Commentary: 2020 Foresight: Big Vs. Small

A weekly publication covering the ocean trade this month published data showing combined U.S. exports and imports had grown 1 percent from 2011 to 2012, with containerized exports essentially flat and imports up 2 percent.

Interesting, yes, but what I found most interesting was how the Top 10 carriers in all U.S. markets performed. Although the overall market grew 1 percent, the Top 10 carriers grew 6 percent and now move 68 percent of all containerized cargo. This is in line with my forecast that by 2020 the Top 10 carriers will control 90 percent of the global market. Some might say, “So what?” But you should care, and here’s why: First, you might want to look into recent articles about how shippers are suing railroads in the United States over their pricing practices. Now that there are four major U.S. railroads, it seems the gains the shippers obtained in railroad deregulation are starting to look very different for many who have facilities served by a single railroad.
But that’s not the main point I’m trying to make here. I’ll let that drama play out in the courts.

What I do want to get into is the differences between big and medium or small. Those differences should be obvious, but I’m not so sure they are when put into the context of shippers dealing with ocean carriers. To me, there’s a developing trend that started when the Ocean Shipping Reform Act was passed in 1999: The playing field has become quite tilted in favor of the big.

Initially, the carriers favored and gave special treatment, rates or space to the big beneficial cargo owners. How many times have you heard that contract negotiations couldn’t move forward in the eastbound trans-Pacific until Wal-Mart’s contract (or later, Target’s, Home Depot’s and other large retailers) was complete? Only then would carriers deal with the rest of the shipper world.

I don’t know how many that process pleased or alienated, but this much is sure: It worked for years. For a long time, the third-party logistics providers — by any other name, the non-vessel-operating common carriers, freight forwarders and 3PLs — were somewhat on the edges, with some carriers obviously favoring them because of their ability to garner large volumes with a stroke of a pen in exchange for a reduction in rates. Some carriers, however, treated them as competitors and were reluctant to give them rates and space.
But times and minds change, and here we are in 2012, with carriers offering significantly favorable rates — not just $50 or $100 per TEU — to the big NVOs as well as the big BCOs, along with better service levels. The gap, you see, is widening between the big BCOs and NVOs and their smaller brethren.

Again, some might ask, so what? Each entity focuses on a particular market segment to fit its business model. Each has strengths, be it local, personalized services with great relationships with their customers, filling in where the ocean carriers leave off in terms of being able to guarantee space and equipment, or a large global reach with extensive services in dozens of countries and specialized services beyond the ports. No doubt, there are relevant factors that make them attractive to specific customers and even full market segments.
But I wonder if the case playing out in the courts between shippers and U.S. railroads offers a glimpse of where we might be in 2020, when only 10 carriers control and move 90-plus percent of global containerized trade.

Some may read this and say, “Only 10? Look at how many there are now, so why only 10?” To that, I say there may be more than 10 carriers in 2020, but there certainly won’t be as many as today. And, in my opinion, those Top 10 will control and carry 90 percent or more of the market.

Considering the cost of entering the market in any significant way and the obvious pressure on profitability for ocean carriers and vessel owners who charter ships, it won’t be the same world in 2020. Certain survivors will be able to approach the market quite differently, just as we’ve seen how the railroads have evolved their strategies on how to approach their markets.

It should be interesting to read the industry reports then.

Gary Ferrulli, a veteran of nearly 40 years in the shipping industry, is director of export carrier relations for non-vessel-operating common carrier Ocean World Lines, a subsidiary of Pacer International. Contact him at mrgtf4811@mindspring.com. The views expressed here are his own and do not necessarily reflect those of OWL.
 

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