Just a couple of years ago, NVOCCs basked in the glow of the growing share of U.S. imports they were handling on behalf of importers. Ocean carriers were slashing vessel capacity to boost freight rates, and shippers in a scramble early in 2010 were forced to turn to non-vessel-operating common carriers to find the space for trans-Pacific imports.
But now, that waxing NVOCC share is on the wane. It dropped to 35 percent of all U.S. import volumes in the first half of 2013, according to data from PIERS, a sister company of The Journal of Commerce. That was down from 39 percent in 2011, a year after carriers had idled 10 percent of the global container fleet and were rolling containers at ports of embarkation in China. Beneficial cargo owners and logistics companies see several possible reasons for the decline in NVO volume.
“Maybe after getting burned when capacity was tight and they had to turn to NVOCCs, the BCOs are going back to the carriers to ask for firmer commitments on capacity in their contracts and stronger contractual language,” said Ed Sands, global logistics practice leader at Procurian, a procurement consultancy. “We push very hard for customers to take control of their own ocean transport and allocate it directly to carriers.” Procurian recommends that BCOs allocate more than half of their ocean transport budget to direct spending with ocean carriers.
One big NVOCC disputes this. “I am not of the opinion that the NVOCCs’ share is declining; rather, it is stagnant in a growing, albeit very modest market,” said Andreas Krueger, head of Ocean Freight, Americas for DHL Global Forwarding. “That makes it look as though it is declining, but it is actually not, if you put the absolute volume figures into context. While retail may be flat and, specifically, the tech sector is down trading, automobile and home improvement have been on the upswing. In any event, I do not see a shift in customer behavior, looking for carrier direct opportunities where before they were NVO friendly. I believe that when you put percent growth figures and absolute figures into proper context, you should see it of the same view.”
NVOs typically buy cargo space from container lines at spot rates, which fluctuate during the year, and resell it to beneficial cargo owners that need more space than they have committed to in annual freight contracts. BCO contract rates are usually several hundred dollars per container below spot rates, so large importers mostly try to nail down space and freight rate commitments with carriers under annual contracts.
|NON-NVO VS. NVO|
|A look at the NVO and non-NVO containerized trade in the Asia-U.S. trade, in millions of TEUs, January-June six-month period.|
|Top 20 NVO volume||1.06||1.15||1.16|
The decline in the NVOs’ import share reflected in the PIERS data is also due to the fact that carriers have become more aggressive in selling their vessel space directly to shippers at a time when they have more than enough capacity to go around. “Ten years ago, the carriers had plenty of freight and left it to the NVOs to go after the BCOs and make arrangements for vessel space for them,” said an executive with a large European logistics provider who asked not to be identified. “But now, the carriers are going after any cargo they can get, so they aren’t leaving it to the NVOs anymore.”
The data supporting this view are seen in the dramatic decline in the NVO share of U.S. imports carried by Mediterranean Shipping Co., which has built its position as the second-largest U.S. import carrier in part through NVO volume. The share of MSC’s import volumes handled by NVOs declined from 75 percent in 2011 to 55 percent in 2013. NVOs also saw their share of imports carried by CMA CGM drop from 49 percent to 28 percent during the same period. In contrast, the share of Maersk Line’s import volumes handled by NVOs grew from 32 percent to 35 percent.
One 3PL executive said the extreme volatility of spot rates last year enabled carriers to seize market share from NVOs. “At the end of 2011, when the spread between the spot market rates charged by NVOs and the contract rates paid by BCOs became astronomical, the carriers ate into the NVO share by reaching out directly to certain BCOs who were paying $400 to $500 more per container than contract rates,” he said.
However, the NVO share of the import market is likely to bounce back up, he said. “As the spreads come back to more normal levels as they are now, you’ll see that trend reverse.”
Hideo Saito, senior vice president and general manager of the International Division of Yusen Logistics (Americas), thinks the decline in the NVO market share is just a cyclical downturn. “Currently, BCOs do have an advantage because there is more capacity right now, and they can deal directly with the carriers,” he said. “But the situation is changing, and you’ll see some years drop and others go up, depending on supply and demand. Peak seasons are becoming longer and are starting as early as July, so importers will have less trouble in traditional peak month booking.”
He said Yusen Logistics is seeing some shortages of vessel space and container equipment as the peak season rolls out this year but not like the situation 10 years ago.
Yusen Logistics is not placing more or less emphasis on the NVO share of its business, but is looking for growth across all its logistics business. “What we want to do is grow every aspect of our business in the U.S.,” Saito said. “As we see, there is still considerable room for growth in this marketplace, so we want to grow every sector.”
Another factor in the decline of the NVO import share is the BCOs’ increasing use of technology to book and track cargoes, a function they used to leave up to NVOs. One large U.S. importer that previously used NVOs to handle imports on smaller trade lanes not served by their core carriers has since dropped them. “We had an in-house global trade management system, and it was always difficult to integrate our system with their system, so we always had missing containers that we had to track manually,” the shipper said.
He speculated that many BCOs once used NVOs to handle imports carried by many different carriers because they could get visibility into their shipments through the NVOs’ tracking systems. “But as global trade management systems became more ubiquitous, more and more importers are bringing tracking systems in-house so they can take advantage of those tools and not the proprietary tools of NVOs.” In addition, he said his company found the rates paid to NVOs to be very volatile, and said their contracts made it difficult to do business with them.
The technology tools used by large NVOs may help them increase their share of the business of smaller shippers. “We see more of the small and medium-sized customers, what we refer to as business customers, looking for supply chain solutions, purchase order management solutions and the like,” DHL’s Krueger said. “Where before this was more a topic for multinational customers, today customers managing as little as high three-digit TEU figures annually may opt to outsource certain non-core activities to DHL Global Forwarding,” he said.
The share of the U.S. import market handled by NVOs is fragmented among many different players, with only a few of them consisting of large global freight forwarders. Expeditors International of Washington, the NVO with the largest import market share, handled only 2.3 percent of the import volume in the first half of 2013, down from 2.74 percent in 2011, so it has little pricing power in a market it shares with many small freight forwarders.
“There are a couple of thousand players in the market, most of them Mom and Pop shops working with cell phones,” an executive at a European logistics provider said. “Shippers are looking for lower costs and better deals, and those Mom and Pops just can’t deliver, because they don’t have the carrier relationships or the technology, so I expect the market to consolidate.”
This is borne out in the PIERS data. While the overall NVO share of the import market has been declining since 2011, the share handled by the top 20 NVOs has bounced back to 19 percent this year from 17 percent in 2011. “The big guys with unlimited capabilities are knocking out the small guys with limited capabilities,” the European logistics provider said.