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Import News: Importers and the Shipping Industry

11 April 2002

In a speech to a shipping industry conference today, we addressed what importers want, the lessons from airfreight, the effects of price collusion and the consequences of ignoring security.

IMPORTERS WANT TIME-DEFINITE SERVICES

A shipment due to arrive "sometime in the second half of this month," is just not good enough, these days. Production is scheduled to start on the 22nd -- that is when the goods must arrive. A couple of days later will be too late. A two-day wait at the American-Canadian border after September 11 nearly caused chaos at Detroit's car factories, which rely on flows of parts from Canada.

Shipping companies have an important role to play but, no less important, is the role of ports, bureaucrats and road carriers.

There have been significant improvements in all those sectors. Ship turnaround times in our ports have improved, border controls have been simplified and some road carriers now run their equipment 24 hours a day, to get around congestion.

Still, much remains to be done. Goods are still detained by Customs to verify details that can easily be ascertained after delivery. Many road carriers, exporters and importers still choose to sleep at night. The shipping and banking industries still have a fetish with paperwork.

THE LESSONS FROM AIRFREIGHT

Over the years, airlines became focused on operations, much like shipping companies and Ports are now. Airfreight, carried in the holds of passenger planes, continues to be the neglected division of mostly unprofitable airlines.

The service is generally appalling. Goods fly between continents at close to the speed of sound, but point-to-point transit times are still counted in days. In fact, average transit times have not improved in the last 25 years. What is worse, freight is frequently offloaded at the last minute. You get your goods days later -- if you are lucky.

Yet, traders demand time-definite service. As the airline and freight forwarding industries failed to meet that demand, someone else had to. Couriers built up an enormous capacity in the nineties. They do provide time-definite services, but subject to a hefty premium. This has worked up to a point, but the very success of the couriers means that they are resembling more and more the postal operations that they have supplanted. They will need to manage the transition from couriers to time-definite cargo airlines if they want to hold on to the rates of growth that their investors demand as return on capital.

In seafreight also, we are likely to see the emergence of global logistics companies offering time-definite premium services, that include third-party logistics, inter-modal forwarding and on-shore cartage. They will become the new integrators of the seas.

My guess is that they will spring from the shipping industry. In fact, there are signs that they already are. Some shipping companies are busy buying forwarders, road carriers and contract warehouses. Some of them are making strategic alliances with Ports. These developments would have happened faster, were it not for the fact that competition has been stymied by our willingness to tolerate price collusion in this industry.

PRICE COLLUSION

A couple of years ago, we upset some of our friends in the shipping industry, when we issued a press release saying that the decision of a group of shipping executives to meet and fix price increases would have landed them in jail, had they been in any other industry.

This industry enjoys a unique dispensation from anti-competitive laws in New Zealand. The industry has managed, somehow, to convince successive governments that the dispensation is needed to maintain security of supply. They say this with a straight face.

While on the surface this may appear to be good business, it is not. It reduces competition, protects the mediocre among them and discourages the innovative. Airlines once thought that they too were safe, in their price-fixing IATA cocoon. The airlines that failed to innovate ended up losing the premium sector of airfreight and are now reduced to being commodity space providers, subordinate to others. I expect that the same will happen to those shipping companies that choose to hide behind the shelter of conferences and cartels.

THE DANGERS OF IGNORING SECURITY

There was a good article on this topic in this week's Economist. Some figures from that article: every day, over 15 million containers are moving around at sea or on land, or standing in yards waiting to be delivered. Last year, the world's total movement in containers amounted to 72 million twenty-foot equivalent units. They account for about 90% of the world's traded cargo by value.

We all know how much disruption September 11 caused to the airline industry. Last October, a suspected al-Qaeda terrorist was found inside a container at an Italian port. The Egyptian suspect, who later disappeared while on bail, was equipped in comfort for the duration of the container's intended sea voyage from Italy to Halifax in Canada. He carried plans of airports, an aviation mechanic's certificate and security passes. Intelligence sources say other containers similarly fitted out were found at the Italian port.

It is probable that suicidal maniacs will use shipping containers, sooner or later. Our bureaucracy is not equipped to undertake surveillance of containers in New Zealand. They are trained to man the gates and look for contraband or spiders, but not for terrorists. The only way in which they know how to react to the next panic will be to shut the gates. That amounts to much the same as shutting our economy, something that the Greens may welcome, but the rest of us would not.

The gate-keeping approach to border protection is not sufficient to deal with these threats. Shipping companies, exporters, importers, carriers, Ports and others all have a wealth of information about containers and their contents. They will need to set up effective surveillance and information exchange systems with border protection agencies. The agencies should provide those parties with security training and pay them back with trusted partner privileges, in the form of reduced impediments to movement.

Before this happens, both shipping companies and bureaucrats will need to change their mindsets. Bureaucrats will need to get away from the gatekeeper mentality; shipping companies and others will need to start regarding security as their problem too, not just a necessary evil to be endured. The alternatives are just too awful to contemplate. Just ask any employee of American Airlines.

Ends

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