It’s as if David had laid down his slingshot and Goliath his spear and started working together.
Non-vessel-operating common carriers and many ocean container lines, which for years have competed on uneasy terms over cargo bookings, are cooperating more than ever, and the results are showing up on the decks of vessels and in the way cargo flows through extended international supply chains.
Container lines that once shrugged aside business from non-asset operators in favor of contracts directly with large U.S. shippers are happily selling space to NVOCCs to fill big, new ships. Other carriers that always had plenty of room in their business models for NVOCCs are basking in strong year-over-year gains in volume.
Total volume of shipments that non-asset-owning freight forwarders handle for U.S. importers grew 5.6 percent in the first half of 2011, compared with 4.2 percent growth in volume moving under traditional arrangements between carriers and shippers, according to the latest NVOCC market report by PIERS, a sister company of The Journal of Commerce. That extended a trend PIERS figures show beginning in 2006 and accelerating during the global trade downturn and the recovery.
The figures show the share of total import shipments under the NVOCC “flag” grew from 28.4 percent in 2006 to 32.9 percent in the first half of 2011, according to the report, which shows the NVOCC share growing in terms of both volume and value.
NVOCCs, which own no ships but are licensed by the Federal Maritime Commission to act as ocean transportation intermediaries, saw their share of the import market by volume climb from 32.6 percent in the first half of 2010 to 32.9 percent this year. The estimated value of NVOCC cargo increased 4.2 percent year-over-year in the first half, much faster than the 0.5 percent rise in value recorded for carrier-negotiated imports. That suggests NVOCCs are beginning to chase more lucrative cargoes.
During the five-year period, the annual average growth in the value of the import cargo booked through NVOCCs was 0.6 percent, while the value of total trade declined at an average annual rate of 3.7 percent.
The growth includes the period in the recovery from the 2008-09 recession, when many shippers turned to NVOCCs to find capacity as demand vastly overwhelmed available vessel space, particularly in Asia.
But the PIERS figures also show the push toward NVOs predating the recovery and the idled ship capacity that dried up space, and persisting as space has grown far easier to find.
“When shippers scrambled for additional capacity, they turned to NVOCCs, who cemented relationships with the shippers,” said Philip Damas, division director of Drewry Supply Chain Advisors.
Damas said some big importers are turning to NVOs and forwarders, in part because of the wider range of services they offer. “Even companies like Wal-Mart work with Damco, which is independent from Maersk Line and operates as an NVO,” he said. “The service portfolio of NVOs and forwarders is more attractive to shippers because they offer not just basic capacity, but also such services as cargo management and other logistics services around the capacity they buy from carriers.”
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In that sense, said Greg Johnsen, executive vice president of marketing and sales at GT Nexus, forwarders may have cemented their services with larger numbers of customers through the downturn. “Once NVOs have found their way into selling space to larger shippers, they tend to be more inventive,” he said. “If they are closer to the supply chain needs of their customers, they might be in a better position to pick up some carriage as well.”
Lars Jensen, chief of maritime market research firm SeaIntel, said the shift is at least partly driven by cost-cutting carriers have undertaken and the impact on customer service. “I believe it has more to do with small shippers finding it very difficult to interact directly with carriers,” he said. “As a consequence, the small shippers are increasingly turning to the forwarders. What then happens is a self-sustaining cycle which goes as follows: A small shipper finds it difficult to interact with a carrier and chooses a forwarder instead. The forwarder’s volume increases and he therefore gains more pricing power. The increased pricing power results in a lower freight rate, and hence lower revenue for the carrier.
“In response to the lower revenue, we see the carriers cut costs. Part of the cost cutting results in lower customer service support, which particularly impacts the small shippers. Consequently, even more small shippers turn to the forwarders,” Jensen said.
Many large container lines that are usually part of the annual contract talks with big U.S. importers are selling a lot of capacity to NVOCCs, according to the PIERS report, which ranks carriers by the total volume of NVOCC-controlled import cargo they transported in the first half of 2011 and by the volume on individual trade lanes.
PIERS puts Mediterranean Shipping, whose business model is built on serving the NVOCC business, as the No. 1 carrier handling NVOCC import volume, ahead of Maersk Line. Evergreen Line, Hanjin Shipping and Hapag-Lloyd round out the Top 5.
The growth in forwarder market share isn’t spread evenly across U.S. trade lanes, however.
During the first half of 2011, NVOCCs gained market share on eight of the 14 regional trades defined by PIERS. The PIERS report ranks the top 20 NVOCCs by the import volume on each of the 14 trade lanes. It also lists the top 50 container lines and their NVOCC import cargo relative to their total volumes.
The largest market share gains in the first half of this year went to companies handling cargo from the east coast of South America, where NVOCC volume increased 16.1 percent, and the west coast of South America, up 17 percent. The share of NVOCC imports from northern Europe and the northern Mediterranean increased 6.9 percent and 5.6 percent, respectively.
But on the import lane from Northeast Asia, the largest U.S. trade lane, the NVOCC share was relatively flat, rising just 1.5 percent to an already high 40.2 percent share. The NVOCC share declined on import lanes from Africa, Canada, the Caribbean and the Mediterranean/Middle East.
The data on trade lane market shares indicates ocean carriers are hanging onto their direct contract business with large-volume full-containerload importers on trans-Pacific trade lanes, while turning more easily to forwarders in emerging markets and secondary lanes.
The share gains also come as the non-asset model generally has proved relatively resilient to some of the deepest financial pain of the 2008-09 downturn, and the weaker demand this year.
Many of the large NVOs saw strong profit growth from 2006 through 2010, except for 2009 when profits turned down even as carriers collectively compiled some $20 billion in losses. Many of the world’s largest logistics companies reported strong profit growth in the first half of this year, when many carrier bottom lines turned red. Seattle-based Expeditors International of Washington, the largest NVOCC ranked by PIERS with 7.2 percent of total volume, saw its net profit increase every year during that five-year period, but for a 20 percent drop in 2009. The company’s gross ocean freight revenue grew 6 percent in the first half of this year but its ocean freight consolidation costs — when it turns over to carriers — expanded only 2.2 percent, one reason Expeditors’ profit jumped 23 percent year-over-year to $186 million.
UTi Worldwide added $26 million in ocean revenue in the first half of 2011 and paid carriers $16 million in additional transportation spending.
Swiss logistics provider Kuehne + Nagel also posted profit increases in every year except 2009, when its profit declined 20.2 percent, and its $356 million profit in the first half of this year was up 11 percent year-over-year. K+N operates Blue Anchor Line, the second-largest NVOCC by U.S. import volume.
Although it does not rank among the top 10 on U.S. import lanes, Panalpina, one of the largest global forwarders, swung to a profit of $76 million in the first half of 2011 from a year-earlier loss of $105 million.
Expeditors Chairman and CEO Peter J. Rose suggests there are limits of geography and type of business to the shipper opportunities for freight forwarders. “The parts of the large volume shippers’ business where we do see opportunity primarily relates to smaller lanes where they require a more ‘on the ground’ presence than the ports where they have higher volumes,” he said in a filing with the Securities and Exchange last year in response to questions submitted through the company’s investor relations office.
“From a scale standpoint, there is still enough freight in these locations that it’s attractive for us to provide our services,” Rose said in comments filed in March 2010. “The small and intermediate volume shippers, who typically need more of the value-added supply chain offerings that we provide as an adjunct to our core services, are the part of that market where we have had the most success.”
Rose said Expeditors hasn’t seen a shift by large-volume importers on the major trade lanes, where “high volume shippers, in turn, prefer to concentrate their considerable buying power across a few direct ocean carriers in order to leverage that volume to obtain overall lower rates.”
But Rose said the fundamental business model for forwarders gives them a financial edge in bad times. “As long as we don’t have to add people … any revenue we generate is marginal revenue and additive to our operating income.” Even with tight capacity, “you can take on a lot of business that may not be as high yielding as you are accustomed to and you can still have profits increase.”
But forwarders such as Expeditors and Kuehne + Nagel also may be building scale just as the carriers are, only they’re doing it with shipper volume rather than ship capacity. “It seems like the big forwarders just keep getting bigger whether through organic growth or through acquisition, and they are putting more and more cargo under their NVO brand,” said John Abisch, president of Econocaribe, a Miami-based NVOCC and freight forwarder.
For access to the full PIERS NVOCC Market Report, click here.