OceanX radar: The Queen, the War and the DB Schenker sale
Has the world changed or have I changed?
“It’s a funny old game”, a sports commentator once said, and he could have been referring to the transport industry. Having read the summary of the Angry Shippers session at TOC Americas, I feel there are several counter-points to make.
Global commerce as we know it would not exist if many brave men – MacLean, Moller, Aponte, Saade, Tung, and so on – had not decided to invest hundreds of billions of dollars in water-borne assets. As a result of unpredictable and sudden global changes, these assets no longer produce a sensible return on investment. They have, however, led to ever lower transportation costs for the shippers who constantly complain about a situation they willingly exploit with apparently few long-term considerations.
The deployment of larger vessels and super-slow-steaming techniques are a direct result of pressure on revenues, at a time when costs have escalated. Alliances have been formed to ensure that service frequency and choice remains the same – and in some cases improved – and that more direct products are available, without these large ships sailing half-full.
Let us imagine that all alliances and VSAs were outlawed in 2015. What might happen?
Several carriers would probably go bust by May, others might survive until October. Product choice would be reduced; costs would increase; the quality of products would not necessarily improve; and the barriers to entry would not be lowered. These barriers may be thought to have been created by larger ships, but they are a symptom rather than cause. It is the painfully low revenues that act as the barrier to entry.
There are many visible signs that shipping lines are genuinely trying to provide additional value in terms of customer service and ease of doing business, despite seeing no recognisable additional revenue from these activities – and in many cases they continue to haemorrhage dollars .
And what are the shippers doing? Are they actively trying to ensure the sustainability of their key vendors, and therefore their many options in an overly fragmented market? Are they honouring commitments? Are they looking to work closer with their suppliers? Do they accept that a 30% downfall against placed bookings less than 24 hours before a ship arrives needs addressing? Are they looking to make use of redundant terminal capacity rather than squeezing everything through half of the available hours within a week? And so on…
Where exactly is the false economy here? Let’s say you can load 1,570 sweaters which retail at $30 apiece into a teu , and you have negotiated a freight rate discount of $500. You have reduced your cost to market per garment by $0.32. Or, if it is 136 TVs, that equates to $3.68 per unit.
Is that actually a significant reduction for a shipper? Because a 30-50% decline in revenue for the carrier definitely is, and because it is simply unsustainable for carriers it is reasonable to ask where shippers’ longer-term view is.
That $0.32, or $3.68, per item is likely to be consumed in additional costs associated with inventory and supply chain band-aids. If they earned an additional $500 per teu from freight rates, lines would probably not be so extreme in their cost focus, and might even increase reliability and other service offerings. But their backs are against the wall, and they simply focus cost for self-preservation – and even that might not be enough to save them.
We are sailing in dangerous waters, and appear to have reached a stalemate – shippers refuse to compensate quality and lines no longer care about it. We can continue with this behaviour, but expecting a different outcome is nonsensical.
Unless we are prepared to proactively change, the constant complaints become ever less justifiable. For shippers that need shorter lead times to market, then there is plenty of airfreight capacity these days, or production can be moved closer to market, but both are costlier than using long-distance sea transport, even at higher freight rates.
So who benefits from the present situation? It would seem to be limited to terminals and NVOCCs – the former largely operating monopolies with return on investment levels of around 15%; the latter making money from carriers’ high-risk investments in big ticket assets. Carriers, truckers and shippers are clearly not benefiting at all.
It would be refreshing to hear from a shipper as to what they believe the best sustainable solutions to satisfy their nuances might be. What initiatives and strategies might they deploy? Perhaps taking control of their own destiny, and therefore negating the propensity of feeling like the victim, of a situation which they are jointly responsible for, and one from which they have enjoyed significantly lower costs.
Carriers might also cease their suicidal tendencies, and stop walking into shippers’ offices offering rates that they know are below operating costs. They might also consider withdrawing from trades within which they will never be profitable, and focus only on those which they have a chance to make some – any – money.
DISCLAIMER: This a guest post from Andy Lane, partner at CTI Consultancy, which assists with cost modelling and automated tools for those in the container supply chain. www.cticonsultancy.com