Among the many events and excellent keynote speakers, I attended a presentation by Dr. David Fung, entitled “Meeting the challenges of growth demand: a shipper’s view.” Dr. Fung currently serves as Chairman and CEO of the ACDEG Group of Companies, a global technology integrator with business partnerships in several different sectors in North America, Europe, and Asia.

His analysis of the current and future business prospects for ocean freight carriers was quite pessimistic, due to changes in the economic forecast and in the business models now being used around the world. For example, with business producing more goods locally, the number of containers shipped has diminished substantially. New technologies such as 3D printing are also decreasing the need to ship by sea.

Of course, nobody wants to hear pessimistic forecasts, but we have to appreciate the contradictory opinion because it helps businesses prepare for tough times. He concluded by encouraging the audience to not look to the past for solutions, but to focus on looking forward and accept the new challenges.

Even the top companies are facing challenges

I wanted to investigate this outlook further, but data from the major ocean freight shippers is not always easy to obtain and when we do, the data is always a bit old.

I looked at the financials for Maersk, the world’s largest shipping company, whose latest data is from Q4 2016. On their financial report, they argue that the demand for transportation of goods grew below expectations in the first half of the year, leading to significant downward pressure on freight rates. In the second half of the year, and especially in Q4, demand increased while the number of deliveries was reduced, which led to a gradual improvement of freight rates.

The difficult business environment during the year enabled industry consolidation, and Hanjin Shipping Co. Ltd., the world’s seventh-largest container shipping company, went out of business. Despite this, Maersk Line continued its cost leadership strategy and gained significant market share.

Maersk Line nevertheless recorded a loss of USD $376 million (compared to a profit of $1.3 billion in 2015) and a return on invested capital (ROIC) of -1.9% (+6.5% in 2015). The underlying result was a loss of $384 million (profit of $1.3 billion in 2015) due to poor market conditions leading to sustained lower freight rates. The lower rates were then partly offset by higher volumes and lower unit costs related to lower bunker price, higher utilization and cost efficiencies.

Looking at the financials for Nippon Yusein Kaisha (NYK) Line as well, their revenues for the first three quarters of 2016 were ¥2,272.3 billion, but their forecast for the same time period in 2017 is just ¥1,414.5 Billion, a major decrease.

Tough times for the industry may be worsened by the Trump administration

While Hanjin’s insolvency made headlines in early 2016, they weren’t the only company struggling at the time.

Due to the sharp decline in ocean freight rates, all of the world’s top 15 container shipping companies reported negative operating margins (EBIT margin) for the first six months of 2016 except the Asian shipping company Wan Hai, which only operates regionally.

Since then, the biggest news story in the world has been the election and presidency of Donald Trump. The election and its economic consequences are not still clear and it is too early to say if and when the change will bring some improvement or deteriorate the current forecast for the industry.

One possible effect is on the iPhone, one of China’s biggest focuses in 2017. Based on the iPhone’s packaging dimensions (15.5 cm x 9 cm x 6 cm, 0.385 kilograms) it is estimated that 44,000 phones will fit in a standard 40-foot shipping container before it hits the weight limit. However, based on recent announcements by Apple, more production is scheduled to happen in the United States because the Trump administration is pushing for Made in America production.

Are sunny skies ahead for the ocean freight industry?

Despite the rough start to the year, the September 2016 quarterly financial report of Hapag-Lloyd, the world’s fifth-largest container carrier, remained positive. It reminds their investors that according to the IMF, the volume of global trade, which is key to the demand for container shipping services, was forecasted to increase by 2.3%. Continued growth of 3.8% is expected in 2017.

Based on current forecasts, the growth in global cargo volumes could reach up to 4.2% in 2017. IHS Global Insight is also predicting average annual growth of approximately 5% in the global container shipping volume from 2018-2021.

The issue is of course, is whether the growth of 5% forecasted for the period will be enough to cover for capital expenditures and operating expenses, while still allowing some profit. Even this level of growth may not be enough to cover rising costs for companies, and could result in further problems unless they begin to consider new approaches.

Innovative and courageous thinking is needed to guarantee future success

The current data confirms that the ocean freight is experiencing tough times, and will likely continue to do so. The question now is whether the time has arrived to re-think their business models.

It seems that now is the time to collaborate, rather than compete, and that doing so to meet logistical needs might improve profit margins.

I want to conclude by thanking the Cargo Logistics Canada organizers for the realization of such a wonderful event. Also, a big thank you to Dr. Fung for his “courage” to share his view about the shipping industry, especially when the industry would prefer not to listen to his pessimistic views.

The challenge for the industry is now that they know about the difficulties, what can they do to turn the challenges into profit? Time will tell, but I think major opportunities await to those companies able to tackle these major challenges head-on, rather than hoping things will get better on their own.

The post The ocean freight industry is struggling – but is there hope on the horizon? appeared first on Trade Ready.

In essence, FCA takes the burden off of the seller to arrange the transportation and allows the buyer to:

(a) Keep transportation related costs out of the price of the goods

(b) Use their own preferred carriers and brokers

(c) Leverage consolidation opportunities

(d) Maintain care and control of the material from origin to destination.

The trade-off for these benefits for the buyer is, of course, more risk.

In a simple example, assume you are a Canadian buyer placing a purchase order with a seller in Europe.

Using the FCA Incoterm, the European seller must ensure the goods are ready and cleared for export. They will do this either directly, by taking care of all of the details themselves, or indirectly, by providing you with everything required to do so.

Normally this would include the standard information necessary to pass through customs, and is fairly straightforward for a simple direct Country A to Country B export of most goods.

Know who’s in charge when documentation gets more complicated

But what if the export requirements for the seller or the import requirements for the buyer are more complex? And what if the goods will be transiting through one or several other countries? This can quickly complicate the export from origin to final destination.

As your supply base expands into the global trade arena, sellers and buyers need to be acutely aware of how this may impact purchases under the FCA Incoterm.

With respect to the first question, both the seller and the buyer must either provide, or render assistance in obtaining any documents or information. This includes security related information and everything that each party needs for the successful export, import and transport of the goods.

In complex transactions, there is often a strong co-dependence between the importer and exporter for documents and information from beginning to end (i.e. export permits linked to import licenses).

Assistance provided by the seller is reimbursable by the buyer and vice versa. This requirement is contained in FCA sections A10 and B10, but is often misunderstood or overlooked.

As an example, in order for the European seller to obtain their export license, you, the Canadian buyer, may already have had to obtain an International Import Certificate from Global Affairs Canada.

Don’t let multi-country transit slow your goods down

With respect to the second question, when the transport of the goods involves transiting one or several other countries, reference sections A10 and B10 (“transport through any country”). These sections are vague on exact responsibilities, but imply the majority of the burden would be on the seller.

In practice, this will really depend on what the requirements and regulations of the transited countries are, and which party is either bound or in the best position to fulfill them (i.e. language barriers, time zones).

Again, assistance provided by either party is reimbursable.

Shipping goods through other counties may require additional authorizations from foreign government departments, as determined by trade agreements and international conventions for the commodities being shipped. This can take up to 6-10 weeks to secure prior to shipping, depending on the circumstances.

Other considerations may include the mode required and specific carrier, depending on the value, controlled status, classification and dimensions of the freight.

As examples, certain air or ocean carriers will not accept military cargo. If your cargo is out of gauge and the typical passenger or commercial carrier cannot accept it, the default would be a freighter. This can be a challenge, as most freighters transit the U.S. before coming to Canada.

The U.S. controls what is allowed to transit through their country. If goods are considered controlled by the Department of State or Department of Commerce, U.S. Customs could seize your material if you fail to provide the right documentation.

Getting through government authorities is going to take some teamwork

Authorities in the countries being transited often require complete disclosure of the full transaction between the buyer and the seller. This would include all documents, such as end user certificates, in determining whether or not they will grant permission.

For example, if you are shipping  material from northern European countries and need to transit Germany for the required flights to Canada, you will require transit permits from the German Authorities if the material is considered restricted. For example weapons of war, medicinal products, textiles etc.

It is therefore very important for both the buyer and seller to work together, and with their respective transportation departments and/or freight forwarder.

This should be done well in advance, in order to identify any transshipment requirements, ensure they will be able to get any supporting documentation they may need from each other, and understand what each will do.

It is equally important to start this dialogue as early as possible, so that there is adequate time to understand and execute each country’s requirements to support the contractual delivery schedules.

One way to provide transparency and accountability is to maintain an action item log containing points of contact, target dates, and tasks assigned to individuals. This living document should be provided with shared access to all accountable parties.

Failure to know and understand the exact route, country by country, port by port, that an international shipment will take can lead to delays, additional costs, compliance violations and potential contractual default.

Taking the time to properly prepare under the FCA Incoterm will save you these unpleasant repercussions. And we all know in international commerce, there are always enough surprises.

Do you have much experience using the FCA Incoterm? How could using it present opportunities or challenges to your business?

The post Do your homework if you plan on using the FCA Incoterm appeared first on Trade Ready.