Executive Briefings

Ocean Carriers' Plea: Stop Us Before We Discount Again

In public forums, shippers and ocean carriers tend to make nice with one another. But sometimes the urge to say what they really feel - driven, perhaps, by the pressures of a terrible economy - is just too much to resist. Then the discussion becomes - well, frank.

That's what happened at the Journal of Commerce's 10th annual Trans-Pacific Maritime Conference (http://www.joc.com/conferences) in Long Beach, Calif. last week. The simmering anger of shippers was brought to a boil after several speeches by carrier executives, who laid out their desperate plight - combined losses of between $13bn and $20bn last year - and pleaded for help from customers.

From Eivind D. Kolding, chief executive officer of Maersk Line, came advice for shippers as to what they should - and shouldn't - be asking of their carriers. Start with the positive part. According to Kolding, shippers should demand:

- Reduced volatility of freight rates. The past year has seen wild swings in spot rates in the trans-Pacific trades, he noted.

- Less waste in industry, and reduced uncertainty. In other words, shippers should curb their rampant overbooking of space on ships, a practice that accounts for between 25 and 35 percent of each sailing, claimed Kolding.

- A higher degree of scheduling reliability. Even the best ocean carriers have an on-time rate of just 60 percent, he admitted, versus more than 90 percent in the parcel industry.

- "One-click" shipping, instead of the huge administrative burden caused by old ways of doing business, and endless amendments to bills of lading.

- More environmental responsibility by carriers, although Kolding couldn't help noting that the carbon-dioxide emissions caused by shipping a pair of shoes from Asia to Europe is one tenth that of a consumer driving from home to the mall to buy those same shoes.

So what shouldn't shippers be asking for? Two words: lower rates. They are what have driven many carriers to the brink of bankruptcy since the recession kicked in - what Kolding termed "the worst crisis in the history of container shipping." The overall 10-percent plunge in rates last year (30 percent if you exclude the inter-Asia trades) prompted carriers to impose an emergency "Revenue Recovery Surcharge" on every container crossing the Pacific while current service contracts were still in effect. Carriers have repeatedly justified the increase, along with those to come in the next round of contracts, by insisting that service would suffer without them. As Kolding put it: "Why gamble by chasing short-term savings instead of ensuring long-term stability and partnerships?"

And by the way, he pointed out, ocean freight costs represent a minuscule portion of many consumer goods. They are 0.85 percent of the retail price of a shirt, and 2 percent of a flat-screen TV. (And 40 percent of the commodity value of grain, but that's another story.) Why quibble over a few extra hundred bucks per box, if it means stable, service-minded carriers?

Of which there are too many, in his opinion. Maersk is the leader among container lines today, and it has just 15.8 percent of the market. The only other carrier in double digits is Mediterranean Shipping Co. (MSC), with 11 percent. "Fundamentally," he said, "this industry needs consolidation."

Other carrier executives echoed Kolding's remarks. Y.M. Kim, president and chief executive officer of Hanjin Shipping Co. Ltd., suggested that the general rate increases planned for this May in the trans-Pacific eastbound trades might not be enough to return carriers to the break-even point. MSC president Claudio Bozzo said carriers are still laboring "in the shadow of 2009," when a plunge in demand forced deep cuts in personnel and had a deleterious effect on customer service.

Then it was the shippers' turn. It began with a dig by Barry Horowitz, a former logistics director for Nike who is now president of CMS Consulting Services LLC. "A lot of customers are really angry and disappointed," he said, following the remarks of Kim, Bozzo and other carrier executives. "I hear you focusing on your problems. What does the carrier industry intend to do ... to regain the trust of customers?"

"We recognize the anger," replied William F. Rooney, president of Hanjin Shipping America, even as he defended the recent rate increases as necessary to stopping a "hemorrhaging of money." As for the sudden tightening of capacity in January and February, caused by importers restocking exhausted inventories, "it was a big surprise to everybody," Rooney said.

But the shipper interests in the audience were just getting started. They were steamed, not only by the steep rise in rates, but by a lack of adequate tonnage to move their freight. Trans-Pacific carriers have hundreds of ships in temporary layup, yet have repeatedly left containers on the dock during the recent surge in demand.

And all that complaining about criminally low rates? Shippers were quick to place the blame where it belongs: on the lines themselves. "You put yourself where you are now," said Pat Moffett, vice president of global logistics and customs compliance with Audiovox Electronics Corp. Shippers didn't ask carriers to slash freight rates as they battled for market share. Under the Transpacific Stabilization Agreement (www.tsacarriers.org), the voluntary discussion pact among 15 lines in the trade, a planned $500 rate increase became a $200 decrease, "and I never opened my mouth," Moffett said.

Now, he claimed, carriers are acting unilaterally in their struggle to get back to profitability. In effect, they're demanding that shippers save them from their own past actions. "We're going to dig you out," he said, "but you've got to throw your shovels away and stop digging these graves."

Bjorn Vang Jensen, vice president of global freight and logistics services with Electrolux, said the increase in demand for ship space began last October, and that carriers have had plenty of time to bring on extra capacity to handle it. As to Kolding's claim that "no-show" freight accounts for a third of carriers' bookings, leaving ships with extra space at the last minute, Jensen replied acidly: "If you have it, feel free to load any of the containers of mine that you're rolling week after week. Don't be shy."

Jensen also took issue with Kolding's claim that ocean freight accounts for a negligible portion of shippers' costs. A $1,000 increase per container adds up to an extra $10m in cost for Electrolux. "The notion that we can accept volatility in rates is truly offensive," he said. "It's also false."

He believes shippers ought to be rewarded for making long-term commitments to carriers, in the form of guaranteed service and protection from "arbitrary" surcharges that are intended to recover variable costs. Manufacturers, too, face sudden rises in the price of fuel and raw materials, he said. "But I can't go to Walmart with an 'emergency copper recovery initiative.'"

Jensen left the door open to "some realistic solutions" between the two sides. First, though, he told carrier execs, "you've got to understand that you have done wrong."

I'll have more on the TPM conference, including some ideas for healing the rift between shippers and carriers, in my next post.

- Robert J. Bowman, SupplyChainBrain

Comment on This Article

In public forums, shippers and ocean carriers tend to make nice with one another. But sometimes the urge to say what they really feel - driven, perhaps, by the pressures of a terrible economy - is just too much to resist. Then the discussion becomes - well, frank.

That's what happened at the Journal of Commerce's 10th annual Trans-Pacific Maritime Conference (http://www.joc.com/conferences) in Long Beach, Calif. last week. The simmering anger of shippers was brought to a boil after several speeches by carrier executives, who laid out their desperate plight - combined losses of between $13bn and $20bn last year - and pleaded for help from customers.

From Eivind D. Kolding, chief executive officer of Maersk Line, came advice for shippers as to what they should - and shouldn't - be asking of their carriers. Start with the positive part. According to Kolding, shippers should demand:

- Reduced volatility of freight rates. The past year has seen wild swings in spot rates in the trans-Pacific trades, he noted.

- Less waste in industry, and reduced uncertainty. In other words, shippers should curb their rampant overbooking of space on ships, a practice that accounts for between 25 and 35 percent of each sailing, claimed Kolding.

- A higher degree of scheduling reliability. Even the best ocean carriers have an on-time rate of just 60 percent, he admitted, versus more than 90 percent in the parcel industry.

- "One-click" shipping, instead of the huge administrative burden caused by old ways of doing business, and endless amendments to bills of lading.

- More environmental responsibility by carriers, although Kolding couldn't help noting that the carbon-dioxide emissions caused by shipping a pair of shoes from Asia to Europe is one tenth that of a consumer driving from home to the mall to buy those same shoes.

So what shouldn't shippers be asking for? Two words: lower rates. They are what have driven many carriers to the brink of bankruptcy since the recession kicked in - what Kolding termed "the worst crisis in the history of container shipping." The overall 10-percent plunge in rates last year (30 percent if you exclude the inter-Asia trades) prompted carriers to impose an emergency "Revenue Recovery Surcharge" on every container crossing the Pacific while current service contracts were still in effect. Carriers have repeatedly justified the increase, along with those to come in the next round of contracts, by insisting that service would suffer without them. As Kolding put it: "Why gamble by chasing short-term savings instead of ensuring long-term stability and partnerships?"

And by the way, he pointed out, ocean freight costs represent a minuscule portion of many consumer goods. They are 0.85 percent of the retail price of a shirt, and 2 percent of a flat-screen TV. (And 40 percent of the commodity value of grain, but that's another story.) Why quibble over a few extra hundred bucks per box, if it means stable, service-minded carriers?

Of which there are too many, in his opinion. Maersk is the leader among container lines today, and it has just 15.8 percent of the market. The only other carrier in double digits is Mediterranean Shipping Co. (MSC), with 11 percent. "Fundamentally," he said, "this industry needs consolidation."

Other carrier executives echoed Kolding's remarks. Y.M. Kim, president and chief executive officer of Hanjin Shipping Co. Ltd., suggested that the general rate increases planned for this May in the trans-Pacific eastbound trades might not be enough to return carriers to the break-even point. MSC president Claudio Bozzo said carriers are still laboring "in the shadow of 2009," when a plunge in demand forced deep cuts in personnel and had a deleterious effect on customer service.

Then it was the shippers' turn. It began with a dig by Barry Horowitz, a former logistics director for Nike who is now president of CMS Consulting Services LLC. "A lot of customers are really angry and disappointed," he said, following the remarks of Kim, Bozzo and other carrier executives. "I hear you focusing on your problems. What does the carrier industry intend to do ... to regain the trust of customers?"

"We recognize the anger," replied William F. Rooney, president of Hanjin Shipping America, even as he defended the recent rate increases as necessary to stopping a "hemorrhaging of money." As for the sudden tightening of capacity in January and February, caused by importers restocking exhausted inventories, "it was a big surprise to everybody," Rooney said.

But the shipper interests in the audience were just getting started. They were steamed, not only by the steep rise in rates, but by a lack of adequate tonnage to move their freight. Trans-Pacific carriers have hundreds of ships in temporary layup, yet have repeatedly left containers on the dock during the recent surge in demand.

And all that complaining about criminally low rates? Shippers were quick to place the blame where it belongs: on the lines themselves. "You put yourself where you are now," said Pat Moffett, vice president of global logistics and customs compliance with Audiovox Electronics Corp. Shippers didn't ask carriers to slash freight rates as they battled for market share. Under the Transpacific Stabilization Agreement (www.tsacarriers.org), the voluntary discussion pact among 15 lines in the trade, a planned $500 rate increase became a $200 decrease, "and I never opened my mouth," Moffett said.

Now, he claimed, carriers are acting unilaterally in their struggle to get back to profitability. In effect, they're demanding that shippers save them from their own past actions. "We're going to dig you out," he said, "but you've got to throw your shovels away and stop digging these graves."

Bjorn Vang Jensen, vice president of global freight and logistics services with Electrolux, said the increase in demand for ship space began last October, and that carriers have had plenty of time to bring on extra capacity to handle it. As to Kolding's claim that "no-show" freight accounts for a third of carriers' bookings, leaving ships with extra space at the last minute, Jensen replied acidly: "If you have it, feel free to load any of the containers of mine that you're rolling week after week. Don't be shy."

Jensen also took issue with Kolding's claim that ocean freight accounts for a negligible portion of shippers' costs. A $1,000 increase per container adds up to an extra $10m in cost for Electrolux. "The notion that we can accept volatility in rates is truly offensive," he said. "It's also false."

He believes shippers ought to be rewarded for making long-term commitments to carriers, in the form of guaranteed service and protection from "arbitrary" surcharges that are intended to recover variable costs. Manufacturers, too, face sudden rises in the price of fuel and raw materials, he said. "But I can't go to Walmart with an 'emergency copper recovery initiative.'"

Jensen left the door open to "some realistic solutions" between the two sides. First, though, he told carrier execs, "you've got to understand that you have done wrong."

I'll have more on the TPM conference, including some ideas for healing the rift between shippers and carriers, in my next post.

- Robert J. Bowman, SupplyChainBrain

Comment on This Article