An open letter to Shippers around the world

三月 07 2017

The bankruptcy filing of Hanjin was news that shook the world of logistics, and yet, at the same time it was fully expected. The news was a wake-up call for shipping companies and their customers that drastic shocks to the supply chain still exist.

Since the hit of the financial crisis in 2009, where operating losses in the industry reached nearly $20 billion, there has been a severe mismatch between demand and carriers, with the supply growing at a much faster rate than the demand. It was common knowledge in the industry that consistent overcapacity in the ocean freight market was not a sustainable business model for any company. However, major container lines continued to receive government support, perpetuating the belief that the major carriers could survive and weather the storm of depressed rates and overcapacity. Now, with Hanjin going through the bankruptcy process, the bubble of safety and consistency in the market has burst for everyone. 

Consolidate for stability

Hanjin is just the beginning. Even without the capacity that Hanjin ships carried (approximately 5% of the capacity of East-West ships in August 2016), there continues to be a larger supply of containers than need for moving goods around the world. As seen in the UNCTAD report, during 2015 the world fleet grew 3.5%, whilst demand was sitting at 2.1%. Ships were being built so big they were unable to call at certain ports, whilst 4.2 more ships were being demolished when compared to the previous period.

Averages per country, 2004-2016: Number of liner shipping companies, container ship size and maximum ship size. Companies have dropped from 22 to 15, ship size has grown from 2259 to 5184 container ship units and maximum ship size has risen from 2812 to 6656 twenty foot equivalent units

With this in mind, the only alternative to further bankruptcies amongst the carriers is consolidation, which is much more stable for the industry as a whole. Thankfully there are two areas where we are seeing consolidations; mergers and alliances. In the past year, according to the latest Loadstar stats, the number of container lines with an operating capacity of over 200,000 teu has been reduced to 17 from 20. This number is expected to reduce further as the industry consolidates.

SEKO is experiencing increased demand as some shippers allocate more containers to non-vessel-operating carriers.

"We can both mitigate the increased risk in the market while at the same time we can provide more end-to-end services, visibility, and more attention" – Brian Bourke

 

 Most NVO-reliant container lines - Non Vessel operating carriers as a percentage of business 2016. PIL is highest at over 90%

The announcement that the Japanese carriers would end decades of rivalry and create a merger of the K-Line, MOL and NYK lines (Japanese 3 or J3 carriers) under a joint venture arrangement, starting in April 2018 and effectively becoming the sixth largest shipping company worldwide, was welcome news to the industry.  So that they don’t succumb to the same fate as Hanjin, the Japanese carriers seek government aid and reduced tax rates after the three carriers recorded a combined net loss of $484 million, with revenue declines of over 20% in 2016. This year will also see the completion of the acquisition of Hamburg Sud by Maersk and the finalization of the Hapag-Lloyd merger with UASC, which will continue to reduce the amount of carrier options in the marketplace.

In addition, the alliances continue their re-shuffling, although at a slower pace, giving shippers a sign that the alliances are becoming more stable, as a result of forming alliances amongst themselves. Effective from this April, the three alliances (2M, Ocean and THE Alliance) will control 91% of the vessel capacity in the trans-Pacific, and in a bid to work towards matching supply and demand, effectively cover all global trade.

How are shippers to react?

The best way for shippers of all sizes to mitigate risk is to work with an NVOCC/Freight Forwarder (non-vessel operating common carrier) that has the technology, service capabilities, experience and network to help spread bookings safely among the carriers, offering door-to-door service at competitive pricing and providing better technology solutions and data integration than the carriers alone offer. Having full scale visibility throughout the entire shipping process allows customers to know where their product is at all times, and more importantly, to have a reliable contingency plan in place for every stage of the process, should a disruption – whether by natural causes or geopolitics – occur. 

With increasing cost pressures and staffing cuts at the lines over the past five years, NVOs like SEKO have evolved from fundamental booking and documentation agents for their clients to become the full-service customer service arm of the collective ocean carrier base. By offering a plethora of value added services, NVOs have successfully filled the void remaining as carrier focus has shifted to management of their assets. The NVO value adds include automated shipment visibility solutions, P.O. Management, drayage in addition to providing the essential documentation, booking, rate solutions and compliance management.

“Through alignment with NVOs (like SEKO) clients experience the numerous benefits of one-stop carrier shopping, even though the customer experiences the benefits of multiple carrier alternatives. Well positioned NVOs have full visibility on the carrier marketplace, equipment surpluses and service offerings. When coupled with value added customer service, client specific SOPs and technology tools within their business portfolio, the NVO offers sophisticated tailor-made solutions that exceed what carriers alone cannot provide to their clients.” – Kevin Krause, Vice President Ocean Services at SEKO Logistics.

Shippers that are moving to this strategy are not only reducing their risk, they are seeing their service levels and visibility improve across the whole supply chain. In addition, with the continued dominance of the soon to be 3 alliances, few shippers have the budget to foster a collaborative relationship with the carriers. Many shippers are losing their relationships as carriers shift their focus to financial health and asset allocation with the alliances. This is the smart strategy for the carriers, but the impact on the shippers is forcing more conversations in board rooms about their international transportation strategy. 

This is where NVOs help, by assisting shippers in this process while improving other transportation, purchasing and vendor KPIs, with better attention, developed solutions and all round better visibility. Whether you have 500 or 500,000 containers on the water over the course of the year, adding a technology NVO into your ocean strategy can add significant value to your supply chain