Asset-heavy container lines have always had an uneasy relationship with asset-light freight forwarders. If they have been the odd couple of the maritime supply chain, the relationship is arguably getting odder.

Two of the three biggest box carriers, AP Moller-Maersk and CMA CGM, are embarked on different paths but with the same aims: to add freight forwarder skills, in order to make more money from moving deepsea containers.

Maersk wants to become the “global integrator of container logistics”. Chief executive Soren Skou admitted in the 2018 annual report that bringing cargo from one part of the world to another “is still seen by our customers as a complex and unreliable process”.

“We aim to deliver better reliability, more visibility and simplicity with our strategy: to become the global integrator of container logistics, connecting and simplifying our customers’ supply chains,” he added.

Significant steps on this journey have included the integration of Maersk’s transport and logistics businesses, with a “vital” focus on growing the non-ocean business to “reduce the dependency on freight rates and increase growth in higher and more stable margin business”. The Danish giant acknowledges that bolt-on acquisitions may be required.

CMA CGM, formerly a minority shareholder in Ceva Logistics, outbid acquisitive Danish forwarder DSV early this year to buy Ceva for an estimated $1.6bn. And in October it announced financial support for Wing, a French start-up offering “innovative urban logistics” for e-commerce.

Maersk has ambitions to be the ‘global integrator of container logistics’, which sometimes means getting off the beaten track. Photo: AP Moller-Maersk

The French line describes the Wing deal as “a concrete illustration of the synergies” between CMA CGM and Ceva Logistics.

CMA CGM has also launched Shipfin Trade Finance, offering all its customers, importers and exporters alike, a range of “simple, reliable and rapid financial services to consolidate and support their international growth”.

The strategies are in play, but can they succeed? History suggests it will be a tough challenge. The fundamental economics of sweating expensive vessel assets do not sit easily with being close to your customer base, be it a freight forwarder or a shipper.

And it’s been tried before. Today’s actions can be seen as another attempt at efforts over the previous 40 years to bolt together lines and logistics arms. They generally have not been a success.

+ point

Pyers Tucker and Tim Power cite APL Logistics, started by APL (now owned by CMA CGM) as possibly the one example of a freight forwarder and its shipping line parent working well together. They agree this is because of APL Logistics’ strong US customer base and a strong buyer’s consolidation service for goods coming from the Far East.

But, says Tucker, there was another important factor: “APL just left APL Logistics to get on with it and did not interfere. The asset-sweaters in APL acted as hands-off owners for what was basically a financial investment. They did not try to drive, steer and influence a freight forwarding and logistics business using their instincts as asset-sweaters.”

One of the first tasks of veteran container analyst Ben Hackett, when he worked for OCL in London, was to assess how much support the container line (now long gone) was getting from freight forwarders, who they were and the type of cargo they provided.

Hackett tells TW+: “The latter was to try to work out who their clients might be. All of this being part of the effort to provide a door-to-door service, which would naturally put pressure on the forwarders.

“This was not wholly successful, and in Europe the carriers provide only some 20%-25% of merchant haulage which one can equate with door-to-door. One issue in this strategy was, and probably remains, the pricing strategy. The door-to-door concept can hide a lot of price discounting and can be used to ‘buy’ cargo from competitors.

“This is very relevant today with the super-alliance concept, where it is hard to differentiate between service offerings: the same ship, same schedules, same port and mostly the same surcharges.

“What Maersk is trying to do sounds like a recap of the mid-1970s. It is hard for a shipping line to have a strong working strategy that is not solely focused on maritime transport. It is very difficult to manage pricing, as each door-to-door sector is under separate management, all trying to show success.”

Tim Power. Photo: Drewry

Tim Power, managing director of Drewry, thinks lines are pursuing this strategy because the return on investment in forwarding and logistics is far better than in liner shipping. But, he adds, the risks are great and do not tackle the problems facing the industry.

“In the liner industry you are lucky if you get a 2% return on investment, but as a forwarder you’re getting around 10%. I think there are great risks in the execution and it is not solving the real reasons why liner shipping doesn’t make any money,” Power says.

“There are two things which have to happen for container shipping to make money. The only way to fix it is for economies of scale to run out and for consolidation to get to a level where there is enough concentration of market power to manage capacity.

“The golden rule of container shipping is that you have got to be 90% full on your headhaul, and if you do that consistently, you are going to make money.”

Power, who used to work for P&O, says the lines have a “very inelastic demand curve” because the costs of container shipping are “incredibly low compared with the value of the goods in almost all cases”.

“What that means is that freight rates on the Asia to North Europe trade can halve and it will make absolutely no difference to demand, because container shipping is a derived demand business.

CMA CGM chairman and CEO Rodolphe Saade, left, with French Prime Minister Edouard Philippe at last month’s inauguration of Ceva Logistics’ new headquarters in Marseille. Photo: CMA CGM

“The opposite is also true, and if you had a highly concentrated marketplace, you could treble container shipping rates and demand would not move.

“Everyone will grumble, but as long as they were all paying the same as each other and no one was at a competitive disadvantage among the beneficial cargo owner group, they will just have to live with it.”

Power believes the answer to achieving profitability for liner shipping is not to add logistics, but to fix the structural issues.

He also questions whether, by putting on additional forwarder services, the lines will deliver increased value and improved services for customers compared with their primary competition, the other carriers.

“They will be competing with forwarders and logistics companies, some of whom are their customers, so will it work? You have got to deliver high frequency and improved reliability, reduced lead times and competitively priced services, plus the ease of doing business.

“Do we really believe that Maersk’s own integrated service can do that better than Kuehne + Nagel by buying services from other carriers? I find it very hard to believe.

“There is a great risk that you alienate a chunk of your customer base and you are not able to beat your competition.”

Pyers Tucker, senior director of corporate development at German carrier Hapag-Lloyd, believes we are seeing a “clear differentiation” in strategies across the container shipping industry, with Maersk and CMA CGM “going in the same sort of direction”.

Pyers Tucker.

Tucker, with lengthy forwarder experience at Exel, DHL and Maersk’s formerly named forwarder arm Damco, adds: “At the other end of the spectrum you have Hapag-Lloyd, who believe that it is not the best way to spend investors’ cash by trying to expand the value chain in order to do things which carriers don’t really know how to do.

“It is actually nothing new. Shipping lines have been owners of freight forwarders or third-party logistics companies for 20 years and more, but the only thing that is new is that they are having another tilt at something for which there is not much past track record of it actually working.”

Ironically, companies owned by Klaus-Michael Kuehne have just become the largest shareholder in Hapag-Lloyd, but Tucker argues that the main value proposition of a forwarder versus a carrier is choice: “What a freight forwarder offers to its customers is a choice of which ocean carrier or which airline to use.

“But if you are a freight forwarder owned by a carrier, it is much more difficult to credibly demonstrate and prove to your customers that you are genuinely unbiased and are not secretly trying to channel cargo onto your owner’s ships.”

Tucker contends that a forwarder owned by a shipping line loses half of its credibility “at a stroke”. Another conflict within that forwarder/carrier ownership, according to Tucker, is that they have very different business models.

“Shipping is an asset play and the lines have large balance sheets of billions of dollars of expensive ships and have a pretty hard responsibility to look after that investors’ money very carefully. The number one, two, three and four priorities are to sweat those assets.

Jens Roemer. Photo: Andreas Suetterlin

“Freight forwarding is a very different game. It is a capability play, with employee costs at 60%-70% of the cost base. For a carrier, employees and people are between 5% and 6% of the cost base.

“With a freight forwarder it is all about people and you can adjust your cost base much more easily than a carrier because they don’t have a shipping line’s multi-billion-dollar balance sheet.”

Jens Roemer, working group sea chairman of the International Federation of Freight Forwarders Associations, says the role forwarders play in simplifying complex supply chains for the customers should not be underestimated.

“Freight forwarders can today be customs brokers or consultants, because it is not just about paper-pushing and filling in some statistical data, it is about how to access potential consumer markets, and for that reason you need to know about tax procedures.

+ point

Online booking, tracking and tracing, plus blockchain trading, have come along since container lines last tried to get into forwarding in a big way. James Hookham, from the UK Freight Transport Association, says these developments have given greater visibility and control over cargo flows, but questions whether lines can do it on their own or whether they need to partner technology providers. “Access or ‘ownership’ of consignment data is often the critical factor,” he warns.

Drewry’s Tim Power finds it hard to see how digital technology gives lines a competitive advantage, as forwarders already have it. Crucially, he says: “Most lines do not have the depth of understanding needed to develop and operate supply-chain management systems.” Citing Amazon’s steps into road and air freight, Hookham adds: “The ultimate game-changer will be if a major shipper takes on the job of being its own carrier.”

“They can be very complex and you can have huge advantages if you know how to use the existing schemes and options.”

Roemer points out that forwarders are legally on the same level as a shipping line when issuing bills of lading.

“The moment a freight forwarder uses a bill of lading, it acts as a contractual carrier,” he says. “We don’t have vessels, but for almost every single container vessel, more than 50% of the shipping line bills of lading are not from the provider. If Hapag-Lloyd ships on a Yang Ming vessel, they may sit in the same alliance but it is the contractual carrier and does not own the vessel.

“One always has to respect the stakeholders in the market. In air cargo, the freight forwarder has an official agency relationship with the International Air Transport Association. I think that shipping lines have always traditionally tried to get involved in the freight forwarding business and in the past they failed, and they failed very badly.”

Roemer says shipping lines “like to dabble in becoming a forwarder” and “want to take the revenues out of the supply chain on land, being less focused on maritime and more door-to-door”.

Ben Hackett, shipping analyst // Photo: Contributed // TW+ December 2019

He also says complex rules on hazardous cargo and container weights need the specially trained teams provided by forwarders, for the safety and security of the lines and the shippers. But clients also value agile logistics thinking.

“The customer wants solutions to supply-chain problems when the Rhine water is low and barges are stuck at Antwerp and Rotterdam. You cannot use artificial intelligence to solve that; you need people with the brain, the knowledge and the commitment, because it means you may have to stay two to three hours longer in the office.

“Finding solutions immediately and at short notice is what freight forwarding is all about. No helpdesk will solve the problem, you have got to do it yourself.”

Sean Van Dort, chairman of the Global Shippers’ Forum, says shipping lines are looking afresh at freight forwarding because it is more lucrative than the low freight rates from container transport.

James Hookham, left, and Sean Van Dort. Photo: Professional Images

“Freight forwarding gives you total control of the supply chain and they can make more money than just carrying a box on the ship from A to B, so they can offer value, but it should be in a very competitive environment rather than trying to monopolise the whole situation.

“The final authority is the buyer, who will nominate the freight forwarder. Shipping lines have to understand that we are a pivotal part of the whole supply chain and value chain and that they must engage with us now because we are becoming a global voice.”

James Hookham, deputy chief executive of the UK Freight Transport Association, hopes to see a new outlook from shipping lines if they become more like forwarders. He claims that the lines have shown “a certain arrogance and poor justification” when levying additional costs on shippers: “They expect them to pay, but maybe with the takeover of freight forwarders, this brings them a little closer to their customer.

“If it requires a shipping line to adopt a slightly more rounded approach to its customer service, then that has got to be a good thing, but it has got to be played out in the market, in improved service levels and sensitivity to customer sentiment.”

Citing “legacy thinking” as manifested in shipping line surcharges, Hookham adds: “In the past, forwarders have criticised shipping line practices, so there is perhaps a chance of more informed conversations in these combined groups because freight forwarders have been on the receiving end of rough treatment from the lines. It will be interesting to see how those attitudes play out.”