poland)
ZNPK Zwi zek Niezale nych Przewo ników Kolejowych (Association of
Independent Rail Operators, Poland)
IV
List of Figures
Figure 1: Detailed Overview of Transport Modes ... 3
Figure 2: Five Forces Model ... 12
Figure 3: Rail Liberalization Index 2011 ... 16
Figure 4: Demand-Related Quality Profiles of Freight Traffic Transport Modes ... 18
Figure 5: Modal Share Evolution and Forecast in Poland from 1970 to 2030 ... 20
Figure 6: Freight Railway Undertaking's Market Share in Poland 2012... 27
Figure 7: DB SRP's Market Share Evolution from 2008 to 2012 ... 31
List of
Appendices
Appendix 1: Transport Performance of Leading European RUs ... 49
Appendix 2: Trading Links between Germany and Poland ... 50
Appendix 3: Short Sea Shipping Development Poland ... 50
Appendix 4: Pipeline as a Threat of Substitute ... 51
Appendix 5: Modal Share Evolution and Forecast in Poland ... 52
Appendix 6: Polish Railway Network Charges ... 53
Appendix 7: Polish Rail Freight Market Profitability... 54
Appendix 8: DB Schenker Rail Polska Performance... 55
1
I Introduction
1.1
Presentation of the Problem
Liberalization of international trade and privatization of entire industry sectors within
the past decades have shaped the international business environment enormously.
Such trends fostered rapid escalations in cross-border merger and acquisition (M&A)
activities, foreign direct investment (FDI) in infrastructure projects, and the interna-
tional movement of resources. (cf. Ramcharran 1998, p. 38) The logistics sector, with
its numerous consolidations, appears to be particularly affected from this cross-
industry progression (cf. Böhmer 2003, p. 96). One can primarily observe larger lo-
gistics service providers which increasingly target international markets. This trend
towards internationalization results from the aspiration for enhanced service offers,
such as one-stop-shopping and integrated logistics solutions, as well as the combin-
ing of transport flows and a concurrent exploitation of economies of scale, econo-
mies of density, and economies of scope. (cf. Phohl 2003, pp. 22f; cf. Henning et al.
2003, pp. 399 et seqq.) In regard to rail freight transport, Poland turns out to be of
special interest because the country hosts the second largest railway logistics market
in Europe (cf. EC 2012, p. 41). Starting from 2002 the number of privately operating
railway undertakings (RUs) steadily increased and unrestricted access, also for for-
eign RUs, was eventually accomplished in 2006 (cf. Król 2010, pp. 166 et seqq.; cf.
IBM 2011, pp. 177 et seqq.).
A company which acted in line with the overall market trend and carried out an in-
ternational market expansion represents DB Schenker Rail and its expansion to Po-
land.
The thesis at hand is based on the abovementioned business example and focuses on
the assessment of the Polish rail freight industry structure using Porter's Five Forces
model. With the application of this framework a statement on the industry's overall
profitability is made. However, direct inferences on a firm's individual profitability
cannot be drawn because performance of industry players can still diverge widely.
Nevertheless, it can be shown what kind of competitive situation DB Schenker Rail
faces after its market expansion. Furthermore, it will be analyzed whether DB
Schenker Rail's profitability is in alignment with the overall industry. A comparison
of the company's profitability with the one of the entire rail freight industry, together
2
with other quantitative performance measures in form of sales growth and market
share development as well as qualitative performance measures focusing on the
achievement of preset corporate goals and DB Schenker's long-term strategy and
vision, allows a conclusive statement on whether the company's market expansion to
Poland is to be considered a success.
1.2
Structure of the Thesis
Chapter II will introduce the basic concepts of logistics, and particularly the rail
freight market in Europe. This preface to the freight market will ensure a general
understanding and background knowledge of the industry which will be analyzed
along with the company case that is introduced later in the chapter.
After a definition
of the logistics industry in chapter 2.1, its sub-industry of railway logistics will be
elaborated briefly. Due to the focus on the Polish market, its national specifications
will be discussed in chapter 2.2.1. Subsequently, the companies DB Schenker Rail
and PCC Rail will be presented in terms of structure and performance to allow an
understanding of the corporate players presented in the case and their positioning in
the industry. Eventually, the acquisition case of DB Schenker Rail, which is the start-
ing point of the succeeding analysis, will be introduced in chapter 2.2.3.
Prior to the actual analysis, Porter's Five Forces framework will be introduced in
chapter 3.1. Chapter 3.2 will explain, how the measure of profitability, among other
indicators such as market share and sales growth, helps to answer the question of
whether DB Schenker Rail's market entry in Poland was successful.
The theory mentioned above will be applied to the Polish railway market to identify
the intensity of different forces acting upon DB Schenker Rail and its competitors in
chapter 4.1. A statement on whether DB Schenker Rail's market entry was a success
will be made in chapter 4.2 on the basis of the derived implications on profitability
and other quantitative and qualitative indicators.
Finally, the results of the thesis will be summarized in chapter V.
3
II
Market Specifications and Developments in the Rail
Logistics Sector using the Example of DB Schenker Rail
2.1
Introduction to Logistics and Freight Traffic in Europe
In order to understand the rail freight sector, which represents the core of the thesis at
hand, in context, the underlying overall logistics framework will be discussed first.
The terminology of logistics is rather brought and definitions may differentiate ac-
cording to distinct points of view and foci. Coyle et al. offer a rather generalist defi-
nition which describes logistics as "
(...)
the process of anticipating customer needs
and wants, acquiring the capital, materials, people, technologies, and information
necessary to meet those needs and wants; optimizing the goods- or service-producing
network to fulfill customer requests; and utilizing the network to fulfill customer
requests in a timely manner" (2013, p. 37). Other definitions emphasize on the logis-
tical activities of transportation, handling and order picking, and storage (cf. Klaus
2002, pp. 7 et seqq.).
The movement of physical goods within and between corporate entities can be car-
ried out by different modes of transportation. These comprise rail, road, air, water
and pipeline transport. (cf. Mangan et al. 2008, p. 61) The figure below illustrates
each transport mode and its specifications in detail.
Figure 1: Detailed Overview of Transport Modes
Source: own diagram based on Klaus/Krieger 2004, p. 543
4
The fragmentation of the overall freight traffic and attribution to different types of
carriers is referred to as modal split or share (cf. Klaus/Krieger 2004, p. 574). Main
drivers determining the modal split are urban sprawl of industrial areas, improve-
ments of road networks also in remote areas, and decreases of shipment size from
wagonloads to less than wagonloads as well as the good's structure effect, which
describes the decrease in shipments of primary goods, such as coal and iron, and a
simultaneous increase in the transport of consumer and industrial goods, and the lo-
gistics effect, which refers to the emergence of supply chain management (SCM) and
just-in-time (JIT) delivery concepts that favor highly flexible and reliable transport
modes (cf. Richey 1998, p. 61; cf. ECMT 2004, p. 12).
The choice of transportation mode is based on the unique set of the parameters
transport costs and transit time because they have a direct effect on material flow
costs (cf. Bookbinder 2013, p. 419). In addition, Eckey and Stock identified predict-
ability and adaptability as important factors in the decision making process (2000,
pp. 23f). Even though these four parameters facilitate the comparison of different
transport carriers, it is rather difficult to compare transportation costs because they
depend on the type and quantity of the goods that are to be transported, as well as the
distance between place of origin and final destination. Generally, there is a negative
correlation between transportation costs and transit time, with air freight being the
fastest and also most expensive transport mode. However, the time dimension
changes in correspondence with the distance. For short hauls, trucks are cost as well
as time efficient. (ibidem, pp. 25 et seqq.)
Another type of shipment is intermodal transport, which embodies "(...) the move-
ment of goods in one and the same loading unit or vehicle, which uses successively
several modes of transport without handling of the goods themselves in changing
modes" (PROTRANS 2003, p. 33). The actual selection of transport modes is a chal-
lenging undertaking in global SCM, because international financial issues (taxes,
border crossing costs etc.) and the involvement of intermodal transport must be con-
sidered (cf. Bookbinder 2013, p. 421).
Despite the modes of transport, freight traffic may also be segmented according to
the type of good being transported. In fact, transport services can be grouped into the
following categories: agricultural products, nutrition and animal feed, coal, crude oil,
mineral oil products, iron ores, non-ferrous metal ores and scrap, iron/ steel/ non-
5
ferrous metals, stones and earths, chemical products and fertilizers, capital goods,
and consumable goods. (cf. Eckey/Stock 2000, p. 8)
Freight traffic volumes are determined by a number of factors, such as the level and
structure of the production and commercial activities of an economy, the distribution
of economic activities within the region, the intensity and structure of foreign trade
links, the spacious position of the economy, the characteristics of freight logistics
concepts of the manufacturing industries and commerce, and special transport inten-
sifying regulations, e.g. recycling or packaging regulations (cf. Aberle 2003, p. 9).
In general, the structure of transported goods has shifted during the last decades.
Transport of bulk goods declined and transport of single, small heterogeneous goods
increased. Demands regarding shorter handling transport time, higher transport fre-
quency, flexibility, and reliability increased simultaneously. (cf. Engelmann, 2003, p.
7; cf. Kuchenbecker 1998, p. 5) Despite the enormous increase in freight transport,
the development of different product categories is quite diverse. E.g. the proportion
of consumable goods in relation to all transported goods increased from 15.3% to
27.6% between the years 1970 and 1993 in Germany. To the contrary, the haulage
share of coal decreased from 12.2% to 8.5% during the same period of time. (cf.
Eckey/Stock 2000, pp. 4 et seqq.) This development puts rail freight as a bulk good
transport mode at a disadvantage.
The increase in European freight traffic is closely linked to the enlargement of the
EU, which faced an increase of member states from 15 in 1990 to 27 today. This
development strengthened trading links between Eastern and Western European
countries and has led to shifts of some manufacturing activities from Western to
Eastern Europe. Such trade flows stimulate the establishment of extensive infrastruc-
tures including corridors and terminals. (cf. Bookbinder 2013, p. 240)
Transportation is categorized as a service (cf. Pfohl 2003, p. 5). The following char-
acteristics are commonly, but not exclusively, attributed to services: intangibility,
simultaneous production and consumption, not storable, and not examinable prior the
purchase (cf. Grüner 1997, p. 10). In recent years many corporations outsourced their
logistics activities to external logistics service providers (LSPs).
LSPs providing a broad and holistic set of services are also known as third-party lo-
gistics (3PL) companies or providers. (cf. Mangan et al. 2008, pp. 61 et seqq.) In the
6
PROTRANS study 3PL providers are defined as organizations providing third-party
logistics which are "(...) activities carried out by an external company on behalf of a
shipper and consisting of at least the provision of management of multiple logistics
services" (2003, p. 32). The 3PL market size in Europe amounted to 121bn EUR in
2011 (cf. Statista 2012).
2.2
Railway Logistics as a Sub-Industry of the Logistics Sector
In the previous chapter, rail freight was identified as one part of the logistics frame-
work. Now it is of particular interest to have a closer look on developments in the
European rail freight sector to understand the environment and conditions DB
Schenker Rail is confronted with.
Throughout the past decades the European rail freight market has experienced far-
reaching structural and legislative changes. The system has been continuously mod-
ernized which has led to an enhancement in quality of service and a decrease in real
costs. In fact, freight transport prices have decreased by approximately 85% since the
beginning of the age of railways, more than one and a half centuries ago. (cf. Savy
1998, p. 41) In 1886 a convention on technical uniformity in the railway sector was
held in Berne. At this conference most European countries agreed on a common
track gauge of 1435mm which is referred to as standard gauge. However, Portugal,
Spain, the Baltic States, Finland, and Russia objected this common standard and de-
cided to use a broad gauge which differs from country to country. (cf. Drapatz 2008,
p. 141) Despite the common standards mentioned above, many disparities in the na-
tional railway systems still exist. Currently there are five different power systems to
supply electrical traction, which comprise 750V, 1.5kV, and 3kV direct current
(DC), as well as 15kV (16 2/3Hz) and 25kV (50Hz) alternating current (AC). (cf.
Drapatz 2008, p. 140) Thus, unrestrained interoperability is restrained to diesel and
multi-system locomotives. This also applies to Germany and Poland, where 15kV
AC and 3kV DC systems are in use (ibidem, p. 140). Furthermore, the existence of
different signaling devices, protection schemes, and automatic train controls (ATCs)
portrays a significant problem (ibidem, p. 138; cf. Rießberger 2004, pp. 180 et
seqq.). The EU has recognized this issue and promoted the development of a com-
pletely nouveau inter-European ATC, called European Train Control System
(ETCS). ETCS has already been launched but will take several more years for an
7
area-wide implementation (cf. Drapatz 2008, pp. 142 et seqq.). According to Dra-
patz, the European railway market is characterized by an insufficient interoperability,
a missing market liberalization, and poor profiting of comparative performance ad-
vantages due to market interventions (2008, p. 135).
To counteract these insufficiencies, the EU elaborated the following guidelines for
the railway sector: free market access for all transport modes, unrestricted LSP selec-
tion through the customer, non-discrimination among nation- and Europe-wide oper-
ating LSPs, free cross-border freight transport within the EU, the promotion and
sponsorship of eco-friendly transport modes, intensified competition with the aim to
reduce costs and to foster innovation, and special incentives for intermodal transport.
(cf. Richey
1998, p. 63) Consequently, the EU introduced the White Paper of March
2011 to propose a "(...) strategy to revitalize the Community's railways by creating a
sound financial basis, ensuring freedom of access to all traffic and public services
and promoting the integration of national systems and social aspects" (EC n.y.). Be-
tween 2001 and 2013 four railway packages have been developed based on these
directives. Worth mentioning is the first railway package from 2001, which defined
the Trans European Railway Freight Network (TERFN). Within this network trans-
national rail freight transport should be facilitated and network access granted to all
European railway undertakings. The opening of the entire European railway network
was scheduled for 2008. From this point on railway companies should encounter the
exact same conditions for accessing the network and should be granted transit rights
for border-crossing freight transport. (cf. DE-Consult 2002, p. 10) These guidelines
were developed by the EU and transposed by the member states into their national
law (cf. European Parliament 2013, p.2).
The rail freight market share has steadily declined in almost all EU countries over the
past four decades. This development is attributed to a mismatch between customer
requirements and the actual deliverables of the rail freight industry. The fact that
most players on the railway market are state-owned also contributes to this develop-
ment because thus far, important structural railway reforms have not been fostered
sufficiently. (cf. ECMT 2004, pp. 12f)
Major players in the European rail freight market are DB Schenker Rail (Germany)
with a market share of 25%, followed by PKP (Poland) with an 8% market share, and
SNCF Fret (France) with a market share of 7%. (cf. Appendix 1)
8
2.2.1
Deep Dive the Polish Railway History and Market at a Glance
For the upcoming analysis of the Polish rail freight industry and DB Schenker's posi-
tion in the market it is not only important to understand the system's given idiosyn-
crasies, but also the geographic specifications. A short introduction of the Polish
railway evolution and the key players serves as a basis for the industry assessment in
chapter four.
The Polish railway system was shaped in times when Poland did not exist as a sover-
eign and independent country. What constitutes Polish territory today used to be split
into Austria, Prussia, and Russia. This led to the development of three clearly hetero-
geneous railway lines in the beginning of the nineteenth century. Major differences
were related to technical standards, the network density, operational instructions, and
priorities concerning the construction of line linkages. Between 1918 and 1939
enormous efforts were made to unify the national railway network and additional
lines were supplemented to connect major cities. (cf. Janiszewski 1996, pp. 22f) Af-
ter the collapse of communist regimes between 1988 and 1990, Eastern European
companies were not able to gain a foothold on the world market and many of them
went bankrupt. This misfortune led to the decline of the Eastern European economy
as well as transport and rail freight activities. (cf. ECMT 2002, p. 10)
The length of the railway network in Poland was 19,702km in 2010. The develop-
ment of the network size in Poland was very drastically. From 1990 to 2010 the cu-
mulated railway length was cut in half (cf. EC 2012, p. 77). In terms of rail freight
transport the Polish market is of great significance. The country has a market volume
of 48.7M tkm and ranks second in Europe right after Germany (ibidem, p. 41).
Key players of the Polish railway market, including their functions, will be elabo-
rated subsequently. Urz d Transportu Kolejowego (UTK), the Office of Rail Trans-
portation in Poland, is an independent authority with the following areas of responsi-
bility: passenger rights, railway market regulation, railway transport safety, and tech-
nical coherence of the railway system (UTK n.y.). As a result of the privatization of
the Polish State Railways (PKP), the PKP Group was established in 2001. It consists
of the parent company PKA S.A. and twelve companies which are in charge of the
provision of services. Among these twelve companies are the network provider PKP
Polskie Linie Kolejowe S.A. and the incumbent logistics service provider PKP Cargo
S.A.. (PKP Group n.y.)
9
2.2.2
Introduction of the Acquisition Parties DB Schenker Rail and PCC Rail
Before DB Schenker Rail's activities and market expansion in the Polish market will
be delineated, the company itself and its acquisition candidate PCC Rail will be in-
troduced shortly. This approach ensures a general understanding of the corporate
culture of the above mentioned RUs.
DB AG had a net profit of almost 1.5bn EUR in 2012 which makes it the nineteenth
largest enterprise in Germany measured in terms of revenue (cf. FAZ 2013). DB
Schenker Rail is amongst several of the company's subsidiaries and is managed by
DB Mobility Logistics AG (DB ML AG) (cf. DB 2011a, cf. DB 2012, p. 55). Due to
multiple acquisitions in the past, Deutsche Bahn does not solely offer railway ser-
vices, but is also engaged in transport services based on road, air, and water traffic
(cf. Drapatz 2008, p. 28). Having had logistics revenues of 18.5bn EUR worldwide
and of 14bn EUR in the European logistics market, DB Mobility Logistics was the
fifth largest 3PL provider in the world and ranked number three in Europe in 2010
(cf. Klaus et al. 2011, pp. 170 et seqq.). DB Schenker Rail, formerly known as
RAILION, is the leading rail logistics service provider in Europe and operates under
the DB ML AG umbrella. It sold a volume of 105,894 tkm in 2012 (ibidem, p. 226;
cf. DB 2012, p. 2). The company offers a wide range of services. Block trains for
transport of high volumes, single cars which allow the shipment of small to medium
volumes, and intermodal transport comprise the core products. (cf. DB SR n.y. a) It
offers customized solutions for various industries, e.g. automotive and chemical in-
dustry, as well as additional services, such as maintenance, direct access to railway
sidings, door-to-door solutions, and consulting services (cf. DB SR n.y. b; cf. DB SR
n.y. c). Past experiences in M&A activities from 1999 to 2008 represent takeovers in
the Netherlands, Denmark, Italy, and UK (cf. DB SR 2011, p. 1). Medium- and long-
term goals include the maintaining and strengthening of the company's position as
the leading rail freight carrier in Europe (cf. DB SR 2013).
Headquartered in Duisburg, Germany, PCC is an internationally operating consor-
tium which is active in the sectors chemicals, energy, and logistics. With its 70 sub-
sidiaries and approximately 2,500 employees, PCC is represented in 16 countries.
Currently, the logistics branch comprises of the Polish subsidiaries PCC Intermodal,
which organizes the international transport of containers by different modes of trans-
port, and PCC Autochem, with a focus on international freight transport by tank
10
trucks, as well as the Russian subsidiary PCC Rail. (cf. PCC n.y. a; cf. PCC n.y. b;
cf. PCC n.y. c) Until 2008, before the takeover from DB Schenker Rail, PCC Rail
S.A. and PCC Rail Rybnik-Group were also part of the logistics sector (cf. PCC
2008a, p. 73). PCC started operations in logistics in 2000 through the takeover of
PCC Spedkol. Since then, the company acquired controlling stakes in PTKiGK S.A.
and PTK Holding S.A. Zabrze, two large Polish rail operators, as well as in the
Szczecin-based port company Drobnica-Port Szczecin and achieved a strong position
in the market as the largest privately owned rail freight carrier in Poland. In 2008
PCC Rail had a market share of approximately 8%. (cf. news aktuell 2009; cf. PCC
2008b; cf. PCC n.y. d)
2.2.3
Positioning of DB Schenker Rail on the Polish Market
Poland is the eleventh most important trading partner for Germany worldwide and
the most important one in Eastern Europe (excluding Russia). Vice versa, Germany
is Poland's most important trading partner worldwide. (cf. Appendix 2) This substan-
tial bilateral economic relationship offers many opportunities for 3PL providers. Ex-
panding its market presence in Poland not only allows DB Schenker Rail to serve the
second largest rail logistics market in Europe, but also to profit from possible syner-
getic effects and Poland's position as a transit country to other lucrative Eastern
European markets, e.g. Russia (cf. railways 2009a, p. 25). As long ago as 1998,
Deutsche Bahn made attempts to actively participate in the Polish rail freight market.
The company entered a joint-venture called Polzug, which was founded in 1991 and
shares were split equally among PKP, HHLA, and DB. (cf. Polzug n.y. a) Polzug still
operates container wagons and connects major European ports, such as Hamburg and
Rotterdam, with the Polish hinterland and Eastern Europe (cf. Polzug n.y. b). In 2006
Deutsche Bahn and the state-run railway undertaking PKP intensified their collabora-
tion and signed a cooperation agreement to foster the competitiveness of both enter-
prises and to increase cross-border activities (cf. Mylogistics 2006). In the succeed-
ing year, DB entered a joint-venture with a 70% company share together with PCC
Rail and formed the RU East West Railways which was headquartered in Wroclaw,
Poland. The new undertaking focused on the transport of chemical goods within Po-
land as well as border-crossing traffic to Germany. Thanks to modified locomotives,
which were also equipped with the Polish radio and fallback system, a non-stop ser-
11
vice without latency at the borders could be offered to the customer. (cf. railways
2007, p. 4)
Up to this point DB Schenker Rail's activities on the Polish market were limited to
partnerships and joint ventures. To optimally benefit from the Polish high-potential
market, the creation of a wholly owned subsidiary was the only logical consequence.
This was accomplished in 2009 with the acquisition of PCC Rail. All in all, 30
smaller formerly independent RUs (which belonged completely or partly to PCC)
had to be consolidated and reorganized to one DB company in the course of this ac-
quisition. This stroke represents the beginning of a completely new era regarding the
company's presence on the Polish market. As part of this acquisition DB Schenker
Rail also established a majority interest in the PTK Holding and the Drobnica-Port
Szczecin, which was later renamed to DB Port Szczecin, and increased these shares
in the following years. Future growth plans include the procurement of 40 new lo-
comotives until 2015 and a 21M EUR investment for new cargo-handling facilities
and cranes to increase the port's capacity. DB Schenker Rail's medium and long
term strategy aims to reduce the dependence on coal transports and to establish a
company status of a premium service provider. (cf. Sharma 2010)
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