2018 Ocean Cargo Roundtable: Unsettled seas

Amid the continued escalation of trade war rhetoric and with peak season upon us, shippers are concerned about the potential impact these uncertainties will have on ocean carrier schedules and deployments. Beyond that, industry analysts say that logistics managers should carefully track how carriers are integrating new technologies into their operations while maintaining financial stability.

To help shippers gain more insight into the many new issues now surfacing in the ocean cargo arena, Logistics Management has gathered three prominent maritime experts including Jonathan Gold, vice president, Supply Chain and Customs Policy for the National Retail Federation (NRF); Philip Damas, head of Drewry’s Supply Chain Advisors; and Brendan McCahill, senior vice president of trade data content at Descartes Datamyne, an import/export trade database company.

Logistics Management (LM): CMA CGM and Maersk Line say that they’ll maintain independent brands in companies they may acquire. Do you believe this is a good idea?

Jonathan Gold: We certainly think maintaining the independent brands is a good thing, especially for shippers. This allows the brands to remain more nimble and able to provide more personalized services. It also allows them to rely on the larger parent company for cost savings and financial support, as well as offer services that might not have been previously available. We think it can benefit shippers, but at the end of the day, it all depends on how the acquisition works out and how much independence is granted to the brands that are acquired.

Philip Damas: I agree with Jon, but one must realize that carrier capacity decisions are driven by trade profitability, ship utilization and other factors. Therefore, branding is secondary to other concerns. For example, Asia-to-U.S. ship load factors had dropped to just 85% in recent months, so the decision of 2M carriers Maersk and MSC to discontinue a loop was justified from a carrier viewpoint—although unfavorable for shippers who relied on this particular loop for their operations. THE Alliance [comprising the carriers Ocean Network Express, Yang Ming and Hapag-Lloyd] is also merging two transpacific loops this month. So, the maintaining of brand integrity remains to be seen.

Brendan McCahill: One would think that maintaining the brand of an acquisition in particularly specialized markets makes sense, as the survivors within these trades are durable companies that have adapted over the years and survived globalization. Experience has certainly shown that shippers value specialization in their trade lanes, and branding is a way of assuring that strategy will continue.

LM: 2M Transpacific is cutting back on service, blaming overcapacity in the trade. Does this signal a trend for other carrier consortia?

McCahill: Is it the overcapacity itself, or is it a buffering against softening of trade flow volumes that may occur as a result of the somewhat truculent trade statements from the White House? Blaming over capacity may be a better statement than a comment on politics.

Gold: Indeed, we don’t think it signals a trend. We think this comes down to the need for carriers to better manage capacity and utilization. I know this is easier said than done and has been an issue plaguing the industry for years. However, in today’s 21st century supply chain, it’s an integral issue that needs to be resolved.

Damas: You mention the 2M “cutting back on service,” which, to me, is not just about providing available ship capacity and equipment, but also quality and reliability of the overall service. The recent survey of shippers run by the European Shippers’ Council and Drewry showed that there has been a deterioration of carrier customer service since 2016, and that shippers are less satisfied with the carriers’ level of service than they were before. This is an ongoing issue.

LM: Many shippers were surprised by bunker fuel surcharges this season. Does this suggest that carriers will return to cartel pricing?

Damas: I certainly hope not. Price fixing is illegal under U.S. and European laws and can be punished by large fines, as has happened when car carriers indulged in such price fixing in recent years. However, the container carriers announced nearly identical new “exceptional” bunker fuel surcharges recently, apparently without joint discussions, and some shippers regard this as “price signaling”—a term used to say that a competitor is communicating proposed price increases to other competitors, who can then respond even without direct discussions.

Gold: I’ll echo Philip’s sentiments, as we hope that’s not the case. In talking with NRF members, most if not all have refused to pay surcharges this season.

LM: Third parties like INTTRA, CargoSmart and GT Nexus insist that carriers are becoming more networked with information technology. What is your take on this development? Have all carriers bought into these models or are they pursuing independent systems?

Damas: The container shipping sector is far behind the trucking sector and the airline sector in IT and digitization. The booking function is the area that’s the most advanced in terms of integration and networked communication, notably via platforms like INTTRA and CargoSmart, which connect the vast majority of ocean carriers.

However, there’s still a lot for carriers to do to standardize, automate and digitize processes, ranging from procurement to payments, via capacity planning. There are opportunities for third-party companies or start-ups to accelerate these developments. For example, Mastercard recently moved into the container shipping payment side of the business.

McCahill: Just as the advent and expansion of vessel-sharing agreements have helped carriers control costs and improve services, more networked services will help carriers as well. American Airlines showed with the Sabre system a few years back that linking technology among service providers offers the smoother gateway across multiple platforms and simplifies shipper access. But there must be a reason that carriers invest in these technology companies.

We question whether all carriers will buy into these models or prefer to pursue independent systems. In either case, the majority of carriers understand the benefit of common platforms, and those that still create their own network solutions tend to be open to participate with the common providers too as a convenience to shippers.

Gold: We think it’s incredibly important for carriers to invest in more information technology that will help drive more transparency into the supply chain. This has to be the case for all of the stakeholders, including the marine terminal operators. That level of transparency will only help drive the efficiency through the supply chain that retailers and other beneficial cargo owners are looking for.

However, and as we’ve seen recently, some carriers are pushing their own systems with no interoperability between them. This isn’t always the best case, as you’re trying to drive system wide efficiency. When you’re operating in an environment where you have multiple terminals all operating their own systems, such as in the Ports of LA/Long Beach, that can make it more difficult and lead to less efficiency.

LM: Blockchain is another much heralded development. How much of it is real?

McCahill: It’s real, but it’s complicated. It’s just not that easy to adopt on a large scale using a built-out network. But with some agility, one would think there would be growth here over time.

Gold: Brendan’s right. I think it’s too early to judge blockchain. There are certainly a number of companies who are in the stages of conducting different pilot projects to determine and evaluate its role in the supply chain. There are even some government agencies looking at how it can be deployed for trade enforcement purposes. The NRF continues to watch closely all of the developments, especially the eventual development of potential rules and regulations that could affect the technology moving forward.

Damas: This is where I disagree. Blockchain is still an unproven technology in shipping and supply chains, and very little of it is real—as of yet. Shippers must have read about the blockchain potential a hundred times, but the view of Drewry’s e-business experts is that blockchain in international trade and transport must first address and resolve transparent and secured paperless trade; real-time traceability of goods and shipment events; real-time traceability of transactions and matching these with physical flows; a distribution of information to a network of partners.

At this point, blockchain technology still falls short in certain areas. There are challenges to be addressed in the coming years in order to have a full implementation beyond the proof of concept. The main obstacles are lack of strong governance, legal framework and compliance, lack of data controls and lack of standards.

LM: Finally, what’s the most critical issue facing ocean carriers for the remainder of this year?

Gold: The biggest issue facing all of industry right now is the continued escalation of the trade war and the impact that will have on both imports and exports. Beyond that, a number of our members have said that carrier financial stability, schedule integrity, chassis and port congestion are some of the most critical issues facing the carriers.

These issues aren’t limited to affecting the industry this year alone. They’re systemic issues that are at the core of an efficient supply chain. For a shipper, especially NRF members, their most urgent need is the ability to get their cargo as soon as it’s available. Solving these larger issues will help create a more efficient supply chain that benefits all stakeholders.

Damas: I’ll add that the most critical issues facing ocean carriers for the remainder of the year are to regain profitability and stop cutting customer service as a cost-reduction measure. The two go together. However, the finances of most ocean carriers now are poor, based on Drewry’s “Z score” of financial strength.

From a shipper’s perspective, the risks are that some carriers could discontinue their services or slow down their services to reduce increasing fuel costs if their losses worsen, and a related risk is that the rapid consolidation of the carrier industry is reducing the number of providers and could eventually push up prices, as has happened in the U.S. airline business.

McCahill: So it sounds like we all agree. Carriers and shippers face the same challenges regarding the volatility in the marketplace. The best strategy, therefore, is for them to pay close attention to all the analytics and concentrate on mitigating risk.