Making a dent in the box
To get an appreciation of just how bad the container shipping markets have become, consider this. The average rate to move a 20ft container from Asia to Europe in 2014 was $1171.50, a 7.5% increase on 2013. In 2015, the average rate on the same route was $620.30, a 47.1% fall and the lowest ever annual average reported on the Shanghai Containerised Freight Index.
It might come as a surprise to learn that many shippers are still paying too much for their freight, but to Patrik Berglund, CEO and co-founder of Xeneta, without more transparency shippers will always struggle to wring better prices out of the lines.
It’s a model he and his colleagues are working to disrupt, using an online platform populated with actual freight rates submitted by shippers and available to subscribers who want to benchmark their freight procurement.
Berglund and co-founder Thomas Sorbo come from the ‘4PL’ sector, in which consultants work with customers to identify inefficiencies and optimise their supply chains, re-engineering processes and renegotiating carrier deals. A business model in which their incentives were aligned with customers encouraged them to see how far they could go in maximising savings.
“The problem was that when we compared ocean freight rates the customers would say, the market has moved, it’s volatile, there’s nothing we can do, we can’t compare it to last year’s rate levels to measure performance” he recalls. “So we started looking for an index we could use to measure cost gains but we found there was nothing suitable.”
With their employer unwilling to donate its database for them to play with, Berglund and Sorbo decided to ‘crowdsource’ rates from shippers, building the data by route, equipment type, timeframes and contract validity periods. Xeneta makes its money from subscriptions with shippers paying to access rate information at different levels with fees varying by product, functionality and number of users.
Given the overcapacity in container shipping, the pertinent question is why so few shippers receive the best rates. Berglund blames a combination of an opaque market and a lack of expertise at many shippers, despite logistics being their third biggest expenditure on average.
Too often he says, in particular for smaller volume shippers or beneficial cargo owners, it’s a case of ‘that guy’s a trucker and knows what he’s doing, let’s promote him’. Education is improving but he says Xeneta walks a fine line: show a shipper they can save huge sums and it raises questions internally; better to suggest some consistent, incremental savings. The bigger issue is that like many service providers, the lines have what might be called a Wizard of Oz’ attitude.
“Management at the top carriers educate their sales people to keep the customer from looking at bottom line. Shippers complain at the price and the line’s job is to point to all the services they provide. The result is that a ship which goes from Shanghai to Felixstowe with 10,000 boxes onboard theoretically could have a different price on every box.”
This traditional sellers’ market has changed into a buyers’ market over the past few years, as the lines have raced to build more and more capacity. Berglund describes 2015 as “a crazy year when the bigger volume shippers basically subsidised the shipping lines by being long on freight”.
But isn’t there a risk that the Xeneta platform delivers such a level of transparency that it not only makes it harder for lines to stay competitive but also makes it harder for shippers to secure the services they need?
Berglund cites an example when the market was at rock bottom, with $100 charged for a 40ft container move, where a line was charging both shipper and consignee. This highlights the need for greater competence in freight operations and as shippers become more sophisticated, it should be harder to hide cost in the supply chain.
“The shippers don’t necessarily expect to be at absolute lowest level of the market, but they just don’t want to be taken advantage of. A potential risk from the transparency is that volatility decreases, but only if we got more or less the whole world inside our platform.”
Xeneta offers a virtual 4PL service, helping shippers find value through internal analysis and benchmarking which can be used for data-driven negotiations with target rates based on Xeneta “rather than putting their finger in the air and saying let’s go 20% lower and hope that’s relevant to the market”.
He says some shippers have already moved from annual to monthly or bi-monthly contracts, shifted part of their volumes into a short/spot market or constructed annual contracts with quarterly reviews and agreed caps on upside moves, all through the use of better analytics and intelligence.
And what of the carriers? For all the freight booking portals, tracking services and other add-ons, perhaps they are doomed to see margins dwindle as shippers get smarter.
Berglund suggests getting closer their customers and talking about rates can give the lines intelligence that they normally don’t have – the spread between their rates and those of their competitors. From the commercial side, he says the main challenge is in improving the customer relationship.
“The cost of acquiring one new customer is many times the cost of retaining an existing one and there are plenty of ways lines can benefit,” he says. “Why would a large shipper need to tender their volumes, if they’re satisfied with the quality of service and can document that they have prices that are competitive in the market? If the carrier is able to work smarter, maybe with more flexibility in their contract lengths, they can use Xeneta to set a new level if needed and focus on quality of service and value in the partnership.”
Xeneta has 6m teu of cargo moves accumulated in its user base – more than double the size of a market leading freight forwarder or Non Vessel Operating Common Carrier (NVOCC) – and the platform knows when those contracts expire or are up for renegotiation. In the future, Berglund suggests Xeneta might be able to push potential business to those carriers or NVOCCs who would be open to such innovative ideas.
And what of the Xeneta business plan? Does Berglund expect to be snapped up by one of the lines and retiring or is he driven by missionary zeal?
“The venture capital guys have all asked me this but I’m not interested in an exit. I want to make dent in global trade. It’s such a dysfunctional market, with some things that are fundamentally wrong and we want to be part of fixing that. Whatever comes afterwards, I’m not too concerned.”
Not an iconoclast then but Berglund agrees that there are other areas of transport which are potentially vulnerable to the same kind of disruption. He points to the ‘weird dynamics of airfreight’ and says Xeneta users have asked him whether they could replicate its functionality in road, rail, air, parcel express or warehousing.
The technology could be used in any market but Berglund says Xeneta realises the enormity of what it is attempting in shipping.
“What has been interesting is the range of people who have got in touch with us. Consultants, tech companies, banks and financiers, insurance and media have all reached out to get access to the data. We have had to figure out how to deal with that whole ecosystem. We had an offer to buy the company before the end of year one and I don’t think we understood until then the full magnitude of who this would appeal to.”