Shipping multipliers

Shipping multipliers

Spiller

      If summer heat makes a cold shiver up your spine sound pleasant, read 'Who's (Not) Making Money' by Eric Johnson in the current American Shipper.
   Johnson observes every global container line lost huge sums in 2009. The top 15 public lines shed $11.4 billion and, if you add in private operators who do not publish results, the losses swell upwards to $15 billion to $20 billion (See chart
   From Johnson's figures we calculate that each 1 percent decrease in volume brought a corresponding 4.4 percent gross revenue loss (negative multiplier of 4.4), and a 49.4 percent decrease in net profit (negative multiplier of 49.4).
   That why losses were billions, not millions.
   Chris Gillis expressed some optimism in 'Full-steam to profitability'. Three years ago liner carrier executives were convinced 'freight volumes were on an unstoppable incline' and focused on raw capacity rather than revenue quality. Amidst 2009's financial rubble, most carriers seem to have taken difficult steps. Gillis wonders if there is 'a sign that liner carriers have started to 'run their business like a business,' where profits actually matter more than freight volumes.'
   In my opinion the current improvement in market volume will reverse significantly in the short to medium term. Carriers divesting non-core assets, selling shares and floating bonds suggests they, too, see more lean times ahead and are plumping up balance sheets to prepare.
   The world's precarious, overspent, debt-burdened financial situation can be blamed on a too politically convenient Keynesian multiplier theory, that we can spend our way back to prosperity, if only the government spends enough. Yogi Berra said, 'in theory there's no difference between theory and practice. In practice there is.'
   Bottom line: Cargo volumes westbound and eastbound from Asia will again decline. Throwing government money at people to encourage spending, both in Europe-United Kingdom and in the United States is ending so there'll be less money for shopping trips and therefore fewer containers of freight to import from Asia.
   Will falling volumes once again, as in 2009, cause an irrational scramble to fill excess ships and again cause a 4.4 negative multiplier for revenue and a 49.5 negative multiplier for net profits? Will global container line management remember a recent lesson, 'run their business like a business?'
   The Keynesian multiplier was thought magically to create $1.50 in positive growth for every $1 spent by the government. To take advantage, President G.W. Bush's administration approved a deficit stimulus of $168 billion and President Barack Obama's administration piled on additional deficit stimulus of $862 billion. Eighteen months later we've had no more growth than a statistical margin-of-error blip.
   Harvard professor Robert J. Barro's respected studies demolish the Keynesian multiplier theory. Rather than $1 of government spending yielding $1.50 of growth, it's actually a negative multiplier, yielding only 80 cents for every $1 spent.
   Conclusion: When government spends more, the country gets poorer. The poorer a country gets, the less the people have available to consume imports. White House Budget Director Peter Orszag just resigned in frustration at the absence of any plan to address America's massive and growing public debt.
   The Group of Eight meeting of major industrial countries in Toronto on June 26-27 showed a new era of government austerity ahead. Political bills are coming due and Europeans are resolving to swear off the fiscal sauce. President Obama is frantically searching pockets for yet another credit card to keep his bar tab open. His liberal coalition is running out of other people's money to spend.
   The 'austerity now' deficit hawks have won their point, that if you wait until the bond market hammers come slamming down, you have waited too long. Debt restructurings are enormously disruptive, economically and politically far more costly than current restraint, painful as that is.
   Carriers are figuring out they cannot count on future profits by simply adding fleet capacity. In the April A. P. Moller magazine Maersk Post Group Chief Executive Officer Nils Andersen said a large group of Safmarine customers said they preferred Safmarine to other carriers primarily because of better relationships with employees with long tenure. He used this as a reminder of the value of the human touch, spending time with customers even amidst a focus on cost and process.
   He communicated what is, in my view, the most essential and reliable positive shipping multiplier. An expenditure of $1 judiciously spent building and maintaining a relationship with a customer multiplies to more than $1 in revenue, a positive multiplier for net profit.
   The 'asset' of employee relationships with customers is built over time by customer-focused organizations. Flesh and blood 'assets' differentiate service in the eye of the customer and, if positive, add value. Differentiation transcends the need to take the pants down in front of the customer and cut $100 off the rate to 'maintain loyalty.' Positive differentiation moves the booking decision from the freight rate alone to the total relationship. The goal is to be the customer's clear choice when the price is similar or, often, when it's a bit higher.
   The relationship 'asset,' unlike ships, is not counted as a positive on the balance sheet. Instead it's negative on the profit-and-loss statement, a cost. Cutting the costs that underpin customer relationships is quick and easy, boosts the bottom line right away, and helps for a few quarters. Revenue per container takes the hit. Another 'me too' service sails the seas.
   Surely you can reduce the costs of maintaining customer relationships: restrict personnel attention to the top 20 percent 'elite' customers that generate 80 percent of the cargo, close smaller offices, and trim back the sales force. Non-elite customers are sent to impersonal, cost effective, remote call centers.
   However, sooner or later the non-elite vote with their feet, seek out a carrier whose personal touch convinces them they understand their cargo is business lifeblood. The 20 percent 'elite' customer base left to fill the ship is expert at hammering the lowest prices imaginable on long-term fixed service contracts.
   Both the shipping business and the economy are booby trapped with dangerous negative multipliers that accelerate profit deterioration on the way down. For stability control carriers can opt to emphasize personal attention to relationships with customers, which positively multiply net profit in both up and down markets.

Peter Spiller
president of the board of Florida Shipowners Group Inc.,
executive director, Caribbean Shipowners Association and Florida-Bahamas Shipowners & Operators Association,
president of Pedro Spiller Inc.
St. Augustine, Fla.
PedroSpiller@aol.com