The past few years have seen a wave of consolidation amongst container shippers, reducing their number, while at the same time ocean cargo carriers operating in multiple trade lanes has also dropped. Yet the container industry remains only marginally profitable. Shippers, meanwhile, are demanding better service.
There are signs that the ocean carrier industry is moving towards a recovery from overcapacity and low freight rates. In the first half of 2018, the Prince Rupert Fairview Container Terminal has seen container volumes surge by 19 per cent from the same period last year, more than any other major gateway for Asian trade in the U.S., Canada or Mexico. The Port of Vancouver also reported that container volumes (measured in 20-foot equivalents or TEUs) increased by five per cent compared to mid-year 2017 to a record 1.64 million TEUs as a result of the growing demand for Canadian resources and products, and the increasing Canadian demand for consumer and manufacturing goods from Asia.
With the good comes some bad, according to Maersk Line Canada president Jack Mahoney.
“What we in Canada share with the global challenge is the escalating costs, particularly as it relates to fuel,” he says. “The rate improvements or the recovery of those fuel cost increases has not been satisfactory. That’s applying a substantial pressure on Maersk Line and I doubt we are unique in that. It’s a negative aspect of ocean freight in Canada.”
On the other hand, there is a positive story adds Mahoney. “In that the market growth we see so far this year is consistent with what we see in the market and that is that the market growth is positively developing—close to six per cent year-to-date—versus last year, and last year was a positive market.”
Continued container volume growth is envisioned by Hapag-Lloyd Canada’s managing director Wolfgang Schoch as well. Cost increases from a variety of sources means freight rates will continue to remain under pressure, “even in cases where third-party vendor costs are charged by a carrier as a pass-through to a customer, resulting in disputes.
“[We] continue to explore operating synergies and efficiencies wherever possible, while negotiating with vendors and offering alternative options to customers in an effort to minimize the impact of such increases. The consequence of not recovering such costs will eventually have an impact on customers, as carriers rationalize and limit services offered as we have already started seeing in certain trades with fewer options now available. Nonetheless, freight rates must increase for carriers to remain viable, while focusing efforts on improved service in a somewhat strained environment.”
The proof is in the pudding
A recent report from consultancy AlixPartners, “2018 Global Container Shipping Outlook,” suggests that if the industry addresses the dual challenges of rising costs and oversupply—mostly driven by fleet expansion—there may be some rate restoration this year.
According to the report, shippers may soon see impacts resulting from the industry’s reconfiguration into two tiers: the five large global players and about two dozen much smaller players, many of which compete either as specialists or exclusively in niche markets.
“As controlling power within the industry stabilizes,” the report states, “it becomes more important than ever for carriers to step up their efforts to improve their performance, discipline their investments, and sharpen their strategies for succeeding through scale or specialization.”
The report also notes that it’s vitally important for carriers to curb their “voracious appetite” for new vessels and increase scrappage to reduce the current margin-crushing balance of supply and demand. However, fleet capacity is once again on the rise. Estimates of growth in fleet capacity in 2018 range anywhere from four per cent to more than five per cent, compared with 3.3 per cent in 2017.
For Pyers Tucker, senior director of corporate development at Hapag-Lloyd, it all boils down to quality of service.
“The irony is that we’re in a service industry, but for the last 10 years—service, quality service—has been neglected. Carriers have not put much effort into it and the reason is that the only game in town was to increase scale as fast as possible. We believe that has now run its course,” he told Canadian Shipper from his office in Hamburg, Germany.
“We believe the container shipping industry is coming to an inflection point. In the past it was only about getting as big as you can as fast as you can, but in the future, we think it’s going to be increasingly about delivering on quality.”
“That’s our fundamental belief and it’s why we undertook a massive market research study.”
What became clear from the results of that study, says Tucker, is that the single biggest thing customers want is on-time delivery. “They’re really fed up with the on-going inability of carriers to provide a sufficiently reliable service to enable their supply chains to work effectively.”
For Tucker and Hapag-Lloyd, it’s all about what they call “provable quality.”
One of the issues over the past ten years, he says, has been that carriers have been effectively selling a “best-efforts” promise and then failing to deliver.
“They were mainly marketing exercises. What they’re missing is the actual operational execution in the background and therefore struggled to be able to deliver against their promises,” says Tucker. “When you look at it from a customer’s perspective, it’s extraordinary how few of the things that really matter to customers carriers can even measure.”
Therefore, the approach Hapag-Lloyd is taking is seeking to identify the promises that really matter to customers, being able to measure them internally so that they can manage their achievement and show customers how they performed and the evidence of how they performed.
“Our goal is to have a standard of performance and we will set up our operations and our systems and our management structure and our reporting to manage by those KPIs and to execute against those KPIs rather than it being quality as promised by a salesperson, that is then not lived up to,” explains Tucker.
“We believe that doing this and really executing on this is what is going to help us win commercially.”
According to Hapag-Lloyd’s market research there is an appetite for quality and that appetite differs from customer to customer. It is all about value creation for customers, says Tucker.
“There’s a small segment of shippers where reliable supply chains really create value for them and that’s particularly manufacturing, retail and high-value goods. For them, having a reliable supply chain where they can reduce their buffer stocks because they know shipments will come in on time and they can reduce their inventory carrying and distribution costs, that really creates value for them.
“There is a second, larger group of shippers for whom price matters, but so does quality, providing that the price is similar and that there is proven quality, not promised quality.
“Then you have the largest group, which are the shippers only focused on cost. Reliability doesn’t really create value for them.
“They are not our target. We will, of course, continue to serve them, but won’t focus heavily on them. We do however suspect that once this type of customer starts seeing the evidence of additional value that we can create for them by increasing reliability, that some of them may switch carriers.”
Quality of service has to be executed—by people—and that’s what can set apart one carrier from another, says Jimmy Deliveliotis, vice president – branch services for MSC (Canada).
“All the carriers offer similar transit times and vessel sizes, but we believe it’s the people that make the difference.
“The feedback we’ve been getting from shippers is that they continue to work with MSC mainly because of our employees and because we’ve been able to build personal relationships with those same customers. We’re also fortunate to have such a dedicated and passionate team who are dedicated to customer service.”
Those relationships in Canada are built in-person, says Deliveliotis. “Since 2017 we’ve decentralized our operations in Canada, establishing a full branch model across the country, with branches in Vancouver, Toronto and Montreal. They handle all the day-to-day interactions with customers, including documentation, bookings, vessels, import releases, et cetera.
“We believe having staff in our customers’ backyard is very valuable in helping us manage their expectations and that is what builds long-lasting relationships.”
Simplicity is another way to improve customer service, says Mahoney.
“What we’re trying to do is make sure that we do our part to make it simpler for Canadian importers and exporters to conduct their business through a host of initiatives. But also, that we make it easier for Canadian importers and exporters to connect with their market.”
On the simplification side, Maersk Line Canada is seeing an uptick in the use of their website, “which is the standard way we take bookings and issue invoices and using that allows us to have and also share with the client great visibility on how quickly, how timely, how accurately we’re doing things like bookings and invoicing,” says Mahoney.
“Of course [from customers] there is an expectation and a demand for transparency and our website helps with that, being available 24/7, having improved functionality and being the main method that customers can get something quickly, timely, accurately and at their convenience without needing to deal with courier fees or counter services.”
As far as connections, Mahoney points to Maersk’s network on both coasts and the recent addition of a new service between the east coast of Canada and the Mediterranean.
“It was seeing these positive developments in north Europe in the months after CETA that helped,” he says. “We did see a want and a need in the market for an alternative to what existed.”
The free trade agreement with the European Union not only helped north Europe, but it helped Mediterranean volume as well. And as Mahoney points out, with Maersk’s terminal network, the new service opens more destinations for shippers.
“We’re able to take Montreal and Halifax cargo to our own facilities in the Mediterranean and from there connect to Africa, the Middle East, India and Pakistan and even as far as Asia.”
With trade policies and tariffs seemingly shifting with the prevailing winds, carriers like MSC need to keep a close eye on where their customers may be heading.
“We’ve definitely seen a lot more cargo coming in from the EU since CETA was enacted and we’re getting a lot more requests on the export side about shipping to those markets,” says Deliveliotis.
“What we’re seeing is shippers are now forced to look at other markets to sell their goods in and are swayed from their traditional trading markets, and what we’ve done is made sure that if customers come in and ask about a new market they want to penetrate that our staff put them in contact with our offices overseas.
“Some are weary of trading to the same traditional trading partner and are using our network to make it easier to move goods efficiently and effectively to those new markets they’ve discovered.”
Given the complexity of today’s global ocean cargo networks, a new era of digitized transparency cannot come too soon, suggests a new report by Boston Consulting Group (BCG). The report, titled “Digital Imperative in Container Shipping,” notes that digital technology is transforming and disrupting the container shipping industry. “A few leading container carriers have started to capture significant improvements in costs and revenues. Other carriers still have an opportunity to leap to the forefront of digital adoption, but they must embark on the transformation immediately,” states the report. “Carriers must also defend their direct customer relationships against threats from traditional logistics players and new entrants that are adopting digital to provide seamless end-to-end services.”
To that end, Maersk Lines’ parent A.P. Moller-Maersk took steps to help overhaul global trade by unveiling a joint venture with IBM to create an industry-wide, paperless platform using blockchain technology. That venture—TradeLens— recently announced that 94 organizations are actively involved or have agreed to participate on the platform built on open standards.
“Technologies like blockchain will help address one of the downsides in ocean shipping, the fact that we have a lot of archaic, paper-based handoff interactions,” says Mahoney.
“Blockchain isn’t intended only as a Maersk offering, but as something the industry can adopt. The whole shipping ecosystem should be able to benefit from it.”
But even before blockchain, Maersk was offering technologies like remote container management (RCM), which, says Mahoney, “enable both sides to avoid and reduce the quantity of waste that can be involved in shipping, waste in the form of redundancy and waste in the form of extra paperwork and handoffs.”
Described as “relatively simple,” RCM involves a GPS, a modem and a SIM card on all 270,000 of Maersk’s reefer containers, enabling readings to be continuously collected and stored. That information then reaches customers and global support teams via satellite transmitters on 400 of the company’s ships.
Interest in the technology has exceeded expectations, says Mahoney, interest he attributes to customer demand for transparency.
MSC also employs ocean container tracking technology, in the form of Traxens, which Deliveliotis says gives customers unprecedented visibility of cargo from door-to-door.
The system uses a sensor-laden hardware, including GPS, that can monitor a container’s position, temperature, humidity, carbon dioxide level, vibration activity, unauthorized door openings, and customs status. In addition, it can also communicate readings in real time to a data hub using mobile transmission technology. The Traxens system can also remotely adjust the temperature in refrigerated containers.
“We’re always looking at what new technologies are out there, exploring and experimenting, and we continue to digitize all aspects of our business to make sure it’s easier for our customers to deal with MSC, whether it’s blockchain or any other technology,” adds Deliveliotis.
At Hapag-Lloyd, efforts to digitize the process for customers led the company to being the first of the major container lines to launch an online rate quotation tool—Quick Quotes.
After, what Schoch describes as a successful implementation period, the program became available to all customers in August.
To get a shipment quotation, customers log in via Hapag-Lloyd’s website, select start and end points of the shipment, and nominate commodity and container types. Customers will, “within seconds” says Hapag-Lloyd, receive a binding quotation, allowing them to immediately make a booking.
Customer feedback thus far has been extremely positive, according to Schoch, who is quick to add that while digitalization of the industry is front and centre, with more products being offered at a faster pace, carriers need to remember nothing can replace customer service when it comes to the unique requirements and issues faced by shippers.
“Digitalization with a human touch is key to our success.”