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January 20 2020

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46 The Journal of Commerce | Januar y 20 2020 www.joc.com Trading Places Peter Tirschwell ON MARCH 5, 2001, then-CEO of Neptune Orient Lines Flemming Jacobs took the stage at the first TPM confer- ence with a direct message for shippers: the time had come for the promise of confidential shipper-carrier contracting allowed under the Ocean Shipping Reform Act (OSRA) approved two years earlier to be fulfilled. Value in these relationships needed to be unlocked, and the first step to doing that was to get beyond the annual contracting cycle, which runs from May to April, and what he described as shippers' "single-minded" focus on price. Just minutes into the first TPM keynote speech, the former Maersk partner bluntly said, "I'm going to give a wake up call to those who still get their kicks from yearly, or even more frequent, fights over freight rates with their ocean carriers, those who just cannot wait for the 1st of May to come around and who derive the greatest sat - isfaction from squeezing another $50 from the carriers, even though in the process they miss tons of opportunities in the total supply chain. "At the moment the majority of contracts are simply price agree- ments, not service contracts," he added. "Let's challenge that. Let's develop relationships and contracts that hold me responsible for my ser- vices. In return I will hold the shipper accountable for his commitment." At that point in time, the idea of one-on-one contracts in container shipping was still in its infancy, and the industry was still imagining what such a future could bring. A key ele- ment of OSRA law, which was signed in 1998 and took effect in early 1999, was the ability for shippers and car- riers to engage in confidential one-on- one contracts, as opposed to negoti- ating through a shipping conference. The law ushered in the end of the era of shipping conferences, dating to the late 1800s, and replaced them with discussion agreements, which also have since disappeared. Pushed heavily by the National Industrial Transportation League representing large shippers, the law further dereg- ulated ocean shipping beyond the previous major rewrite of US shipping law in 1984, which had taken the then-revolutionary step of allowing individual conference carriers to undercut conference-set rates. Twenty years later, as we prepare for the 20th anniversary of TPM, little of what Jacobs was talking about has come to pass. The 2000s were a period of breakneck, double-digit percentage international trade growth over several years as supply chains took root in China, and everyone was too busy to focus on the nuances of extracting value from ocean supply chains. Shipper-carrier relations went downhill from there, particularly when the financial crisis was followed by car - riers' withdrawal of massive amounts of capacity, which restored profitability in 2010 but at the expense of cus- tomer relationships and trust. Carriers retreated further into their own worlds by gutting customer service, perma- nently slowing down their fleets, and embarking on a mega-ship building spree, all of which negatively impacted customers' supply chains, while still failing to earn acceptable returns. Contracts today contain little of the innovation Jacobs was envision- ing. For example, there remains little in the way of mutual accountability, multiyear, or index-linked contracts. "From the beginning and to this day contracts with ocean carriers are all about rates and not about service. They do have service-related metrics in them like free time, but that is really just another form of rates," said Bill Rooney, vice president at Kuehne + Nagel and the former US president of the now-defunct Hanjin Shipping. It would be easy to say, therefore, that it was a lost 20 years, but that isn't entirely the case either, as the seeds for more significant change were indeed being planted. In his speech, Jacobs warned about the consequences of a singular focus on price in ocean ship- ping, which is that carriers would lack the ability to return profits to share- holders and be starved of investment. And that is exactly what happened. It was only so long that carriers could continue to report losses or inadequate profits before consolidation would naturally result. The ensuing waves of mergers, acquisitions, combinations, and the largest bankruptcy in industry history has resulted in the top five carriers controlling about 65 percent of global capacity, up from about 30 percent in 2001, according to industry analyst Alphaliner. The number of east- west carriers is half of what it was four years ago. It is that development — not ship - pers and carriers together determining ways to create value — that will take the industry into the future. With consolidation accompanied by all major carriers being part of mega-alliances, short-term capacity reductions, virtu- ally unimaginable in 2001, are allowing carriers to exercise newfound influence on rates. That has helped push up pricing in recent weeks on the major east-west trades and driven the share prices of carriers such as Maersk Line and Hapag Lloyd sharply higher over the past year as analysts see the market tilting in carriers' favor. In declining to challenge the block exemption for carrier alliances, the EU signaled that it will not stand in the way of carriers' new operating model. But consolidation also led carriers to begin investing anew, especially in digital services, and to begin to retool business models toward end-to-end logistics, as Maersk and CMA CGM have done. How much these forces will drive changes in the core shipper-carrier relationship is unclear. But as long as carriers continue to struggle financially, their search for a profitable model will continue, as Flemming said it would, and this will inevitably impact how they interact with shippers. JOC email: peter.tirschwell@ihsmarkit.com twitter: @petertirschwell Two decades in limbo "The majority of contracts are simply price agreements, not service contracts. Let's challenge that."

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