Gray area
ESC resurrects 'gray box' concept to alleviate shortages, but is issue still black-and-white for carriers?
By Eric Johnson
An ocean container shortage in the first half of 2010 led to shipper dismay, and in late November it prompted the European Shippers' Council to moot the idea of establishing a global pool of neutral containers.
This idea, known as the 'gray box' concept, is by no means new. It has floated around the container-shipping industry for nearly three decades, but with little acceptance. However, the ESC said time is ripe to reconsider the idea, given the problems equipment shortages have caused for shippers.
'During the first half of 2010 especially, members of the ESC Maritime Transport Council reported on shippers concerns and difficulties being encountered in their supply chains as a direct consequence of equipment shortages,' the ESC said. 'Container shortages affected the continuity of trade flows in various locations around the world. Slow steaming, notably on the transpacific and Asia/Europe trade lanes, was one of the suggested causes for container shortages being more pronounced this year than in the past. Other key contributory factors cited included trade imbalances and the lack of investment in container fleet renewal during the period 2008-2009.
'Carriers undertook some actions to resolve the situation by investing in extra equipment and introducing ships to move empties to where they were most needed. Nevertheless, such solutions come at a price, and generally these are passed on to shippers; additionally they may not resolve the problem nor prevent the same thing happening again.'
The ESC said its members have agreed to form a working group, open to shippers and others in the maritime supply chain, to examine whether the gray box concept could alleviate those container equipment shortages, as well as reduce carbon dioxide emissions through elimination of some repositioning of empty boxes.
The basic idea behind the gray box concept is to save costs for carriers, and thus shippers, by reducing the required size of the global fleet of containers and minimizing repositioning of equipment on a global and regional basis.
Richard Butcher, of U.K.-based Invicta Management Services, is considered a pioneer of the gray box idea. He estimates container lines spent $10 billion in repositioning costs in 2010 that could have been mitigated by a neutral management of containers.
'At the end of the journey, once the box is 'stripped,' the empty container is 'off-hired' at a common container depot, to there await the next call for its services,' Butcher wrote in a mid-2009 white paper on the subject (Available via the Cambridge Academy of Transport at www.catz.co.uk/docs/file/Grey Box.pdf).
'The concept is very similar to that successfully practiced by the industry's leasing companies. The 'depot handling' charges will reflect the actual lifting costs and the storage expenditure occurred at each location. The 'pick-up' and 'drop-off' charges would take into account the overall equipment repositioning costs for the locations concerned.
'Although the 'gray box' common pooling concept should be established as a standalone profit center, it is in reality 'owned' by its stakeholders, i.e. the participating carriers. Any 'profits' which might accrue are therefore returned to the carriers and distributed to their trade divisions as they see fit.'
Despite the idea being around for ages, there remains a reluctance among lines to relinquish the opportunity to promote their brand via the millions of boxes that wind their way round the globe.
'Although the gray box concept has been muted for the last 25 years, it has been practiced by relatively few of the major container carriers,' Butcher wrote. 'Whilst much of this reluctance to have a 'common' asset stems from the perception of a loss of the carriers' market image and the fact that the price of general purpose containers has been relatively cheap, there is also a view that the participants in such a venture might 'lose control' of the individual service standards which would affect their customer retention. The cost benefits of such an operation have until now seemed of lower importance than the 'brand name' and the 'inconvenient' fact that nearly 50 percent of the world's container fleet belongs to the leasing companies with their individual logos seems to have been entirely overlooked.'
Carrier Resistance. Yet carriers are likely to remain reticent to accept such a major structural change to their operations, even if (on paper) such a system might reduce costs.
'This concept would be quite difficult to implement,' Lamont Peterson, vice president of marketing for Hyundai Merchant Marine, told American Shipper. 'Generally speaking, all lines have similar surplus/demand dynamics, so how would containers be rationalized in demand areas and costs of idling inventories shared in surplus areas?'
Peterson pointed to the teething problems carriers in North America are having in developing a neutral pool of container chassis ( 'Everybody in the pool, online at www.AmericanShipper.com/links).
'We currently experience equipment shortages in some chassis pool locations in North America,' Peterson said. 'Carriers who do not contribute a large enough volume of equipment to the pool put a strain on the pool during peak seasons. All the carriers, and our customers, pay a price for the inefficiencies this causes in delays and additional costs. In fact, if we point to the relatively recent arrival of neutral chassis pool on the scene, this micro-environmental impact points, on a smaller scale, to the types of challenges we could expect with the gray box concept.
'And we believe implementation of the gray box idea is quite a bit more challenging than elimination of chassis in the U.S. Remember that only in the U.S. do carriers provide chassis as part of their fleets. Changing the entire world to a model in which container assets are managed by a neutral party is a much bigger and more complex problem.'
When asked whether the idea could potentially be a way to alleviate container shortage problems in the future, with a neutral party ensuring that there is enough equipment to meet demand, Peterson said, 'Sure, why not? But someone would have to shoulder the cost of an increased fleet during times when there is surplus equipment everywhere. Almost all carriers were short of equipment last year where they wanted it. Likewise, all carriers have challenges and expenses associated with evacuating empties where they are not wanted. A gray box fleet will also be victim to the same changing environment and seasonalities of the trades.
'A cost advantage might be realized by carriers who cannot manage their costs well but, for carriers that already do a good job of fleet management ' velocity, match-back, purchase/lease control, maintenance and repair, etc. ' they would likely only incur increased administrative burden from such an arrangement,' Peterson added.
There would also be the cumbersome financial exercise of migrating the global fleet of containers into one neutral organization.
'It is a logical idea and I could imagine that one worldwide pool of neutral containers could indeed increase efficiency and the availability of boxes at more places in the hinterland,' said Dirk Visser, senior shipping consultant at Netherlands-based maritime consultancy Dynamar. 'How to get it organized is the first question. We're talking about roughly 14 million to 15 million carrier-owned TEUs and 12 million to 12.5 million lessor-owned ones. If everybody ' any and all carriers and any and all lessors ' is prepared to transfer their property to the gray pool manager they will of course want to be compensated. How to finance the $6 trillion or so?'
Visser also pointed out that, contrary to the carriers, container lessors would lose their business and would expect to be compensated in the takeover price.
Demand Issues. 'The logistics of it all will not be easier than today, but the gray pool manager could, in principle, act free of carrier policy and therefore better tune availability to demand,' Visser said. 'It doesn't take away the fact that the costs in areas of high demand will be lower than in places with restricted demand. The question is whether the relevant extra costs should be spread over the whole of the inventory or whether they should be itemized to the shippers in the lower demand areas.'
It's a point Peterson stressed: that establishing a neutral pool wouldn't suddenly bring equilibrium to high and low demand areas.
'Even with a gray fleet, there would still be surplus locations where the third-party operator would have to evacuate containers, and the cost would be borne by someone,' Peterson said. 'Location of true synergies, where one carrier has surplus and another demand, are actually quite rare.'
There are potential benefits to the liner industry under such a system.
'Operationally, there could be an advantage in locations where one would ordinarily reposition large quantities of containers to cater for demand,' Peterson said. 'There could also be an advantage for spot booking requirements from locations where the carrier does not normally have shipments.'
Back to the significance of the brand issue, since a gray pool of containers would effectively eliminate the thousands of advertisements that carriers get in the current structure.
'The most frequently heard argument is 'brand,' or 'showing the flag,' through the logo on the box that identifies itself as the service provider,' Visser said. 'It is true that the container is the only device most regularly visible for the shipper and consignee, at the works or distribution center and on the road. The ship is much farther away. But I'm not so sure how much that actually weighs for the shipper's traffic manager making the routing decision, much less for the higher logistics management involved. So this is probably more an emotional consideration for the carrier than something of real brand value, all the more since around 55 percent of the boxes used will be lessor-provided and thus not bear the carrier's logo.'
When asked what compels a line to own containers in an era when carriers seem to want to lighten their asset loads, Peterson focused on control: 'If a carrier can move a container into a location, there is definitely a way to move it out. It's just a matter of cost.'
'Control is absolutely an issue,' Visser said. 'If there is simultaneous demand for two gray boxes by two carriers, then to whom would the gray pool manager give the available single box?'
Jean-Louis Cambon, chairman of the ESC's Maritime Transport Council and head of the ocean management committee at tire manufacturer Michelin (and also a former liner executive), admitted that a neutral pool of containers would not be a panacea, but said it is worth studying.
'Realistically, the gray box concept may not solve structural imbalances, but the potential to improve turnaround of equipment and thereby increase efficiency and making more boxes available in the hinterland is worth further investigation,' Cambon said. 'The gray box concept does raise some big questions, largely surrounding ownership/leasing of the equipment, interchange procedures, and the impacts of abandoning corporate or product branding on boxes. This is what the proposed working group should explore as a priority.'
Cultural Change. Butcher said a shift to a share pool of containers is about a change in culture or mentality among carriers as much as anything else.
'Cost savings are achievable, but to be fully maximized, they must be accompanied by 'cultural acceptance' and considerably greater internal discipline within the companies concerned,' Butcher wrote.
He said those costs savings could reach 15 percent to 20 percent, though 'the concept itself will achieve its maximum benefit with carriers engaged in consortia or alliance workings, but it would be almost as effective with the major independent corporations which operate a number of separate trade route profit centers.'
It's perhaps easier to envision a gray box pool succeeding among a small group of carriers with some like-minded interests ' like some of the larger alliances in existence today ' than some all-encompassing global pool in which a box would be expected to migrate easily from an intra-Asia feeder service of one carrier to a Mediterranean/West Africa loop of another.
And Visser took the argument even further, suggesting that if carriers were to agree to a neutral pool of containers, what would stop a neutral pool of ships?
'If you gray the box, you should perhaps also gray the ships with the carriers in their present form, and then they're actually becoming asset-light pipeline managers, or better said, NVOs' or non-vessel-operating common carriers, Visser said. 'They would all have one and the same purchase price per trade lane/port pair, be literally all in one boat and then have to excel towards the shipper/consignee in their capability to organize quality, entirely customer-focused, door-door transport through the pipeline, with no asset worries anymore. The questions remain who will own and operate the ships and boxes ' Governments? Banks? ' and how will their neutrality be guaranteed?'