As the dust settles on the 2018-2019 service contract negotiations in the eastbound Pacific, the biggest issue this year was not ocean freight rates, but rather securing truck capacity at a reasonable cost.
This has given non-vessel operating common carriers (NVOCCs) an opening to build on their market share gains of the last decade, which slowed dramatically last year. The NVOCC share of US imports increased 1.7 percentage points year over year in the first quarter to 38.8 percent, according to data from PIERS, a sister product of JOC.com within IHS Markit. NVOCCs' share of Asian imports was the second-fastest growing after Africa, with the NVOCC share increasing 2 percentage points to 44.3 percent.
“We told our customers, you can’t just look at the ocean rate. The inland destination cost has gone up,” said David Bennett, president of the Americas at Globe Express Services.
“I’ve seen requests for increases in the high single digits to double digits,” said an executive at another NVOCC. “I’ve been in this industry for 32 years and truckers never had any leverage. Well, that worm has turned,” he said.
Ocean carriers for years have routinely offered their customers a bundled service, known as a “door rate,” that covers the cost of the ocean voyage and the dray to the customer’s warehouse. Ostensibly, the door contract was created to make transportation procurement easier on the importer by turning the all-in logistics move over to the ocean carrier. Less talked about but definitely a factor in the mind of the beneficial cargo owner (BCO) is that the drayage portion of the move is usually subsidized by the shipping line.
Some, but not most ocean carriers, have stayed out of door contracts because they don’t want to subsidize the BCO’s drayage by hundreds of dollars. “We would be happy to offer store door if it was a cost-plus scenario,” said a Southern California carrier executive whose contracts are port to port. “In 99.9 percent of the cases, the truck portion is subsidized. Carriers are finally getting their heads smart enough to realize that,” he said.
BCOs this year are keenly aware of the trucking shortage that burst on the scene last year and worsened in December with the rollout of the federal electronic logging device mandate. The driver shortage intensified on April 1 when penalties were imposed. “The shortage is real,” said Vic LaRosa, president of TTSI in Southern California, “but it’s not a capacity shortage, it’s a driver pay issue. I have plenty of equipment. The problem is getting enough drivers,” he said.
In order to retain drivers or attract new drivers to handle import volumes that Global Port Tracker projects will increase 5.8 percent in the first half of 2018, trucking companies must pay drivers more. The shortage is expected to accelerate with the approach of the summer-autumn peak shipping season.
Ocean carriers now hesitate to quote customers a door rate based on today’s cost of drayage because they don’t know what that cost will be in October at the height of the peak season. For example, if a carrier quotes a door rate of $1,600 from Asia to an import warehouse in Southern California based on $1,200 for the ocean move and $400 drayage, and the drayage cost goes up to $500 or $600 in autumn, the carrier has to absorb the added cost.
NVOCCs step in to fill shipper service void
As shipping lines pull back from door rates, some BCOs for the first time ever have to procure their own inland transportation. Many have few if any relationships with trucking companies. NVOCCs are stepping in to fill the void. “That’s what we do. We bring solutions to the ocean side and the truck side,” said Bruce Chilton, vice president of trade management at Ascent Global Logistics.
Ascent in recent years saw the truck capacity shortage beginning to develop and based its business plan on the assumption that the shortage would get worse, so it expanded the number of trucking companies with which it has relationships. Chilton said the NVOCC is urging its customers to work with those truckers to establish a relationship and secure capacity for the peak season. “It’s always been difficult to keep drivers. With the volumes increasing and demand increasing, the driver shortage will get worse, a lot worse. Those who are prepared for this will do better,” he said.
There’s more at stake for BCOs than just securing truck capacity. Personalized attention in handling each customer’s containers is equally important, said Scott Weiss, vice president of business development at Port Logistics Group. “These store-door containers get lost in the hold of the ship. They’re just a number. If a container is hot, we’ll pick it up today,” he said. As an asset-based service provider, Port Logistics Grouphas the ability to direct the capacity where it is needed, he added.
NVOCCs such as Seko Transportation are advising their customers to pay closer attention to the truck spot market for moves to inland destinations such as Chicago, Minneapolis, and Detroit, said Kevin Krause, vice president of ocean services. Spot rates are escalating rapidly, up 20 to 30 percent year over year. As carriers retreat from all-in services to port-to-port shipping, NVOCCs are improving their information systems to provide assistance in securing trucking, tracking movements in the spot market, providing shipment visibility, and processing documentation. “We have become that customer service arm,” he said.
Some NVOCCs are using their technology capabilities to help customers respond to congestion and other issues at marine terminals and inland depots across the United States. Bill Rooney, vice president of trade management North America at Kuehne & Nagel (K&N), said every Friday the NVOCC’s intermodal people discuss internally gate-in, gate-out conditions at 62 marine terminals and inland ramps, and K&N is able to provide alerts to customers before conditions get worse.
In some ways, the US market is slowly evolving to look more like the port-to-port model that has existed in Canada for many years. “Canada is not huge on store-door delivery,” said Marc Bibeau, president and CEO of the OEC Group in Montreal. Carriers offer mostly port-to-port contracts, and BCOs either arrange for trucking themselves or they contract with an NVOCC or third-party logistics provider for drayage. BCOs in Canada prefer this arrangement because they rely on the service providers to take delivery of their containers in a timely manner in order to avoid demurrage issues, Bibeau said.
Despite the increasing penetration of NVOCCs in the value-added sector, many carriers are maintaining their relationship with trucking companies and will continue to offer door contracts, certainly to their steady customers. “We’re still working with our customers to that end, and we’re working directly with truckers,” said Lawrence Burns, senior vice president of trade and sales at Hyundai Merchant Marine. Additional truck capacity is sometimes needed during seasonal cargo spikes, but otherwise, “I don’t know that adding an intermediary will help,” he said.
Contact Bill Mongelluzzo at email@example.com and follow him on Twitter: @billmongelluzzo.