In my August JOC column, I discussed the nasty environment facing the ocean shipping and international logistics industries (“Shipping’s Chain Reaction”). It’s nasty because the service providers are continuously fighting a battle to increase, or at least maintain, market share, while simultaneously improving their revenue. Their customers are no less troubled: They face the daunting requirement of increasing supply chain efficiency and economy with a service provider community struggling to improve revenue while managing global networks plagued with too much capacity.
As always, any attempt to oversimplify this story will result in part of the audience being unhappy. At the risk of facing some level of unhappy readers, I’ll dive in anyway.
After a great deal of deliberation, following years of experience on both sides of the ledger, it seems carriers could improve the situation significantly if they could better formulate and apply pricing.
With global economies on the mend, stock markets roiled with volatility and consumer confidence struggling to improve, ocean shipping volumes have been relatively flat for several years, with little improvement in sight. As a result, carriers will not easily fill the significant new vessel capacity they’ve added to major trade lanes, and the absence of increased cargo volumes won’t produce higher rates, improved revenue or much-needed profits.
In such an environment, carriers’ classic methods of raising prices through new and improved services or product features are probably unavailable. Besides, much of this already has been done: Customers seem to have all the new, improved IT-based tracking and other tools they can use; service strings have multiplied so much that some are being eliminated; and the bunching of carriers into alliances has so blurred service differences, at least in the port-to-port arena, that carriers are increasingly looking more alike.
In the once-upon-a-time days of ocean shipping conferences, lines were obliged to toe the line on rates, which were established in closed meetings. Each commodity was assigned its individual price for the designated period. A couple of rounds of so-called deregulation over the past three decades tossed this process onto the dustbin of history. Free to price their services independent of one another, carriers have a deeply difficult time setting prices and then holding to them. The allure of market share increases or just the simple need to fill ever more vessel slots largely have eliminated carriers’ resolve around their price setting and negotiation processes.
Compounding the problem is the reality that their customers, kept in the dark during the regime of conferences, now know that at least one line will discount rates to secure their business.
Nowadays, we often hear comparisons between the ocean shipping and aviation businesses. Although they both transport cargo, the fundamental differences between ocean cargo and air freight make meaningful comparisons difficult. With no equivalent business to moving passengers, comparing shipping containers with moving passengers is probably a waste of time. Airlines’ ability to unbundle the fare for a seat from the cost of loading suitcases and offering meals has little relevance to ocean rates.
Besides, unbundling of ocean pricing already has been done and undone a couple of times with no obvious or lasting benefit or consistency for carriers or shippers.
The ocean shipping industry often talks about the need for partnerships between shippers and carriers. Although a wonderful, progressive and modern concept, it’s always seemed rather unrealistic to me. Carriers and shippers exist on the opposite sides of a wide and deep canyon, but because they can’t exist without each other, they share a kind of “hierarchy of needs.” Furthermore, each side largely measures success on securing benefit at the expense of the other side: I need lower rates; you need higher revenue. That’s hardly a formula for long-lasting partnership.
This might be a problem without a solution, or perhaps it’s not a problem at all. Both sides continue to exist under the terms of an often uneasy, but well-understood set of rules: There may be too many carriers with too much capacity, and shippers may not need that last $50-per-container rate reduction, but rates aren’t substantially different from what they were 20 years ago, service has improved greatly, and leviathans are built on the foundation of those rates. So what’s the problem?
Just one final thought: would (could?) this long-running pricing quandary be eliminated if each carrier set its prices based on its internal metrics for profit and resolved to stick with them come what may, including accepting the risk of losing a customer’s business if its rates are not agreed to? Or maybe it just doesn’t matter that much.
Barry Horowitz is principal of CMS Consulting Services. Contact him at 503-208-2232 or at firstname.lastname@example.org.