The freight forwarding industry has been around since at least the Middle Ages. In fact some of Europe's leading forwarders can trace their roots directly to forwarders operating in the days of the Renaissance and the Hanseatic League. But as venerable as the industry may be, it has never garnered much respect from ocean carriers even thought they derive a significant amount of their cargo from these middlemen. Just a few years ago, in a speech at a trade association meeting, a shipping line executive referred to forwarders as parasites that feed upon the ocean carrier industry. Admittedly, those were leaner times when tempers were thin, but the relationship between forwarders and ocean carriers remains a rocky one.

The forwarders may now be getting some revenge in the form of increased prosperity and market share of containers the shipping lines carry. According to Philip Damas, director of research for London-based Drewry Shipping Consulting, a leading provider of economic, marketing and technical information to the international shipping industry, the forwarding industry controlled about 20 percent of the global container market last year and earned revenue of $50bn (not counting customs services). In comparison, forwarders earned $30bn from the airfreight market where they control 95 of the market.

The good news for forwarders, according to Damas, is that their share of the ocean container market is growing at near double-digit rates, and it has plenty of room to grow. The very large forwarders, including Kuehne + Nagel, DHL, Panalpina, Schenker, and more recently UPS SCS, are gaining market share even faster. For example, K+N sea freight volume increased 19.4 percent in 2005.

The growth in container market share for the large forwarders is coming both because of consolidation among the forwarder ranks and because the world's importers and exporters are outsourcing more logistics activities to intermediaries. But exactly where the consolidation is happening is more difficult to determine. The number of forwarders doing business today as measured by active licenses on file at the Federal Maritime Commission has not changed over the last few years.

"I believe that the consolidation is coming at the expense of mid-sized forwarders that are either being acquired or just going out of business," says Damas. "The small forwarders that offer very personalized service are actually doing fairly well."

Herman Amsz, owner of Omnitrans Corp., Ltd, a small freight forwarder based in New York, agrees with Damas's conclusion.

"Smaller forwarders can react faster to market changes and will provide the customer with excellent service," says Amsz. "At my company, we have no voice mail. People actually answer the phone."

While large forwarders focus on building volume with equally large customers, Amsz who has operated Omnitrans for nearly 35 years, says that the small forwarder has to keep its customers and work every day to find new business with emerging exporters and importers.

"Just being big does not guarantee success or longevity," he says. "The dinosaurs are long gone, but the little mouse is still around."

Direct Shippers
The large direct shippers do not need the forwarders to make their deals with the ocean carriers. According to the 3PL research company Armstrong & Associates, the freight forwarders and non-vessel operating common carriers (NVOCCs) now control only about 38 percent of the container traffic in the Asia to U.S. trades. The other two thirds are handled direct by the large retailers such as Wal-Mart and Target, which have more clout with the carriers when it comes to negotiating rates and services. The traffic that the forwarders and NVOCCs handle on their own bills of lading is for smaller accounts, less-than-container load quantities and multiple customer consolidations.

For traffic from Asia to Europe, the forwarders handle the majority of traffic. A few large shippers, however, are going direct. For example, Swedish furniture retailer IKEA ships 100,000 TEUs per year with Maersk to North America and Europe without using a freight forwarder.

Even where the importer or exporter is booking direct with the carrier to leverage its own volume rates, the shippers often use 3PLs or forwarders on a fee basis for product handling. The retailer contracts will cover support activity and consolidations in Asia, but not the movement from origin to destination on a freight forwarder bill of lading. When the containers hit the U.S., the 3PL contracts will also take cover container stripping, cross-docking, distribution and transportation.

The direct shipping phenomenon has not spread to the high-tech sector. While these shippers have the clout to negotiate directly with large carriers, they also require much more sophisticated forwarding services such as consolidation, inventory management, packing and other distribution center operations. They all use forwarders and 3PLs. They may negotiate the basic transportation service with the carrier, and then use the forwarder for the value-added service. High-tech shippers need airfreight, so they need multimodal service. They depend on forwarders to ship goods by the best mode.

Even with very large companies shipping direct, Damas says that forwarders do not have much to worry about in terms of growth. Ever since the early 1980s when forwarders took over the container consolidation business, often as NVOCCs, forwarders have made steady progress.

"Carriers couldn't make any money doing this, but forwarders and NVOCCs could," says Damas. "They also know how to attract new business. As a result, forwarder growth has generally been twice that of the ocean carriers."

And while forwarders earn margins that average only about three percent of sales, these translate into a higher return on invested capital than carriers enjoy because the forwarding is essentially a non-asset business.

Carrier 3PLs
Many forwarders are now marketing themselves as 3PLs, not just forwarders. While these companies are diversifying into various types of contract logistics where the margins are higher than with booking air and sea freight, most remain freight forwarders at their core. The non-forwarding portion of their revenue is still a very small portion of revenue that at best spreads business risk. It certainly does not change the basic freight forwarder model that relies on small commissions from carriers and fees for document preparation and any special cargo services.

Shipping lines have acquired forwarders or have set up 3PL operations that serve similar services. For example, Maersk Logistics is a 3PL that works very closely with the parent company to manage cargo-handling operations to keep the revenue on the same balance sheet.

"Maersk Logistics allows the carrier to do multi-country consolidation, which is a complex service: small consignments for individual companies for different countries into one hub, and consolidate a container and move it one container to one destination in the U.S. or Europe," Damas says.

Many other ocean carriers, including APL, OOCL, MOL, NYK and 'K' Line, all have similar logistics offshoots that allow them to provide customized services beyond transportation. Needless to say, these carrier-affiliated 3PLs have access to ocean capacity that independent forwarders do not. "When capacity is tight, these operations have the edge," says Damas, "but few handle airfreight and land logistics as well as the independents."

While forwarders as a group are growing their ocean business, each has its own strategy, according to Damas. For example, Panalpina uses a subsidiary within the company that is responsible for managing capacity with ocean and air carriers. This subsidiary uses all of its global volume to negotiate rates on a centralized basis. The global volume can then be allocated to markets around the world as needed. Most other forwarders have country managers that negotiate locally with air and sea carriers on a spot or short-term contractual basis.

Philadelphia-based freight forwarder BDP International ranks fifth in global volume mainly because of its leading role in exports, especially chemical exports that comprise about 65 percent of its business.

The Japanese forwarder Kintetsu World Express has negotiated a strategic partnership with Mitsui OSK Line and its forwarding subsidiary, MOL Logistics, where each party owns a minority share in the other business. The parties jointly market ocean and air consolidation services in the U.S. and potentially share certain facilities and services in China and Japan. Such a strategic alignment of interests between a carrier and a forwarder is probably only possible in Japan.

Chinese forwarders are growing along with the burgeoning trade. State-owned forwarder SinoTrans controls 3 million TEUs in China, but the scope of service is not up to the standards of global forwarders. One possible exception is Kerry/EAS, a Hong Kong-based forwarder owned by a consortium with global freight expertise as well as Chinese market knowledge.
Despite the growing influence of forwarders in the ocean freight industry and the increasing dominance of very large global forwarders, the market is still fragmented enough so forwarders do not have control over prices.

"There will need to be much more consolidation in the freight forwarder ranks before they have any significant impact on freight rates," says Damas.

However, forwarders do have a way to leverage their profitability in times of shifting rates. According to Damas, the forwarding market tends to be counter-cycle to the ocean freight market because forwarders and NVOCCs have contracts with carriers that are usually about three months long. When the ocean carrier rates go down, forwarders can make more money, at least in the short term. They squeeze the lowest possible rate contracts as soon as the market turns south, but they do not pass on the reductions to the shippers until later. They use the additional revenue to widen their margins.

"If you look at Panalpina's first quarter results for 2006, they more than doubled their net earnings at the same time the market was soft," says Damas. "Earnings for a large ocean carrier like APL in the first quarter went down 30 percent."

Chart: Top 20 Global Ocean Freight Forwarders Ranked By TEU Volume