Perspectives, I’ve learned, are very much based on where you sit, so I was more than interested in what two of my favorite industry people had to say recently. I say “favorite” in the sense that I know them both and have the highest respect for their professional abilities — and both are really “good guys.”
Rob Kusiciel, a former colleague at Sea-Land and now Wal-Mart’s vice president of inbound transportation, discussed at October’s TPM Asia Conference what Wal-Mart thinks about ocean carrier pricing. A common thread runs through his words and those of other retailers: Wal-Mart wants a stable environment with predictability in price, and, not so surprisingly, at lower levels.
The theory, I suppose, is that if carriers keep rates relatively low, new players may not enter the market; no new players, no fluctuation in pricing. And when the supply-demand ratio doesn’t favor carriers, rates can’t fall much. That’s the “stable environment” Wal-Mart and other retailers want.
Although that’s a good philosophy for Wal-Mart, it’s not so good for the ocean carrier industry. Wal-Mart, which ships more than 600,000 20-foot equivalent units of goods into the U.S. each year, saves more than $60 million for every $100 per TEU that rates drop.
That $100 per TEU is more than the average margin carriers made in what was a good financial year for most in 2010. So Wal-Mart gains $60 million in lower costs, and carriers go from profits to losses — not a good tradeoff for carriers.
But how many lounge chairs, flat-screen TVs, pairs of shoes, computers, toys and dresses does Wal-Mart have to sell to make $60 million? A lot, which is why many feel Wal-Mart is a logistics company disguised as a retailer; it constantly refines its supply chain. Look at what it saved by changing packaging over the past few years. It’s skilled people like Rob who make it happen — and it doesn’t hurt to be working for one of the largest retailers on Earth.
The other recent comments that caught my attention came from Erxin Yao, OOCL’s president for North America. He made two presentations recently, one in Memphis and one in New York, and each carried some strong and sobering thoughts.
In Memphis, Yao delivered a straightforward, highly detailed depiction of the global economy and the ocean carrier industry, the latter with some not-so-flattering references to how the industry regularly damages itself — as it’s doing this year and apparently will do so again in 2012 — self-inflicted wounds that are deep and I believe will be catastrophic to some.
But Yao’s points went beyond just saying, “we do things to ourselves.” He expands on the “pricing” theories of some who believe they have to fill the last empty slot on the vessel to be successful, a theory debunked long ago but still practiced by most of today’s global container carriers. Don’t they ever learn?
Each views “they” as the culprits — you know, the other guys; “if we don’t do it, they will.” Except in today’s world, there truly is a they. One carrier’s strategy is to gain volume regardless, betting that, over a period of time, the ups and downs of profitability will heavily favor the “ups” due to the cost of vessels, fuel, equipment, terminals and other operating essentials. Except we see that carrier today selling several of its ships and leasing them back to generate operating cash.
Back to Yao’s points: The costs associated with being a global player in today’s world are getting quite steep. Note the estimates that just the new vessels on order cost more than $40 billion. The cost of fuel, while down a little now, isn’t expected to improve in the carriers’ favor over the long run. With many ports and terminals forced to make considerable capital investments to accommodate the new larger vessels, they have to recoup those costs through higher charges to the carriers. And so on.
Another important observation from Yao is that reducing rates doesn’t result in any additional volume into the market. Companies making green widgets won’t make more of them because ocean freight rates go down; there is no connection between the two. So why reduce rates? Again, if “we” don’t, “they” will, and they will gain volume and market share.
So that’s two diverse views by two extremely bright and talented professionals, each with a perspective based on where they sit. It creates an interesting set of dynamics that helps keep me involved in this fascinating industry.
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. He can be contacted at email@example.com. The views expressed here are his own and do not necessarily reflect those of OWL.