US-ASIA CONTAINER TRADE-Crystal Balling

We are going to discuss the Asia-US trade from the shipper view. This is our perspective as a shippers association. We are unique in what we do; and our discussion may represent a different view also. We hope it does and that it generates discussion.

The Asia-US trade has been a study in carrier dilemmas in the last ten years. Quick thoughts that jump out. Large volumes, maybe the largest trade lane in the world. Great balance between Eastbound and Westbound volumes and rates one time. Then great imbalances creating both operating and profit problems. Continued growth of Westbound volumes, even absorbing capacity additions, while raising freight rates. Collapse of volumes into Asia during the economic crisis. Larger size vessels entering the trade, and more on order. New carriers entering the transpacific. Value-added cargo primarily going in one direction, meaning the ability to absorb price increases; and the opposite in the other direction. Feast and famine. A pendulum and an enigma at its ultimate.

The Westbound trade has rebounded somewhat from the Asian crisis. Cargo volumes are coming back, and carriers are able to increase revenues, both with price increases and surcharges. But basically Eastbound container volume drives the transpacific, both as to volume and pricing. It could be said that imports from Asia subsidize exports as regard to rate levels. This is also seen in the ability of carriers to implement price increases on import containers to the U.S.

It is the size and dependability of the trade, particularly the Eastbound that is creating new paradigms for how shipping will be handled. Not what shipping is, but what it may become. We are not talking about carrier mergers, the future of alliances, cargo growth, larger ships and such "mundane" issues. We are not talking about challenges faced by ports or by rail and trucking companies to complement ocean volumes. And we are not going to discuss antitrust immunity. No, we are talking about who will be the key players in controlling container volumes.

Ocean shipping will change. Oh, the basics of putting containers on to a vessel and moving across the ocean may not change soon, but the way business is done is going to undergo change. In some cases the change will seem subtle; other cases not. How could ocean shipping change? After all, it has existed as it has for centuries. Technology has changed, not shipping. That is true. But the change that lies ahead is not about vessels. Change will be about how business, from the shipper perspective, is done.

Here are the topics that will shape ocean shipping, from the customer perspective. These are forming now in the Asia-US, have begun to take root and develop and will accelerate. Let's see what they are.

SUPPLY CHAIN MANAGEMENT Supply chain management (SCM) is driving customer practices, both directly and indirectly. Asia-US cargoes are very much consumer-goods type products. And consumer goods companies are key players of SCM.

The purpose of supply chain management is to drive inefficiencies out of the system. That means consumers have the products they want and when they want them. Inventories, as a buffer for uncertainties, should be reduced. Logistics cycle times would be reduced.

To drive out inefficiencies and reduce cycle times, an effective supply chain is built from the customers' door back through his suppliers. This is what SCM is about, and suppliers of companies that practice supply chain management know this. They have to find ways to be both cost and service responsive. Yet sourcing from Asia, with its ocean transport, is a weak link in the supply chain and creates its own issues. How can you be service responsive with a service that could take a month in transit? Shippers will continue to demand faster transits. Carriers will look at how they can define the key lanes and develop the appropriate service. It will also require emphasis on inland, door deliveries and pickup. The traditional port-to-port business will occur less and less.

Creating faster transit runs counter to what else is happening in ocean transport with larger ships, large port infrastructures necessary and hub supports. This creates a dilemma for carriers. How can they be customer responsive yet meet the economic operations required of capital-intensive organizations? But they will have little choice if they are to have customers satisfied.

SCM presents a way for carriers to break out of their commodity service provider market approach, and its resultant impact on freight prices. Being a supply chain partner to shippers will provide a way for carriers differentiate themselves in the marketplace. This differentiation should mean higher rates for supply chain carriers. Quality service carriers will have a way to brand and price themselves versus those carriers who are low cost and low price competitors. The challenge will be for those carriers who cannot compete as an SCM service provider and who cannot compete on price.

CUSTOMER SIZE SCHISM Corporations are merging on a global basis. And as mergers take place, divisions of that corporation are spun off and employees laid off to pay for the acquisition cost and to generate initial returns. Large corporations are perfect for ocean carriers. By securing large volumes secured in contracts, throughputs developed. This complements the global carriers and those with global aspirations.

The challenge is not with large shippers. It is with the Small-Medium Enterprises. SMEs are the backbone of the U.S. and global economies. Statistics are difficult to obtain in what they represent in the trade, but 25% of volume seems to be a good number. That is a good market portion. SMEs are where job growth and economic growth are really located. They are the entrepreneurs; however, small businesses do not often have logistics departments. The president may make shipping decisions. His familiarity with how shipping is done, Federal Maritime Commission rules and other fundamentals may be limited. But he is potentially a profitable customer, on a per container revenue basis.

How are carriers to reach to these small businesses? Carriers, as part of their business plan, have steadily reduced the size of sales forces from what it was in the 80's. Instead of different sales persons for different trade lanes, one sales person is now responsible for many trades, while covering a larger sales territory and customer base. And for some carriers, customer service support has been centralized away from local customers. This situation creates pressure for sales to generate more volumes from fewer customers, simply because sales cannot service the customer accounts. As a result, carriers pursue the same large customers trying to secure the same chunks of business. And in many cases they secure the business by cutting prices more than they should have. The ripple effect of those decisions reverberates all the way to the bottom line.

At the same time, carriers bypass many, many small shippers because they do not have internal resources to handle these companies. One way to gain the business of SMEs without creating the manpower and organization to do it is by partnering with third-parties. Yes partnering. Not just view them as customers, but as partners to mutually penetrate and serve the SME market. Carriers have generally viewed forwarders in a love-hate view. As for shippers associations, they are not sure what to do about them. Love them when they have cargo in a soft market. Hate it when they compete against us. That Jekyll-Hyde view must end.

Carriers cannot ignore the SME market; it is good revenue per container business. Besides, they will have to recognize it. Large shippers can only do so much in terms of cargo and revenue. If carriers do not want to staff up to go after SME's, then they need to develop relationships with companies that do service this niche.

Not all third-parties compete for and want the small shipper. Large forwarders, with large overheads, do not want to use valuable resources for a work intensive segment of business. And working with entrepreneurs is very different than working with logistics executives; it requires a new perspective. That is where the partnership comes into play for the SME, for the third-party and the carrier to mutually work together. The end result for the carrier is more business and profitable business. A win-win by any definition.

3PL With the emphasis on SCM and with finding a way to gain the volumes of small-medium enterprises, the role of third-parties continues. Third-parties themselves-especially freight forwarders and NVO's-are being challenged with how to keep up with the demands of the trade and customers. Forwarders too, like carriers, struggle with the concept of supply chain management, with building customer-specific, tailored logistics programs and with moving away as a traditional, commodity freight service provider. Plus, there are many forwarders chasing cargo. How do they distinguish themselves from competitors? They are too many forwarders in a very highly fractured industry. Consolidation is inevitable.

It also opens up the shipper market to a new entity-the third-party logistics (3PL) and fourth-party logistics (4PL) provider. Third-party logistics and fourth-party logistics companies will assume a more important role. In many cases, they will become the customers for the steamship lines.

Third-party logistics companies provide a tailored, customer specific logistics service to shippers. The third-party can have its roots in trucking, warehousing, air freight, forwarding, and even ocean transport. 3PL is a growing market because it is profitable business. Where commodity freight services can generate a nominal return, 3PL can generate double-digit returns. Quite a contrast. It is also long term business, not subject to the vagaries of the annual bid process. Ocean carriers with a good strategic view see the 3PL market as one they want to enter.

3PL's generally are developed to develop profitable business while using the services of the parent company. That can hinder their ability to develop logistics solutions for all possible customers. Not all customers need logistics programs that include the services of the parent company for all or a significant part of the activity.

There are also 4PL's. In contrast, 4PL's develop solutions that are very tailored. 4PL's are not a part of an asset-based service provider, such as a trucking company. A 4PL will bring together whatever logistics and freight providers are needed to meet the needs of the customer and will then manage the operation, similar to what an in-house logistics department would do.

3PL and 4PL's will continue to grow and thrive. After all, it could be a multibillion dollar global market opportunity. Corporations will look at outsourcing of their logistics as a way to gain competitive advantage, realize it is not a core competency, reduce costs or whatever drives their decision. A third-party will be the customer.

Carriers must look at the 3PL/4PL market and decide whether they can compete in it. It has many of the same requirements as the supply chain management market. If carriers choose to compete, how will they? Will they develop their own 3PL division with the ability to market it over the core shipping business? Will they view the 3PL as an extension of their business or a competitor? Will they be able to work with 3PL's to develop cooperatively the programs needed by the 3PL or 4PL? This does not meaning quoting rates and negotiating volume contracts. It is a very focused business endeavor, but the size of it is huge and profitable.

E-COMMERCE This is THE "in" word in business. It's growth rate and future development is unfathomable. E-commerce is here for both B2B (business to business) and B2C (business to consumer). It redefines the traditional business model. Carriers must decide on how they will participate in the Internet. They have no option. They must have dynamic web sites, for booking, tracking, tracing, rates and much, much more. That is the minimum they must do.

They must also address the issue on how work with third-parties who deal in freight through the Internet. Be it an auction.com or an exchange, or a truly creative web/portal approach, carriers must have a way to deal with the issue, at the strategic and tactical levels.

The internet also opens up a new way of quickly handling information and managing business. Where EDI (electronic data interchange) never fulfilled its promise, the Internet will and has. XML and other tools are being developed for this. The web may be the tool and vehicle to really develop logistics effectiveness as it is meant to be. Any company who ignores the Internet should be in a unique business or be prepared for possible extinction.

OSRA The Ocean Shipping Reform Act (OSRA) will be a tool to carriers' future success and to developing away from being a commodity service provider. The potential of the law has not been realized yet. Traditional contracting has still been used, in markets where either the carrier or the shipper dominates. There has not been the collaborative contracting needed.

There is one key provision with OSRA-confidential contracting. It has already led to the demise of the conference system, with little weeping by shippers. Confidential contracting will be the vehicle that lets carriers move into supply chain management, into dealing with 3PL's and all the other events that are occurring. It is the way to move out from the past and those stifling ways of doing business. One-on-one dealings. Fantastic.

In conclusion, ocean shipping will change. The change has already begun. Supply chain management, customer size, 3PL's, E-commerce and OSRA will accelerate the changes. The Asia-US trade, because of the makeup of players in it, will be the trade that causes those changes to occur. Carriers have choices in how to deal with the changes. Ignoring them is the choice they should not make.