Is the emperor naked on that horse? Transportation policies and investment that helps manufacturers. Correction.
Is the emperor naked on that horse?
To accommodate the ultra-large container vessels (ULCVs), ports are becoming indebted for billions of dollars to dredge and build infrastructure. That debt is to be serviced by payments from terminal operators committed to long-term leases paid for by carriers whose mega-ships require that infrastructure. But the development cost and the ongoing capex/opex must be paid from revenues generated by an unstable and unpredictable revenue base—commodity market freight rates. The result is meager returns for carriers, and enormous debt for them as well as the ports and terminals they need. Also, supply chain pipelines full of cargo are being stretched beyond their limits, resulting in high frustration levels and enormous cost to shippers. International goods movement is resting on a very shaky foundation.
The downward pressure on rates is said to be caused by overcapacity. But it is a misaligned overcapacity in the trade lanes to the few ports at which ULCVs can call because of their draft and size. Proponents of the ULCVs attempt to rectify the misaligned overcapacity problem with alliances. But alliances create service problems for shippers and have not proven to avoid downward pressure on freight rates pressed on carriers by their customers. The ULCV business model also assumes that the ships will carry at or near capacity since their raison d’etre is the “economies of scale” created by the ships and the alliances. This model is premised on the assumption that shippers are either content to live in this house of cards or that there will be no alternative to this tangle of jury-rigged solutions.
From the cargo’s perspective, shippers’ “purchasing” departments continue to focus on pushing freight rates down even further as if that was the only path to cost savings for their companies. To get those savings, most shippers’ purchasing departments blindly accept carriers’ boilerplate service contracts which incorporate bill of lading terms that include the magic words—“not liable for delay or loss of market.” Those words mean that there is no contractual obligation on the carriers to get goods to destination on time, even if the service contract contains key performance indicators (KPIs) which appear to promise otherwise.
The KPIs are an illusion, because they are not applicable to door-to-door service and, as in most cases these days, if the bill of lading prevails over the service contract (read that in your carrier-drafted service contract and then ask your carrier rep to change it), the only means of enforcing KPIs is to move to another carrier promising better ones. But since the carriers are operating in alliances, it is likely that a move to another carrier would just have the same result. Thus, because of their immunity to shippers from delay and loss of market, carriers can slow steam, congest terminals, stack boxes to heaven, or do whatever else is needed to reduce their costs.
The door-to-door, just-in-time business model is lost in the wake of the ULCVs. The result is stretching shippers’ supply chains, removing predictability and stability from shippers’ planning, and increasing shippers’ inventory investment. It is this problem that should be the major consideration for shippers, not just the freight rate.
Although the inventory cost stuck in each shipper’s supply chain pipeline needs to be valued in accordance with its own business practices, a lesson learned from 40 years observing and consulting to manufacturing, retail and their insurers is that, when supply chain pipelines stretch, the inventory investment in them increases. Conversely, when supply chains are shortened, even by a few percentage points, substantial cash is squeezed out of the pipeline to the bottom line. More important, the dollars squeezed from a shortened supply chain pipeline far exceed the comparative pennies saved by chasing lower freight rates. But without a different operating paradigm with which to move cargo by sea, shippers are forced to tolerate the ULCV business model imposed on them and adapt to it.
Are shippers actually content to subject their cargo to this confused, unstable and unpredictable house of cards just to get a lower freight rate? Do they have blinders on and can’t see the overall impact to their companies of pipelines stretched by the mega-ships? Or is it just that there appears to be no alternative, so the carriers continue to be the tail wagging their customers’ dog?
The ULCV business model is the culmination of this madness. It began when the Ocean Shipping Reform Act was lobbied into existence and created a purely competitive rate structure that culminated in a business model in which “just-in-time,” “door-to-door” service was abandoned in favor of the “dock-to-dock” ULCV business model with all its faults for both carriers, shippers and the taxpayers who ultimately pay for the infrastructure.
Shippers have been led to believe there are no alternatives to the ULCV business model. In fact, SeaHorse Shipping is developing such an alternative which is focused on solving the shippers’ problems by providing cost stability, dependability, predictability of service, and a sensible method of shrinking the supply chain pipeline by avoiding the complications of the ULCV business model. But it is not a solution created within the box in which the ULCV was invented and their operators now seem to be trapped.
Somebody really needs to speak to the emperor about his choice of clothes.
Maritime Law Association of the United States,
SeaHorse Shipping, Ltd.,
Transportation policies and investment that help manufacturers
In his column in the April edition (page 20) of American Shipper, Economist Walter Kemmsies suggests that U.S. transport policy favors imports over exports. This is an extremely important point that gets perennially overlooked. Anyone involved in ocean shipping knows U.S infrastructure is geared for the import trade, especially consumer goods. Meanwhile, the companies, workers, and farmers who produce the exports that generate wealth for America struggle to get their goods to U.S. ports for overseas shipment. Policymakers seem to be unconcerned or unaware of the issue.
Today, trade policy is under the microscope more than ever. I hope Washington continues to foster an open system of international commerce, but it will not help the American competitiveness in the marketplace without an efficient logistics system to get our goods to market. Washington must fix this situation with more resources and a comprehensive policy.
Late last year, Congress provided new tools in the FAST Act for improving freight and port infrastructure. The Department of Transportation likely is receiving more than a thousand applications for highway- and freight-related project funding. We may see in the awarded projects how U.S. exports are considered in the coming decisions. In recent years, billions have been invested in channel-deepening, container terminals, intermodal corridors and terminals, inland ports, distribution centers, highway projects, and so on. The export trade may make use of some of this, of course, but how much have these investments actually benefited exporters? To what extent are exports considered in planning such investments? Not much in my view.
Take the case of the Great Lakes and St. Lawrence Seaway—my neck of the woods. This magnificent navigation system allows oceangoing shipping 2,300 miles into one of the most productive economic regions in the world. If the eight states and two Canadian provinces bordering the Great Lakes were a country, it would be the third largest economy in the world with GDP exceeding $5.5 trillion. Manufactured goods and agricultural and natural resource commodities from this region literally built much of America and continue to feed the world.
William D. Friedman
President and CEO,
Port of Cleveland,
The April feature story “U.S. booms for DHL Express” (pages 32-36) misspelled the name of Mike Parra, the CEO of DHL Express Americas.