Container-line transformation faces its biggest test from those paying the bills
Ocean carriers are looking to reinvent themselves as providers of premium value-added services. The question is, are shippers willing to pay for the upgrades?
Ira Breskin is a senior lecturer at SUNY Maritime College in the Bronx, N.Y. He is the author of the recently published The Business of Shipping (9th edition).
Liner shipping firms are upgrading their offerings to attract the premium business needed to bolster the industry's anemic margins. Yet it is shippers, intermediaries, and beneficial cargo owners (BCOs) who will render the final judgment on the strategy, and the jury remains very much out.
Led by the Danish giant Maersk Line and French line CMA CGM, carriers are building end-to-end service portfolios that leverage their scheduled sailings. These initiatives come as liner operators posted modest operating earnings in 2017 that followed big losses in 2016. Volume growth has slowed this year due partly to fears, which seem to be becoming reality, of a trade war between the U.S. and China.
Carriers said they are committed to ending their overreliance on pricing regimes that have sacrificed margins on the altar of market share and that have resulted in billions of dollars in losses. Yet such a dramatic shift to emphasizing value-added services is inherently risky. It requires substantial investments in processes and technology, costs that need to be recouped by attracting new high-margin business. It is unclear if users accustomed to enjoying cheap rates on sailing services will go for pricier, value-added solutions or would rather maintain the status quo.
Transforming liner carriers into seagoing versions of nimble competitors is a tall order. Maersk CEO Søren Skou, who outlined a plan earlier this year to become a "global integrator of container logistics" on a par with firms like FedEx Corp., UPS Inc., and DHL Express, acknowledged that Maersk's strategy, which will take three to five years to implement, is "pretty complicated, with multiple dimensions."
CMA-CGM joined the value-added service fray last spring when it took a 25-percent stake in Dutch third-party logistics service provider (3PL) Ceva Logistics and said it would enter into strategic agreements with the 3PL. "With this transaction, CMA CGM aims to grow its presence in the logistics sector, a business closely related to shipping," the company said when announcing the purchase. In mid-July, CMA CGM won regulatory clearance of its investment.
BEEFED-UP SERVICE MENU
Box line users, for their part, give the carriers marks for getting beyond the rate wars and leveraging their global networks to add more heft to the relationship. "What we like is carriers specializing [in] something other than price," said Peter Friedmann, executive director of the Agriculture Transportation Coalition, which represents agricultural and forest products exporters.
Underpinning the carriers' strategy is the belief that customers would pay more for services like door-to-door delivery with real-time visibility, compliance labeling, kitting, supply chain services (design, planning, management, optimization, and enhanced visibility and control), customs brokerage, and warehousing and distribution. This, in turn, would allow carriers to break the vicious cycle of dependency on low freight rates. "We want to build a business that can deliver good returns, more consistent returns than what we have today, providing high cash yields and able to grow both revenue and earnings on a less volatile basis," Skou said.
A potential stumbling block is carriers' neutral/in-house nonvessel-operating common carrier (NVOCC) affiliates, such as Maersk's Damco or Japanese carrier NYK Line's Yusen Logistics, potentially alienating large freight forwarder accounts. These two entities conceivably could both seek to provide competing value-added services, the forwarders' bread and butter, directly to the BCO.
Maersk seems to be moving in that direction, given its announcement in late September that Damco Supply Chain Services and Maersk's Ocean Product value-added services would be combined and marketed as Maersk products and services. In the same announcement, the company said that Damco's freight forwarding business—which serves customers requiring air freight or multi-carrier ocean freight options—will continue to operate as a separate and independent business under the Damco brand—a move that will enable the unit to focus solely on freight forwarding.
Swiss forwarding giant Kuehne + Nagel Group "gained significant new business mainly with its integrated digital solutions" during the first half of 2018, it reported in July. It handled 2.289 million TEUs (twenty-foot equivalent units) during that period, 172,000 more than in the comparable 2017 timeframe, it reported.
Forwarders, and to a lesser extent NVOCCs, generally don't compete for major shippers' underlying linehaul business because those tariffs are set under terms of pre-negotiated service contracts. However, poaching smaller account business is fair game.
Maersk looks to its expanded service offerings to bolster its annual return on investment (ROI) to 3 percent, up from the 1 percent reported during each of the past five years, said Vincent Cui, general manager, supply chain planning and value-added services for Shanghai, China-based Damco China Ltd., a neutral NVOCC. Damco, Maersk's wholly owned third-party logistics firm, generates two-thirds of its annual revenue by providing value-added service in Asia, Cui said.
FIRST THINGS FIRST
Carriers could not embark on such a major change of direction without first getting their capacity house in order. Though it has been a slog with peaks and valleys, they seem to be making progress. A spate of ship alliances, mergers, and acquisitions over the past two years has reduced to 12 from 24 the number of lines claiming global market share. This is expected to yield better operating efficiencies, reinforce pricing discipline, and keep shippers and BCOs from engaging in such price-destructive behavior as double-booking without any type of consequence.
Friedmann of the Agriculture Transportation Coalition said that, on balance, users will benefit from the carriers' expanded footprint by having more service options. "It's not who is providing the service, but what the service is," Friedmann said. Ideally, carriers will compete both on the range and relative quality of their services, he said.
Larger forwarders shouldn't be too concerned by the carriers' expanded service initiative, Okan Duru, an assistant professor and director of the master's in maritime studies degree program at Nanyang Technical University in Singapore, wrote in an e-mail. The reason, he said, is that freight forwarders control enormous volumes, and they have the economic resources and savvy to blunt the carriers' recent marketing push that emphasizes selling directly to shippers and bypassing traditional 3PLs and forwarders.
In fact, carriers would be better served determining how to better accommodate shippers' ever-changing sourcing arrangements given their invariable supply chain reconfigurations, Duru wrote in the e-mail. Often, that means more freight emanating from lower-wage Asian countries such as Vietnam and India.
Carriers now have full plates. They have begun pushing value-added services while fine-tuning capacity to better address fluctuating demand handled by the latest generation of carrier alliances, which haven't yet meaningfully bolstered members' profit. In the short term, "alliances exaggerate [spot] price volatility," said Gino Marzola, Singapore managing director/ocean shipping for Panalpina, the ocean- and airfreight forwarding giant.
This isn't the first time that steamship lines have tried to extend their value proposition beyond sailings. Prior efforts have yielded little traction. Despite their insistence that this time is different, it remains up to the marketplace to judge whether it will value the full range of services offered by carriers seeking to become more financially secure.
Supply chain planning (SCP) leaders working on transformation efforts are focused on two major high-impact technology trends, including composite AI and supply chain data governance, according to a study from Gartner, Inc.
"SCP leaders are in the process of developing transformation roadmaps that will prioritize delivering on advanced decision intelligence and automated decision making," Eva Dawkins, Director Analyst in Gartner’s Supply Chain practice, said in a release. "Composite AI, which is the combined application of different AI techniques to improve learning efficiency, will drive the optimization and automation of many planning activities at scale, while supply chain data governance is the foundational key for digital transformation.”
Their pursuit of those roadmaps is often complicated by frequent disruptions and the rapid pace of technological innovation. But Gartner says those leaders can accelerate the realized value of technology investments by facilitating a shift from IT-led to business-led digital leadership, with SCP leaders taking ownership of multidisciplinary teams to advance business operations, channels and products.
“A sound data governance strategy supports advanced technologies, such as composite AI, while also facilitating collaboration throughout the supply chain technology ecosystem,” said Dawkins. “Without attention to data governance, SCP leaders will likely struggle to achieve their expected ROI on key technology investments.”
The British logistics robot vendor Dexory this week said it has raised $80 million in venture funding to support an expansion of its artificial intelligence (AI) powered features, grow its global team, and accelerate the deployment of its autonomous robots.
A “significant focus” continues to be on expanding across the U.S. market, where Dexory is live with customers in seven states and last month opened a U.S. headquarters in Nashville. The Series B will also enhance development and production facilities at its UK headquarters, the firm said.
The “series B” funding round was led by DTCP, with participation from Latitude Ventures, Wave-X and Bootstrap Europe, along with existing investors Atomico, Lakestar, Capnamic, and several angels from the logistics industry. With the close of the round, Dexory has now raised $120 million over the past three years.
Dexory says its product, DexoryView, provides real-time visibility across warehouses of any size through its autonomous mobile robots and AI. The rolling bots use sensor and image data and continuous data collection to perform rapid warehouse scans and create digital twins of warehouse spaces, allowing for optimized performance and future scenario simulations.
Originally announced in September, the move will allow Deutsche Bahn to “fully focus on restructuring the rail infrastructure in Germany and providing climate-friendly passenger and freight transport operations in Germany and Europe,” Werner Gatzer, Chairman of the DB Supervisory Board, said in a release.
For its purchase price, DSV gains an organization with around 72,700 employees at over 1,850 locations. The new owner says it plans to investment around one billion euros in coming years to promote additional growth in German operations. Together, DSV and Schenker will have a combined workforce of approximately 147,000 employees in more than 90 countries, earning pro forma revenue of approximately $43.3 billion (based on 2023 numbers), DSV said.
After removing that unit, Deutsche Bahn retains its core business called the “Systemverbund Bahn,” which includes passenger transport activities in Germany, rail freight activities, operational service units, and railroad infrastructure companies. The DB Group, headquartered in Berlin, employs around 340,000 people.
“We have set clear goals to structurally modernize Deutsche Bahn in the areas of infrastructure, operations and profitability and focus on the core business. The proceeds from the sale will significantly reduce DB’s debt and thus make an important contribution to the financial stability of the DB Group. At the same time, DB Schenker will gain a strong strategic owner in DSV,” Deutsche Bahn CEO Richard Lutz said in a release.
Transportation industry veteran Anne Reinke will become president & CEO of trade group the Intermodal Association of North America (IANA) at the end of the year, stepping into the position from her previous post leading third party logistics (3PL) trade group the Transportation Intermediaries Association (TIA), both organizations said today.
Meanwhile, TIA today announced that insider Christopher Burroughs would fill Reinke’s shoes as president & CEO. Burroughs has been with TIA for 13 years, most recently as its vice president of Government Affairs for the past six years, during which time he oversaw all legislative and regulatory efforts before Congress and the federal agencies.
Before her four years leading TIA, Reinke spent two years as Deputy Assistant Secretary with the U.S. Department of Transportation and 16 years with CSX Corporation.
Serious inland flooding and widespread power outages are likely to sweep across Florida and other Southeast states in coming days with the arrival of Hurricane Helene, which is now predicted to make landfall Thursday evening along Florida’s northwest coast as a major hurricane, according to the National Oceanic and Atmospheric Administration (NOAA).
While the most catastrophic landfall impact is expected in the sparsely-population Big Bend area of Florida, it’s not only sea-front cities that are at risk. Since Helene is an “unusually large storm,” its flooding, rainfall, and high winds won’t be limited only to the Gulf Coast, but are expected to travel hundreds of miles inland, the weather service said. Heavy rainfall is expected to begin in the region even before the storm comes ashore, and the wet conditions will continue to move northward into the southern Appalachians region through Friday, dumping storm total rainfall amounts of up to 18 inches. Specifically, the major flood risk includes the urban areas around Tallahassee, metro Atlanta, and western North Carolina.
In addition to its human toll, the storm could exert serious business impacts, according to the supply chain mapping and monitoring firm Resilinc. Those will be largely triggered by significant flooding, which could halt oil operations, force mandatory evacuations, restrict ports, and disrupt air traffic.
While the storm’s track is currently forecast to miss the critical ports of Miami and New Orleans, it could still hurt operations throughout the Southeast agricultural belt, which produces products like soybeans, cotton, peanuts, corn, and tobacco, according to Everstream Analytics.
That widespread footprint could also hinder supply chain and logistics flows along stretches of interstate highways I-10 and I-75 and on regional rail lines operated by Norfolk Southern and CSX. And Hurricane Helene could also likely impact business operations by unleashing power outages, deep flooding, and wind damage in northern Florida portions of Georgia, Everstream Analytics said.
Before the storm had even touched Florida soil, recovery efforts were already being launched by humanitarian aid group the American Logistics Aid Network (ALAN). In a statement on Wednesday, the group said it is urging residents in the storm's path across the Southeast to heed evacuation notices and safety advisories, and reminding members of the logistics community that their post-storm help could be needed soon. The group will continue to update its Disaster Micro-Site with Hurricane Helene resources and with requests for donated logistics assistance, most of which will start arriving within 24 to 72 hours after the storm’s initial landfall, ALAN said.