The saying goes that a rising tide lifts all boats; does the same apply to ocean contracts? The New York Shipping Exchange (NYSHEX) says yes. The startup is on a mission to solve inefficiencies that often sink container shipping relationships.
Containerized freight contracts have become major issues as nonperformance — on both sides of the contract — is plaguing ocean freight. No matter what’s written in ink, poorly drawn contracts have led to a broad understanding in the maritime industry that actions speak louder than words.
Amid growing waves of unaccountability and distrust, NYSHEX has charted a course for calmer waters by introducing a digital, two-way, committed contract solution for transoceanic trade.
A misalignment of terms and expectations often leaves shippers and carriers in what NYSHEX calls a “vicious cycle” — a regularly repeated event that costs the maritime industry $23 billion annually.
It begins when the terms of a contract are unclear, rendering no consequences for failure to deliver. This in turn leads to the carrier not meeting the expectations of the shipper. The carrier then cuts the shipper’s allocation after a backup carrier is chosen. NYSHEX Chief Executive Officer Gordon Downes explains that the culmination of these factors ends with an unfulfilled contract, dragging down both parties in the process.
“Let’s say that a carrier and shipper sign a contract for 5,000 twenty-foot equivalent units (TEUs) for the year,” Downes said. “Perhaps the shipper interprets it as, ‘I can ship 5,000 TEUs anytime I like over the next 12 months.’ However, the carrier walks away from the same meeting believing they just signed a contract for 5,000 TEUs, in which 100 TEUs will be shipped evenly for 52 straight weeks. Of course, neither of those things is true.”
The only way to break the cycle is by fixing the contract. Downes aspires for bookings to instead take place within a “virtuous cycle,” in which contract terms are clear, expectations are discussed and resolution paths are established — ultimately leading the carrier to properly allocate space and equipment, enjoy fair and fast exception management, benefit from fulfillment of contract and most important, increase the likelihood of a lasting relationship.
“At NYSHEX, we make it crystal clear exactly what the carriers and shippers are going to do,” Downes said.
So what are the benefits of using NYSHEX? For carriers, this includes improved vessel and network planning, freight revenue certainty and enhanced shipper relationships. Conversely, for shippers, one can expect enhanced carrier relationships, improved supply chain reliability and freight cost certainty, in which all-inclusive contract pricing is fixed for the duration of the contract. This provides shippers with peace of mind knowing that unforeseen costs won’t arise and affect the pricing of future customer quotes.
As an exchange, NYSHEX caters to the needs of its members. Downes adds that its key features, including clarity of terms, visibility of performance and exceptions resolution, can be provided in any format or framework that members use in their contracting process, whether it’s performed digitally in real time, offline and inputted after the fact, or a hybrid of the two.
NYSHEX’s next frontier is the retail shipper segment.
“Retail represents about 25% of all imports into the United States; it’s a large part of the market,” said Bryan Most, NYSHEX’s senior vice president of retail. “Retailers are discovering that those with a resilient, predictable supply chain are essentially the ones winning in today’s economy.”
“We’re actively talking to many new retail shippers about how NYSHEX — through technology and two-way, committed agreements — can provide the predictability that they so need in their networks,” Most said. “That’s been a really exciting development for NYSHEX.”
Downes told FreightWaves in October, “We started off with the U.S. agricultural sector and then expanded into recyclables and other segments on the westbound trade. Now that we’ve raised more capital, we can invest more in some of the more complicated [eastbound] segments, for example, retail. … In the past few years, we’ve started to build more and more technology around the needs of shippers. The next focus is the retail shipper segment, and we’ll be investing in a lot of technology to service that.”
NYSHEX continues to make a splash throughout the maritime industry, largely because of its workforce’s prior experience in navigating the ocean freight waters themselves. Downes credits NYSHEX’s leadership for collectively understanding the industry’s needs, especially the need to deliver guaranteed, reliable ocean contracts.
“One thing [at NYSHEX] that we all have in common is that we’ve all experienced firsthand the challenges with the old, traditional ways of doing things in the industry,” Downes said, explaining the dreadful effects of rolled cargo and blank sailings. “We all realize that it comes down to the same root cause: The way that carriers and shippers make their freight contracts is really, really outdated.”
Downes was drawn to NYSHEX after frustrating experiences on both sides of the contract. Enduring unfulfilled carrier contracts at Maersk as well as shipper woes firsthand with global brewer SABMiller led him to the realization that unreliable contracts negatively impact both shippers and carriers.
The reality is that maritime contracts are flimsy in nature and the terms aren’t always clear. Downes notes that the number of bookings that don’t go according to plan — depending on the time of year — range from 30%-50%, which he finds astonishing.
NYSHEX believes in accountability through visibility, achieving this through independent monitoring of carrier and shipper performance to each contract, providing details down to the container event level.
Members can view their contracts at any time as opposed to reviewing only quarterly or at the end of each agreement. According to Downes, NYSHEX contracts currently achieve a fulfillment rate of 99.3%.
“We’re providing contract visibility to give sort of a running total on the performance of each contract,” Downes said. “It allows members to take course-correcting action before reaching the end of the contract to avoid going off track.”
The marketplace is governed by participating carriers, beneficial cargo owners (BCOs) and non-vessel-operating common carriers (NVOCCs). NYSHEX states it protects the shipper-carrier relationship by investigating, resolving and settling any liquidated damages automatically.
Exceptions are flagged independently and handled according to the procedures spelled out in the Member Handbook. Through its impartial governance structure, the resolution is unbiased and fair as the company is not a party to the contract.
“If something happens that isn’t incorporated in the rules, then NYSHEX doesn’t unilaterally decide what happens. NYSHEX’s governance structure is made up of individuals from the industry that independently determine how these situations should be resolved,” Downes said. “All of this is overseen by the Federal Maritime Commission and there’s full transparency into how this works, so it provides fair outcomes when these things don’t go according to plan.”
Most suggests the COVID-19 pandemic has many shippers reconfiguring their strategies for 2021. He recommends starting the new year with new resolutions — eliminating contracting challenges altogether and achieving near-perfect predictability by becoming a NYSHEX member. “Going through the significant disruption [coronavirus], I think a lot of shippers have realized that they’ve absolutely got to do things differently in 2021.”
Downes added, “The volatility that the pandemic caused in the container shipping market really demonstrated to a lot of our members as well as potential members the value that NYSHEX provides in helping them manage these types of risks.”
NYSHEX’s carrier members span all three of the east-west container trade alliances, representing 60% of global ocean capacity. Current participants include CMA CGM, COSCO Shipping, HMM, Hapag-Lloyd, Maersk and Ocean Network Express (ONE).
“These are pretty exciting times for NYSHEX,” Most said. “We have a lot of members and prospective members that are excited about going a new way forward, and I think we have a unique value proposition to help them.”