Kuehne + Nagel chairman sees demand for premium container service

Chairman Gernandt believes some shippers would pay for more reliable transit times.    Karl Gernandt, the chairman of Kuehne + Nagel, said Monday there is need for more reliable for container shipping services with more reliable transit times.
   “Getting services up to at least 90 percent reliability, or at least multiple product offerings with one level providing 90 percent or better at an appropriate price would be a win-win for shippers and carriers,” said Gernandt in a keynote address at TPM, the transpacific maritime conference in Long Beach, Calif.
   “Shippers would get higher reliability that will bring down supply chain cost and carriers would get the financially appropriate rate given the service provided. These higher rates would need to support the added investment and cost required to reach the higher level of reliability,” he added. Switzerland-based Kuehne + Nagel is the largest forwarder and NVOCC in the world.
   Today, carrier schedule reliability ranges from 65-85 percent and “this is only the case in good years,” according to Gernandt.
   “There obviously is a problem when customers expect their cargo to move on time 90 percent of the time,” said Gernandt, noting this is the goal set by shippers with which his company does business.
   “This dissonance normally gets handled by adding time to the anticipated transit time, and as you know, time is money,” he said. “Shippers wind up with a supply chain that performs differently than they want and at a higher cost.”
   He said part of the reason why container services have poor reliability lies in the level of service carriers can justify given their ability to earn a return on the assets they have deployed.
   Gernandt said various studies have estimated that carriers have an unsubsidized cost of capital of 10-12 percent while carrier industry returns are less than 5 percent over the business cycle. The result of this disparity, he said, is a flow of about $10 billion annually from carriers and suppliers of capital to the users of ocean transportation services.
   “This system is not going to work for long. Essentially the users are paying a discounted price for discounted services,” Gernandt said. While this might make sense for some shippers, he said “modern supply chains require higher reliability and customers are asking for it.”
   Gernandt said carriers have done a great job of lowering costs by forming alliances and increasing ship size, spending billions of dollars to offer lower rates on discounted services rather than providing higher level service at undiscounted or premium rates.
   “It is time to offer a new solution, to be more flexible — to offer products discounted and enhanced. I’m not saying that the current level of service needs to end, but what I’m saying is current reliability arrangement seems to work for many customers, and much of the cargo that moves, but not all of them. There needs to be a higher service choices.”
   “Would the people who ultimately pay the bill, the BCOs (beneficial cargo owners) be willing to pay for more reliable service choice? I think they would.”
   In another session at TPM, Soren Skou, the chief executive officer of Maersk Line, was asked whether he saw scope for premium services.
   “A number of very big customers do talk about about willing to pay more for better quality service and I hope that we see attempts to establish that,” he said.
   He noted that Maersk had attempted to offer a premium service between Asia and Europe in 2011 called Daily Maersk with 95 percent on time delivery.
   “Our experience was that we were operationally able to deliver on our promises, but our experience was also that the customers, frankly, were not willing to pay for it and we had a lot of extra costs in delivering that level of reliability so we had change our strategy a bit,” he said.
   “Who knows, it would be good for the industry, if we could have differentiated service,” Skou added.
   “We are watching what is going on,” he said, pointing to Matson’s eastbound transpacific service that offers faster transit time for cargo moving from China to Long Beach.