Tilting at FCL
Frustrated, cautious shippers use NVOs for more than just less-than-containerloads.
By Chris Gillis
Non-vessel-operating common carriers have dominated the handling and transport of less-than-containerloads for 30 years, but many of today's international shippers are now asking them to handle more freight, especially in the form of full boxes.
According to 2010 inbound-U.S. containerized freight volumes, provided to American Shipper by Minneapolis-based Zepol Corp., the NVO industry just managed to tip the balance of its gross TEUs toward full containerloads.
'From 2006 to 2009, Zepol's data shows that the majority of NVO shipments were LCL. However in 2010 we found that this shifted to FCL,' said Paul Rasmussen, the company's president and chief executive officer.
'The change is not significant, as the split has historically hovered around 52 percent/48 percent for LCL vs. FCL shipments,' he added. 'In 2010, this trend reversed to 49 percent/51 percent, which could signal a change in the way shippers are using NVOs within their supply chains.'
In specific, some major NVOs increased their LCL/FCL shipment ratios to FCL during the past year, including Danmar Lines, Phoenix International, Orient Express and UPS. 'These players helped push the overall ratio above 50 percent,' Rasmussen said.
Zepol's data is derived from bills of lading entered into U.S. Customs and Border Protection's Automated Manifest System. This information represents the TEU volume of house manifests entered by importers of waterborne containerized goods. Zepol estimates TEUs based on the best available information provided by Customs, Rasmussen said.
In Zepol's NVO data analysis for American Shipper, it excluded shipments noted as empty containers and freight remaining on board. NVOs are designated based on SCAC (Standard Carrier Alpha Code) as those not identified as vessel operating common carriers.
After the 1998 Ocean Shipping Reform Act took effect, many shippers took advantage of the legislation's confidential service contracting environment. It was not uncommon for liner carriers to accept contracts with volume commitments for as few as 25 containers.
|' Shippers should establish relationships with a handful of global and niche NVOs to serve
as backup if their contracted ocean carriers fail to perform or experience international
' Since NVOs are non-asset-based, shippers should know the level of shipment accountability and liability of these entities for their own protection against service failures.
' Shippers should provide regular feedback to NVOs on how they can improve their service offerings.
The inability of many shippers in late 2008 and early 2009 to sufficiently forecast where freight rates were headed, not to mention their own volume commitments, compelled many to become more open to the option of using NVOs.
On top of that, shippers became increasingly frustrated in early 2010 by what they viewed as deteriorating liner carrier customer service and the sudden lack of equipment and vessel space when freight volumes in Asia to North America rose. At the same time, service contract rates from the carriers were on the rise and shippers were repeatedly peppered with surcharges.
Through NVOs, shippers found themselves able to take advantage of the spot market for ocean transport rates and service. NVOs generally buy container space from numerous liner carriers in the form of service contracts and retail it back to shippers.
Timothy Brotzman, manager of international transport at Sparks, Md.-based McCormick & Co., said problems experienced in early 2010 with transpacific eastbound capacity and Chinese New Year compelled the spice shipper to use some NVOs to 'supplement' its FCL service requirements.
'LCL shipments are a rarity for us,' Brotzman said. 'We prefer to support long-term relationships with the major carriers to lock in costs as much as practicable.'
However, McCormick enlists NVO services for about 10 percent of its annual volumes. 'NVOs will be used to some degree for supplemental services and for shipper-routed cargo,' he said.
'I believe that NVOs are well positioned to gain market share, based on the flexibility of their service offerings,' Brotzman said. 'At a minimum, NVOs become the 'backup plan.' '
Denver-based Johns Manville ships about 75 percent of its 8,000 TEUs of international freight a year through NVOs. 'In my opinion, NVOs provide an efficiency that would be hard to replicate by the steamship lines unless they were to invest in substantial infrastructure improvements,' said David Fisher, the building supply company's global logistics leader. (In full disclosure, Fisher and Brotzman serve on American Shipper's editorial board, a representative industry group that advises the publication on content and issues of importance to shippers.)
Rasmussen said smaller shippers have tended to rely on NVOs more during the past five years. 'As these relationships have grown, these shippers are giving the NVOs bigger cargoes,' he said.
However, the NVOs' ability to garner more business from large shippers has its limits due to the nature of their shipment requirements.
'We employ NVOs to handle an estimated 3 percent of our total global volumes, and that will likely not grow beyond 5 percent given their inability to agree to certain commercial requirements that ocean carriers can agree to, beyond just fixed rates,' said the logistics manager for a large consumer products company, who asked not to be identified because he spoke outside normal corporate channels. 'Of course NVOs do not own the vessels and equipment, thus understandably they are not in a position to assume the liability we require in the case of service failures.'
According to Zepol, overall growth of NVO shipments in 2010 topped 36 percent after a poor 2009 for many providers. In comparison, total TEU volume increased about 16 percent from 2009.
In specific, cargo originating in Asia increased 38 percent, while Europe showed an increase of about 26 percent, and South and Central America volumes reached 19 percent. 'Asia drove much of the increases for the NVO market, but individual players in specific trade lanes bucked some of the trends,' Rasmussen said.
The Asian freight origin picture shows a fragmented market (about 67 percent of volume lies outside the top 10 NVOs). Some of the top NVOs in this trade lost market share in 2010 as others increased their volumes faster, Rasmussen said.
For example, Expeditors enjoyed a TEU market share of 8.3 percent in 2009, but that shrank to 7.2 percent even with growth of nearly 20 percent, he explained. On the opposite end, Phoenix International bumped up its share 0.2 percent by growing at a rate of about 48 percent.
The European trade to the United States remains dominated by Kuehne + Nagel's Blue Anchor Line with nearly 20 percent of all NVO shipments. Yet, Blue Anchor's overall market share reduced nearly 3 percent on growth of only 9 percent, while the rest of the market grew nearly 26 percent. Schenkerocean Ltd., along with FMS Lines and JAS Ocean Services, saw strong 2010 increases over the previous year. The top 25 NVOs in this market make up more than 78 percent of all TEU volume, Zepol reported.
Zepol's data for NVO shipments from South and Central America to the United States showed the weakest growth of the three mainline inbound U.S. trades at 19 percent. Among the top players, Blue Anchor slightly increased its overall market share while Danmar Lines saw a reduction from 8.5 percent in 2009 to about 7 percent in 2010 on weak growth. The top 25 NVOs in this market increased their shipment volumes faster than the smaller NVOs for this trade lane, as companies outside this listing averaged only 4.3 percent growth.
During the past two decades, the liner carriers have become increasingly dependent on the NVOs to put containers on their ships. Yet this was far from the case in the early 1980s when the fledgling NVO industry was making its presence felt in the market.
'NVOs have always been successful at LCL because they offered complete services and no ocean carrier could compete with the expensive on-dock unionized labor,' said Gary Ferrulli, principal of Chandler, Ariz.-based Global Logistics & Transport Consulting, who worked in the liner carrier industry for 28 years. 'They are now successful in FCL because MSC, CMA CGM and Hapag Lloyd give them more than 50 percent of their vessel space and fluctuate the rates based on the market, allowing the NVOs a high percent of margin to work with. Other carriers deal with them but not to that degree. Take 2009 when the VOCCs (vessel-operating common carriers) lost over $1 billion while the NVOs collectively made billions because of their favored positions with certain carriers.
'VOCCs have tried to compete with NVOs with their 'logistics' arms, but shippers realize it is just another division of the ocean carrier,' he added. 'NVOs have independence and can offer numerous sailings a week from southern China, let's say, and at different rates.'
Zepol's data indicates that Mediterranean Shipping Co. has ranked as the top VOCC for NVOs during the past four years, but it is only the second-biggest liner carrier to the United States. In addition, just over half of MSC's volume can be accounted for by NVOs. On the opposite end, Maersk Line is the top VOCC to the United States in 2010, but only about 27 percent of its volume is tied to NVOs.
'Nearly all VOCCs' total traffic grew in 2010, but some of them began to utilize NVOs more heavily than in the past including Hanjin, Hapag Lloyd, and Hyundai,' Rasmussen said.
'Some VOCCs have allowed these intermediaries to become a high profit making arm of the industry.' Ferrulli said. 'Yes, the VOCCs had a big rebound in 2010 and so did the NVOs ' not in the billions of dollars, but they risked no billions. The NVOs do perform for their money, but to me it depicts how some VOCCs haven't figured out how much money they are taking out of their own pockets, as well as those of their fellow owners, and literally giving it away to a market segment that is both a customer and competitor at the same time.'