Breakthrough year ahead

Breakthrough year ahead

I recently had the opportunity to speak at the first TPM Asia Conference in Shenzhen, China, and was asked to provide an outlook for the trans-Pacific trade for the balance of 2007 and for 2008.

We're nearing the end of a transitional year in the container shipping industry. We've experienced healthy, albeit moderated trade growth. Financial losses for many remain a fact of life, but they are narrowing. It appears carriers are starting to emerge from the cyclical downturn in rates that reached its low point in 2006. The question now is: What's next?

Economic forecasts and analyst projections suggest a strong market environment will continue through 2010. Trade growth is expected to remain brisk. Container ship capacity will stabilize. As the supply-demand gap narrows further over the next 24 months, rates should increase, and yes, they do need to come up.

We're facing a complex operating environment in 2008. Looming are issues that, while familiar to all of us, leave unanswered the question of whether this industry can truly return to profitability and afford to reinvest to meet the growing demands of our customers. Chief among these are:

-- Rising costs and congestion.

-- West Coast longshore labor negotiations.

-- Growing and complex environmental issues.

-- A changing regulatory landscape

We're also facing a U.S. economy rife with mixed data. Could an unsettled economy dampen the rise in container trade? Too soon to say.

The U.S. economy is resilient, and so is the U.S. consumer. So before we jump to any hasty conclusions, let's wait for patterns to emerge from all the very differing economic views that are out there. But let's face facts: the container shipping industry needs to change the way it does business.

Our boom-bust mentality is fine in those heady years when rates are robust and ships are full. But last year, the ships were full, rates did not go up as planned, and many carriers posted huge losses that are simply not sustainable in the face of growing trade and more challenging customer demands for service.

So what needs to change? For starters, the shipping industry must come to grips with its cost structure. Operating an international transportation network has never been more expensive.

Intermodal rail rates have jumped as much as 30 percent this year. Trucking rates could rise as much as 80 percent if stringent clean-air regulations envisioned at the ports of Los Angeles and Long Beach chase independent owner-operators out of the industry. Meanwhile, bunker fuel costs have tripled since 2002. The higher fuel costs that carriers have to bear must be recovered, and containerized shipping should be no different than any other transport mode.

Carriers must better understand their cost structure. If their products and services don't produce returns that cover costs and generate profit to reinvest in business growth, they should change the model. Herd mentality governs our industry, and the incentives have been all wrong. We chase market share and full ships rather than the bottom line. Global trade growth will continue strong into the next decade. But if our industry doesn't fix its cost problem, it won't be able to grow commensurately. Simultaneously, we must change the carrier-shipper dynamic. We need to relate to each other in a new fashion: as partners in trade, not as combatants in a high stakes version of "The Price Is Right."

Instead of selling price, carriers should sell service. Instead of propagandizing to buck up rates, we should exchange objective market data. We should engage shippers in constructive discussions aimed at mutually beneficial outcomes.

Here are more changes that will be necessary:

-- We must stop our foot-dragging and take the initiative to mitigate the environmental impact of containerized transportation growth.

-- We must speed the pace of service innovation in response to increasing supply chain congestion.

-- We must improve processes, better use technology and work more collaboratively with labor to close a widening productivity gap with other leading maritime nations.

Market trends foreshadow improving industry conditions. But they're offset by economic, labor and regulatory variables that cloud our prospects. Significant opportunities await carriers and shippers because of relentless trade growth. The only question is whether our industry will change to take advantage of them.