Perceptions and Paradigm Shifts

Perceptions and Paradigm Shifts

Perceptions, I learned long ago, are stronger than reality. Recent actions in international trade and transportation indicate there may be a paradigm shift that changes perceptions and gets us all back to reality.

A shipper was quoted recently as saying that, with all the money carriers are saving by slow-steaming, and extending shippers’ supply chains, carriers should give shippers some form of payment. This tells me the shipper perceives that carrier pricing is based on or connected to cost.

Let’s forget for a moment that carriers are awash in red ink. There is logic to the view that prices should be connected to or based on cost, but that is exactly why they aren’t. I have maintained for more than three decades that there is little logic in pricing international ocean transportation. Historically, ocean carrier pricing has been market-driven; supply-demand ratios dictate the actions as in most industries.

What distinguishes container shipping from other industries is that when there is a mere hint of a drop in the market, rates don’t just turn downward; they plunge. Recall about two years ago when base Asia-to-Europe rates went to zero, with cost obviously having nothing to do with the action. Similarly, rates plummeted in the trans-Pacific as markets slowed amid rising capacity. The carriers’ theory has been to protect market share, regardless of cost. The ocean graveyards are filled with skeletons of carriers that tried to protect their market share.

But in recent weeks and months, carriers apparently have embarked on a changing strategy — one that takes the excuse of excess capacity out of the equation — by anchoring ships and slow-steaming. Having taken those steps, the carriers have moved to restore rates to what they hope will be profitable levels, and they’ve done it in a fashion not seen in my career: by telling customers what they’re doing and actually doing it. In some cases, carriers have raised rates or instituted charges on short notice, almost at the same speed they cut rates.

These moves have caused some dislocation for cargo interests, either through capacity shortages during a pre-Chinese New Year spike in the market — causing extended time frames to move the goods — or through short-notice rate increases that narrow the margins on the goods sold.

These moves also tell me top management in carrier home offices has removed the “local discretion” that allowed regional management to give customers a break. The analytical side of me says, “Finally, they get it; in order to stay in business, you have to consistently make enough money to sustain the entity and replace assets at regular intervals.” I’m also encouraged by some cargo interests publicly saying they understand the circumstances and conditions and accept that rates must rise to levels allowing carriers to do that.

Is this a true paradigm shift, where service providers become more cost- and profit-conscious and cargo interests recognize they depend on their service providers and must pay a reasonable price to get reasonably good service? Or is this a short-term phenomenon created by global economic conditions exacerbated by a glut of capacity coming on line in the trough of the economic downturn?

I’d like to think it’s the former, but my gut says it’s the latter. And why do I want a world where service providers and service purchasers live in peace and harmony? Because I’ve been on both sides of the equation, and I’m pragmatic enough to understand that both sides must be satisfied to maximize the opportunities available. Current trans-Pacific conditions are not conducive to maximizing opportunities for either side. If you can’t get your freight on a ship, you can’t sell it. If your revenue is below your costs, you either cut services — again to the detriment of cargo interests — or you go out of business, also not in shippers’ best interests.

The reality is both sides have a huge stake in ensuring the other’s success, not that one benefits from the other’s plight.

One last observation: While I note carriers’ top management has instilled some discipline in the ranks, I hope it also is monitoring closely the financial reports from non-asset-based service providers. While the carriers are bleeding billions of dollars, absorbing millions of dollars in costs from vessel-delivery cancellations, and searching out exotic ways to keep up with cash requirements, non-asset-based companies are reporting relatively modest drops in profit — but are still profitable.

While it’s true the non-asset-based companies perform some services beyond basic transportation, they in essence derive the vast majority of their revenue from one or more forms of asset-based services. It may occur to some that those with the greatest risk and greatest capital outlay are subsidizing greatly their non-asset-based counterparts — counterparts that are both customers and competitors.

Gary Ferrulli is president of Global Logistics Consulting in Chandler, Ariz. Contact him at ferrullig@mindspring.com.