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June 09, 2014

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BENEATH THE SURFACE THE JOURNAL OF COMMERCE 27 Gary Ferrulli DESTINATION UNKNOWN S E V E R A L ITE M S C AU G HT my at- tention during the past month regarding the direction of the con- tainer shipping industry. Some of the signals are becoming almost too clearly understandable, and some of them, well, point to something all too familiar when dealing with this industry: a mess with one of several possible outcomes. Let's start with the ongoing mess regarding chassis. As most carriers try to extricate themselves from pro- viding chassis after some 55 years of doing so in the U.S., we see many side effects. Going to one place to pick up or drop off chassis and another place to pick up or drop off containers is about as inefficient as you can get. I recall customers and truckers com- plaining 15 or 20 years ago about having to do that all within the con- fines of a terminal. Now it may be 5 minutes or more than an hour away from that terminal. The reality is that this would have happened regardless of who owned the chassis, because there simply isn't enough room in ports and terminals for the process cre - ated by Malcom McLean and his truck-operating people five-plus decades ago. But the other pieces are like bro- ken glass. Not all carriers are leaving the chassis-provision business, and some consider it a competitive advantage. Some are geographically selective in exiting the chassis busi- ness. And then there are the favored customers who, in their service con- tracts, get chassis provided for free or, at worst, at a negotiated lower cost. The point is that chassis are like all other matter in ocean transport: negotiable, but to a select few. Unlike McDonald's, where a Big Mac is the same wherever you go, services pro- vided by ocean carriers are anything but uniform, and that leads to much of the chaos we see today at termi- nals and inland points when it comes to first- and last-mile operations. Is that much different from any other industry? I'd say no, it's simi- lar to many other industries where provision of products and services is a one-on-one situation: Customers negotiate the best deal they can. The problem is that the carriers provided chassis in the U.S. for more than 50 years, and it takes time for change to settle into a new norm — whatever that new norm is. Still to be defined is who the pri- mary providers of chassis will be, the truckers like almost everywhere else in the world or third parties such as container-leasing companies or even entrepreneurs who develop another business model? Stand by, but don't hold your breath, because it will be a mess for a few more years. Next a re the ocea n ca rrier financials reported during the past month. If you were a financial ana- lyst with no understanding of the industry and saw the reports, you'd assume that several of these entities aren't long for this world, because they're apparently so far removed from being competitive in terms of revenue and profitability. First quarter results and fore- casts for the remainder of the year simply reinforced the notion that emerged in last year's reports that some carriers are truly pulling away from the rest of the industry. Are we finally getting to the point where there will be consolidation? It's become apparent that size matters, that economies of scale matter, that fuel savings from con- siderably larger vessels matter, that having more larger vessels is far more economic than having more smaller vessels. That Maersk Line turned to them eight years ago and is continuing down that path has cre- ated a chasm that will take time and a lot of money for others to catch up. In the interim, more chaos similar to the situation with chassis in the U.S. will occur, except this will be on a global level and not confined to the U.S. Maybe a thinning of the herd is needed, unless you like chaos and the opportunities that presents. And opportunities are there, but history says they are there for the few, those with enough volume to be able to influence decisions. Cargo owners used to com- pla in bit terly about not being treated equally, pointing to lower rates being available from another market source and demanding competitiveness. Now it's worse. Rates aren't competitive with other cargo interests in the same markets. The big-volume cargo movers have a significant advantage over even medium-sized shippers, and the small guy, well, good luck. Yet some of the medium-sized and smaller shippers are still there, making you wonder if the freight costs ever meant that much. JOC Gary Ferrulli, a 40-year shipping industry veteran, is president of Global Logistics and Transport Consulting in Chandler, Arizona. Contact him at Unlike McDonald's, where a Big Mac is the same wherever you go, services provided by ocean carriers are anything but uniform.

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