Shipping Deregulation Roils Waters
If this is what shipping deregulation is all about, Costa Mesa toy maker and importer Mark Lee will take the good old days of steamship cartels and price-fixing any time.
Like every other U.S. merchant who imports from Asia, Lee today begins paying up to 47% more in ocean transportation costs for the Star Trek Collectibles, Amazing Amy dolls and Friend.link toy pagers that he has shipped from China to the West Coast for sale in places such as Wal-Mart, Target and Toys R Us.
“We don’t like it,” said Lee, vice president of Playmates Toys.
The rate hike will raise his overall costs 2% to 5% and eat into his profit because, for competitive reasons, he can’t afford to pass the cost along to consumers. “We’re hoping this is a temporary situation,” he said.
So are hundreds of other U.S. companies, from Gap and Mattel to Dayton-Hudson and Ford Motor, which all import ready-made goods, components or raw material by steamship container from Asia.
Most say the rate hike will affect profits, not prices, because competition is too tough to pass the increase along to consumers.
“It’s a lot more bucks all at once, but we’re in no position to raise prices,” said David Reed, vice president of operations at Casio PhoneMate, a Torrance-based firm that imports “several hundred” container loads of cordless telephones and answering machines annually. “The competitive climate in the consumer electronics business is too rough for that.”
The rate hike is taking effect today in tandem with the Ocean Shipping Reform Act, a federal law that partly deregulates the steamship industry, covering all cargoes leaving or entering U.S. ports.
Largely because of its strategic importance and vulnerability to global economic forces, shipping is one of the last protected U.S. industries. Since 1916, cargo lines have acted as cartels with broad price-setting powers that are immune to antitrust laws. But shippers at least had to make freight rates public and available to all customers, big and small, in their role as common carriers.
The result was that smaller companies such as Lee’s benefited from the rates negotiated by import giants such as Nike and Mattel, which import 70% or more of the billions of dollars of apparel and toys they sell.
The idea of deregulation is to lower prices by introducing competition. And the new law might eventually do that because it gives carriers and shippers the flexibility to individually and confidentially negotiate customized, global transportation deals, even including truck and rail transport, while excusing them from making those rates public.
But shippers and importers say the price run-up is a matter of timing: Old shipping contracts are expiring while the transpacific traffic is badly out of balance and demand for space is at a premium. Thus carriers seized the moment and boosted rates sharply. Presumably, market forces will eventually enable the big customers to negotiate better package deals.
“Maybe in the long term, the law will be a good thing, but obviously the cost of business is going up for now,” said Charles Woo, whose Los Angeles-based Megatoys company imports goods from Hong Kong.
Steamship carriers say the price hike merely brings container freight rates back to 1995 levels.
Locally, the changes are cutting into profits of numerous importing firms. And, more generally, deregulation promises a shipping shakeout as new competitors see openings to undercut other carriers.
“It’s roiling the waters,” said Jack Kyser, chief economist for the Los Angeles Economic Development Corp.
“These are very aggressive rate increases and you’ve got small shippers groping in the darkness,” Kyser said. “On the other side of the equation, new steamship companies are entering a market where no one’s been making any money.”
The rate hikes are focused on Pacific trade because that is where demand is highest and profits have been lowest, thanks in part to the Asia economic crisis that began in July 1997.
Demand for U.S. goods dried up in Asian nations at the same time demand for Asian goods soared in the United States, due to the booming economy and the attractive import prices caused by currency devaluations in Thailand, South Korea and other nations.
That means the rough balance of cargo traffic in each direction that carriers say they need to be profitable is ruinously out of whack. They don’t have enough containers to meet the U.S.-bound demand, while the vessels heading in the other direction are half-empty.
“From an environment where you had 55% of all container freight coming to the United States from Asia and 45% going, it changed to 70% coming and 30% going. That has meant a lot of empty containers carrying the same costs but no revenue,” said Niels Erich, a San Francisco-based consultant to steamship lines.
All but one U.S.-based steamship line, Sea-Land Service of Charlotte, N.C., have gone broke or been bought out in recent years. Sea-Land, the third-largest carrier in the world and a unit of CSX Corp. of Richmond, Va., led the flotilla of maritime lobbyists that sought the new law.
The new rates raise the average cost of shipping a 20-foot, cargo-stuffed metal box from Hong Kong to Los Angeles to $2,800 from $1,900. Making matters worse, the industry on June 1 is slapping on an additional surcharge of $300 per container through the busy Christmas season.
Small importers such as Lee and Woo are scrambling to form associations with clout to negotiate better deals with the carriers. But whatever the impact on them, Sea-Land is looking out for its own interests.
“We’re not profitable to the degree we can continue to invest capital. Rates have dropped 30% since 1996. It’s caused Sea-Land to get out of areas, like Northern Europe-to-South America routes,” spokesman Clint Eisenhauer said.
“Now we’ll be able to configure our products and services to our target customers,” he said.
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Trade-Offs
A booming U.S. economy and weakness in Asia have knocked the shipping industry off balance, with eastbound vessels jampacked and westbound traffic half empty. Annual export figures, in billions of dollars:
Jan.-Feb. ’99
Asia to U.S.: $51.3 billion
U.S. to Asia: $25.8 billion
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Source: Census Bureau, Foreign Trade Department
