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Remarks of Steven R. Blust at the Liner Shipping Forum, Beijing, China April 27, 2006

April 27, 2006

It is a great honor and a personal pleasure to be addressing this forum on how globalization and its impact on international trade has been and will be affecting the liner shipping industry. I would especially like to thank Captain Wei Jiafu, the President and CEO of the COSCO Group, and Mr. Luo Delin of the China Shipowner’s Association, for putting together such an impressive program, and for inviting me to participate. And, I certainly must add: Congratulations to COSCO on arriving, so successfully, at its 45th anniversary!

In looking for a theme for my remarks today, one in keeping with the forum’s own theme of “Change in the Shipping Market and Business Model,” I recalled the epigraph from a prize winning, popular novel from the late 1990s, set in the state of North Carolina in the closing days of the American Civil War, entitled Cold Mountain . That epigraph consisted of two lines, in translation, from a work by the T’ang Dynasty poet Han-Shan. The lines read:

Men ask the way to Cold Mountain.

Cold Mountain ? there’s no through trail.

The poet’s observation, that progress in life is often difficult and one must blaze one’s own trail, is a familiar one. And, when it comes to the future of liner shipping there’s certainly no easy “through trail” is sight. Recent trends may suggest a general direction, but in this business those who succeed are their own pioneers. There are no well traveled, secure paths to commercial success or even survival. That was true 50 years ago when Malcom McLean’s first containerized shipments sailed from Newark to Houston . It was true in 1961 when China Ocean Shipping Company, with just four ships, began service as ’s international shipping line. It was true in 1984 when the first economical, double-stack rail car system was launched. And it was also true on the regulatory front, when service contracting and independent action were first introduced in the Shipping Act of 1984; and again in 1999, when OSRA took effect, and confidential service contracting took hold.

Innovations in liner shipping -- whether technological, organizational, or regulatory -- frequently surprise us with the dramatic changes they generate.

So my comments today must be qualified by a caveat:

It’s relatively easy to predict near term prospects. But more precise and longer-term forecasts tend to be less clear -- it’s a question of what unforeseen changes will occur, and what will be their impact in magnitude and direction. Still, we have no choice. To manage our businesses, or even our daily lives, requires planning -- and planning requires prediction. Whether the forecasts underlying the plan turn out to be relatively accurate -- or otherwise -- the process that they help guide is a critical one.

Later today, we’ll be hearing forecasts from other distinguished speakers. They will be offering their predictions, for example, on the future prospects for ’s shipping industry, and on the outlook for the container shipping market. So I take comfort in knowing that my going out on a limb today will not be a solo exercise.

As head of a government regulatory agency, it is perhaps natural that my remarks will be about the possible future in the regulatory arena. And, when one looks at trends in liner shipping regulation in the trades, there are at least three areas that stand out as likely to see change over the next five years:

  • Cargo security regulations, 
  • Regulations affecting ocean transportation intermediaries, and 
  • The organization of carrier agreements.

I will offer a few qualitative prognostications on what regulatory changes may be in store.  I would underline that qualification -- “may be.”  These are just personal speculations – my own views, and not necessarily those of my colleagues at the Commission.

Cargo Security

Cargo security is one of the subdivisions of the broader category of maritime security, which also includes vessel security, port and terminal security, and maritime personnel security.  As we have seen since the airliner attacks on September 11, 2001, there has been a strong push -- initially in America, but expanding now to Europe and beyond -- to ensure that neither liner vessels, nor the containers they carry, can be successfully used to deliver chemical, biological, or nuclear weapons -- or transport terrorists. 

The basic direction taken by the so far in the effort to improve cargo security for containerized goods has had two main emphases:

  • Conducting security screening of “high risk” containerized cargo, in cooperation with partner countries and ports, before it is loaded onto a U.S.-bound vessel -- which involves undertaking an informed risk analysis of what’s in the container; and  
  • Finding ways to establish responsibility for the security of import supply chains, and encouraging active oversight by the responsible parties.

Both approaches are highly complex and data intensive.  Both depend on the active and on-going cooperation of partner countries, international shipping lines, ocean transportation intermediaries, and cargo owners alike.  And both approaches are likely to involve a continuing push for more detailed and accurate information relevant to improving risk assessment procedures.

As a consequence, one trend we are likely to see in coming years is a greater effort by government security agencies to hold shippers -- and in particular the “importers of record”-- increasingly responsible for the security of their supply chains.  The logic is fairly straight-forward: Shippers own the cargo in question and are responsible, directly or indirectly, for choosing their overseas suppliers and the consolidation and transportation service providers they employ, so those shippers are the natural ones to turn to, to promote improved security measures.  Not withstanding the difficulties that will be involved, I believe that shippers increasingly will be called on to take a more active role in ensuring that appropriate security procedures are being applied across their supply chains.  And I also believe they’ll be expected to provide more and better data on their import cargo that can be used to improve the government’s risk assessments.

When and how such changes in security regulations will occur is, of course, a matter of conjecture.  But I can tell you that, during the Commission’s strategic planning process, we identified the issue of NVOCC licensing and bonding as an important area to which we will be devoting greater attention, effort, and staff in the future.  We hope to make the licensing process easier for applicants so as to minimize any administrative burden -- but we also plan to stress the necessity of compliance as well.  So I feel confident in predicting that, in the future, NVOCCs in particular, but also the shippers that use their services, and the ocean carriers who contract to carry their cargo, will find it increasingly important to be certain that full compliance is achieved in the Commission’s licensing and bonding requirements for NVOCCs and freight forwarders.

NVOCC Service Arrangements

And, as long as I am discussing NVOCCs, this may be the appropriate place to make a few comments about NVOCC Service Arrangements (also known as NSAs), the new contracting option that the Commission created by establishing an exemption to our tariff publishing requirements.

The first NSA was filed with the Commission in late January of 2005, shortly after the rule was first effective.  So we now have about 15 months of experience with this new pricing tool.  As of mid-April 2006, 300 original NSAs had been filed -- by 57 active NVOCC filers -- out of 355 NVOCCs who are registered to be able to offer NSAs.  That means that only slightly more than 10% of all NVOCCs have even registered to offer NSAs, and fewer than 2 percent have actually taken advantage of the new contracting option.

Explanations for the slow start to NVOCC contracting have, so far, been anecdotal and largely speculative.  We remain cautiously optimistic that over the next year or so the number of NSAs will increase significantly, but we are also aware that shippers do not yet seem to be attracted to the NSA option.  Results from a recent survey by BDP International offer a few interesting suggestions as to why that may be the case.

BDP’s survey of 85 beneficial cargo owners involved in liner transportation of their goods produced some interesting data.  The survey results suggest that small and medium shippers (those shipping fewer than 1,000 TEUs annually) may not be taking advantage of NSAs either because they are wary of having to make binding volume commitments to their NVOCC carriers, or because NSAs are too new and untested an option to be attractive to them.  On the other hand, the survey results suggest that larger shippers seem to prefer to deal directly with ocean carriers via service contracts -- perhaps because ocean carriers, as vessel operators, can provide the kind of space guarantees or service commitments that larger shippers are seeking.

The folks at BDP note that 40 percent of their respondents had “low” or “no” awareness or knowledge of NSAs, how they work, or what benefits they might potentially offer.  BDP found that only slightly more than one quarter of the survey respondents had ever been contacted by NVOCCs regarding the availability of NSAs. 

I believe that this presents a golden opportunity for new business, and therefore I forecast a substantial growth in the use of NSA’s in the future. There is a fundamental shift that will emerge--small and mid-sized shippers will be able to take advantage of prime supply chain service providers by contracting with NVOCCs thru the use of NSAs and utilizing other services provided by them. However, because this is a new playing field established on the playground of international trade, it will take some time for new business processes, skills, and recognition of benefit to converge into a new market.

We are all familiar with the term outsourcing. In his book “The World is Flat”, Thomas Friedman refers to a recent logistics development as “insourcing”. Service supply companies in the field of logistics and supply chain management, are emerging to assist sellers and buyers in analyzing their business processes, and then design, implement and manage the whole supply chain for them. Originally, it was just for the large companies, now, with the advent of NSAs it can also be for small and mid-sized companies. Insourcing requires of the service supply company, an assumption of some of the risk, such as responsibility for security, collecting money, and acting as a trust broker between the business parties. Small companies are seeking parity with the big companies, and companies that provide this service will greatly add value to the small companies and create the opportunity for growth.

Logistics companies can help level business barriers and help harmonize trade through their broad business base.

Insourcing is distinct from supply chain management as it goes further beyond the basics. It requires more intimate and extensive collaboration and added value. It creates platforms for anyone to take his or her business to vastly improved efficiency of the global supply chain. Insourcing managers could take the lead and assume responsibility for the safe transportation of the goods thru the supply chain.

While we remain hopeful that 2007 may produce a take off in the use of NSAs, it appears that the convergence of activities and the establishment and implementation of the new business model must develop before shippers will be willing to take the plunge. Shippers -- especially small and medium beneficial cargo owners -- have to be confident that there’s real value in signing NSAs.  As was the case when service contracts were first introduced in 1985, it will be shipper demand that drives contracting.  If NVOCCs can show their clients that there are significant benefits to be had from making the necessary contract commitments, NSAs should have a bright future.  If not, NSAs could remain a pricing tool of limited general appeal -- a niche product useful mainly to a select shipper segment.

Ocean Carrier Agreements

And finally, I’d like to offer a few personal observations about ocean carrier trade-lane agreements -- conferences and discussion agreements.

As most of you are aware, the European Commission’s Competition Directorate is proposing to eliminate the European bloc exemption on pricing, from the competition laws for liner shipping -- but it is still engaged in discussions with the European Liner Affairs Association about whether, and to what extent, information exchange among competing lines may be allowed.  In this region, many Asian nations appear to have decided that continued antitrust immunity for liner shipping is indeed warranted.  And, in the , the Ocean Shipping Reform Act of 1998 allows continued antitrust immunity for carrier agreements, but has limited the scope of permissible concerted activities -- while dramatically altering the way lines price their services by introducing confidential contracting.

First announced in 2003, the European Commission has now proposed the elimination of the bloc exemption for conferences and pricing agreements.  The EC’s Competition Directorate has presented its proposal to both the European Council, for determination, and to the European Parliament, for consultation.  The current view is that the proposal will be adopted by the end of 2006; my understanding is that DG Comp is planning to have some guidance to the industry about how carriers may conform current practices, or eliminate them, with respect to the new application of the competition laws.  A two-year “sunset period” is likely.  After that, there may well be two general systems – one in the European trades and another for all other trades.

Given such differences in policy, predicting with any accuracy what the future regulatory framework for this highly international industry may look like five or ten years from now would be a major challenge.  In the short term, it seems more likely than not that the liner bloc exemption in the European trades will give way to some sort of system of information exchange.  What sort of system may emerge over the next few years remains to be seen.  However, given the recent policy directions taken by some Asian governments, it seems unlikely that Asia will be adopting the EC approach anytime soon. 

OSRA, perhaps because it was a product of the congressional legislative system -- with the negotiation and consensus-building that are usually involved in that system – OSRA was essentially the continuation of a pragmatic and evolutionary reform process.  It was a process that generated tightly-focused reform provisions targeted at specific, identifiable problems.  For example, the specific problems involved were:  (1) the tendency for published service contract rates to constrain rate negotiation efforts and outcomes; and (2) the fact that conference regulation of members’ service contracting resulted in burdensome administrative inefficiencies -- too much red-tape and delay.  The solution:  make contracts confidential and remove conference authority to regulate service contracting.  The result:  a more efficient pricing system, greater flexibility for all parties, and minimum disruption.   OSRA also increased the FMC’s authority to grant pro-efficiency, pro-competitive exemptions -- which means that some future regulatory reforms may be accomplished on a regulatory, instead of a legislative basis.

It now appears that global liner operators may for some time be subject to a dual system, with the continued existence of discussion agreements in U.S./Asia trade, and more limited information exchange procedures in the Asia/Europe trade.  Whether or not there will ultimately be some form of convergence in international liner policy is hard to guess -- and I don’t intend to try. 

If legislators believe that changes to OSRA are warranted, I am confident that the affected parties will discuss such potential changes, as they have done in the past, in a problem-specific fashion, while seeking a broad industry/government consensus.  

Conclusion

And on that note, I would like to thank you all for your kind attention.  Perhaps five years from now, when COSCO celebrates its 50th anniversary, we can reconvene under similar circumstances and see whether today’s various speculations about regulatory change, market change, and business model change, proved at all accurate.  Again, thank you.