Supply Chain Matters has brought previous attention to a significant trend occurring in global transportation. Large numbers of manufacturers and service providers have placed a greater focus on transportation cost efficiencies and/or flexibilities. That is good news for bottom line budgets but rather troubling news for global carriers or global logistics services providers who have invested in expensive capacity and infrastructure. Recent earnings report from FedEx, UPS, Ceva Logistics and other global transportation providers, to name just a few, reflect this building shift within the industry. More sophisticated planning has allowed global supply chains to not rely on priority shipping modes but rather rely on non-premium or multi-modal surface transportation options. Erosion in global transportation rates has in-turn provided global shippers’ added flexibilities in the modes they elect to move goods to consuming markets.
One of the most time-sensitive industries is that of fresh-cut flowers. The Wall Street Journal recently reported that even this $14 billion industry has responded to increased premium air freight costs. In essence, the floral industry is responding to cost conscious retailers who want to reduce the input costs for flowers. A spokesperson for Netherlands based FloraHolland, the world’s largest floral wholesaler predicts that upwards of 30 to 40 percent of floral shipments from Latin America, along with 20 percent of shipments from Africa to Europe could be routed by ocean container in the next five years. That is a rather significant shift emanating from a stalwart industry that had total reliance on global air freight.
According to the WSJ, improvements in chilling and container monitoring technologies have prompted this building shift toward ocean shipping modes, particularly for imports to Europe which is a rather large market. Industry sources were cited as indicating that certain roses, carnations and other floral varieties do not suffer ill effects from sea voyages provided temperature environment is consistently maintained.
Transportation professionals are fully aware that ocean container carriers are making big and rather expensive bets in bringing a new generation of larger, more efficient mega-ships into service during the next five years. Today, there is far too much ocean container capacity chasing lowered volumes. Industry leader Maersk has again downgraded its outlook for global trade while the industry itself endures its 15th consecutive week of declining market shipping rates. Maersk now forecasts global container demand to grow just 2-4 percent in 2013 vs. a prior forecast of 4-5 percent in February. While newer ships will address needs for more efficiency and flexibility, the industry itself is in a Darwinian struggle as to which players can financially survive the transition. The Financial Times recently reported that a fifth of global container capacity has now been idled worldwide.
Global multi-modal transportation and logistics providers are obviously noting the building momentums in this modal shift and will invariable adjust their business strategies in the coming months. However, the biggest question mark is how many existing ocean container carriers, suffering building economic loses from the current gross condition of excess capacity, will survive to serve a different global transportation landscape several years from today.
There are other industry shifts to cite as examples.
Today’s Wall Street Journal notes that the proposed $2 billion Freedom pipeline project that is proposed to ship refined oil products from the lucrative oil field of Texas to California based refiners has failed to gain the interest levels of the major oil refiners in that region. Instead, they are relying on existing tank car shipments via rail lines to feed fuel hungry west coast markets. According to the Association of American Railroads, rail carloads of oil nearly tripled from 2011 to 2012. A recent boom has also come from new sources of crude in the U. S. Northern Plains and Appalachian regions that now increasingly rely on rail tank car movements to core refining distribution points. According to WSJ’s reporting, refiners are relying on rail shipments because of the flexibilities it provides in allowing firms to access crude supplies from different geographic regions at different prices, a flexibility not offered in a fixed pipeline.
This week, global 3PL CEVA Logistics, which provides logistics services to service sensitive consumer, healthcare, pharmaceutical and major high tech markets, reported a 6 percent decrease in earnings citing an overall soft global logistics markets, under performing contracts and impacts of business switching to ocean transport. CEVA , an asset light 3PL, has already taken steps to re-capitalize its balance sheet and raise new capital and has taken actions to offload some remaining fixed costs. At this week’s Smarter Commerce Summit, IBM announced a four year contract with CEVA to utilize the cloud-based IBM Sterling Commerce B2B platform and integration services for its customers. At the time of its re-capitalization efforts in April, L.M. Schlanger, CEVA CEO interviewed with Logistics Management and was quoted: “… customers are demanding more transparency and more visibility and more traceability and control of their supply chains at any given point in time.” He alsopointed to increased internal IT investments and applications to meet the increased needs of customers.
Thus, multiple shifting forces are impacting global transportation. The current economic crisis that has severely impacted Eurozone markets, and the building momentum toward nearshoring occurring in some industries are impacting current shipping volumes and rates. Longer term, more sophisticated shippers with better planning capabilities and leveraged use of advanced technology have discovered means to rely on more economical or more flexible modes of transport. That is the long-term trend.
Insightful industry officials are now or should be connecting the dots. Investing in appropriate technologies and services our beginning to yield savings in a cost area that has begged attention for many years. At the same time, carriers and logistics providers that have to invest in rather expensive assets and global transportation capacity are making their bets on where the long-term industry trends end up.
The takeaway for procurement, supply chain and product management teams are to not at all assume business-as-usual in short and longer-term transportation strategy and contracting. Do your homework, stay informed of continuing industry shifts and implications. Select your partners wisely, those that can fulfill both today’s and tomorrow’s business needs. Teams should also be evaluating investments in more synchronized fulfillment execution across the end-to-end supply chain including the journey toward supply chain control tower.
We are here to help you sort out these trends and implications.
There is unfortunately another update to the condition of severe overcapacity and the resulting market and shipper dynamics involving the ocean container transport industry.
Industry leader AP Moller-Maersk has according to a recent Wall Street Journal report, kicked off a new “arms race” in ordering 20 new triple-E container vessels valued at $3.8 billion. These ships can carry upwards of 20,000 20 foot containers and according to statements from Maersk, will consume 35 percent less fuel consumption per container than the current standard 13,000 container vessels scheduled for delivery to other shipping lines.
Of course, one has to wonder about the marvelous math of spreading savings across roughly 54 percent of additional capacity at a standard list price contract shipping rate. In that light, the WSJ reported that the decline in ocean container freight rates in the past six months was three times as fast as in 2011 when a previous price war broke out among the leading carriers. All but seven of the largest shipping lines have lost money in 2012 according to a reported analysis by Alphaliner. The WSJ noted that last month, Maersk CEO Soren Skou warned that the industry is on the verge of another price war unless excess vessels are not taken out of service, especially on the Europe-Asia corridor. Freight rates in that sector alone dropped by 6.5 percent according to the latest Shanghai Containerized Freight Index.
The industry paradox of big-bucks chicken now enters yet another chapter. Industry leader Maersk obviously wants to continue to initiate an industry advantage by investing in even larger ships. This will obviously precipitate other responses from existing lines, and the spiral of gross overcapacity could carry itself way into the future unless the industry comes to its financial and operational senses. More mega-ships equates to needs for even larger and more efficient port facilities. In the past six months, labor disputes involving U.S. west and east coast ports, as well as the most recent Port of Hong Kong, centered on, among the usual wage issues, calls for increased port efficiency and automation needs.
As freight rates continue to soften in 2013, container carriers will incur more severe financial challenges. Adding new long-term financial commitments for even larger ships adds more burdens not only for the shipping industry but for global logistics infrastructure.
Something has to give, and when it does, it will not at all be attractive for the industry. Large global shippers and global product sourcing professionals can currently bask in the current eroded freight rate environment but had better be aware of the longer-term implications that will invariably occur.
©2013 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters Blog. All rights reserved.
Supply Chain Matters is pleased to report an update on our ongoing alert commentaries regarding the labor dispute occurring at the Port of Hong Kong.
Various media and other reports confirm that a settlement has now been reached by the parties involved. After 40 days of protest, striking dockworkers have voted to accept a 9.8 percent pay hike after four labor contractors agreed to honor the proposed pay hike. Contractors also agreed to provide workers work breaks for meals and use of bathroom facilities, which was not a previous practice.
What was also significant was that the strikers appeared to have garnered broad public support, calling into question the dominance of the city’s business elite. In a legal challenge, striking workers upheld their rights to peacefully picket the corporate offices of the port operator, Hutchison Whampoa. The operator was reported as welcoming the decision and stating that it respected the freedom of speech and peaceful protest.
According to a news report from The Standard in China, port operations should return to normal sometime next week. Global shippers and ocean transportation providers apparently heeded the alerts from this site and others, and began diverting cargos to other Chinese ports, thus the overall impact of the port disruption may have be controlled. None the less and similar to what occurred in contract manufacturing facilities in mainland China, this event will stand as being a rather significant milestone in terms of dock workers standing-up to perceived conditions of low pay and sub-standard working conditions. Many in the region were initially doubting that the work stoppage would hold and that workers would not stay united.
Last week, global transportation and services provider UPS reported its Q1-2013 earnings results and re-affirmed trends underway for at least six months or more. The results reflected both positive and concerning developments.
The company continues to benefit from the growth of B2C online shopping within the U.S… Ground based daily package volumes were up 4.4 percent leading to a 9 percent increase in operating profit for the U.S. segment. Senior management pointed to increased support of both E-Commerce and Omni-channel commerce as the principle force of both revenue and profitability growth. In the earnings briefing, management noted 25 retailers moving to UPS Omni-channel support programs and further stated that 40 percent of current domestic package volumes stem from B2C package delivery. The company generated $1.4 billion in free cash flow and ended the quarter with $7.3 billion in cash as it continued to benefit from previous cost control and efficiency initiatives.
On the concern side, total operating profits remain somewhat flat. The company recorded $1.62 billion in adjusted operating profits for Q1-2013 primarily because of a gain related to its attempted acquisition of Europe based TNT which was terminated. Without this adjustment, operating profit was noted as $1.58 billion compared with $1.57 billion in the year ago quarter. Two challenging operating entities remain as the International and Supply Chain and Freight segments.
International, revenues were essentially flat from a year ago while operating profit and margin declined. Operating profit for the International segment actually declined by 13.7 percent overall. Similar to what rival FedEx reported in its recent quarter, Asia-Pacific freight tonnage and yield were both down resulting in a 9 percent decline in revenues in this area. The actual yield decline was 2.5 percent with management attributing this erosion to lighter packages and customer use of non-premium internal freight services. It was also acknowledged that Asia-Pacific schedule capacity has been reduced by 10 percent from a year ago. In the Q&A segment of the earnings briefing, there was an acknowledgement that the use of newer 777 freighter aircraft provides more belly capacity which is currently not being fully utilized in current Asia outbound routing. While UPS has been ramping up services for less-than-truckload ocean container transportation services, the growth of this new segment was not enough to offset the negative aspects of international air freight. Management also noted that Europe is essentially 2-3 years behind the U.S. in the wider scale adoption of online buying, thus hampering UPS E-commerce growth in that area.
Management characterized results for the Supply Chain and Freight segment as a “tough quarter” with growth of just 1 percent while profit declined by $23 million and margins declined by 102 basis points. UPS has been investing heavily in support for the healthcare logistics segment with new investments in advanced technology and logistics infrastructure, all of which continues to drag on profitability in this segment.
UPS additionally reduced its previous guidance on total revenues for the fiscal year, now forecasted to be low to single digit growth. The company however, maintained its guidance for earnings per share
A little over a month ago, Supply Chain Matters noted a radically changing international airfreight environment. Carriers can no longer rely on shippers opting for premium overnight delivery of international shipments, with perhaps the one exception of Apple or Samsung smartphones or electronic tablets that are short in supply. Shippers and supply chain planning teams have done their homework, not to mention that global sourcing changes continue. FedEx declared that it will aggressively move more lower-yielding traffic to lower cost networks. UPS has now declared that it will absorb more international freight onto its own aircraft, continue to adjust capacity downward, and provide more LTL ocean container service alternatives. All of the major air freight carriers remain reluctant to park complete airplanes, hoping that a competitor will be the first to blink on wholesale cutback. All continue to hope for a rebound in premium service needs, or the next great product launch that results in severely constrained supply.
There is therefore little doubt that the structural shifts in airfreight traffic are now confirmed, carrier bottom lines are being affected. A similar but more severe capacity overhang trend remains in ocean container transport out of Asia.
We again reiterate that for international shippers, procurement and product management teams, transportation and on-time fulfillment is going to get extremely challenging in the coming months. The ability to overnight shipments, compensate for delays in scheduling, or seize a market opportunity on a time sensitive basis are going to be constrained and expensive in cost, inventory and resources.
Supply Chain Matters provides yet another update to our previous original disruption alert regarding a labor strike that occurring in the port of Hong Kong, the third busiest ocean container port in the world. Our last update on April 12th, noted the effects at the second week of the labor disruption. This disruption is now approaching its fifth week but media reports indicate a changing but confusing picture.
First, striking crane operators have made some indications that they are willing to bend on the previous demand for up to a 23 percent wage increase. Keep in mind that current wage rates for operators currently average $5 per hour. The Hong Kong labor department has invited union representatives to sit down with renewed talks with port contractors tomorrow.
According to a recent published Bloomberg story, the chairmen of Hutchinson Port Holdings Trust, the principal operators of the port are indicating that the port is now operating at 90 percent capacity after additional temporary workers were hired. He declares that waiting times for ships have now dropped to an average of 20-25 hours, while Bloomberg reports that at least 100 ships have skipped calling on the port. Union representatives however take issue with statements that the labor stoppage is essentially over. Striking workers took part in a rally held at the residence of Hong Kong’s chief executive on Friday.
Transportation and shipping industry professionals are probably in the best position to actually assess what the real conditions at the port are at this point. We continue to urge procurement and chain chain planning teams to seek the latest information and continue to plan for some transport delays for goods coming from China. It would seem that this disruption is waning, but that remains to be seen as talks continue among both parties. We again encourage readers to share any additional information in the Comments section associated with this commentary.
The Wall Street Journal and other business media report that FedEx has been successful in securing a renewal of its multi-billion contract to provide domestic U.S. mail air service for the U.S. Postal Service. The contract which runs for an additional seven years is reported to be valued at $10.5 billion, and calls for FedEx to support Express and Priority mail services between U.S. airports. FedEx’s original contract was awarded in 2001.
In its reporting the WSJ indicated that rival United Parcel Service actively sought to secure this latest contract and that FedEx may have agreed to tougher terms to win the business given the current cost crisis consuming the U.S. Postal Service.
Supporting the U.S. postal program with air services is an important tool for FedEx to continue to efficiently operate its air freight assets and infrastructure. This is especially important given the current structural issues impacting the industry.
Supply Chain Matters has no doubt that this latest contract process was both dynamic and competitive.