Price, port coverage and transit times are traditionally the primary determinants in choosing a container carrier or service loop, but with vessels stopping at fewer ports and sailing slower than ever before, it’s fair to wonder if this is still the case.
Whether you’re talking about third-party logistics services providers or carriers, one thing that comes up regularly in the great rate debate is differentiation of services.
3PLs have evolved their own set of differentiators, namely technology, flexibility, scalability and in some cases white-glove services. But ocean carriers often seem to be moving in the opposite direction, with almost all Asia-Europe and transpacific cargo moving on alliance vessels that, due to their size and efficiency, stop at fewer ports and sail slower than ever before.
Just to be clear, ocean carriers still maintain individual pricing for alliance services to remain in compliance with anti-cartel regulations. Logically speaking, however, if several companies are offering roughly the same product in terms of capacity, ports served and transit time, in the same highly competitive market, their prices are naturally going to be very similar.
Other factors have contributed to this trend too, like added transparency in pricing that has come from composite spot rate indexes like the Shanghai Containerized Freight Index and the Ningbo Container Index, as well as anonymous ocean procurement platforms like Xeneta that publish aggregate contract rates.
Leaving aside the question of whether freight rates are headed toward true commoditization (for an in-depth discussion of this topic, see the American Shipper July 2016 cover story “Is Container Shipping a Commodity,” pgs. 28-32), the more pressing question then becomes: what are the factors still within the control of the carriers that justify a higher, or lower, rate for a given container?
Traditionally, the primary determinants for a shipper choosing a given container carrier or service loop are price, port coverage and transit times. Lesser factors include carrier “brand” value, built on reputation as well as previous interactions with the shipper, and customer service related functions like status updates and cargo tracking and visibility.
The adjacent chart, which utilizes data from BlueWater Reporting’s Historical Transit Time report, compares the average inbound and outbound transit times between Shanghai and Los Angeles and Long Beach, the busiest ports in Asia and North America, respectively, on a quarterly basis since the end of 2008.
Source: BlueWater Reporting
In early 2009, average import and export transit times were considerably lower than today. Average import transit time on services with direct connections from Shanghai to one of the twin Southern California ports was 13.57 days, nearly 2 days faster than today’s average of 15.57 days. Exports haven’t fared any better, with average time increasing from 19.23 days at the end of 2008 to 23.28 days as of Aug. 31, 2016. In addition, carriers are offering fewer service options between Shanghai and L.A./Long Beach than in years past – just 18 total strings as opposed to 22 loops as of Jan. 1, 2009.
It’s tempting to assume that with fewer service options and increased average transit times, we could dispense with the notion that service speed can rightly be considered a differentiator in rate negotiations, but it turns out this may not be entirely accurate either.
Fewer services, the logic goes, should translate into fewer options for shippers to choose from in terms of sailing time, but in actuality, the disparity between the slowest offered time and the fastest has grown quite a bit during the period examined. At the end of 2008, the fastest available sailing time from Shanghai to L.A./Long Beach was 11 days and the slowest was 15 days, the shipper only had a four-day disparity from which to choose. As of Aug. 31, 2016, however, the fastest available eastbound transit was actually faster than in 2009 at 10 days, but the slowest was 27 days, leaving a disparity of 17 days and resulting in a much higher average.
On the westbound leg from L.A./Long Beach to Shanghai, a similar pattern has emerged. The fastest transit remained the same at 14 days, while the slowest increased from 28 days in 2009 to 30 days in 2016, increasing the disparity from 14 days to 16 days in the process.
It’s difficult to imagine ocean freight ever reaching “true” commoditization – i.e. shipping one container being the same price regardless of the contents, carrier or cargo owner – but it’s also true that there are some signs the industry is closer to this than ever before. If carriers wish to hold on to whatever pricing power they have left in a market that is suffering from an extreme imbalance of supply and demand, they would do well to remember the service differentiators that helped them to win market share in the first place. And in the case of transit times, at the very least, it seems they may already be doing just that.