Trans-Pacific Contract Bidding Advice in a Sea of Unknowns
Chas Deller, Shipping Commentator | Nov 21, 2016 10:55AM EST
Published today in Journal of Commerce:
To quote the Humphrey Bogart and Lauren Bacall masterpiece from 1944, “To Have and Have Not,” ocean carriers entering the preliminary stages to this year’s trans-Pacific eastbound contracts have some fundamentally far reaching decisions to make in their upcoming marketing and pricing strategies. This coming season is unlike any other, in as much as never before have we seen so many alliance changes, such high levels of ocean carrier financial uncertainty, and so many unanswered questions about how fast the new President-elect Donald Trump will inject fear into the Trans-Pacific Partnership process, indeed “how little we know.”
For these are not just the same old contract negotiation sessions; this season is about the perception of ocean carriers’ desire for profitable growth and their willingness to force home the advantage of less competition.
Do they “collectively” say to beneficial cargo owners “well you saw what happened to Hanjin Shipping?” If another one goes down then not only will you have even less choice, the price will skyrocket, so let’s lock up your deal as soon as possible so that you Mr. BCO are not adversely impacted by future events.” This begs the question: “If I don’t know when your ships are sailing or arriving and who is the underlying carrier how can I make the right long-term decision now, without all the facts?”
The answer for BCOs is “Don’t blink.” That is simple to say, but we have to remind ourselves that market share is now even more important for ocean carriers than ever before. Back to the 1944 classic, “To Have and Have Not” is their heart-stopping decision. Do they run the risk of pricing themselves out of the trans-Pacific eastbound market share sweepstakes or do they grab as much as they can now, when all around us, uncertainty prevails.
So let’s step back and look at “how little we know” at a time when BCO supply chain planners are looking for answers from their logistics teams and providers regarding “what does all this mean to us guys and what’s in it for me?”
Are Mediterranean Shipping Co. and Maersk Line really interested in allowing Hyundai Merchant Marine to share their leadership game, and if so when will we know?
Will NYK Line take the leadership role in the “J carrier partnership,” and how will all three overcome and then successfully market their individual identities as a “collective”?
How will the new multifaceted and multicultural Ocean Alliance carriers differentiate themselves? China Cosco Shipping, OOCL, CMA-CGM, and Evergreen Line, albeit the first to announce scheduling, were first to the punch so will this give them a lead over the rest of the pack?
Will Hapag-Lloyd’s well-known conservative business approach lead to a collective marketing failure for THE Alliance, and will they ever invite fellow German carrier Hamburg Sud into their house in order to boost capacity lost by Hanjin’s financial failure and ultimate departure?
What about the “outsiders?” Will they remain independent or become new bedfellows to one of the three Alliances, albeit in a ‘niche’ capacity? How much will all this cost me as a BCO?
Once upon a time it was relatively easy for BCO’s to plot and plan their trans-Pacific eastbound carrier selection based on two primary scenarios: service and cost. But no longer: a year of historically low ocean rates; a year when three primary trans-Pacific eastbound carriers — China Shipping, APL and Hanjin — departed while a fourth, HMM, still as of this writing does not have a home.
We are now “in the playoffs,” a time when major BCO’s are finalizing their calendars, looking out at a future shipping market and bid season that says “sorry, don’t have a sailing schedule yet, don’t know who is running the show and, oh by the way, we may be looking at a 40 percent increase over last year’s rates.”
Some unanswered questions right now:
- How will ocean carriers market and then price their service differentiators? Will we see another year of low ocean rates followed by even more service disruption?
- When will ocean carriers publish their sailing schedules, so we can all fathom the impact on transits and routing after a chaotic last three months?
- How am I as a logistics director going to explain to the CEO, the chief financial officer, and my merchandisers that I am planning my trans-Pacific eastbound bid process, but I am not even sure who to invite to the party or what the outcome is likely to be?
Remember, the only two reasons to go to bid are to improve service and lower cost
If, at the outset of the race, you cannot see the winning post or even know the course directions then, do not bid. Extend what deals you have today, if you can, until all of the fundamentals are known, but do not blink, ocean carriers have to decide to have and have not, in other words, do I take the business at another low rate and get the volume, or do I create delay and uncertainty until I know what everyone else is doing, in other words a well known follow the leader strategy that saw ocean rates plummet and record setting losses for the industry.
One thing is very certain, the United States will soon have a new president, one who has already fired a warning shot across the bows of the Asian nations. Thus, “beware the Ides of March, a March 15 deadline for all to fall into place for supply chain planners. Let the games begin!”
Chas Deller, CEO of 10XOCEANSOLUTIONS, provides strategic advice and analytical insight to BCOs in their ocean contract process.
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