Special Coverage: How forwarders, NVOs will adapt to change

Forwarders and NVOs are accustomed to adapting to complex markets and new competitors, but is this time different?

   A lot has been said in recent years about the inability of freight forwarders and non-vessel-operating common carriers (NVOs) to adapt to a coming wave of digital transformation.
   But if there’s one thing those companies know how to do, it’s adapt.
   Forwarders and NVOs have made a living on thin margins, volatile rate swings, and changing market characteristics for decades. If anyone can weather protectionist attitudes toward trade, ocean carrier consolidation, and the intrusion of marketplace-based pricing technologies, it’s these service providers.
   That said, it’s not going to be easy.
   Innovations in ocean freight procurement are buffeting some of the forwarder/ NVO market at the same time as the number of carriers to provide capacity is shrinking. And in the background, the effect of meager global trade growth in 2016 could be amplified by protectionist policies in certain developed economies.
   There is an interesting bright spot though. The rise of global e-commerce has dramatically increased the number of companies shipping across borders, and although many of those companies have small volume and unsophisticated service needs, it is inevitable that some will need the help of a forwarder or NVO, especially as they grow.
   On the flipside, Amazon and Alibaba, the world’s two giant e-commerce marketplaces, are no longer content to just provide a platform for sales and distribution. Both are making major investments in logistics capabilities.
   If this all seems like an impossible situation for forwarders and NVOs to navigate, bear in mind a few things.
   First of all, some of the top 20 freight forwarders and NVOs feel like they already do have the technological tools to compete with upstart technology-focused forwarders and freight rate marketplace providers. Second, much of the technology being developed in the forwarding space is actually intended to empower forwarders and NVOs, not put them out of business. And third, the largest forwarders believe visibility technology is far more of a sales differentiator than automated procurement technology.
   It’s also crucial to note that there are literally hundreds of thousands of freight intermediaries around the globe. To attempt to categorize them, even broadly, when it comes to their technological readiness in a challenging market is ultimately an exercise in futility.
   Even so, major forwarders and NVOs for the most part feel confident that they have the global footprint and local expertise to remain relevant.

   “Twenty years ago our customer base was mostly small and medium-sized businesses,” said Otto Schacht, executive vice president of sea logistics at Kuehne + Nagel. Now we have a balanced mix of SMEs and large customers. Why do they engage with us? We provide them with visibility. We offer them a global network of locations and people. We help our customers to manage their inventory even better. This development didn’t start recently. Automation and the offering of IT-based services started 20 years ago.”
   Schacht said his company is respectful of the new crop of technology startups, and has held internal discussions about what they mean to the industry going forward.
   “But we’re not afraid of the startups,” he said. “Companies like Kuehne + Nagel offer also digital platforms and solutions.”
   Sri Laxmana, director of global forwarding ocean services at C.H. Robinson, noted that the NVO industry’s share of overall global volumes has risen the past decade. He believes part of that growth is due to technological innovation by forwarders, the software industry and startups, all of which are providing solutions shippers don’t get directly from carriers.
   “I do feel given that there’s been a transformation since 2009, and we’ve seen the industry take a fundamental turn,” he said. “When you look at an intermediary that helps customers bridge the gaps from a technology and procurement perspective, certainly a lot of customers see the value. Larger and mid-size retailers that were traditionally approaching carriers direct are now going to NVOs.”
   From a procurement perspective, “that goes to the NVO’s ability to provide solutions across all the [carrier] alliances,” he added. “If you take a specific customer, they might dilute their volume across numerous carriers. [Procuring through an NVO] gives you the ability to leverage your cumulative volume, but delivering cost that is aggressive.”
   Laxmana said C.H. Robinson’s ability to secure capacity is tied directly to other services it offers, like purchase order management and reporting.
   “The rates are going to be the rates,” he said. “For me, the core differentiator is technology.”
   But even those who advocate that forwarders and NVOs need more modern technology come back to an oft-cited rationale for their existence.

Local Knowledge. “The key value proposition of market knowledge and expertise is not going to be easy to replace by technology until [artificial intelligence], deep learning and those types of technologies mature,” said Fauad Shariff, co-founder of the freight forwarding technology provider CoLoadX. “If Alexa, Siri or Cortana can get you a ‘late gate’ at Long Beach, or if it can tell you why you should not have airfreight shipments transit through Astana no matter how short the published flying time, then forwarders will have trouble because their knowledge base becomes digitized.”
   Shariff’s platform is an example of startup technology aiming to arm NVOs and forwarders with modern technology to run their business better. As a former forwarder in the New York area, Shariff comes at the issue with a wealth of real-world experience. CoLoadX isn’t necessarily aimed at the Kuehne + Nagels of the world as much as the forwarder or NVO that doesn’t have millions to invest each year in procurement technology, but increasingly can’t afford to fall further behind.
   “Forwarders do not face any threat from marketplaces per se,” he said. “Marketplaces like CoLoadX are built specifically to help forwarders become more efficient by digitizing resource-draining functions like pricing, quoting and all the manual steps that go into a shipment. This frees up valuable human resources to focus on forwarders’ core value-add, which is product or market knowledge.
   “Think Merrill Lynch versus TD Ameritrade. Both can get you 100 shares of Apple stock. Merrill adds on huge value in the form of financial planning, consulting, etc. TD Ameritrade adds value by lowering the cost of transacting or acquiring those shares. Neither of them has men wearing visors, hunched over a desk, handwriting trade tickets and then handing them off to a runner to complete the order. Right now, freight forwarding is very much in the days of hand written orders and runners.”
   Schacht, however, said that the renewed focus these days on so-called “price discovery” empowered by marketplaces and indices is really nothing new.
   “The transparency was there 25 years ago as much as today,” he said. “The only difference is there was no email yet. If you were an importer back then, forwarders were bombarding you with offers. All these agents in Hong Kong, and they didn’t have email. But they would call, say the rates dropped, space is tight. Today [the importer] knows it one day earlier, but the fundamental transparency was there 25 years ago.
   “There’s a lot of hype about this. If you’re a customer, you can see online five different prices, but you don’t want to change the service provider every two weeks. You see who offers a good price and the best service. As long as he’s somewhere in the market, you won’t constantly switch because if we import three 40-footers a week from China, the most important thing is having product to sell to U.S. consumers.”
   Having had the experience of several cycles within the container shipping industry, Schacht compared the current technology investment boom to one during the dotcom bubble, which brought about an online freight booking portal called gocargo.com. That entity had the backing of Goldman Sachs, but was probably ahead of its time and folded within a couple years.
   Plus, he said the actual booking transaction is not what persuades Kuehne + Nagel’s customers, it’s the service and technology that surrounds that transaction.
   “Booking is only one subject we concentrate on,” he said. “We offer a functional booking solution for air and sea freight. But others do that as well. What is far more important is the instant quoting capability Kuehne + Nagel offers through KN FreightNet, and the seamless visibility. We have a good, proactive visibility system constantly monitoring the container status, so the customer can at any time see where his cargo is, from step A to Z. Especially large customers appreciate this kind of visibility. This is the important part of digitalization.”

Bigger Not Necessarily Better. A former shipper, however, said most large forwarders don’t have the airtight visibility that shippers require these days.
   “In general, the bigger you are, the slower you are to adopt,” said Jack Oney, CEO of Oney Consulting and a former logistics executive with Procter & Gamble. “That goes for 3PLs, carriers, and shippers. In my experience, the big guys are all struggling with IT. They’re sort of in a holding pattern, waiting to see who’s going to rise to the top.”
Oney pointed to what he calls the difference between freight forwarding and freight management, saying most forwarders would like to be seen as freight managers, but really only have the capability to be forwarders.
   “A freight forwarder helps you get on a plane, but they don’t ensure that you arrived,” he said. “Freight management is end-to-end ownership. There are so few forwarders that can manage that. Most of the bigger guys don’t have that visibility. It’s difficult even asking a forwarder to scorecard your carrier performance.”
   Oney is impressed with some of the ideas coming into the forwarding and NVO industries from Silicon Valley startups in an industry slow to innovate.
   “The industry doesn’t ask the out-of-the-box question, and startups are starting to do that,” he said.
   But he’s also surprised how much attention these startups have attracted given the size of the industry.
   Some of these Silicon Valley companies are partnering with experienced advisors, “but I’m somewhat surprised at the exposure these guys get,” Oney said, pointing out (as Schacht did) that dozens of new forwarders and NVOs emerge each week without such notoriety.
   The problem facing smaller companies in the industry is that it often seems like there aren’t any good options. Chasing the scale of even mid-size forwarders can seem pointless, while technology – even new browser-based systems – can be beyond their budget.

   “To the best of my knowledge, there is still no compromise in terms of technology that can offer us a marketable solution against the tech-based NVO starts-ups nor the in-house software of major NVOs,” said Tony Chen, president of the Southern California-based NVO TSJ, which primarily serves clients shipping from China to inland U.S. destinations. “This is a huge ongoing concern, with no solution in sight.”

Alliances And Tariffs. Technology isn’t the only issue on Chen’s mind, either. Carrier consolidation and alliance changes mean his options are fundamentally changing.
   “I’m not exactly sure what the percentage of reduction in capacity is after the consolidation, but it seems there’s still a glut of supply, even after scrapping of so many Panamax vessels,” he said. “The current numbers, affected by Chinese New Year, are rather comforting, but we’re really waiting for BCOs to negotiate their contracts.
   “[Alliance changes] have been bigger for us in terms of [inland point intermodal] cargo, where we suddenly lose 50 percent of carrier selection in tier 4 cities. To compensate, everyone will probably be signing with every steamship line in 2017.”
   Chen also worries about the impact of tariffs, since much of his customers’ cargo originates in China. An across-the-board U.S. import tariff would be bad enough, but one targeted specifically at China could decimate his business.
   “We are extremely concerned about volume being affected by the various new tariffs,” he said. “The most severe would be the 20 percent tariff, which many of our current clients say may immediately force either reduction in workforce or complete closure.”
   Laxmana said he expects to see more merger and acquisition activity in the ocean carrier industry in the months ahead.
   “It was an environment where you had numerous options and now it’s cut in half,” he said. “Carrier margins will continue to improve, and that’s good for the industry. But your operating strategy will be defined by the alliances. Whether you like it or not, you’re going to be directly impacted even if you’re not working with a specific carrier.
   “It’s forcing people to break out of their comfort zone and ask questions that were never asked in the past. Now you’re looking at alliances. Who’s providing vessels? Which terminal are they calling? Which rail line are they using? All of that adds to the equation. Things might be all good at origin and sailing, and then it hits a bottleneck.”
   Aside from providing better leverage with each carrier and connective technology, this is a key differentiator for NVOs, according to Laxmana.
   “This is a value that we can bring to the table in terms of how it impacts their supply chain,” he said. “You can protect yourself from the volatility out there. It’s not just about ‘this carrier has sound financials, go all in with this carrier.’”

Online Conversion. With all these uncertainties hanging over forwarders and NVOs, there’s also the small issue of deciding whether quoting their rates in public marketplaces is a good idea. None of the digital freight marketplaces that have launched in recent years are truly open exchanges. Most have been curated at the outset as the companies try to manage supply and demand.
   “I personally think that forwarders are still not moving fast enough into the online business,” said Ivan Tintore, co-founder and executive president of the online freight platform iContainers. “Everyone seems to keep doing more or less the same. They are all trying and investing but we see no output. It is a huge market and we understand that just being one of the stops on the way is a must. It is not a winner-takes-all market.”
   A “mystery shopper” study conducted in early 2017 by the online global freight marketplace provider Freightos found that of the top 20 forwarders, 15 allow customers to request a quote online, but only Kuehne + Nagel has the ability to provide instant quotes.
   And as reported frequently by American Shipper, freight rate marketplaces aren’t the only software providers aiming to help forwarders and NVOs quote quickly and accurately. Companies like CargoSphere, Catapult and Info-X Software all provide cloud-based rate management tools designed to drastically reduce the time it takes for forwarders to respond to requests for quotes.

   The marketplaces – like Freightos, Simpliship, and iContainers – are putting a greater emphasis on public price discovery.
   In other words, forwarders and NVOs have their options these days. They can continue on a traditional path; they can invest in proprietary or off-the-shelf software that speeds quoting capability, but keeps those quotes confidential or only transparent among a cluster of networked companies; or they can go fully public and quote rates on the open digital market.
   Then there’s the question of whether the large established forwarders might eventually buy a technology provider.
   “We think large forwarders will look to acquire online forwarders,” Tintore said. “The sooner, the better because the longer the time, the bigger the gap. I truly think that the market is huge. I also think it needs to be sliced. Amazon, Maersk, Alibaba, all the big players are making a lot of noise to get into it.
   “And the market has many types of services – standard containers, reefers, hazardous, out-of-gauges. We are still not able to automate it all, but step by step and one after the other, we think it can be done. I see in the market very similar strategies to what happened in the travel industry a decade ago. New, big online players in a very short period of time and the more up-to-date freight forwarders also getting a big piece of the cake.”
   Oney similarly said forwarders should be looking at niche markets.
   “If they’re not scared of what’s going on, they should be,” he said. “They better have a strategy, and they better figure out their niche. There is a lot of opportunity out there, but a lot of danger too.”
   He spoke of shippers creating global visibility platforms and relying on forwarders to handle tactical aspects, rather than entrusting them with total supply chain management.
   And don’t forget the Amazon effect either. As one shipper and former freight forwarder told American Shipper recently, “don’t take your eye off them for one second.”
   But there’s also no guarantee they’ll be successful.
   “Amazon and Alibaba will create disruption for sure, but not necessarily transform the global supply chain or logistics industry,” said Shariff. “They can digitize, they can create price discovery mechanisms for shippers, but ultimately, they will still be constrained by the unscalable, in other words, expertise and relationships.
   “The trouble is that they are going to expose selling rates to shippers and create a race-to-the-bottom environment, and forwarders are way too smart to play that game,” he added. “But shippers could say, ‘okay, we’ll pay a service fee for your knowledge, but still buy the container from Amazon and Alibaba,’ much the way a BCO has their own contracts yet still uses a forwarder to manage the transaction.
   “If the entire outcome of their efforts is to simply rationalize shipping costs, then they will be resisted, find themselves commoditized, and ultimately will have wasted an opportunity to effect transformative change in the industry in a manner similar to what they have achieved in retail.”
   Shariff is convinced forwarders will survive because of their asset-light or asset-free model.
   “Having the ability to change focus areas or markets will allow them to survive,” he said. “Platform adoption will enable more efficient allocation of human resources and make them more effective.”
   Shippers shouldn’t expect established forwarders and NVOs to shrink from the fight of a tough market and new technology-based challengers. But they should realize that they have more options than ever before to negotiate their specific ocean freight challenges, both from a procurement perspective and an end-to-end supply chain management perspective.