Enhanced Cooperation Is Required to Solve Global Supply Chain Congestion

The pandemic began in China at the end of 2019, reaching American soil in March 2020. The world did not seem to notice much when 25 percent of the global container fleet was stuck in transit on ships anchored in ports in the early days of the pandemic. At that point, we all struggled to envision the path forward to vaccines, boosters, and ultimately learning how to live with COVID-19. From the start of the pandemic and through the first year, the women and men of our industry worked bravely and tirelessly out of the spotlight to keep goods moving throughout the first year of the pandemic. From a legal perspective, we did our best to navigate the different COVID-19 protocols and policies. Seafarers, longshore workers, warehouse workers, truck drivers, and office staff all made personal sacrifices working every day to keep the economy moving while achieving amazing results under extremely difficult circumstances.

The delicate nature of containerized shipping became evident to even the casual observer with the very public and captivating grounding of the Ever Given in the Suez Canal. The shipping industry was not used to being on the front pages of newspapers. From that moment forward there has been a relentless wave of scrutiny, criticism, complaints, and political focus. There is a solution and an opportunity to harden our supply chains, which will lead to a better way forward for container logistics.

Current Challenges for Container Shipping

Global transportation demand is peaking due to inventory backlogs and new consumption habits, exacerbated by government stimulus packages (this is not just an American phenomenon). In response to this, every available container vessel in the world is sailing. Despite the fact that all container vessel capacity has been deployed, the “effective” capacity of the world container vessel fleet is severely limited by landside supply chain bottlenecks (if ships are stuck at anchor waiting to be unloaded, then that capacity is trapped and unproductive). The American consumer has developed an insatiable demand for goods during the pandemic, which, because there is finite capacity, has interrupted traditional flows and resulted in higher rates for cargo going from Asia to the United States. This high demand has also resulted in the need to evacuate the empty containers back to Asia to be quickly re-loaded with more cargo destined for store shelves at places like Home Depot and Lowe’s or to provide goods directly to the consumer. Basic economics dictates that a decrease in practical supply combined with an increase in overall demand will create upward pricing pressure. Cargo-owners and transportation intermediaries (called “freight forwarders”) are bidding competitively for an increasingly scarce fleet of available equipment. In other words, prices are being driven higher by the operation of free market principles in the face of a supply shock caused by the labor shortages and other market disruption brought on by the pandemic.

Meanwhile, costs are rising on multiple fronts. Port and inland congestion issues have driven up prices paid by ocean carriers across all facets of ocean shipping. Lack of available berths causes ships to spend more time at sea, using more fuel to complete loops. Trapped containers drive up key input costs for freight rates. Chartered vessels operate at much higher marginal cost than the core fleet.

On top of all this, vessels used on ”under-utilized trades” are being redeployed on trades where demand is high, and routes are constantly optimized in response to congestion. In practical terms, this means ships and containers have been pulled out of other trade lanes and thrown into the Asia-to-U.S. Trans-Pacific trade lanes to meet the demand.

Although there exists some verticalization within the container shipping industry, the historic focus on short-term, commoditized shipping has been shaped in the last two decades by success of certain procurement models of a few, very large U.S. companies. This in turn has resulted in a less resilient, less flexible, and ultimately lower quality supply chain that is fragmented and relies on cooperation between links in a supply chain that are made up of parties with different priorities. Indeed, today’s global container supply chain suffers from too many handovers, data scattered across parties and formats, lack of accountability for outcomes, and cumbersome and analogue engagement models. On any shipment, there may be more than 10 different supply chain companies, each with a different role and approach. Customers face delays, costs, and other issues when dislocations occur at any of these nodes.

A Better Way Forward

Maersk is actively helping customers to build resilience, agility, and flexibility with digitization and an integrated logistics model. A solution to the current supply chain challenges is long-term partnerships built on clear and relevant contractual delivery promises on both sides (with consequences if not delivered), with guaranteed fulfilment across transportation modes and products, including ocean, air, warehousing, trucking, and direct-to-consumer e-commerce delivery. Our goal is to deliver high predictability in customers’ supply chains, enabling them to reduce inventory cost and better capture market opportunities. Most nontransportation attorneys would be surprised to learn that two-way contractual commitments remain rare in the ocean container shipping business. There are many reasons for this and, while I remain sympathetic to the dynamic nature of certain markets like agricultural export, the fact remains that more predictability and reliability is required from all supply chain participants, since all markets utilize the same container supply chain (which is the brilliance of Mr. McLean’s model).

The U.S. government, like many other governments, is grappling with the impact of supply chain congestion and rising inflation. President Biden’s July 9, 2021, executive order, for example, targets (among other things) competition concerns in transportation and logistics markets and directs the Federal Maritime Commission to look into supply chain disruptions and pricing practices among ocean carriers and others. However, it’s important to remember that supply chain congestion is not limited to international container trades. The shortages you experience at your local grocery store, shortage of hospitality workers, the inflation caused by rising apartment rents and housing, and the increases to gasoline prices are not a result of the ocean container trade congestion. And, while there are potential solutions to many of the challenges noted above, these will involve more than simply trying to ferret out supposed bad actors and promoting “competition” without first understanding the nature of the problem.

There is currently a misconception by some as to whether there is enough competition in the ocean carrier industry. This misconception stems from the fact that the ocean carrier industry utilizes alliances to provide more routing options and better utilization of vessels. For example, an ocean carrier might conclude that starting a new weekly service to support trade in South Florida would be advantageous but not have enough vessels or customers to serve the route alone (a weekly service generally requires seven vessels calling ports in a rotation). A vessel-sharing alliance simply allows ocean carriers to contribute ships to a single service, making it more economically viable.

Vessel-sharing alliances exist in some trade lanes and not in others. If a trade lane has enough demand, then carriers would prefer to operate and control their service and not be dependent on competitors for operational collaboration. The Federal Maritime Commission reviews each such proposed alliance agreement before it goes into effect to ensure the alliance will add capacity to the market and not eliminate or reduce capacity that would exist if no alliance was allowed. The ocean carriers in an alliance are required to compete commercially and are not allowed to discuss, fix, or align any rates or commercial offerings. Discouraging the formation of vessel-sharing alliances or adding reactionary restrictions to try to address the current congestion is therefore an exercise that should be taken with full awareness of the potential unintended consequences of a reduction in service and increase in cost.

In short, while regulatory oversight is important in a functioning global economy, overuse of enforcement can easily slow down progress. Far more can be gained currently from assessing and addressing where the system itself drives inefficiencies that can be addressed through reform of those processes, rather than rote application of traditional competition enforcement principles. Global trade needs support from government to increase investment in critical infrastructure. Industry participants also need support in creating flexibility and agility along the supply chain, including on the cost side, to provide for ongoing creative and alternative solutions for customers. Government should encourage collaboration on initiatives related to sustainability and stability—something that can be readily accomplished while preserving competition on the key customer-facing aspects of the industry.

The shipping industry is uniquely positioned to influence positive changes in these areas. My company in particular has coordinated closely with the Federal Maritime Commission in its initiatives to introduce common-sense rules and regulations and increase enforcement on bad actors. For its part, the Federal Maritime Commission has taken a balanced approach in acknowledging the number of different players in the supply chain and recognizing that the Commission has a unique ability to bring these different stakeholders together in a proper forum to achieve industry solutions and best practices to benefit the supply chain and its participants.

For example, much attention has been given to efforts to reduce the congestion at the Ports of Los Angeles and Long Beach. Although much credit belongs to those respective port directors for their leadership, the collaboration that led to those successes was only achievable under the construct of discussion agreements expressly permitted under the legislation that empowers the Federal Maritime Commission. This is an excellent example of how the industry needs to function—by finding common ground on issues that drive inefficiency while preserving full competition on commercial issues. We will need to implement this type of collaboration and cooperation across the industry on issues such as reducing emissions and introduction of electrified operations to achieve the necessary reduction in greenhouse emissions and fulfilling commitments to achieve net zero greenhouse gas emissions by 2040.

Conclusion

Mr. McLean started with a simple concept that has evolved into a global supply chain that touches every country. The COVID-19 pandemic has shown how vulnerable our supply chain has become. In order to reinforce it and build it back better, we need to continue to find the opportunities during this crisis and invest, integrate, and collaborate to design a better and more sustainable container shipping industry. We need to appreciate the complexity of the supply chain shipping infrastructure, avoid the desire to find the single instigating factor or the single solution, and work collaboratively beyond our focus on ocean container shipping to build a green, resilient, supply chain transport network.