Here’s how the DSV-Schenker integration favours Schenker

ID 327773387 © Saruepee Che Ngoh | Dreamstime.com

(This is the first column written for Premium by a veteran of transport and logistics, writing for us under the nickname of Mr Vol)  

Five years ago, Jens Bjørn Andersen (pictured below) mentioned that his ultimate goal was for DSV to buy DB Schenker (DBS) before his retirement. UTi Worldwide, Panalpina and Agility GIL were, all combined, the entrance ticket to be able to do so.

(Source: STARK Group)

The disclosure of his departure took place almost one year today, but his legacy lives on through his successor as DSV chief executive, compatriot Jens Lund.

Different sources suggest DSV and Schenker joining forces will be different to the last three deals struck by the Danes, as DBS is of equal size. What needs to be kept in mind is that UTi (21,000 staff) had almost the same workforce as DSV (23,000).

(Source DSV)

Meanwhile, Panalpina’s sea freight business was slightly bigger and its air freight unit was almost twice  DSV’s at the time the deal was done in 2019.

The result, however, was that only where DSV had close to “no footprint”, the acquired company’s managers could continue perform their duties, for instance in the Americas and South Africa at UTi.

DSV then said, in a nutshell, that after several years, that workforce numbers were higher than at acquisition. Although this is true, DSV preferred to make a lot of acquired workforce redundant and employ new staff, quite likely to preserve its company culture. Its true identity.

When looking now at staff figures that DSV provided for the combined DSV-Schenker entity emerging at some point next year, it is definitely worth mentioning that DSV’s workforce includes temporary workers* while the DBS figure excludes 13,900 temporary employees.

(*This is one element also recently flagged by equity analysts, more here.)

Quite possibly, this was done to suggest that DSV is bigger, while the opposite is true; but also, to be able to use those lower numbers in future discussions, when workforce must be cut to achieve a materially higher level of profitability than DBS’s under Deutsche Bahn ownership.

However, some of those contractors play a vital role in DBS’s current landscape. And they will be needed in the near future.

It has been mentioned by several news outlets that DBS has an old IT system. Naturally, though, DBS has several IT systems, depending on product and region.

Noteworthy: the DBS financial upgrade from SAP R/3 to S/4HANA was stopped recently, ahead of the upcoming acquisition**.

(**Editor’s note: Legacy IT systems at Panalpina were also part of the allure of taking it over for DSV, and the Swiss forwarder also needed IT investment when it was taken over.)

In DBS air & sea, a self-developed system was rolled out globally over the last 17 years, while it was built to last 25 years.

Most analysts are certain that WiseTech’s CargoWise has a huge edge over the DBS TMS (aka transportation management system). But DSV has always tried to be less dependent on WiseTech.

DSV’s new combined size with Schenker under its belt, plus the already made investments into a self-developed TMS by DBS should not rule out other options just yet.

In this context, Lund’s estimate of 18 to 24 months for the air & sea integration certainly leaves both options open.

Meanwhile, in contract logistics DBS adopts different warehouse management systems (WMSs), depending on the region of business activity.

To be sure, DSV’s strategy to rely on Blue Yonder WMS globally and to consolidate smaller warehouses into bigger logistics centres looks like a more successful model.

Lund’s forecast of 48 months for 90% of the business integration seems realistic at first sight. One could argue, in fact, that a lot of integration knowledge was built up with the last three acquisitions, all of which went smoothly.

However, Agility GIL had a warehouse footprint of 1,400,000 sqm and Panalpina 500,000 sqm when they were acquired, while DBS boasts 8,500,000 sqm with almost 800 sites.

Now: for the integration of 155 UTi warehouses, roughly four years were needed. So, it would be a huge success if the DBS integration could also be executed in the same timeframe.

Probably the most interesting part of the DSV-Schenker combination will concern land activities, because it will be the first time in 16 years that DSV acquires a (mammoth) European road business. Here Lund estimates 36 months for the integration.

As DBS is 52% bigger than DSV, the question remains: which side will be in charge of the integration?

While DBS has its own European groupage network, DSV is part of the IDS network only until the end of 2025 (it’s taking a different path versus rival Kuehne + Nagel, more here).

The most reasonable way forward, it seems, would be to add DSV’s road business to the existing, mature, and standardised DBS structures.

While DSV’s European rollout of the BluJay TMS was put on hold, the DBS TMS was rolled out to 25 countries worldwide, with the remaining countries on the roadmap.

Finally*** to volumes and client churn.

(***Quite clearly, DSV did its homework as also proven by this 88-page research paper from a year ago – headed: ‘Should DSV pursue to acquire DB Schenker?’… which I humbly, and respectfully, didn’t find very insightful.)

Looking at the combined figures for air & sea, the last two integrations resulted in a loss of around 25% of the business, both air and sea for Panalpina and for Agility… 19% air and 11% sea freight, based on figures sourced from DSV’s M&A announcements.

Total air tonnes, DSV + Panalpina 2019, versus DSV air tonnes from April 2021 at Agility GIL takeover, etc etc…. well, look below at an overview in an excel I crafted (click to expand the screen grab below):

(Source: author of this column)

The four main reasons for the decline were: 1) departing key account managers taking their business with them; 2) diversification of logistics providers from customer side; 3) negative experience with DSV from the customer side; and 4) discontinuing low-margin contracts from the DSV side.

The same is to be expected from the €14.3bn Schenker takeover, whose value is bigger than the previous three deals combined.

Applying a conservative 20% downsizing for air & sea and a stable outlook for contract logistics as well as road activities, would bring the combined entity back to around €35 billion in revenue, just below DHL’s current €36 billion (this combines 2023 sales of DHL Global Forwarding, Freight and DHL Supply Chain, two of DHL Group’s five operating pillars).

(Source DSV)

If we stick to top-line comparisons, DSV claims that they will be number one with €39.3 billion sales, but applying a realistic 20% loss of revenue for air & sea after the merger, based on its most recent deals, pro-forma revenues should drop back to €35 billion, against DHL’s €36.3bn, on the aforementioned basis and as also illustrated in the table above – but DHL’s projected sales possibly could be even higher through business gained from Schenker.

(What I haven’t factored in here are various scenarios for global logistics trends, which have been more favourable for DHL and K+N, growth-wise, than DSV, in the past three years.)

Either way, at the end of the integration, it is quite likely – and this is also a coveted target – that Schenker margins will grow in line with DSV’s current benchmark profitability in forwarding, its slim organisational structures in turn benefiting the DBS set-up as well.