Freight forwarders brace for change
In an otherwise troubled economy, some U.S. shippers are heartened by the fact that the weak dollar has meant more revenue return on exports. Domestic freight forwarders should be happy, too; but in the global arena the fight for middleman “market share” is more heated than ever.
By Patrick Burnson, Executive Editor -- Logistics Management, 11/1/2009
According to Global Freight Forwarding 2009, the recent report compiled by London-based Transport Intelligence Ltd. (Ti), this dynamic sector “is in the eye of a recessionary storm.” In fact, industry analysts who’ve examined market growth rates from 2008 and the first half of 2009 note that since the middle of last year there has been a massive reduction in demand for all forwarding services.
“The magnitude of the fall suggests that the sector is undergoing a systemic change,” says Ti analyst John Manners-Bell. Furthermore, notes Manners-Bell, the market environment for freight forwarders is changing quickly, not only in terms of geography and type of business, but also by the competitive position of industry players.
“There is no doubt that the big forwarders are gradually gaining a greater market share; but in addition to this, the relative competitive position between the forwarders is also being adjusted,” he says.
This is not an entirely bad thing, if you are among the leaders, says G. Edmond Clark, president and CEO of FedEx Trade Networks. “Global trade trends continue to point toward a demand for both air and ocean freight forwarding services,” says Clark. “Expanding our footprint in critical growth markets will enable us to deliver a full-service transportation solution and better serve global needs.”
Ranked among the Top 10 by both Ti and the venerable U.S. consultancy of Armstrong & Associates Inc., these analysts believe that FedEx Trade Networks is a forwarder that exemplifies the traits of a top player working to stay ahead of the pack. Having recently expanded its operations in Beijing, Guangzhou, and Shenzhen, FedEx Trade Networks says it’s poised to support the company’s growing international air freight forwarding operations and provide comprehensive coverage in key Asia-Pacific trade lanes.
This is “forward” thinking according to Manners-Bell, who notes that while the fall in volumes to and from China has been steep, the freight forwarding sector has been restructuring for a rebound. “There has been an appreciable shift to lower value goods being moved by container ship from China, while higher value goods make-up a larger proportion of cargo moved by air,” observes Manners-Bell. “It seems that many shippers have taken the view that inventory velocity is not as important as lower transport costs—a situation influenced, no doubt, by low interest rates.”
Recessionary tactics
If there’s one area of agreement among industry analysts it’s that there are major differences in the way large freight forwarders have approached the downturn.
So, why the difference in terms of performance? Manners-Bell suggests that one possible cause might be exposure to different trade lanes. “Trans-Pacific trades, particularly east-bound, have declined more quickly than the whole market. However the Europe-China lane has also fallen violently and the two compose around half of all traffic,” he says.
Which leads to another question about recessionary tactics: How likely is this to be a differentiator? “Alternatively it might be possible that different companies have differing strengths on different routes,” declares Manners-Bell. “This seems more likely when one looks at the relative profitability of Kuehne+Nagel (K+N) compared with DHL.”
This is something hardly in dispute by spokesmen for K+N, although they would prefer to invoke “strategy” above mere tactics. “We had very satisfactory results for the first nine months of the year,” says CEO Reinhard Lange, who attributed higher earnings to the early, consistent implementation of its dual strategy of strict cost management and commitment to market share expansion.
Company spokesmen add that this strategic move has proven effective, enabling the company to successfully counteract substantial volume declines through strict cost management and increased sales activities.
Market growth
After four years of double digit growth, the global freight forwarding market experienced a dramatic slowdown in 2008, some 8 percentage points lower than the previous year, according to the Global Freight Forwarding 2009 report.
“However it must be noted that at this stage of the economic slump, the market was still growing overall,” says Manners-Bell. “The reason for this was the strong first half of 2008. The market only started to stagnate in the third quarter before dramatically falling away in the last sector of the year.”
But as with K+N, UPS is telling shippers and shareholders the worst is over. While the lackluster earnings of UPS freight forwarding were negatively affected by increasingly competitive conditions in the current environment, the business outperformed the market and gained share while maintaining yields. “The business environment in the third quarter of 2008 began similarly to that of the preceding quarter,” says Kurt Kuehn, UPS’s chief financial officer. “However, we did see profitability improvement due to effective cost management and firming volume later in the quarter.”
Both the logistics and forwarding business units experienced moderation in the rate of revenue decline, say UPS spokesmen, adding that the logistics unit again achieved significant growth from its services to the healthcare industry. “We’ve instituted cost initiatives that will approach $1.4 billion this year, making UPS more efficient. In addition, we will reduce our 2009 capital expenditures to $1.7 billion, down $500 million from our initial budget,” says Kuehn
All of this came as scant surprise to industry insiders who no doubt recall that the company said its 2009 forecast would reflect “one of the most difficult periods in UPS history.” Indeed, it was at that time that the company announced the freezing of management salaries and the rationalization of some operations and services.
Market forecast
Ti’s five-year market forecast shows slow growth for the global freight forwarding market. However, this masks a dramatic drop in 2009, and only a slow recovery between 2010 and 2012. Ti also forecasts that the market will grow with a compound annual growth rate (CAGR) of just 1.9 percent between 2008 and 2012.
Darwinian principles will prevail, analysts agree, as the most powerful players bear down and wait out the storm. Among those to watch are DHL Global Forwarding, the world’s largest middleman, followed Schenker, UPS, and K+N.
“The major European forwarding powerhouses dominate the market, accounting for six out of the top ten,” says Manners-Bell. “Their dominance has partly been driven by the aggressive acquisition strategies that have seen them buy up U.S. competitors such as BAX Global, EGL, and AEI.”
Meanwhile, the global forwarding market remains highly fragmented with Ti’s Top 10 accounting for just 42 percent of the market. The market leader, DHL, controls just 8.8 percent, and it doesn’t expect a “substantial” recovery in world trade in coming months. “The current scenario includes continued risks to individual customers and industries, be it insolvencies or extended factory closures,” says DHL’s CEO Frank Appel. “In all our divisions cost-cutting initiatives are being executed, which are by now successfully taking hold.”
Still, taking these factors into account, Deutsche Post DHL expects a return to a positive net income. The company says that its global freight forwarding division was able to benefit from the economic crisis and win significant new business, particularly in the life science, fashion, industrial project business, high tech, and automotive sectors. Still, an overall declining demand, particularly in the technology and engineering sectors, as well as lower freight rates and fuel surcharges, prompted a decline in earnings.
In contract logistics, DHL continued to add contracts despite the weak business climate and contract renewal rate remained around 90 percent. “We are demonstrating strength in the crisis,” says Appel.
According to Manners-Bell, some companies are simply better run than others. “Freight forwarding remains a people-led business, and if staff are managed well and are good at their jobs, company performance will shine,” he says, admitting that it’s difficult to generate meaningful measures on the relative performance of the leading forwarders during the recession.
“This is in great part due to the variability of information produced by the forwarders themselves,” he adds. “However it does appear that some have performed much better than others, both from the perspective of the underlying profitability of their business and from the levels of their cost base.”
In particular, Ti notes, staffing levels appear to have a significant impact on costs. “In this respect, there are differences of opinion in the industry,” says Manners-Bell. “Expeditors, for example, has vowed not to reduce headcount, as it sees its staff as a key competitive differentiator.”
This contrasts with Panalpina, which has reduced employee levels by more than 10 percent. Ti analysts say that Expeditors’ decision may have a short term financial detrimental effect, but may prepare it better to exploit the upturn. “However,” adds Manners-Bell, “if Panalpina is able to effectively ramp up its staffing when good times return, while keeping shareholders happy through a cost reduction program, who’s to say that it did not have the better strategy?”
What is clear to Ti analysts and other industry experts is that none of the major freight forwarders have been able to react quickly enough to the precipitous fall in volumes and revenues in terms of cutting costs, despite the asset-light nature of the business. The final financial quarters of 2009 will show which have adjusted to the new market environment. Those that get left behind could find themselves struggling to catch up with their rivals over the next three years…or even more.
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