Cambon: Carriers engaged in ‘value destruction’

   Shippers on the Asia-Europe trade lane should be ready for some sizable changes on their trade from March, as a new set of service alliances commences.
   Mediterranean Shipping Co. and CMA CGM, the world’s second and third larges container lines, have joined forces on the Asia-Northern Europe trade, as have members of the New World and Grand alliances. A third power group, composed of Evergreen Line and the CKYH Green Alliance members has also formed.

Cambon

   American Shipper spoke to Jean-Louis Cambon, chairman of the European Shippers Council’s Maritime Transport Council and head of the ocean management committee for tire manufacturer Michelin, about the formation of these larger alliances and what impact they may have on shippers.
   “The emergence of larger alliances is not surprising if one looks back at the history of the container shipping industry,” Cambon said. “In the 70s and 80s, individual lines which did not muster the required investment levels to grow often decided to group under joint marketing organizations – for example, ScanDutch on the Asia/Europe route.
   “Later, in order to deploy their individual marketing strategies, lines decided to operate in separate marketing schemes, which explains the strong development of slot-sharing and VSA (vessel sharing agreements) arrangements. In the 90s, global alliances naturally followed suit. All along, trade growth and the corresponding increase in the size of vessels in search of economies of scale were the core reasons for the forward push.”
   Cambon said the European Shippers Council has taken the approach that the trend of alliances and vessel sharing agreements is not one that will be going away anytime soon.
   “Whether we are concerned or not, it appears to be in line with the path taken in other industries as well,” Cambon said. “Therefore, clearly, for shippers it is not a matter of opposing what looks to be a compelling trend, but rather be vigilant on what could possibly lead to infringement of normal rules of business conduct.”
   When asked whether shippers should be concerned about a reduction in possible service choices from the joining of several large lines and alliances, Cambon agreed, but said another problem is the disruption to shipper supply chains caused by consistent service rotation and deployment changes.
   “When companies merge tonnage coming from different/individual services in order to create a joint service, there is a reduction in choice for shippers – the opposite of what we have been promoting for many years,” Cambon said. “Sudden service changes also bring about instability in calling patterns, sometimes with no or, at best, only short notice, which are strongly affecting shippers’ tense supply chains and are a factor of cost overruns.
   “Also, evidently, it is much easier for one newly-formed group to adjust capacity of their pooled tonnage than for the two hitherto separate companies. The conditions under which adjustments take place deserve close attention. Trade has to flow. Restraining capacity below trade demand or delaying reactivation in order to push rates up is counterproductive for international trade.”
   Cambon did point out the positive development of the “current realignments,” which he said are in “in response to the industry leader having decided to line up very efficient ships on the Asia-Europe route. Taking up the challenge for the other carriers necessarily means increased focalization on control of unit costs, in order to minimize efficiency gaps.
   “In a way, we are now witnessing the change of mentality that the end of conferences heralded, from a frame of mind where the only objective was to charge the highest possible rates – coined as ‘what the market can bear’ – so that the least efficient carrier, without any specific encouragement to improve, could still make a profit, to an environment where focus moves to cost reductions and improved service quality, an agenda set by shippers.”
   Cambon noted that the planned rate increases for March are remarkably similar between lines. In recent years, he has been an outspoken proponent of carriers differentiating themselves in terms of service and price.
   “Notwithstanding the self-inflicted dire situation in which the carriers are, it is very remarkable that the date of March 1st (has been) so often adopted by most of them with a largely similar quantum of increase,” he said. “It is all the more peculiar that, very rarely in the past has a GRI been successful at such a date, so shortly after Chinese New Year, and taking now into account the background of a depressed European economy.”
   When asked whether it was fair for lines to seek such large increases in one go when rates have hovered at such low levels for the past year, Cambon said the question should be looked at differently.
   “Is there a logic in the herd mentality that pushed a number of carriers in chasing market share, often pricing below shippers’ target levels, then having to ask for unreasonable increases in one go?” Cambon said. “No. Unfortunately, not all old practices have disappeared yet. In a zero sum game, going for market share always brings depressed revenue levels for largely unchanged market positions at the end of the game. It’s called value destruction, achieved by the modern version of ‘fighting ships,’ and is detrimental to both carriers and shippers. When will the lesson be learned?” – Eric Johnson