Being in the middle of a transition means that the shipping industry is coping with multiple uncertainties on all sides. Both forwarders and shippers are concerned that the new large alliances might possibility disrupt their own supply chain, using their superior market share and infrastructure.
The 1st of April is penned in as the official transition date. At this point, the VSAs will be restructured. A large number of ports are involved in the process so it is unlikely that any forwarder or shipping is going to be completely unaffected by the events. As the rollout dates come into focus, those who estimate and model the process anticipate some problems.
The Hanjin Shipping bankruptcy demonstrated in the most brutal fashion that managing risk will remain a competitive advantage within the industry. Early planning is the key to avoiding some of these pitfalls in the future. That means that every actor within the sector has to develop a clear understanding of the services that they are offering as well as the impact of the upcoming strategic alliances. For example; at the moment there is an expectation of space shortages on both the Asian and North European routes.
That means that rates on the backhaul routes are going to rise. A case in point is CMA CGM, which recently announced its freight-all rates (FAK) in which a journey from Rotterdam to China costs $1400 per 20-foot equivalent unit (TEU) starting on the 16th of April. Just for perspective, the quoted figure is nearly $500 more expensive than the headhaul spot rate from Shanghai to North Europe. It would not be surprising if carriers started to ration cargo space.
Capacity management, manipulation might be a major threat
The mega alliances could potentially disrupt the supply chains and make life very difficult for shippers and forwarders. Vessel Sharing Agreements (VSAs) are the bedrock of industry operations and the changes on April 1st are momentous. About 420 port pairs on the Asia-Europe line are bound to be affected, let alone all the other ramifications. Ken Sine of Crane Worldwide Logistics anticipates frequent pullouts and repositioning. 17 weekly strings between Asia and North Europe are expected from The Ocean Alliance, THE Alliance, 2M Alliance and Hyundai Merchant Marine. This represents an increment of one string when compared to the current big four alliances of 2M, G6, CKYE, and O3.
Shippers’ Commitments are staying the same
Despite the changes in schedules, the same high standards of performance are expected of shippers. That means delivering on time, all the time. If it so happens that the carriers begin to shift vessels around in anticipation of the new alliances, then there could be a major shortage of space. Nevertheless, it is expected that freight lines will be reliable regardless of the changing operational models.
It is worth remembering that nearly 50% of the entire shipping industry’s capacity is in the hands of no more than four major carriers. That means that any disruption to the big 4 is likely to send shockwaves throughout the industry. Without adequate competition from the smaller carriers; there might be a number of problems such as the lack of product diversification, late port calls, mixed routine, networking bottlenecks and frequency issues. Jessica Zhang of Dow Chemical insists that the commitments remain stringent despite the restructuring upheavals.
Less Competition Isn’t Good for Shippers
This is not the first time we are dealing with a situation of massive alliances. Besides, the experiences from the past are not entirely rosy. In the past, new alliances have directly led to blanked sailings, delays and general port congestion. Chances are that we are heading that way. All shippers and forwarders have a duty to ensure that they have sufficient space to meet the needs of their customers, otherwise, they risk losing their reputations. Chris Welsh of the Global Shipper’s Council has criticized the lack of customer engagement when planning for the transition phase.
VSAs have a history of failing to provide their business partners with sufficient certainty to allow them to operate at the highest levels. As a result, the supply chains get broken. Alan Murphy of SeaIntel is of the view that carriers have no choice but to cope with what has been given to them. Three alliances will be reconfigured and two of them will be undergoing this process for the very first time. The change of partners and the embedding process might take weeks, hence increasing the sense of chaos within the industry.
Shippers: How to Stay Ahead
The solution for shippers lies in keeping a diverse portfolio of carriers on the books so that they have options when things go wrong. This is no longer a case of merely dealing with a single carrier. Instead, you have to contend with the needs of VSA partners who may have lots of other vested interests. A freight forwarder can add a number of benefits to the supply chain in order to make it work.
- Adjusting schedules according to consumer needs
- Relaying timely and accurate information to business partners
- Always having a plan B to go to when there are issues with the status quo.
Shippers have been warned to brace themselves for the implications of the new alliance networks. Both the consignee and shipper must make certain adjustments to the alliance in order to make it work. Risk management is another consideration, particularly if you do not have a business partner to rely on for results and risk sharing. Hanjin learned the hard way that putting your eggs in one basket can be a very risky strategy. VSA arrangements are a whole world away from the individual contracting arrangements that link one firm to another. This is a large scale operation within an interlinked network of business relationships and alliances.