The meteoric rise of e-commerce has led many logistics providers to rethink their business and sourcing models – and the international shipping lines are no exception.
Recent years have been stormy ones for those who make their living transporting cargo across the oceans amid rising consumer and business expectations for ever faster delivery times. The widening and deepening of the Panama and Suez canals are part of a trend to reduce costs by employing ever-larger vessels. But the formula has not been as successful as some had hoped as the industry battles against heavy borrowing, poor cash flow and fluctuating levels of demand.
“Some of the difficulties that the shipping industry is currently facing are related to the race to be bigger,” says Dr. Walter Kemmsies, chief strategist at JLL’s U.S. Ports, Airports and Global Infrastructure Group. “Ocean carriers need to deploy large vessels stopping at as few ports as possible in order to remain profitable. The largest ships in the world are now 22,000 TEUs [twenty-foot equivalent units].” That means they are over 400 meters (1,312 feet) long and 60 meters (197 meters) wide. And each ship can have up to 30 containers stacked on top of each other starting at the bottom of the hull.
While mega vessels are a dominant force in transoceanic delivery, their economies of scale may run counter to the speed-to-market demands of e-commerce groups. The problem is that “the really big liners can only call at a few ports on a schedule service,” according to Dr. Kemmsies. “Ships do not make money when they stand still,” he explains. “A giant liner can take four days to unload at each extra docking.”
While megaships are ideally suited to make traditional crossings such as between Shanghai and Los Angeles/ Long Beach or from Singapore to New York, these journeys become uneconomic if multiple stops are added on at each end – as in the ‘milk run’ down the eastern U.S. coast linking New York to Savannah and Jacksonville, where there are seven ports that handle over 1 million containers per year compared to three on the West Coast.
“A lot of storage space is needed. Unless there is enough space, the different sets of mechanical equipment which haul the containers into and out of storage areas can run into each other,” Dr Kemmsies adds.
Fastest routes to reaching the customer
If e-commerce companies want to get their goods to their local distribution centers in the fastest time possible, the smaller liners – those of 5,000 TEUs, for instance – are far nimbler and can be unpacked much faster are often the ones for the job. Stopping off in more ports, they frequently come closer to the final destination, interlocking with a rail/road network which finishes the trip. As Dr. Kemmsies says: “We will see more of the 5,000 TEUs in peak seasons. The smaller vessels will act as a supplement to the largest ones.”
Ports are adapting to these changes to enable them to take the full range of ocean ships whether through restructuring the staging space for containers or expanding. Shanghai, the world’s largest port, has ambitious expansion plans. The same is true of Rotterdam, Europe’s largest port, which already stretches over a distance of more than 40 kilometers.
Connections between sea and land are also improving to speed up total delivery times. As the use of trucks is generally more direct and, therefore, faster than train, the contents of the international 40 foot (FEUs) containers are increasingly being repacked into 53 foot long domestic containers. Given that three FEUs are usually repacked into two domestic 53 foot containers, this reduces the cost of transportation by about a third. The domestic containers are delivered by truck to local distribution centers and some are sent by rail to distant inland locations.
This process, known as ‘transloading’, is currently used for about 50 percent of containers arriving in major ports – although it varies depending on the importer and the location. But Dr. Kemmsies expects it to increase to 75 percent within a few years. As such, it’s feeding into a surge in demand for potential transloading zones near ports. “The increase in real estate used this way could be between 25 and 50 percent over the next two to five years,” says Dr. Kemmsies.
In Southern California, for instance, in the area within reach of the Los Angeles / Long Beach ports, large logistics players are even paying rents 1.5 times the going market rate to win the key location point, says Louis Tomaselli, JLL Senior Managing Director in that region. “In some instances, ground zero infill industrial sites in Los Angeles and Orange County would not meet any recognizable Class A standard, but their strategic key location makes them successful.”
Learning the ropes on collaboration
For their part, retailers exporting goods will also change their operations. “We expect to see more jointly-operated distribution centers from the middle market retailers,” says Dr. Kemmsies. “The smaller companies can’t survive unless they band together.”
E-commerce players are also gaining more control over shipping operations. Some are even beginning to organize their own shipping services. And Maersk, the world’s largest container shipping line, has started a digital innovation program, allowing Chinese exporters to streamline the system by booking places on container ships without going through freight forwarders. It has also introduced an app for clients to track containers.
The shipping world has not been the fastest to adapt to change – as shown by the current wave of mergers, poor financial results and the bankruptcy of Hanjin, the South Korean group which is the world’s seventh largest shipper. But the signs are there that the industry is now working out the future direction it needs to take.