Correction: A previous version of this story indicated XPO Logistics lost $600 billion in revenue from a single unnamed customer that still has another $300 billion still with XPO. The correct figures are $600 million and $300 million, respectively.
Amazon has permanently redefined what supply chains mean to end consumers, and its increased use of its ocean forwarding arm suggests two ways the online giant will make an impact on the container shipping industry — one moderate and one major. Through its non-vessel-operating common carrier (NVO), launched in 2016, Amazon is certainly exerting greater control over its internal supply chain, but, more grandly, it might also be building a supply chain platform it could market as a distinct service, even selling to shippers outside of its marketplace network.
Whether Amazon becomes a full-fledged third-party logistics provider (3PL) or not, it will have an indelible impact on the future of ocean freight shippers and the logistics companies that serve them. If Amazon chooses to only leverage its budding ocean freight prowess internally, it will have created efficiencies for itself and its community of sellers that will be hard for other companies to match over time.
If, however, Amazon chooses to create a global logistics platform capable of serving any shipper, it would redraw how ocean freight fits within the larger context of global supply chains, and that would force shippers to make difficult decisions about working with a company that resides in the gray area between competitor and service provider.
Underlining this whole discussion is the environment that Amazon has largely helped to create, one in which — as one freight forwarder put it to JOC.com — the power of the consumer has overtaken the power of the large beneficial cargo owner (BCO).
Since Amazon created this environment, it stands to reason it would be best positioned to thrive within it. This dynamic has already become clear in the domestic parcel space, where Amazon has weaned itself off a total dependence on courier and final-mile services to become a potential competitor to the oligopoly of US integrators. It’s not hard to imagine Amazon wishing to create similar autonomy on the international side of its parcel business, ultimately moving to freight.
Following in AWS’s footsteps
That Amazon has made tangible progress as a non-vessel-operating common carrier (NVO) is clear, as detailed in a January USA Today report on its business of consolidating freight from Chinese sellers on its marketplace. It has also thrown away all pretenses that it doesn’t have plans to build out its logistics business, not only admitting in its 2018 annual filing with the US Securities and Exchange Commission that it considers transportation and logistics companies to be competitors, but carving transportation out into a distinct operating unit as well.
New entrants spring up in the NVO space from time to time, but with Amazon’s scale and ubiquity, the company’s expansion into ocean freight has the container shipping industry grappling with some deeper, existential questions around what it actually means.
For now, the volume moved by Amazon’s NVO, Beijing Century Joyo Courier Service Co., is small relative to even a midsized competitor on a single ocean lane. According to data from PIERS, a sister product of JOC.com within IHS Markit, Amazon was listed as the shipper on 123,000 TEU imported to the United States in 2018, a small slice of the 24.7 million TEU of total US imports.
The volume moved by Beijing Century Joyo — roughly 10,000 TEU last year, according to the USA Today report — is tied almost exclusively to Chinese companies selling to the US market via the retailer’s Fulfillment by Amazon (FBA) service. By definition, that means the forwarder’s business is not tied to the large-volume BCOs that the largest freight forwarders, NVOs, and ocean carriers target as customers.
But Amazon is an enigmatic presence for its competitors across every vertical or horizontal element of commerce it touches. It is somehow both eminently public and highly secretive, and with executives remaining tight-lipped about its ultimate intentions with regard to its logistics business, it’s unclear whether Amazon will one day offer a completely integrated supply chain service from production to final delivery for its sellers and its in-house manufacturing business.
This begs the question: will Amazon seek to grow its NVO business to serve non-FBA sellers on their marketplace?
If it does, the logical next step would be to “platform-ize” its ocean freight business, leveraging its growing expertise as an NVO and its seemingly unlimited technology research and development power to build a platform analogous to Amazon Web Services, the cloud server business that is among the most profitable things Amazon does.
On the surface, the motivation behind Amazon’s foray into NVO services is pretty clear. Amazon takes a ruthless look at its balance sheet to find a way to reduce its internal costs, then figures out if there’s a way to turn that into a profitable service-oriented business to the outside world.
With AWS, Amazon saw server costs eating into its profits. In solving its own problem, Amazon then realized it could provide that service to other companies, eventually spinning it into a highly profitable endeavor. It similarly saw that shipping costs were volatile and subject to dynamics outside its control and so sought to control those variables more tightly.
That pattern suggests that Amazon will seek to provide a service to companies outside its current reach. But logistics is a different business than others where Amazon has scaled. The online shopping marketplace it pioneered largely didn’t exist on any meaningful scale. AWS came about as companies were growing more comfortable with the idea of cloud-deployed software, and thus the size of the market exploded.
It’s theoretically possible that a more customer-oriented, digitally-forward logistics platform could foster more trade, but the market is already large, fragmented, and saturated. The top 10 US import NVOs controlled just 33.8 percent of the market in 2018, according to PIERS. That compares with a market concentration of 86.9 percent among the top 10 US ocean carriers for US imports. Freight forwarding is also a low-margin business with fierce competition.
If Amazon is successful in growing its NVO business by reaching BCOs currently outside of its network, the next question is whether the company would seek to connect the dots to provide end-to-end service — with ocean freight coupled directly to domestic parcel. Some freight forwarders and NVOs are already moving to this model through integrations with parcel platforms, both domestic and international. And some ocean carriers — most notably Maersk Line and CMA CGM — are looking to offer more integrated supply chain services. For Amazon, the goal would be to build it all.
Reading the 10-k tea leaves
Using recent financial filings as a guide, it seems as though Amazon is on a path toward building that integrated logistics service. The company separated out “Transportation and Logistics” as a separate business unit within its 2018 annual report.
Second, and perhaps more importantly, a number of publicly traded US freight companies have alluded to business lost, or expected to be lost, as a result of Amazon bringing management of its own freight in-house. XPO Logistics, for example, recently lowered its 2019 earnings forecast after losing $600 million in revenue from a single unnamed customer. XPO legally could not identify the customer, but industry analysts have speculated that the only customer with the scale to pull back $600 million in transportation spend — and still have another $300 million still with XPO — is Amazon.
Those dual moves indicate a company now comfortable enough with its internal capability to run freight management for its own massive — and still growing — supply chain. In essence, Amazon is signaling that its own ability to manage freight has reached a threshold high enough to be entrusted with its own precious supply chain.
If history is a further indicator, it will build that expertise into a scalable business model of its own. Just look to the way AWS has grown.
“They are thumbing through their income statement and picking off the largest categories to ‘productize’ - first technology (AWS), then fulfillment (Fulfillment by Amazon, or FBA), then cost of goods sold (the actual products themselves via Amazon’s various private label programs), and next shipping,” Zack Kanter, CEO of the electronic data interchange (EDI) middleware platform Stedi, wrote in a seminal 2017 piece for TechCrunch on Amazon’s impact. “It’s the fact that each piece of Amazon is being built with a service-oriented architecture, and Amazon is using that architecture to successively turn every single piece of the company into a separate platform — and thus opening each piece to outside competition.”
And Kanter said it might not even be revenue that Amazon is after in any platform business, at least initially. “The revenue bonanza is a footnote compared to the overlooked organizational insight that Amazon discovered,” he wrote. “By carving out an operational piece of the company as a platform (its server business, Amazon Web Services, or AWS), they could future-proof the company against inefficiency and technological stagnation.”
In other words, while Amazon builds a logistics platform to potentially sell to the entire market, it would also gain operational and data insight from its current customers to blend with its own self-managed freight expertise. That creates a virtuous circle, where the more freight it moves, the better it becomes at moving it, and the better it could become at moving others’ freight. Since no other shippers have such an interest (outside of vertical-focused logistics providers that sometimes get spun out of shipper umbrellas), that in and of itself would be a differentiation.
As Fauad Shariff, CEO of the freight forwarding marketplace CoLoadX, put it in a mid-January LinkedIn discussion, “Aside from amalgamating its captive FBA volume, Amazon can ultimately offer its NVOCC services to any retail brand on its platform. Remember, their strategic goal isn't to be a freight business, but rather to enable faster on-demand retail transactions, thereby keeping consumers at home and away from physical stores.”
AWS has become such a force for website hosting that software providers are often compelled to use a competitor, such as Microsoft Azure, for fear of alienating their retail clients. It’s this paranoia around what access Amazon might have to its customers’ data that has some predicting Amazon the logistics provider has a ceiling.
There’s also the fragmented nature of global logistics to consider, at least compared with the relative hegemony in big box retail or internet hosting services.
“One of the things I've wondered about is whether the zero-sum economics that dominate tech apply to this market,” Brian Glick, CEO of the logistics systems integrator Chain.io, said in a Feb. 17 LinkedIn discussion about the role technology will play in logistics. “In search (Google), social (Facebook), marketplace (Amazon) a single dominant player emerged. The rationale for new investment is that if you can take losses long enough to push out your competitors, you'll win the war of attrition.
“In freight, the battlefield is so large and there is so much room for multiple winners. I wonder if the environment even exists for a truly dominant player at the scale of an Amazon or Google.”
Forwarders hearing footsteps?
This begs another question: how will existing NVOs respond to Amazon? Will they upgrade their services, make acquisitions, invest in technology, attempt to provide a more end-to-end product, or even partner with Amazon?
A clutch of forwarders have already partnered with Amazon on FBA cargo, and if Amazon is seeking to move into the NVO business, that’s a direct threat to those forwarders’ NVO volume.
Smaller NVOs might be more in the crosshairs of Amazon’s growing presence, but then they also might not fully recognize the scope of the challenge they face.
“Amazon as an NVO ought to be concerning, but I haven’t run into them in the wild so to speak, and the grandpa old guards seem not concerned at all,” a small NVO told JOC.com. “It’s wild. I think in due time we'll be able to tell. But I've also had FBA sellers come to me because they've matured and wanted better pricing.”
One big issue is whether midsize to large volume shippers would be willing to use Amazon as a logistics services provider, given Amazon could be seen as a rival as much as a partner. And then there’s the issue of how ocean carriers and large global 3PLs might view working with Amazon as they transition directly from customer to customer/competitor, especially in light of some carriers’ ambitions to be more full-service container logistics integrators themselves.
One liner carrier told JOC.com that Amazon’s dive into ocean freight might actually be a blessing in terms of bringing greater “professionalization” to the NVO industry. The company also said it could benefit carriers in terms of aggregating “disorganized and fragmented” NVO volume into more predictable lanes and volumes. But the carrier said they “absolutely are a threat based on the speed and scale they move with.”
In 2017, Kuehne + Nagel signed a memorandum of understanding with Alibaba, the e-tailer analog in China to Amazon in North America.
Another consideration hanging in the air is whether Amazon might eventually seek to become a vessel operator, similar to how it has chartered its own planes and operates a fleet of trucking and final-mile assets. This scenario is less likely due to the general lack of profitability of the container shipping industry, but given the vast resources of a company with an $800 billion market cap, Amazon could theoretically lease a fleet of container ships and sail them at or even below operating expenses to give the company even more control over its supply chain.
For now, shippers and rival NVOs must grapple with the reality that Amazon is no longer a far-off, theoretical force in ocean freight, but one squarely in the rearview mirror and approaching fast.