Return to index-linked contracts an idea gaining traction with BCOs and forwarders
It’s time for the liner industry to ditch the flawed fixed tender process where “someone ...
I often talk to the executives of startup companies, mainly from the US, but few end up being on record. So I am glad to be able to make an exception with Fauad Shariff, chief executive and co-founder of CoLoadX, a New York-based start-up backed by venture capital.
Mr Shariff, a freight forwarding veteran, discussed the structural changes determining the new competitive environment for the middle-man, as well as the technological gap that currently exists between freight forwarders and other key players in the supply chain.
I should note that by sheer coincidence that The Loadstar is running what appears to be a companion news item today – but that only goes to prove how relevant our conversation was.
And for readers possibly unclear about the difference between forwarders and non-vessel operating common carriers (NVOCCs), this blog from Xeneta remains a useful primer.
What is CoLoadX and its business model – what’s different from the value proposition of other tech startup companies that cater to the T&L industry?
“We started with a marketplace for container shipping, but unlike a lot of the other startups we actually took a very different direction, by bringing growth and savings opportunities to freight forwarders and NVOCC’s rather than trying to disintermediate them.
“Prior to launching CoLoadX in 2015, I had been a freight forwarder and NVOCC for over 15 years. By 2013, I found that the business of negotiating rates and signing contracts had turned into a joke. Within a matter of weeks after signing a carrier contract, customers would make it clear that my rates were ‘unworkable’. Not just off by a few dollars, but downright ‘unworkable’!”
Why did that happen?
“The reason was that steamship lines were discounting and signing contracts for decreasing rates and capacity commitments just to fill up their vessels. Hence, a contract for five teu was negotiated at rates less than 50 or 100 teu within a matter of weeks. Meanwhile, we found that full-container pricing and service levels were more accurate and easy to access in the NVOCC market with no need for contract commitments and only minimal price risk.
“There was tremendous rate liquidity in the NVOCC market, and we know that freight forwarding is a highly fragmented business, with so many stakeholders all chasing the same business. It’s an industry that is perfectly set up for a digital platform. We do not sell freight services to shippers, and we do not sign contracts with steamship lines. That is how you create a neutral platform.
“Do not disintermediate the freight forwarder and do not try to compete with the NVO’s.”
Can you explain it differently?
“The analogy we give is the securities industry, where you can do business with Goldman Sachs or TD Ameritrade or others.
“They both offer a different value proposition and commensurate pricing. But none of these companies have manual workers handwriting purchase orders and trading tickets. They’re all similarly automated at the back end. Yet, in the freight market, you have manual processes such as phone calls and emails for booking, price discovery, and so forth. There exist no true mechanisms for benchmarking or order execution. At CoLoadX, quite simply, we’re bringing all of that all into one online environment.”
More broadly, what are the risks for the incumbents and the business model of the freight major forwarders?
“The mistake that everybody has made in looking at this problem – and I say this with tremendous confidence – is that people view the freight forwarders as the travel agents of cargo, and they are expecting them to be wiped out by the next ‘Expedia-like’ tech product coming to the market.
“We have a completely differently view. We say freight forwarders are value-added resellers without whom the world’s cross-border commerce simply cannot happen. So, if you are going to change logistics, you have to start with automating the freight forwarding sector first.”
What does that mean exactly?
“Take price discovery – for a spot quote on per container basis, you can only shop with the sales rep of the steamship line or the NVOCCs with whom you have an existing connection. If you do not have a connection, or if you’re a small NVOCC, they might not even return your call. And that’s just to get the conversation started. After rates are negotiated, maybe after 10-15 days, you arrive at a contract in a spreadsheet. And if you talk about spot rates, it’s emails, with no recourse for typographical errors, misquoted line items, and so forth.
“And yet it gets worse, as forwarders and NVOCCs have to keep one dedicated team for quoting alone, another for booking, and still more teams for documentation and settlement, and that is ridiculous in terms of capital allocation. As a result, we’ve seen freight forwarding EBITDA compress to the low single digits over the past couple of decades.”
What’s important to understand in the dynamics that characterise the trade going forward?
“The first step is to make price discovery online so it’s just like how you find anything else, just like in hotels or air fares.
“One more thing we must all realise is that freight forwarding is a retail business. At a bare minimum, you have to bring to this market the same tech capabilities and advances, that Alibaba and Amazon have to e-commerce retail.
“Otherwise, they’ll fill the gap, and we think they have won the last mile. So, now first mile is where they have to go next, which is the domain of the freight forwarders and the NVO’s.”
“There is a technological gap of about 25 years – retailers have moved from catalogue to mobile commerce while the logistics players from telex machine to emails and then just stopped.”