The Journal of Commerce recently reported that NVOCCs are
gaining a greater share of the container market, in part because carriers have
pulled back from relationship-building. Nothing could be more true. But in
actual fact, the thing carriers have pulled back from is “integrated
door-to-door- logistics”. And this is why.
Containerization has gradually led to the commoditization of the ocean (port-to-port)
liner service: All carriers have more or less the same ships, sail at the same
speeds, call at the same ports with the same frequency and charge fairly
similar spot tariffs. Thus, for the shipper, a slot is a slot is a slot and
-other things being equal- he should normally care little if his container
arrives in Rotterdam on a Maersk or NYK ship. He should also care little if his
container arrived in Vienna from Hamburg, Rotterdam or Antwerp.
This situation has led to excruciating competition among
carriers who -in the 1990s- realized that survival
meant differentiation. They thus started to invest in the other components of
the supply chain, such as container terminals, distribution centers, road, rail
and air transport means, as well as in a miscellany of other value-adding services,
such as bar-coding, assembly, documentation, customs clearance etc.
I remember,
during my years at NOL/APL Logistics, managers telling me that they would
advise a shirt manufacturer, all the way from his production line in Shenzhen,
to the shelf his shirts should be placed on in downtown New York. I remember
consignees in Rotterdam telling me that carriers were texting them four times a
day to inform them on the whereabouts of their container. A quality carrier, at that time,
had a global sales-force which, for some, was representing 25% of their running
costs, if not more. Today, in the carriers’ cost-cutting strife, this has
dropped to zero. “There is no one to talk to”; complained to me one shipper. “Well”,
I replied, “you should have known better my friend. But there is never too
late. You have saved more than enough from the shipping industry’s rock bottom
tariffs. And if you now want higher quality; predictability; traceability;
lower inventory- and supply chain costs, like in the past, I am afraid you will
have to put your hand deeper in your pocket…”.
Moreover, investment
in logistics services and related infrastructure allowed carriers to become
more asset light, thus more agile in
coping with the vagaries of the business cycle. The example of global
forwarders and 3PLs was very convincing: They suffered the least from the 2008
economic meltdown just because they didn’t own any ships but were able to ‘buy’
capacity as and when required.
There is considerable research evidence to support my
statement: The return on investment (RoI) of global forwarders is much higher
(and stabler) than that of carriers, just because the former can “ride the
business cycle”, chartering in and out at will,
while carriers are stuck and burdened with shipping tonnage, ‘sinking’ with
it in every market downturn. After all, carriers realized, there was no real
need to actually own the ships, which could be easily chartered-in by the KG
funds of the rich German dentists…
Finally, in addition to service differentiation, carriers’ vertical integration along the supply
chain also served in increasing both the complexity of operations and the sunk costs of aspiring new competitors
(carriers). This was particularly effective whenever shippers were convinced,
through effective marketing, that an integrated service is the only way to
better serve their transport requirements.
In the past 10 years, this situation has started to change.
Carriers appear to be returning back to core business, shedding the idea of
vertical integration in favor of better horizontal
integration (alliances) and dominance in the sector (shipping) where they
have the comparative advantage. Partly, this return to roots has been the
result of the weakening or banning of liner
conferences, and the low freight rates and service unreliability that have
ensued as a result.
In the “Erasmus Report” (freely downloadable from my
ResearchGate profile), for one more time as a heretic amongst my colleagues, I
had warned shippers and the European Commission that the banning of conferences
from European trades would lead to greater carrier consolidation (3 alliances
today control world container trades) and service unreliability. They didn’t listen...
But the truth is that carriers have lost the logistics battle against global
forwarders for another reason:
Being asset light, 3PLs adjust easier to demand and thus
weather the downturns of the economic cycle. In the opposite, carriers, in their
strife for survival, build increasingly larger ships, which they are unable to
fill, and then sell, wholesale, capacity to their competitors (3PLs). To me,
this looks like giving someone the knife to stab you in the back. Is this a
clever strategy? I wonder…
HE Haralambides
(Article first appeared in the Journal of Commerce, 24 Oct 2017)