Power in Supply Chains

As scenarios for the future of global supply chains change, supply chain professionals must regularly review their organisation’s Supply Chains Network Design map.

The map identifies the attributes of the Network at the Nodes and Links. The Review is an opportunity to ‘look over the fence’ that surrounds the daily life of your business, to focus on potential changes that may affect its ongoing success. One element to be considered is the possible change in the relative ‘power and dependency’ situation at points through supply chains. An example is shipping ports.

In 2015, most major container shipping routes experienced freight rate reductions of between 10 and more than 20 percent, with the highest of more than 40 percent on the Asia to Europe route. This caused much cheer among shippers and despondency among shipping companies. Over the past two years, the wheel has turned, with extra high freight rates between July 2019 and February 2022 and large container shipping companies making ‘super’ profits. As shippers prefer to plan from a position of near certainty, neither of these scenarios are preferred.

The container shipping sector

The container shipping sector is homogenous – a ship is a ship and a container is a container, with little differentiation. In a competitive, homogeneous market, the participants are usually ‘price takers’ – that is, they take the freight rate on offer. To remain profitable requires a business to become large and so reduce their unit operating costs (usually through mergers and acquisitions (M&A) activities). They are then able to exert influence in the market and become a ‘price setter’. For container shipping companies, the proof will be if future freight rates remain high, as shipping companies use IT apps to balance capacity with consumer demand, through cancelling (‘blanking’) voyages and using smaller ships.

In a 2015 blogpost, Learn About Logistics discussed how the consolidation of container shipping lines would change the balance of power at ports between shipside, ports and terminals and landside participants. UNCTAD has stated that container shipping now has features of an oligopolistic market. They state that between 2004 and 2018, the number of companies providing services per country declined by an average of 38 percent. The 13 years since 2009 has been a period in which consolidation of container shipping lines has enabled the market share of the top 10 container shipping lines to increase:

• 2009 = 58 percent market share
• 2015 = 64 percent market share
• 2018 = 70 percent market share and
• 2022 = 85 percent market share (Alphaliner March 2022)

Of the top 10 companies, nine operate within three alliances, where companies attempt to allocate capacity that assists in managing freight rates. The top five companies have increased their market share from 37 percent in 2005 to 47 percent in 2015 and 66 percent in 2022. Four of the companies are either family controlled or private and one is state controlled, so they are able to take a longer term view and response concerning global markets. Also, the super profits are not distributed to shareholders, as would be expected in public companies. There is a ‘war chest’ available for investments and purchases, not only of shipping lines but terminals, as another step to vertical integration.

Shipping consolidation and risks

The scenario discussed in 2015 is becoming more evident in 2022. Here is a potential external risk in your Supply Chains Network map. The large container shipping companies and their Alliances are now able to select and negotiate with the ports and terminal operators they will serve. Where ports are in close proximity, a select few that are able to negotiate on the basis of lower total costs, gain additional business. Where ports are further apart, they may need to respond to demands for infrastructure improvements, such as deeper shipping channels, more berths and more efficient landside operations (such as stevedore companies).

Whatever action the ports and landside operating businesses take will cost money, which the large container shipping companies are unlikely to pay. While large shipping companies and their Alliances are able to negotiate reduced shipside fees, the parties with the least power (road transport businesses that serve the port) will have to pay the additional costs in the form of landside charges. As there are few rail companies, they have a more equal negotiating power relationships with ports and terminal operators The costs at a port, container parks and ‘less than container’ (LCL) depots, can take the form of:

• Infrastructure surcharge
• Terminal (or facility) access charge for each received and delivered container
• Terminal (or facility) handling charge
• Vehicle booking administration charge
• Demurrage charge per container past ‘free’ days
• Detention charge

Transport companies are likely to experience ‘pushback’ as they attempt to pass the additional costs to their customers (shippers and freight forwarders), due to the perceived ease of selecting a replacement service. Road transport businesses are relatively homogeneous; as margins decrease, some will go out of business and others will be acquired. Unless the business environment changes (such as government intervention), the result will be fewer, large road transport businesses that are in a position to negotiate on more equal terms with their customers.

The new scenario (which may take some years to evolve) is a few large shipping and transport businesses with higher profit margins and global shippers having to absorb higher transport costs. Depending on the region, this could influence a change in the business model of shippers. An example could be to increase domestic production and reduce the volume of intermediate products that are shipped to final assembly facilities. But other factors could influence decisions:

• In the 10 years 2015-2025, many additional people will enter the consuming classes, mainly in emerging countries. New shipping routes, larger terminals and hubs are required
• Actual capacity added on a shipping route is about one-third of that originally proposed and it arrives about four years later than planned (Drewry Shipping Consultants)
• As container shipping becomes an oligopolistic markets, governments are more likely to influence how shipping companies operate

The supply chain group in your organisation (Logistics Operations Planning and Procurement) needs to have a review timetable for the Supply Chains Network Design map. This will provide an opportunity to understand the potential affect on supply chains from future possible actions by governments, shipping companies and 3PLs at shipment Nodes in your organisation’s Supply Chains Network.