Like container carriers, ocean freight intermediaries are seeing their cargo volumes drop. But unlike the carriers, their bottom lines are not dragged into the red by ships that must be laid up or by expensive vessel orders that will take years to pay off. As a result, transportation middlemen see opportunities in the current downturn.
Granted, it's no bed of roses for customs brokers, forwarders and non-vessel-operating common carriers. The downturn has hit them hard, and some will be forced to close, merge or be taken over. But even though their business has flattened out or is dropping and customers are taking longer to pay their bills, ocean freight intermediaries remain surprisingly optimistic in the face of the withering downturn in global trade.
"It's not all going to hell in a handbasket, despite what you see on CNN," said Jeffrey Coppersmith, president of Coppersmith Inc., a Los Angeles-based forwarder and customs broker." We still have freight. There's still container traffic on the freeway. Our import department has slowed down, but our exports have been strong all year long."
While business is up for some intermediaries and down for others, the sector is becoming more competitive. Some of the weaker intermediaries are cutting rates in order to survive, while others are relying on quality service to retain and attract customers. But if the downturn in global trade volumes continues for another year, the weaker firms won't be able to survive by rate-cutting.
In these economic conditions, further consolidation is a given. "Some firms won't be able to withstand a long economic downturn," said Peter H. Powell Sr., chief executive of C.H. Powell Co., in Revere, Mass., and a former president of the National Customs Brokers and Forwarders Association of America. "They may decide not to try to swim uphill and will look for an acquisition or sell out. A lot will depend on the length of the downturn."
Several smaller intermediaries already have closed. At least one smaller NVO whose business depended heavily on furniture imports from China was forced into bankruptcy when that business plummeted and its customers couldn't pay the ocean freight bills that the NVO had incurred on their behalf.
"I've had more phone calls and approaches in the last six months from small competitors that proactively called me to see if we were interested in acquiring them than I have had in the last six years," said John Abisch, president of Econocaribe Consolidators Inc., a Miami-based NVO.
Ocean intermediaries are being careful not to get caught in the same payments' trap that has killed off some of their colleagues, and are watching their receivables closely. "We have to be more vigilant," said Marjorie Shapiro, president of Samuel Shapiro Co., a Baltimore-based customs broker and forwarder. "We are finding more shippers who are trying to extend terms. The banks are holding back on credit, so they are looking to us to provide credit. We take it on a case-by-case basis."
The global credit crunch is making it more difficult to get credit insurance, which assures importers they'll be paid for the shipments they bring in. Credit insurance companies have tightened their criteria for writing insurance policies. When the housing crisis hit two years ago, Shapiro switched its insurance policies to Atradia because its previous insurer, Euler Hermes, would not insure any shipments related to housing materials or furnishings.
"Now both companies have been hit hard and both have given us a long roster of our accounts they will no longer insure without any explanation," Shapiro said.
Other ocean intermediaries also are tightening up on their receivables. "We don't want to be a bank," Coppersmith said. "I don't like playing bank for anybody." He has hired a manager to monitor its accounts receivable. "I get a weekly report from her on every account that is over 30 days, with a written explanation of when we're getting paid, when the check is being mailed and what the check number is."
Coppersmith has set up an early warning system to alert his company to potential payment problems. "If we see a customer whose average rate of pay is 23 days and he slips to 28 days or 29 days, we put out a bulletin companywide that says here are our 10 red-flag accounts," he said. "If their payment changes more than seven days, they are all red flags and the account can't file a new entry (for cargo) unless it has the approval of the manager."
But for all the headaches that the downturn in trade volumes and the tightening of credit is creating for ocean intermediaries, it may also send some new business in their direction.
"It's had a positive effect in one respect because steamship lines are so desperate for cargo that they are entertaining more business from NVOs," Shapiro said. "The market is so soft that rates are changing daily. It means NVOs of our size can be nimble and take advantage of that opportunity to provide more value. We can educate our customers as to how they can use us as an arm of their business so they can save on overhead and labor."
Econocaribe's Abisch believes the downturn will enable NVOs to expand their market share if the carriers decide to reduce their sales and customer service staffs. Some carriers use NVOs as a retail sales staff, while others resist dealing with cargo owners through intermediaries.
"If carriers say to their staff, 'If the guy doesn't have 1,000 loads a year, I don't want you talking to him,' there could be an opportunity for NVOs because the carriers are trying to be so lean and mean," Abisch said.
Other carriers, however, could take the opposite tack and go after smaller loads. "Other carriers may say, 'Boy I need that client that has 200 loads more than ever before.' " So a lot of the success of the NVOs in the full-load business will depend on how the carriers decide to deal with their small clients.
Abisch thinks the downturn is likely to produce more less-than-containerload business for Econocaribe, which specializes in LCL shipments. During this period of tight credit, shippers may not want to tie up capital by bringing in full containerloads that might only produce higher inventory if the goods don't sell.
He also expects to pick up more LCL business from some forwarders. "If their core competency was not LCL, they may outsource that to NVOs like us who handle LCL cargo," he said.
New government regulations also are providing new business for customs brokers. "The only increase in our business is coming from our customs brokerage, because customers are asking for help on filing 10+2 documentation," said Matthew Brauner, president of Brauner International, a customs broker and forwarder based in Jersey City, N.J. "We hope that by helping them in their time of need, they will continue to turn to us for help when times get better," he said.
The sharp increase in the processing and paperwork that the government requires may be increasing business for some brokers, but Coppersmith warns that shippers may risk problems and delays with their shipments if they are tempted to use cut-rate services. "I see some brokers getting more desperate and offering to do business at cost," he said.
Coppersmith said he gets quite exercised about the problem. "Some groups say they can provide customs brokerage for half or less of what I charge, but sure enough, the customer comes back to us saying that Customs has come to them for more information and it has cost them storage and demurrage charges," he said. "These firms do it dirt-cheap and screw it up and then go out of business."
Peter Leach can be contacted at email@example.com.