Non-vessel-operating common carriers are handling more and more Asian imports to the United States, now nearly 43 percent compared with 29 percent a decade ago, as even the largest container lines are unable to satisfy the needs of their regular customers during periods of peak traffic volume.
NVOs' share has steadily increased, rising to 42.6 percent in 2016 from 40.1 percent in 2015, according to an analysis of cargo bookings performed by PIERS, a sister company of JOC.com within IHS Markit. It’s another sign that the liner shipping industry is becoming increasingly commoditized.
The days when the largest, so-called premier carriers had large sales staffs and booked most of their cargo directly with beneficial cargo owners, and the up-and-coming carriers relied mostly on NVOs, are over. As services become more vanilla in nature, and most of the lines participate in vessel-sharing alliances, the reliance of the top carriers on NVOs has equaled out.
NVOs, also referred to as freight forwarders, have been steadily increasing their market share in the largest US trade lane since 2006. Carriers rely on NVOs for at least one-third of their container volume, and NVOs account for more than half of the cargo carried by some container lines, according to the PIERS analysis.
Nine of the 16 largest carriers in the trans-Pacific receive 30 to 39 percent of their cargo from NVOs, four rely on NVOs for 40 to 49 percent of their cargo, and three — Mediterranean Shipping Co., 'K' Line, and Yang Ming Line — receive more than half of their cargo from NVOs. All of the top 16 lines, except MSC, rely on NVOs today for a higher percentage of their freight than they did in 2006, according to PIERS.
“There is more than one moving part here,” said David Arsenault, president of Logistics Transformation Solutions and former president of the Americas at Hyundai Merchant Marine. NVO growth in the eastbound Pacific dates to 2010 when even large BCOs that had service contracts with carriers had difficulty securing space after carriers had laid up a number of vessels during the 2008 to 2009 global economic recession. When cargo volumes surged in 2010, BCOs needed extra space, so they turned to NVOs for their surplus requirements, Arsenault said.
Also, although larger BCOs generally book directly with carriers on their high-volume trade lanes, they often rely on NVOs on those lanes where they or their core carriers do not have a major presence. NVOs have business relationships with a number of ocean carriers spread out over many trade lanes.
NVOs, meanwhile, do not want to be thought of as only niche players that serve the needs of BCOs in the spot market. Some NVOs are pressing carriers to negotiate with them early in the service contracting season on the same level that they negotiate with larger retailers. Traditionally, carriers have negotiated with their largest accounts early in the year, established the rates for these “champion accounts” as their baseline, and then in late April and early May they negotiated NVO rates.
David Bennett, president of the Americas at Globe Express Services, sees that scenario changing. “This year GES has identified our core carrier base and will be having early discussions with them starting in mid-March,” he said. The smaller-scale, regional contracts will be finalized later in the spring under the normal contracting cycle, he said.
Carriers in aggregate have been losing money since 2010 because their global fleet capacity has been growing faster than trade volume. As a result, freight rates on the major east-west trade lanes have declined, reaching record lows last year. Since carriers could not make money on the revenue side of their business, the only way to stay whole was to cut operating costs, which often involved reducing sales staff. NVOs stepped in and in effect became an extension of carriers’ sales staffs.
At the same time, the number of importers and exporters on the major trade lanes has increased. “Now 30 percent of US imports are handled by businesses of less than 500 employees, and smaller businesses almost always use NVOCCs/forwarders,” said Zvi Schreiber, CEO of Freightos. The boom in digital business-to-business platforms is helping to drive this development, he added.
Drilling down to the individual carrier level, the PIERS numbers show that most of the carriers in the eastbound Pacific in 2016 relied on NVOs for at least one-third of their container volume, up from 20 to 25 percent in 2006. Some carriers experienced an even larger increase. NVO cargo accounted for 10.55 percent of APL’s eastbound volume in 2006 and 43.78 percent in 2016. 'K' Line went from 20.8 percent to 54.3 percent last year, and OOCL’s share booked by NVOs doubled to 36 percent in the past 10 years.
MSC and Maersk Line, which have worked together in the 2M Alliance since 2015, are an anomaly in the eastbound Pacific. MSC in 2006 was heavily dependent upon NVO cargo, which accounted for 73.47 percent of its eastbound Pacific volume. Last year the NVO share dropped to 53.81 percent. Maersk Line in 2006 relied on NVOs for only 24.41 percent of its volume, and the NVO share in 2016 increased to 34.82 percent. Maersk and MSC weren’t available for comment.
Bennett said that as the carrier base shrinks, he sees shipping lines in the trans-Pacific achieving a “healthy” split of 55 percent of the freight being booked directly with BCOs and 45 percent with NVOs. “They need the NVOs to become their sales team, so the volume moving on the NVO paper will continue to increase,” he said.
Dean Tracy, managing director of Global Integrated Solutions and former logistics executive at Lowe’s, said that although some carriers prefer to deal directly with BCOs, they can never fill all of the space on their vessels year-round with BCO cargo, so “carriers use NVOs as a safety spigot.” However, during the peak-shipping season in the fall or before Lunar New Year in February, NVO cargo is always the first to be bumped from ships, he said.
Increasingly, NVOs are capturing year-round cargo by offering value-added, end-to-end services to BCO customers. Also, they are providing information technology services that small to medium-sized BCOs may not have at their disposal. That has created a “do it yourself shipping” environment, Arsenault said. When carriers cut back on support staff, “this opened the door to NVOs to use their technology,” he said.
The new environment works to the benefit of carriers as well, Schreiber said. “For strapped carriers, working with a forwarder is a cost-effective way of aggregating business, leading to more volume with less operational overhead,” he said.
Furthermore, the relationships are changing and evolving as the industry adjusts to the restructuring of global vessel-sharing alliances that is playing out this year. “We have seen that with the consolidation and strengthening of the alliances, that shippers find themselves in a position of not having necessarily the same relationship that they had before with an individual carrier,” said Brian Bourke, vice president of marketing at SEKO Logistics.
Bourke said SEKO is experiencing increased demand as some shippers allocate more containers to NVOs. “We can both mitigate the increased risk in the market while at the same time we can provide more end-to-end services, visibility, and more attention,” he said. NVOs are increasing their business with small and medium-sized shippers as they seek to mitigate risk and receive the attention to details they once had from individual carriers, he added.
The past year saw unusually volatile pricing, driven by overcapacity in the major east-west trade lanes and the Hanjin Shipping bankruptcy filing on Aug. 31. Bennett said the eastbound Pacific today is marked by extreme price volatility, with spot rates changing weekly. In this environment, GES is working with its core carrier base that understands its short-, medium- and long-term objectives. These relationships provide GES and its customers a measure of rate stability.
Although NVOs have established their value in the trans-Pacific by securing space for small and mid-size BCOs, NVOs are increasingly being called upon to secure capacity for large BCOs, even on their core trade lanes. An importer of home furnishings noted that last autumn, when capacity tightened in the eastbound Pacific, his company shifted about 10 percent of its imports — that would have otherwise been booked directly with carriers — to NVOs that were able to book the cargo for the intended voyages.
Some shipping lines that used to book most of their freight directly with BCOs have experienced significant increases in NVO-booked cargo, possibly owing to the participation of the lines in vessel-sharing alliances. 'K' Line went from 20.8 percent of its freight booked by NVOs in 2006 to 54.34 percent in 2016, MOL experienced a 30 percent increase, and APL, a 23 percent increase. Cosco Container Lines last year received 43.78 percent of its cargo from NVOs, up 20 percent from 2006.
The PIERS analysis also found that although NVOs in aggregate are increasing their market share in the eastbound Pacific, the 10 to 12 largest NVOs are growing faster than the second-tier forwarders. Schreiber said this is due in part to consolidation in the forwarder industry. “Freightos data collected from shippers indicates a trend of consolidation among logistics providers, which may shift volume from the smaller forwarders to the larger ones,” he said.
BCOs since the Hanjin bankruptcy and the mergers this past year of other carriers have been paying closer attention to risk mitigation as they seek stability in their commercial relationships, and SEKO has found that these concerns are directing more business to the established NVOs, Bourke said.
Tracy added that since the larger NVOs control more cargo volume in more trade lanes, they are able to leverage their volume with the carriers for more attractive freight rates.
On the other hand, BCOs are not necessarily looking to NVOs to secure rates that are lower than they could secure on their own if they could get the space. “We don’t use them to play the market,” the home furnishings importer said.