SHIP LINES MATCH APL RATE CUTS ON JAPAN ROUTES

SHIP LINES MATCH APL RATE CUTS ON JAPAN ROUTES

Shipping lines serving Japan are cutting some key freight rates in the hope of stopping a discount wildfire.

Shipping lines that set prices together for moving goods from Japan this week matched rate cuts enacted Monday by American President Lines. By taking this action, the container carriers hope to create a fire wall and thereby avert a full-blown rate war.But carriers and shippers concede the cease-fire is tenuous.

Some see a danger that APL could launch another round of rate cuts if its terms aren't met in ongoing negotiations.

Others fear that aggressive carriers with smaller market shares - such as Neptune Orient Lines, Orient Overseas Container Line and Hapag-Lloyd Ltd. - could tip the awkward balance by enacting their own discounts, thereby spurring a free-for-all.

"Everyone's on alert now," one carrier official said. "All these so- called professionals are all acting with emotion. Some things never change."

APL shocked the industry Sept. 29 when it announced a series of deep discounts effective Oct. 9 on auto parts, electronic goods and complete auto kits. These are the three largest commodities shipped from Japan to the United States accounting for up to 70 percent of the trade's volume.

"It appears other conference members have taken a course to encourage rate stability," said Gil Roeder, an APL spokesman in Oakland. "APL has been advocating real market rates and responsiveness to customers in addition to rate stability. We'll continue to closely monitor rate conditions."

APL has seen its market share steadily erode and been frustrated by conference rules that make it difficult to respond to outside competition. Conference carriers set rates collectively while non-conference lines price their services independently.

APL apparently reasoned that it was better to take one bold step, enact the discounts and force the conference to reform its rules rather than continue the company's slow but steady loss of position.

OUNCE OF PREVENTION

The Trans-Pacific Freight Conference of Japan's move this week to match APL's discounts on auto parts and CKD auto kits appears to be a recognition that the damage is done and the best approach now is to try and limit further undercutting.

By putting all conference carriers on an equal rate footing - albeit at lower levels - the group hopes to create a floor that can prevent further discounts.

Noticeably absent from these conference discounts, however, are electronic goods. One major Japanese electronics shipper expressed hope that the discounts be applied to his commodity as well.

As outlined, the new conference rates effective Oct. 9 are $2,750 per 40- foot equivalent unit for CKD shipments for large service contact accounts - auto makers that guarantee an annual minimum of 75,000 tons - and $2,650 per FEU for auto parts.

Tariff rates are 11 percent above those levels.

A service contract is an agreement under which shippers guarantee a sizeable volume of cargo in return for preferential rates.

Toyota Motor Corp., meanwhile, which is entitled to the very deepest discounts, given its annual volumes in excess of 500,000 tons, will be entitled to a rate of $2,479 per FEU for CKD under its existing service contract.

CUTS SEEN NECESSARY

Though these rate reductions hurt - these rates are down from the $3,200 to $3,400 per FEU levels just a month ago - carriers see them as necessary to ensure that large shippers aren't penalized.

Large auto companies - including Toyota, Honda Motor Co. and Nissan Motor Co. - don't want to find themselves suddenly paying higher rates just because they signed service contracts before the rate competition started.

"We have absorbed or swallowed the (rate discounts) to maintain the service contract loyalty," one Japan-based carrier executive said.

In addition to the large rate gap between conference and non-conference carriers, however, APL has two other complaints. Addressing these may be somewhat more difficult, according to competing carrier executives.

One involves the rate gap between certain large premium conference carriers and smaller-volume conference carriers.

APL argued in conference meetings that there should be no gap so the conference can better compete against its real adversary - non-conference lines.

APL REACHES ACCORD

APL has now agreed to some differential so long as the gap doesn't exceed $50 per FEU, according to competing carrier executives. But carriers such as OOCL reportedly want it to be in the $150 range.

A second rather technical but very important issue involves the way the Japan conference responds to competition. Under the current system, it takes agreement by six conference members to reduce the conference rate structure and trigger matching discounts for large-volume shippers.

The Japanese carriers have favored this approach because while it may cause them to lose business on some commodities it helps protect their vital CKD market. APL, however, feels it's been hurt more than helped by the rule.

Executives say there are three proposals under consideration. APL reportedly wants the Japan conference to follow the system seen in the Asia North America Eastbound Rate Agreement whereby a rate discount by just one carrier will be enough to trigger matching conference discounts.

Two other proposals, one by Nippon Yusen Kaisha and the other by Kawasaki Kisen Kaisha - are similar and call for any conference-wide rate reduction to be triggered by five or possibly four carriers.

"APL's plan is a bit difficult," said one Japanese carrier executive. ''We cannot isolate (the discounting)."

Toshio Suda, managing director of the Japan Shippers Council, said the conference has not decided whether it will extend the discounts beyond CKD and auto parts to other cargoes. "This is not a general reduction yet," he said.