Wednesday, October 25, 2017

Back to the roots for container shipping?

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)

Friday, April 28, 2017

Globalization, public sector reform, and the role of ports in international supply chains

[for the full article, click here]

The first rough brushstrokes of this paper
 were put 20 years ago, mostly in the later part of this paper, concerning the issue of port reform. At that time, I was working for ILO, on the labor aspects of structural adjustment programs, as well as for the European Commission (Commissioner Kinnock), on matters of European port policy.

Since then, the text has expanded substantially to include globalization, containerization, the mega-ships controversy, port competition, transshipment, financing of ports, port labor, and general port management issues. Most of the latter issues derive partly from my recent experiences as president of the port of Brindisi: a provincial town of southern Italy (Apulian Region) which taught me the problems of economic dualism, underdevelopment, and north–south divides in the best possible hands-on way.

Readers are 
strongly advised not to skip my frequent footnotes, which I hope many will find most entertaining. Many of my countless revisions, improvements, updates, and additions have appeared earlier in various forms, including posts on my blog, and some are also included in these footnotes.

Finally, it is not without some satisfaction to see, through this review, that almost everything I was predicting all these years on the evolution of ports towards entrepreneurial entities, and the 
diseconomies of scale posed by mega-ships on ports, shippers, and the supply chain, have come true in 2017.

Friday, March 17, 2017

One-Belt-One-Road (OBOR), China-EU trade relations, and (geo)political ‘positioning statements’

I have updated my ever-developing OBOR presentation, following countless discussions with senior policy makers in Europe and China. 

Inputs are provided on European trade and investment policies; TPP; Regional Comprehensive Economic Partnership (RCEP); Persian Gulf Ports; Africa; Mediterranean; Iran; Russia; India; Pakistan; as well as certain (in my view) "missing links" in the Caspian and Black Seas. 

I also touch upon Global Shipping Alliances, mega-ships, and Panama and Suez Canals. Finally, some thoughts on European port policy and on the financing of ports are offered. To be continued (of course)...

(The presentation is freely downloadable from my ResearchGate profile)

Friday, January 27, 2017

India, Russia and the Persian Gulf: A new OBOR in the making?

The Chinese One-Belt-One Road (OBOR) initiative is a US$ 1 trillion plan, with an estimated economic multiplier of 2.5. However, since the initiative was first announced in 2013 by President Xi of China, only 5% of this budget has been spent. There are as many plans as interested countries, and China is talking to most of them.

This impressive transport network consists of a “Belt”, i.e., overland transport connecting China to Europe through Central Asia; and a “Road”, i.e., a maritime return-route from southern Europe, through Suez, back to Asia. The Mediterranean Basin is therefore ‘central’ in this network which, looking at Chinese investments in Australia, central- and south America, could be easily extended to a global around the world transport system. Such a development assumes more concrete credence, after president Trump’s withdrawal from the Trans-Pacific Partnership (TPP) and, possibly, from NAFTA too in the near future.

Although Arabian Gulf ports are not yet part of this network in any visible way, the Region’s importance cannot be underestimated, as seen also by Chinese investments in Oman, Qatar, etc., as well as India’s interest in the Iranian port of Chabahar, so as to ‘bypass’ the (for her worrisome) Pakistani port of Gwadar, developed by China.

In short, and particularly for ports in the Upper Gulf (MAK, Umm Qasr, Bandar Imam Khomeini), the region could constitute a (land) alternative to Suez, at the same time connecting the Gulf to the Mediterranean Sea. In addition, a ‘port system’ such as this, would and could serve the vast hinterlands of Iraq, Iran, Turkey, all the way up to Moscow, thus connecting to OBOR (Belt) through Russia’s North South Transport Corridor (NSTC).

Could such a scenario be feasible in the short- to medium term? The answer is 'yes', and much of the infrastructure is already there. The only thing it will take is a firmer understanding that progress and welfare are better achieved through economic cooperation rather than political conflict. HH 

Tuesday, January 17, 2017

Davos 2017

Sergio Ermotti (UBS): "We ought to listen to what people say: The benefits of globalization are clearer to emerging economies than to developed countries"

[excerpt from my new book, written 20 years ago]:
[...] The western world has been losing out in this zero sum game, as it has proven to be after all. The West’s initial enthusiasm with globalization and trade liberalization was based on a false premise: i.e. that its saturated economies and increasing returns to scale industries could only survive if and only if the West could expand the international market for its exports. Unfortunately, this didn’t happen. Instead of producing ‘here’ and exporting ‘there’, Foreign Direct Investment (FDI) started to flow ‘there’, producing ‘there’ and, often, re-importing back ‘here’. Profits of European multinational companies have not been repatriated in a way that would allow us to sustain our welfare systems and way of life, developed over decades with the taxes of our fathers and forefathers. These systems are now being unraveled in the pursuit of the Holy Grail of cost competitiveness, and as a result of a mentality of ‘cheap consumerism’ which, if it does not change, it will be signing the economic death certificate of, at least, Europe... HH  

Thursday, January 12, 2017

Mother, should I work in a port?

[The recent New York Times article* reminded me of this photo which I had collated some time ago, appearing in my forthcoming book]
In the earlier days (up to the beginning of the 1960s) general cargo, carried by liner ships, was transported, in various forms of packaging (pallets, boxes, barrels, crates, slings), by relatively small vessels, known as general cargo ships. These were twin-deckers and multi-deckers, i.e. ships with holds (cargo compartments) in a shelf-like arrangement where goods were stowed in small pre-packaged consignments (parcels) according to destination (figure).

This was a very labour-intensive process and, often, ships were known to spend most of their productive time in port, waiting to load or discharge. And although seafaring was great fun in these days [sic], the same cannot be said for casual port work which was rather ill-considered and looked down by society.

As a result of the unpredictability of port work, port management could not possibly employ permanent staff, paying them while idle, and waiting for the next ship to arrive. Labour was thus casual, i.e. employed for as long; as much; and whenever required.

Recruitment of dockers was very different too. Each morning, a number of dockers would present themselves to a union foreman, often a mobster, and he, on the basis of certain ‘criteria’ that had more to do with natural selection rather than anything else, would thumb-in the youngest, the strongest, the favorites of the Union, or those prepared to return a kickback to the Union.
To indicate this ‘preparedness’, the latter dockers used to put a toothpick behind their right ear.[1] The rest would return to their ‘locales’ [sic] and indulge in whatever it was they were indulging in.

Containerization and the new cargo-handling techniques changed all this by taking work away from the waterfront to inland consolidation areas, or to the backyard of the manufacturer who would stuff/strip the container at his own good time. Port labor was thus reduced by 90%, while at the same time labor productivity increased tenfold. Port management had to make generous concessions to docker unions, including the setting up of 'funds' to compensate port workers for the fewer hours they now had to work as a result of automation. In a number of countries, including the US, such 'funds' exist even today, topped up by carriers, and at rates such as $5/ton of cargo handled.

In spite of the reduction in numbers, port union strength has remained largely unchanged and it is not uncommon, in many western ports, to see 'closed shop' salaries well above 100 thousand dollars per year.

Labor 'rigidities' such as the above often lead to large gang sizes, excessive over-manning, little labor mobility and high port user costs. In many ports around the world, the inflexible and monopolistic supply of port labor has effectively discouraged intended private sector activities around the port and has, thus, deprived the latter from one of its main functions, that of being a "growth pole" for the region and the country. 

[1] A beautiful account of the “waterfront” can be watched in Elia Kazan’s 1956 masterpiece “on the waterfront”, with Marlon Brando (soundtrack: Leonard Bernstein), or Mike Newell’s 1997 drama “Donnie Brasco”, with Al Pacino and Johnnie Depp.

* "The Mob’s Last Candy Jar", New York Times, January 8, 2017, p. MB1.