To most observers, the current economic conditions for the industry simply reflect dreadful numbers. The global economy has pushed volumes for virtually all sectors of transportation and logistics down considerably. But a more careful review of the financial results for the first half paint a slightly different picture for different segments of the business: asset-based versus non-asset based firms.
Let’s take the ocean carrier industry, VOCCs vs. NVOCCs. Virtually all vessel-operating common carriers are reporting significant losses because of market conditions that have supply-demand ratios heavily in favor of shippers and because of significant rate deterioration during the last 18 months.
Meanwhile, reports from the non-vessel-operating community, although not pretty, are nowhere near that dramatically poor. While most report revenue, volume and operating income down, most show no truly large losses, and some large players are even showing slight increases in operating income.
Similarly, look at the U.S. trucking industry and you’ll see thousands of asset-based companies teetering close to bankruptcy or going out of business. The brokerage businesses, although suffering losses in volume and revenue, have in many instances increased margins and are weathering the storm in a much better fashion.
It is an accepted theory that in down markets asset-based firms will suffer the most because of their heavy fixed-cost structure. Non-asset-based firms, whose primary costs are paying the underlying service provider, are getting the deep rate discounts the carriers are offering and as such aren’t as greatly affected.
In addition, their primary internal costs are people; they can adapt more quickly through headcount adjustments to levels that reflect their volume and revenue decreases.
That was true in previous downturns, so what is different today?
I believe many forward-thinking asset-based companies, even as they fight for survival, are rethinking their position with regard to non-asset-based sources of revenue. The U.S. trucking industry has seen many asset-based firms delve into brokerage, but how serious have they been? Most “broker” what they can’t handle in their own trucks; they don’t actively market or sell the brokerage piece of their business. They don’t dedicate top management to that segment of their business.
With the current markets and the restrictions in access to capital, some forward-thinking people are likely to change their business models in the next year when the economy turns upward; they will focus more on accessing the entire market, including the brokerage piece.
The Transportation Intermediary Association reports that during the first quarter of 2009, the brokers averaged a 17 percent margin; not great, but if you are the underlying service provider, why are you giving away 17 percent? Would the incremental sales and customer service costs be that high? I doubt it.
What about the ocean carriers? With few exceptions, they have all entered the logistics business to one degree or another, somewhat in response to the NVOs, and with varying degrees of success. The logistics services are a natural adjunct to their ocean services, and have far fewer capital requirements.
To be really successful and competitive with the true NVOs, however, they must separate their logistics services from the ocean carrier because they have to offer the same cornucopia of vessel sailings that the NVOs have.
Maersk recently seemed to take that direction when it merged Maersk Logistics into Damco.
But I recall a phone call about two years ago from a venture capital firm seeking input from consultants and others on the possibility of “a major ocean carrier buying a major European freight forwarder.” In this instance, it was a large ocean carrier that was a fixture in the Asia-North America trades but a relative newcomer to European markets considering the purchase of a substantial European based forwarder/NVO. There was some logic to it from a marketing perspective, but apparently not enough for the deal to be finally made.
Is there the same thought out there in the international arena that there apparently is in the domestic arena? Or are they so embroiled in their fight for survival that they have no time for those ideas to be considered?
That may be a good topic for discussion at the board meetings of the survivors in a year or two.
Gary Ferrulli is president of Global Logistics Consulting in Chandler, Ariz. He can be contacted at email@example.com.