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Ares(2016)6528984 - 21/11/2016 EU wholesale trade: Analysis of the sector and value chains Bernhard Dachs Ella Broos Martina Dünser Doris Hanzl-Weiß Kristof Mertens Doris Schartinger Robert Stehrer Valentijn Vanoeteren AIT-IS-Report Vol. 128, June 2016 EU wholesale trade: Analysis of the sector and value chains This report has been prepared for the European Commission, DG GROW, under Specific Contract No. SI2-723237 implementing the Framework Service Contract ENTR/300/PP/2013/FC-WIFO coordinated by the Austrian Institute for Economic Research (WIFO), (coordinator: Andreas Reinstaller). 1 Bernhard Dachs 2 Ella Broos 1 Martina Dünser 3 Doris Hanzl-Weiß 2 Kristof Mertens 1 Doris Schartinger 3 Robert Stehrer 2 Valentijn Vanoeteren Final Report AIT-IS-Report Vol. 128, June 2016 1 AIT Austrian Institute of Technology, Innovation Systems Department 2 IDEA Consult 3 The Vienna Institute for International Economic Studies - wiiw Contents Executive summary 1 Introduction 2 The EU wholesale sector in perspective 1 8 10 2.1 Literature survey 10 2.2 3 Economic classification of wholesale Structural profile of the sector 12 13 3.1 Relative size and overall development of wholesale 13 3.2 Geographical profile of wholesale 16 3.3 Sub-sectors of wholesale 24 3.4 4 Summary Firm size in wholesale 31 32 4.1 Firm size distributions 32 4.2 The largest firms in European wholesale 36 4.3 Concentration 39 4.4 The performance of wholesalers from the European Union and from the rest of the world 41 4.5 5 Summary Productivity and profitability in wholesale 44 45 5.1 Productivity 45 5.2 Profitability 51 5.3 Wholesale and the European single market 54 5.4 6 Summary The role of foreign-owned firms in wholesale 61 63 6.1 The share of foreign-owned firms in European wholesale 63 6.2 Productivity and profitability of foreign-owned firms in European wholesale 68 6.3 7 Summary The role of technology and innovation in wholesale 71 72 7.1 Disintermediation 72 7.2 E-commerce 74 7.3 Innovation activities and skills in wholesale trade 77 7.4 Tangible investment in wholesale trade 84 7.5 8 Summary Sectoral value chains in wholesale 87 88 8.1 The concept of sectoral value chains 88 8.2 Input and output structure of the EU-27 wholesale sector 89 8.3 The role of wholesale trade in the input-output framework 92 8.4 Wholesale trade in selected value chains 95 8.5 Trade and transport margins along the value chains 100 8.6 Analysis of five wholesale sub-sectors in detail 102 8.7 Summary 106 9 Case study: Wholesale of mining, construction and civil engineering machinery 107 9.1 Description and delimitation of the sector 107 9.2 9.2.1 9.2.2 9.2.3 9.2.4 9.2.5 9.2.6 9.2.7 Competitiveness of the sector Number and size of companies Value added Turnover Gross operating rate Apparent labour productivity Price level of construction and mining equipment Differences in profit margin between vertically integrated wholesalers and independent wholesalers 110 110 115 118 121 123 125 9.3 9.3.1 9.3.2 9.3.3 9.3.4 9.3.5 9.3.6 9.3.7 Regulatory framework Machinery Directive 2006/42/EC Outdoor Noise Reduction Directive 2000/14/EC Emissions from Engines in Non-Road Mobile Machinery Directive 97/68/EC RoHS Directive and WEEE Directive Product safety and market surveillance package Road circulation requirements for non-road mobile machinery New Legislative Framework (NLF) 129 129 130 131 133 133 133 134 9.4 9.4.1 9.4.2 Value chain Description of the value chain Changes in the value chain 134 134 136 9.5 Assessment of the creation of a single market in wholesale of construction and mining machinery 137 9.6 10 11 12 Summary Summary of the findings, SWOT and policy conclusions References Annex 128 139 140 144 148 Executive summary This report investigates the importance of wholesale as one of the main service industries in the European economy. Wholesale is the resale of new and used goods to retailers, industrial, commercial, institutional or professional users, or to other wholesalers on their own account or for third parties. The economic significance of wholesale Wholesale employs about 10 million persons in the EU-28. Employment in the wholesale sector has remained roughly stable over the last five years. Wholesale activities are quite evenly distributed across the EU, with a share of 7–9% of total employment in most member states. Greece and Denmark stand out as particularly specialising in wholesale. The wholesale sector is about the same size as tourism and transport, but is smaller than retail trade and manufacturing. However, if we examine manufacturing and wholesale sub-sectors, there are industries with considerable employment shares in both parts. For example, the sub-sectors wholesale of household goods and other specialised wholesale trade employ roughly the same number of persons as the EU automotive industry (see figure below). Comparison of the number of persons employed in manufacturing and wholesale subsectors, EU-28, 2013 4.5 4.0 Persons employed (Millions) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Source: Eurostat, Structural Business Statistics (sbs_na_ind_r2, sbs_na_dt_r2), own calculations. There are about 1.8 million wholesale firms in the EU-28, 90% of them micro and small enterprises (the average firm size is 5.7 persons, compared to 14.3 persons in manufacturing). The share of micro and small enterprises is considerably higher than in manufacturing, and thus wholesale provides opportunities for self-employment. However, the share of large firms in turnover, 01 employment and value added is smaller in wholesale than in manufacturing, which points to a lower concentration in the wholesale sector. Wholesale firms on average reveal similar productivity to manufacturing and higher productivity than retail trade. Productivity in wholesale increases with firm size. Differences in profitability are smaller but still notable. We found convergence in the form of a decreasing between-country variance in the period 2000–2013. However, the comparison of annual growth rates and initial profitability suggests that this convergence is due to the fact that the majority of countries are falling behind in productivity. Share of different size classes in terms of the number of persons employed in wholesale, retail trade and manufacturing, EU-27, 2013 0 to 1 persons 2 to 9 persons 10 to 19 persons 20 to 49 persons 50 to 249 persons more than 250 persons 100% 90% 80% 70% Share of total 60% 50% 40% 30% 20% 10% 0% Number of firms Turnover Value added Persons employed Note: No data for Ireland available. Source: Eurostat, Structural Business Statistics, own calculations. Wholesale provides a genuine economic function in the European economy; in a value chain perspective, it is an input to almost all production processes. This input of wholesale trade accounts for about 5% of gross output. In the five value chains analysed, we find the highest share of wholesale inputs in food and beverages and the lowest in construction. The heterogeneity of wholesale Despite the pervasiveness of wholesale, a closer look at indicators at the country level reveals a very diverse picture in the EU. There are considerable differences in terms of firm size, productivity and profitability across EU member states. For example, German, Danish and UK wholesale firms are twice as large as firms in Poland or the Netherlands, and three times as large as firms in the Czech Republic, Slovakia or Italy. The average person employed in the most productive wholesale sub-sector (wholesale of tobacco products) generates three and a half times the value added of the average person employed in the least productive sub-sector (agents involved in the sale of a variety of goods). At the country level we 02 find the highest productivity in Northern and Western European countries and the lowest in Romania, Bulgaria and Slovakia. These differences, however, shrink but are still noticeable when we correct for wage differences (see figure below). Wage-adjusted labour productivity across EU countries in wholesale, 2013 350 Wage-adjusted labour productivity (in %) 300 250 200 150 100 50 0 Note: Values reflect value added at factor cost per person employed as a share of wage costs. Ireland, value of 2012. Source: Eurostat, Structural Business Statistics, own calculations. One reason for this heterogeneity is that large parts of the wholesale sector are very integrated along the value chain with upstream manufacturers and downstream retailers. Obviously, a wholesaler in the clothing sector has much more in common with clothing manufacturers and retailers than with a wholesale firm trading in oranges. One of the factors that contribute to this heterogeneity is sectorspecific regulation. Another is that different wholesale sub-sectors offer very different types of services. After-sales services – such as the rapid delivery of spare parts – are an essential task for the services provided by wholesale of construction machinery, yet they have no role to play in food and beverages wholesale. The integration along the value chain also promotes heterogeneity in terms of actors. Three principal types of wholesale firms can be distinguished according to ownership. First, there are firms which are the wholesale divisions of domestic manufacturing, utilities or retail firms which are legally independent, but nevertheless embedded in the strategies and activities of their parent enterprise groups. Second, there are genuine wholesalers, many of them micro and small enterprises with a high share of self-employment. Third, a considerable portion of the wholesale sector consists of affiliates of multinational manufacturing firms, which act as national representatives for the products of their parent companies. The share of these firms is around 15–30% of employment, and even more of value added. Foreign-owned firms account for a higher share of the total number of firms and value added than in manufacturing. There are considerable differences in productivity between foreign and domestic wholesalers, and these make foreign investment in wholesale a driver of productivity growth. 03 The role of technology and innovation in wholesale Services are often considered as innovation laggards compared to manufacturing, but this is not true of wholesale. Wholesale has a similar share of innovative firms as manufacturing. However, wholesale firms are less frequently engaged in research and development (R&D) and more often employ external technologies. The economic returns to innovation in wholesale are below those of manufacturing firms. Share of innovative firms in manufacturing and wholesale as a percentage of all firms per sector, different EU member states, 2010–2012 80 Manufacturing Wholesale trade 70 60 Share of all firms 50 40 30 20 10 0 Source: Eurostat Community Innovation Survey 2012, own calculations. An important part of innovation activities in wholesale are new information technologies. There is evidence that wholesalers are very active in e-commerce, and make considerable efforts in this field. Expenditure on tangible investments, such as buildings, machines or transport equipment, dropped considerably in wholesale after the crisis and has not yet recovered. On average, wholesale sectors spend less per employee on tangible investments than manufacturing, but considerably more than retail trade. Despite predictions of a decline in wholesale activity due to disintermediation and the diffusion of ecommerce, input-output data indicate that the magnitude of wholesale inputs into production processes is relatively stable over time. One reason for this stability is that wholesale firms themselves are moving into e-commerce. Moreover, wholesale firms provide a range of services other than trade. An example of this is after-sales services, as highlighted in the case study on wholesale of construction machinery. Wholesale and the single market Wholesale trade can contribute to the integration of the European single market by bridging national markets and connecting producers, retail trade and industrial demand across Europe. Convergence in productivity and profitability between countries would be a sign that wholesale is on the way 04 towards this goal, because the free flow of goods and capital would bring foreign competition into high-margin markets and would raise productivity and reduce extra-normal profits in these markets. However, the figures show virtually no convergence in productivity levels since 2000, and only a slow trend towards convergence in profitability. This leads to the conclusion that considerable barriers to the single market still exist in wholesale services. One of these barriers is the practice among manufacturing firms of preventing parallel imports. However, there is a lack of systematic evidence of this practice, apart from information on single sectors (IDEA Consult et al. 2011; Prognos 2014). Another barrier is the difference in national regulation, which leads to higher costs for wholesalers active in more than one European country. There are also other indications of a large degree of heterogeneity in wholesale. For example, differences in labour productivity levels can also be found at the 2-digit sub-sector and even at the 4digit level below. Sectoral value chains in wholesale Selected evidence is presented on the role and magnitude of wholesale trade services in the EU and individual member states, based on information provided in the supply and use tables and the inputoutput tables. In the input-output framework, wholesale activities are an additional cost that a purchaser of products (like a firm buying intermediates from other firms) has to bear. To account for sectoral value chains, wholesalers and retailers are treated as supplying services and their output is measured by the total value of the trade margins realised on the goods they purchase for resale. First, we find that wholesale services are mainly offered by the trade sector. Manufacturing plays a minor role in the provision of wholesale activities. So from an input-output perspective, there is little indication that disintermediation (for example by manufacturing firms offering over wholesale services) actually takes place. Second, trade and transport margins account for about 15% of the total supply of manufacturing products in purchasers’ prices. This figure is relatively stable over time; however, significant differences across countries can be observed. Third, the share of wholesale trade on total costs (as a percentage of gross output) for manufacturing industries is quite stable over time; it accounts for about 5% of total costs, although there are differences across countries (in terms of both magnitude and trends). Fourth, these observations also apply to different value chains, although there are some differences in their magnitude. We considered five different value chains. The direct cost share of wholesale trade in food and beverages and in textiles is about 6–7% (of gross output), whereas in machinery and transport equipment it is about 4%; and in construction it is about 2.5% (for this industry, the share of intermediates in gross output is significantly lower). These figures are similar to those obtained when we consider value added created along the value chains (i.e. direct and indirect costs). Case study: Wholesale of mining, construction and civil engineering machinery A case study on wholesale of mining, construction and civil engineering machinery provides insights into this specific part of wholesale in the EU. A major conclusion from the analysis is that heterogeneity exists even in this – at first sight, well-delimited – sub-sector of wholesale, as the value chain and the role of wholesale may differ depending on the type of machinery, its size, the size of the firms, etc. Wholesale of mining, construction and civil engineering machinery is first characterised by dense interrelations in the value chain: since wholesalers are the only connection between manufacturer and final customer, they are an important link in the value chain. The importance of wholesalers is 05 expected to become even more important in the future, due to the increased cooperation between manufacturers and wholesalers. This cooperation is fuelled by a need to respond better to increasing customer needs, in order to create added value in the construction sector, which is under pressure and is becoming more complex. This may lead to vertical integration in the value chain. The upstream players in the value chain often operate on a global scale (in particular broad-range manufacturers and manufacturers in niche markets), while the downstream players operate on a local or regional scale, due to the need for proximity to the client in the event of machine failure. Value chain of mining, construction and civil engineering machinery Parts fabrication Assembly and engineering Automotive suppliers (e.g. engines, drivetrains, …) Original equipment manufacturers (OEM) Specialized suppliers (e.g. booms, cabins, …) Atlas Copco Bomag Caterpillar Doosan Fayat Hitachi Hyundai JCB Komatsu … In-house fabrication Wholesale End customers sales, aftermarket & rental Independent dealer groups, dealers and workshops (including spare parts) Independent rental companies OEM-owned dealers and in-house rental Construction companies, quarry operators, recycling companies, etc. Recycling of machines Direct sales Leasing and financing (by OEMs and financial providers) Source: based on McKinsey & Company (2016). In total, the sector accounts for approximately 10,000 firms across Europe in 2013. This number increased by 16% between 2008 and 2013, due to emerging businesses in Poland, Germany and the Netherlands. In contrast to this considerable growth in the number of enterprises, employment in the sector decreased significantly over the same period, by almost 12%: in 2013, some 81,000 people were active in the sector. German wholesalers accounts for more than a quarter of the total value added at factor cost in Europe. Compared to the manufacturers of mining, construction and civil engineering machinery, wholesalers in these products are less vulnerable to volatility because of the provision of maintenance and aftersales services. This diversification in their service portfolio provides a buffer against any immediate downturn in investments. However, the fact remains that growth of the sector largely depends on the construction (and mining) industry, which has lost considerable employment since 2008. The impact has been felt most strongly in the Southern European member states. Growth of the sector is expected to increase in the future due to a recovery in demand by final customers and due to aftersales services, which are traditionally the segment with the highest value added. The regulation of mining, construction and civil engineering machinery in the EU is an excellent example of the tight linkages between wholesale and the upstream producing sectors. This regulation is very much sector specific, and is of only minor importance for other parts of the wholesale sector outside the sector of this case study. Other parts of the wholesale sector are regulated by similar frameworks, and these are one important reason for the strong segmentation and heterogeneity of wholesale. Most regulations are harmonised at the European level – but not all, in particular the road circulation requirements for non-road mobile machinery that occasionally goes on the road. The lack of harmonisation in this respect remains a major barrier to the creation of a single market, especially in the upstream segments of the value chain. Wholesalers are also 06 impacted if they want to provide their services (mainly sales and renting of machinery) across borders. In addition, the lack of market surveillance causes major impediments to the creation of a single market. Even with regulatory reforms implemented, market surveillance wi...
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