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)