Container line-shipper relationships fail to evolve

Container line-shipper relationships fail to evolve

The number of major east-west carriers is half of what it was four years ago. Photo credit: Shutterstock.com.

On March 5, 2001, then-CEO of Neptune Orient Lines Flemming Jacobs took to the stage at the first TPM conference with a direct message for shippers: The time had come for the promise of confidential shipper-carrier contracting allowed under the Ocean Shipping Reform Act (OSRA) approved two years earlier to be fulfilled. Value in these relationships needed to be unlocked, and the first step to doing that was to get beyond the annual contracting cycle, which runs from May to April, and what he described as shippers’ “single-minded” focus on price.

Just minutes into the first TPM keynote speech, the former Maersk partner bluntly said, “I’m going to give a wake-up call to those who still get their kicks from yearly, or even more frequent, fights over freight rates with their ocean carriers, those who just cannot wait for the 1st of May to come around and who derive the greatest satisfaction from squeezing another $50 from the carriers, even though in the process they miss tons of opportunities in the total supply chain.

“At the moment, the majority of contracts are simply price agreements, not service contracts,” he added. “Let’s challenge that. Let’s develop relationships and contracts that hold me responsible for my services. In return I will hold the shipper accountable for his commitment.”

At that point in time, the idea of one-on-one contracts in container shipping was still in its infancy and the industry was still imagining what such a future could bring. A key element of OSRA law, which was signed in 1998 and took effect in early 1999, was the ability for shippers and carriers to engage in confidential one-on-one contracts, as opposed to negotiating through a shipping conference. The law ushered in the end of the era of shipping conferences, dating to the late 1800s, and replaced them with discussion agreements, which also have since disappeared. Pushed heavily by the National Industrial Transportation League representing large shippers, the law further deregulated ocean shipping beyond the last prior major rewrite of US shipping law in 1984, which had taken the then-revolutionary step of allowing individual conference carriers to undercut conference-set rates.

Twenty years later, as we prepare for the 20th anniversary of TPM, the track record shows that little of what Jacobs was talking about came to pass. The 2000s were a period of breakneck, double-digit percentage growth over several years as supply chains took root in China, and everyone was too busy to focus on the nuances of extracting value out of ocean supply chains.

Shipper–carrier relations went downhill from there, when the financial crisis was followed by carriers’ withdrawal of massive amounts of capacity, which restored profitability in 2010 but at the expense of customer relationships and trust. Carriers retreated further into their own worlds by gutting customer service, permanently slowing down their fleets, and embarking on a mega-ship building spree, all of which negatively impacted customers’ supply chains, while still failing to earn acceptable returns.

Seeds for change were planted

Contracts today contain little of the innovation Jacobs was envisioning. For example, there remains little in the way of mutual accountability, multi-year, or index-linked contracts. “From the beginning and to this day contracts with ocean carriers are all about rates and not about service. They do have service-related metrics in them such as free time, but that is really just another form of rates,” said Bill Rooney, vice president at Kuehne + Nagel and the former US president of Hanjin Shipping.

It would be easy to say, therefore, that it was a lost 20 years, but that isn’t entirely the case either, as the seeds for more significant change were indeed being planted. In his speech, Jacobs warned about the consequences of a singular focus on price in ocean shipping, which is that carriers would lack the ability to return profits to shareholders and be starved of investment. 

And that is exactly what happened. It was only so long that carriers could continue to report losses or inadequate profits before consolidation would naturally result. The ensuing waves of mergers, acquisitions, combinations, and the largest bankruptcy in industry history has resulted in the top five carriers controlling about 65 percent of global capacity, up from about 30 percent in 2001, according to industry analyst Alphaliner. The number of major east-west carriers is half of what it was four years ago.

It is that development — not shippers and carriers together determining ways to create value — that will take the industry into the future. With consolidation accompanied by all major carriers being part of mega-alliances, short-term capacity reductions, virtually unimaginable in 2001, are allowing carriers to exercise newfound influence on rates. That has helped push up pricing in recent weeks on the major east-west trades and driven the share prices of carriers such as Maersk Line and Hapag-Lloyd sharply higher over the past year as analysts see the market tilting in carriers’ favor.

In declining to challenge the block exemption for carrier alliances, the EU signaled that it will not stand in the way of carriers’ new operating model. But consolidation also led carriers to begin investing anew, especially in digital services, and to begin to retool business models toward end-to-end logistics, as Maersk and CMA CGM have done.

How much these forces will drive changes in the core shipper-carrier relationship is unclear. But as long as carriers continue to struggle financially, their search for a profitable model will continue, as Flemming said it would, and this will inevitably impact how they interact with shippers.

Contact Peter Tirschwell at peter.tirschwell@ihsmarkit.com and follow him on Twitter: @petertirschwell.