US importers, already suffering supply-chain disruptions from previous rounds of tariffs, say the threat of a 25 percent tariff to be imposed by the Trump administration on imports on China, effective January 1, will further roil shipping patterns and will stress the intermodal supply chain, especially warehouse space, beyond capacity.
The warnings, which were issued Tuesday at the Intermodal Association of North America (IANA) Intermodal Expo in Long Beach, included advice to beneficial cargo owners (BCOs) that now is the time to work closely with ocean, truck, and rail partners to ensure they can provide the capacity that will be needed in what should have been slack shipping months in November and December.
“If everything gets loaded prior to Jan. 1, it will cause a huge surge,” said Steve Hughes, president/CEO of HCS International, who specializes in auto parts logistics. “How do you plan for the December-January rush on the intermodal side?” he said.
The latest round of Trump administration tariffs on $200 billion of imports from China will actually kick off on Monday with a 10 percent hit. The tariffs are scheduled to increase to 25 percent on Jan. 1, 2019. BCOs addressing the IANA Intermodal Expo said that while it’s too late to do anything about Monday’s tariffs, an increase to 25 percent would be devastating for many importers, so they have no choice but to revamp their supply chains for the remainder of the year.
Laura Crowe, senior director of global logistics at Walmart, said that with only several months remaining, the giant retailer will work with its key providers in the ocean, inland transportation, and warehouse sectors to forecast capacity requirements and pre-plan its international and domestic supply chains. With truck and drayage capacity already tight, and truckers turning down loads from some BCOs, it will be necessary to work with them more closely than ever to be their “customer of choice,” (also known as a shipper of choice) she said. “We have to understand what they want in addition to pay. We have to do more for them,” she said.
Trump tariffs cause front-loading
The import supply chain has been turned upside down since spring as the Trump administration announced several rounds of tariffs, turning what should have been slack volume months in June and July into periods of historically high growth. Imports normally peak in August and again in October, but this year importers fast-forwarded so much volume that July was the peak month so far, according to numbers provided by PIERS, a JOC.com sister product. Imports actually slowed somewhat in August.
The trade is now bracing for an earlier-than-usual Chinese New Year surge of imports. In past years, most of the Christmas merchandise had entered the country by the end of October to be delivered to stores in time for the beginning of the holiday shopping season on Black Friday following Thanksgiving. Imports would then drop in November and December, but would surge again in January for the pre-Chinese New Year rush before many factories in Asia close for a week or longer for the celebrations.
Chinese New Year 2019 falls on Feb 5. Although many importers who shipped their holiday merchandise to get in front of the tariffs are glad they did so, it also came at a cost of unexpected inventory carrying costs. Hughes noted that shipping pre-Chinese New Year merchandise in October or November rather than in January or early February as in the past will result in similar inventory carrying costs, and this will become another unexpected cost, on top of the increased transportation costs that BCOs are also experiencing. “There is a lot that is stacking up as challenges this year,” he said.
Further, even if the threat of punishing 25 percent tariffs does not materialize on Jan. 1, BCOs cannot wait much longer to plan their logistics for the next few months, so the pre-Chinese New Year rush could begin in October and run through Dec. 31. Spot ocean rates, which have been higher than $2,000 per FEU to the West Coast and more than $3,000 per FEU to the East Coast for two months, could likely remain elevated, but that scenario depends upon how quickly production can be ramped up in Asia. “On the shipping side, what amount will be front-loaded, and how will it affect early 2019?” Hughes said.
Tariffs also whipsawed ocean carriers, prompted ‘extra-loaders’
Ocean carriers have been whipsawed by the tariffs and threat of tariffs, reducing capacity when it appeared that volumes would drop and then suddenly announcing the addition of ”extra-loader” vessels when cargo rolling in Asia raised cries of protest from shippers. Ron Brothers, senior director of global transportation and logistics at Callaway Golf, said he already experienced periods in recent months where previously negotiated service contract rates didn’t hold when cargo rolling was at its peak, so he ended up paying spot rates, which were much higher than the contract rate. “There’s really nothing you can do about it,” he said, unless your company is one of the few, high-volume retailers that have leverage during times of uncertainty.
While higher transportation rates due to tight carrier capacity on land and at sea are a concern to BCOs, today’s especially tight warehouse space environment is of even greater concern because an early pre-Chinese New Year cargo surge will have nowhere to go, if warehouses are already filled with Christmas merchandise. “I’ve heard a lot about this — a lot,” Scott Weiss, vice president of business development at Port Logistics Group, said Thursday. “They already brought in more because of the tariffs, and many warehouses are at full capacity,” he said.
“We are essentially full now,” Kevin Turner, executive director and practice group leader, ports and logistics at Cushman & Wakefield said Thursday. “When you’re at 88 percent capacity, you’re full,” he said, referring to warehouse and distribution space throughout the massive Southern California market. “It’s the highest capacity level I’ve seen in my 30 years in the industry,” he said.
Like a marine terminal, a warehouse reaches its functional capacity far below 100 percent utilization. “Eighty-five percent is the number for warehouses. No warehouse wants to be more than 85 percent because productivity is affected,” Weiss added. Third-party logistics providers find over-capacity conditions especially difficult to deal with because they serve multiple importers and must divide their facilities into separate spaces devoted to individual customers. An unexpected freight surge from one customer has an impact on others. “We plan for a 10 percent variance, but if it is a 50 percent variance, we don’t have that exponential amount of space,” Weiss said.
Impact on importer supply chains
Many importers are in a quandary as how to plan their supply chains because of the lead times required to ramp up production at the foreign factories, and the lead times involved in dealing with the tariff process. Footwear importers have so far escaped harm from the previous tariffs, and they appear to be OK for these latest tariffs, but yet another round, as is being threatened, would affect them, said Matt Priest, president of the Footwear Distributors and Retailers of America. After previous announcements, appeals, and other procedural steps lasted about six weeks before the process closed, the time element is an important factor, Priest said. Those importers who do not have time to adjust their production schedules may have to shift to high-cost air freight, he said.
Planning for intermodal rail and truck moves for the inland portion of the supply chain likewise becomes more complicated, said Mike Gavle, vice president of global operations at the Rockport Group. Shippers must be precise in telling their carriers which shipments are crucial and which can be held back if necessary. “If you say they’re all hot, then nothing is hot,” said.
Even conscientious pre-planning of logistics to avoid pain points and secure capacity for the traditional peak season will fall short during unexpected disruptions that, of late, seem to be repeating themselves. “We understand the pain points and how to work around them, but it’s the exceptions,” Crowe said. “We have to get better at handling those,” she said.
The uncertainties of one round of tariffs after another have longer-term implications for BCOs as they attempt to plan their sourcing strategies years into the future. “It’s a dial, not a button. Production will gradually shift,” Gavle said.
Sourcing decisions involve more than just the ability of factories in a different country to produce quality products. The ability to secure reliable transportation from the factory to the port and from the foreign port to the United States is a key component of the sourcing strategy. “It’s not easy to shift production,” Brothers added. “You have to think — ‘what is your five- to seven-year strategy?’” he said.
Contact Bill Mongelluzzo at email@example.com and follow him on Twitter: @billmongelluzzo.