Thanks to the courtesy of Loadstar, WCL has been authorized to publish
the full article even though it is paid content.
BY ALESSANDRO PASETTI
Take three chief executives who know each other well, all carrying the old-school Kuehne + Nagel (K+N) badge thanks to over 40 years of combined experience at the world ocean freight leader out of Switzerland. Detlef Trefzger, seven years at K+N, after 14 at DB Schenker; Tim Scharwath, with his stunning 24 years at K+N, now at DHL Global Forwarding for over three years; and Jochen Thewes with over 12 years at K+N, now at DB Schenker for five.
Anything can happen when three gorillas in freight forwarding meet up. Even more so if the gathering were ever masterminded by the king of the forest.
Their ocean volumes sagging, and freight rate hikes forced upon them by the carriers – which have eventually learnt how to control capacity and make money – and then the companies they lead, unable to pass on the price increases straightaway to the shippers, with whom they hold the relationship.
Obviously constrained on the air freight front as belly capacity has never been tighter, these forwarders are under perennial scrutiny given the very nature of their businesses, but also they are the smartest bunch in the supply chain, albeit by self proclamation.
Wary of anti-trust risk here, setting the scene for (vertical consolidation) murder may be easier on paper than in reality, but we went for it with a bit of extra help for what is in essence a thought-provoking exercise, substantiated by valuable external feedback.
How we got here
K+N king Klaus-Michael Kuehne has been outspoken recently, particularly with regard to vertical consolidation, hinting at the unthinkable paradigm shift according to which asset-light may become heavier, should the power struggle between carriers and forwarders not subside over time.
And although his words weren’t properly portrayed by a bunch of stories that did the rounds after his interview with DVZ(one observer was so confused as to attribute the Q&A to… DSV rather than DVZ) what is undeniable is that K+N is the one freight forwarder that could move the needle if the segment is going to regain its pride and be in deeper control of the supply chain.
But Kuehne cannot do it alone.
To my knowledge, there are few people in the marketplace who know all these supply chain intricacies, let alone dynamics, well enough to help us try to manage the “unthinkable”.
And one of them, Hans J. Willam, managing owner of Hamburg-based Worldwide Consultants in Logistics, recently agreed to engage, pointing out that any deeper ties between the major 3PLs is something that may not be too far-fetched.
“At this very moment, I don’t see such a scenario. Such a project requires long-term preparations,” he said, but “it’s not impossible for K+N, DHL GF and DB Schenker to sit down and discuss a scenario which will help all three companies, particularly to ensure that they could also offer a one-stop shopping product in order to go after Maersk customers.”
These three, which top the freight forwarding rankings in the good company of exuberant DSV Panalpina, are very different in the way they are run at desk and operating level.
Take DB Schenker – as one senior forwarder put it, it boasts “greater desk level democracy”, a la DHL but only to some extent – while K+N can brag about greater leadership (thank Kuehne).
Also, as far as the Swiss firm is concerned, it’s hard to envisage why K+N would move away volumes from Maersk now, one reason being that Maersk offers trade-lane services and scale that others don’t.
Moreover, K+N is widely understood to be unwilling to rely fully on Geneva-based MSC, if it were ever to cut strong ties or shrink business volumes with AP Møller-Mærsk (APMM).
We were here before (almost)
Having worked for two decades at K+N in his previous working life – and reporting directly to Kuehne himself – Willam said that the latest remarks from the boss rang a bell, as creative structures were already being discussed before in order to exert deeper control on the assets.
He keenly reminded me that “during the 90s, LCL [Less-than-Container-Load] was an important focus for the large NVOCCs [Non Vessel Owning Common Carrier]. As so-called neutral master loaders grew their business, the large NVOCCs needed them because there is always overflow when operating consolidated container services.
“On top there were port pairs with smaller volumes. I.e. the master loaders grew their business thanks to the co-loaders, primarily the big NVOCCs. Thus it was kind of logical to discuss if it made sense to join forces to create (or buy) a global master loader. Thus, it makes sense today for the top three NVOCCs to think about joining forces for the FCL [Full Container Load] business. How, you ask? We’ll see.”
So I asked whether the LCL project he worked on in the past moved forward, what was the hurdle and which players were involved?
“When the top NVOCCs were still allowed to talk to each other (anti-trust) we had agreed that it makes very little sense to support Vanguard, ECU Worldwide and so forth. Eventually it did not happen because the top NVOCCs did not trust each other. At that time ECU was rather small and possibly buying 51% of ECU and letting a neutral management run the company would have been an alternative as well.”
APMM started it all
While the group of traditional forwarders who believe APMM’s logistics plans are just another attempt aimed at re-inventing the wheel in logistics (common wisdom in the bear camp: “They will never make it, not smart enough, they don’t get it”), it’s undeniable that, as the Q3 ’20 numbers showed, the plan may be as good as the paper it is written on. It’s taking time? Fine, APMM has plenty of that to cut out the middleman.
(Reminder: DB Schenker, before ending up in bed with APMM’s chief rival MSC, was the number one customer for Hapag-Lloyd, of which Kuehne controls one-third of the equity. DHL is a friendly customer and all three are from mighty Deutschland at a time when Germany wants to secure more stringent supply chain power wherever it can globally)
Meanwhile, DSV and APMM are friends out of convenience in a Danish business fashion, whereas there is a more pragmatic deal in place – what you need I get and what I get is what our clients need. Politics play a part, of course, as APMM reminded us when its ocean and logistics CEO, Vincent Clerc, blasted that forwarders are with APMM.
While it’s totally feasible that APMM picked the right time to become a “one-stop shopping logistics provider, if APMM would have done so two years ago, the loss of support from the entire NVOCC community could have meant a huge loss of teus,” Willam continued.
“Thus the next 12-18 months become pivotal. At the end of the day it’s the BCO [Beneficial Cargo Owner; the shipper], i.e. Maersk customers to decide if they like one-stop shopping or prefer to use a neutral logistics provider for buyer’s consolidation services (SCM).
“Large BCOs usually prefer to sign service contracts with more than one VOCC [Vessel-Operating Common Carrier]. With regard to how NVOCCs will react to Maersk, it is clear that Maersk will attack the BCOs who are today working with large NVOCCs – look at the recent personnel appointments, i.e. Maersk hiring staff from their NVOCC customers.”
If we now focus on what Kuehne said regarding his personal investment in Hapag-Lloyd and the excruciating pain of ‘jokingly’ having thought about deeper vertical ties in the past, we can only assume that a NVOCC-friendly Hapag-Lloyd could well come to the rescue of large NVOCCs in order to defend themselves from potentially nasty moves from Maersk.
But it won’t be a bilateral deal, Willam and I mused, because of the risk of being attacked by the others on all fronts. In other words, a joint investment by K+N, DB Schenker and DHL into Hapag-Lloyd* or any neutral platform of a certain scale (Shipco also sprang to mind) would secure the volumes needed to offset any possible losses stemming from any attack from other asset-light rivals eager to preserve what’s left of the neutrality concept in the supply chain.
(*Assuming one of the existing key shareholders wants out and/or a capital raising, totally unnecessary now, is engineered)
Hence, the natural idea of a triumvirate which also conveniently cuts out the Danes, as DSV Panalpina is perceived by all three as being a fast-growing, recurring threat.
Knowing that just like a thorn in their side, DSV PAN is now selling “one-off” carrier services (check this out, published yesterday: “Hello DSV, can we book a couple of vessels?“), an event mystically preceded by the remarks of Kuehne, think about “a Super NVOCC acting as a procurement entity for everyone” having skin in the game, as another senior contact argued.
“Founding members share profits/losses; or you just focus on the 3PL friendly carriers and let Maersk go down the drain – which is technically possible although it’s most likely be a massive bloodbath.”
The cheapest option?
“Take over existing carriers but there aren’t many good targets. PIL would be the easiest (on paper), followed by Yang Ming. The remainder are either too big or state protected.”
Many thanks, Mr Ocean.
Willam is adamant that, “20 or 30 years ago it would have much easier to create or buy a VOCC. Nowadays, the number of VOCCs is so low (thanks to M&A) you need to talk about size. None of the smaller VOCCs offer sufficient trade lanes to cover the globe. Short term, I recommend all NVOCCs to focus on a partnership with NVOCC friendly VOCCs. Midterm the large NVOCCs need to analyse what’s best for them. Actually a ‘Super NVOCC’ could be an alternative if the NVOCC friendly VOCCs would allow such an NVOCC to sign slot charter agreements on the most important trade lanes.”
Bearing in mind that “NVOCCs do not like fixed assets or fixed cost, what you do need to create and operate a VOCC are: vessels; container equipment; and contracts with container terminals.
“Another thought here: the Big Three could create a joint VOCC with the top five or top 10 BCOs. Today many BCOs are frustrated due to the fact that spot rates have reached a totally unacceptable level. Most probably, future contract rate negotiations will disappoint the large BCOs. And I do not believe that large BCOs will ’embrace’ the Maersk ideas (one-stop shopping) on a long term basis.”
Meanwhile, the allure of the counterargument is obvious: forwarders are smart but also ruthless and selfish in the way they operate, so there cannot be a paradigm shift without a cultural shift. And a Super-NVOCC triumvirate structured as outlined herein is highly unlikely to address that.
At the heart of this dilemma, as we know too well, is the love-hate triangle between shippers, forwarders and carriers.
Here is a reminder on those relationships, dated 2016 as part of a side Walmart (one major shipper that could move the needle) coverage:
Shippers often suspect forwarders of hiding things from them and making money at any opportunity, and question whether the 3PLs have their customers’ best interests at heart; and yet their experience of dealing directly with ocean freight carriers, the shipping lines, has not been much better. Carriers appear to feel the same way. In air freight [where APMM is building its services], airlines would theoretically like to talk to shippers, but shippers want a more complete service than airport-to-airport, and forwarders prefer tripartite discussions, rather than seeing shippers and airlines talking without them.
“Ultimately, forwarders have always been a necessity”: that’s how the gorillas’ meeting could well start if it happens, but if you think that’s all rather messy, and that relationships along the supply chain are strained… it’s because they are, and always have been, with only one king dictating the structural changes that are worth pursuing.
(Disclosure: Worldwide Consultants in Logistics serves half of the top 10 global logistics services providers)