Thirty thousand high-end snow globes are trapped in San Pedro Bay, split between two sea containers on two ships of the inactive offshore flotilla.
A ship arrived at the end of September; the other at the end of October. They have since been stuck at anchor.
Liz Ross, co-founder of CoolSnowGlobes, says that at this point in the season all is lost. His snow globes – worth $ 1.5 million in sales – were due to reach customers before the holidays.
But Wan Hai Lines Ltd., the Taiwanese shipping company that owns these vessels, is making a record profit this year. The same is true for all major shipping, trucking and warehouse companies, as consumer demand has resulted in a 20% increase in imports.
The supply chain, defined as the system of moving goods from factories and farms to end consumers, is tied in knots and fails to deliver. But companies in the supply chain, each a private entity that hopes to make as much money as possible from increased consumer demand, are having their best year ever. At the moment, that means there are few financial incentives to quickly resolve the supply chain crisis.
“Right now, consumers are screaming because they don’t have the product and the price is going up,” said Christopher S. Tang, distinguished professor at UCLA Anderson School of Management who studies chains. supply, “but the big players are quietly happy.”
It starts on the boat.
Most imports arrive in the United States in ocean containers, and only nine shipping companies control 80% of all global container shipments. These companies have further consolidated into three major alliances – 2M, Transport High Efficiency Alliance and Ocean Alliance – over the past decade, giving them unprecedented market power.
“To a certain extent, they have become a cartel,” Tang said. “There’s not a lot of competition, so they can raise the price even more. “
A glance at San Pedro Bay, where dozens of ships have been idling for weeks, can give the impression that these companies are under duress. How can having $ 100 million ships moored at anchor be good for the bottom line?
The financial reports of the shipping companies show that they are finding a way. AP Moller-Maersk, the Copenhagen-based shipping giant, is on track to make more than $ 16 billion in profit in 2021, three times more than its best previous year in 2014, and the biggest profit ever recorded by a company in Danish history. Cosco Shipping, the Shanghai-based company that rivals Maersk for the top spot in the industry, made $ 12.6 billion in profits from container shipping in the first nine months of 2021, and said its revenues had increased. doubled since 2020, thanks to the tighten chain offer.
Wan Hai Lines, which is not part of any of the major alliances, made a profit of $ 2.48 billion in the first nine months of 2021, 19 times more than it did during from the same period last year. Overall, the shipping industry is on track to make more profit in 2021 than it has in the past decade.
Transportation costs are the main source of this skyrocketing income. In 2019, shipping a container from China to the West Coast cost on average less than $ 2,000. At the height of the logistics crisis this summer, prices soared above $ 20,000 for that same container, before dropping below $ 15,000 in the second half of November. Demand increased, supply decreased as arrears increased and prices skyrocketed.
Customers like Liz Ross prepay the shipping lines. In previous years, these companies had a financial incentive to unload their ships as quickly as possible in order to free up capacity for more voyages. But the eight-to-ten-fold increase in prices means a carrier can double its revenues even at 20% capacity. With that amount of money, unused ships in ports such as Los Angeles and Long Beach barely wipe out the bottom line – and could actually turn out good for business, if they mean companies can keep up. high prices, Tang said.
Shipping carriers are also making money by stacking containers on the docks. Once a container has been in the terminal for a certain number of days, shipping lines begin charging end customers a rental fee for using their box, a charge called demurrage in the industry. On the flip side, once a trucker picks up a container and delivers its contents to a customer, shipping companies also begin charging the trucker a late fee, called holdback, if the trucker does not return the empty container in. a certain delay. .
In the ports of LA and Long Beach, so many empty containers have piled up that shipping companies often do not allow truckers to return their containers empty but continue to charge detention fees. Truckers are then stuck with a rising retainer tab and an empty container on their trailer, meaning they cannot go and get a new import container and get paid for a new job. So the pile of import containers is growing, and the only players with the power to remove empty shipping containers to free up space – the shipping lines – have little incentive to do so quickly.
The ports themselves belong to the cities of LA and Long Beach, respectively, but local governments have little leverage to change the behavior of private multinational shipping companies. Ports serve only as owners of the private terminal companies that operate the docks, many of which are owned in part or in full by the shipping lines and depend on them for their income.
In a bid to change the financial incentives at stake, port officials voted in October for a new idle container charge at terminals, which could add millions in additional costs to shipping carriers. Port officials have delayed the implementation of the charge, but cargo has left the docks faster in recent weeks.
The federal government has turned its attention to ocean carriers, but has not taken any regulatory action yet. The Biden administration signed an executive order in July encouraging the US Federal Maritime Commission to investigate “exorbitant fees” charged by shipping carriers. A recent White House blog post raised the idea of using antitrust laws to regulate the industry and called on Congress to support increasing the commission’s budget to fulfill the regulatory task.
While port truckers, many of whom are independent contractors, have suffered from the fees and deadlock of containers at the docks, other major players along the supply chain have reaped profits in the crisis. Supply Chain.
The supply chain activities of DHL and Kuehne & Nagel, two of the world’s largest freight forwarding companies, have both more than doubled profits this year in their core businesses. Profits of major truckers such as Saia Inc., Schneider National Inc., Old Dominion Freight Line Inc. and JB Hunt Transport Inc. soared in 2021, even with fuel and labor costs at the expense of rising, and many are on track to nearly double that. 2019 pre-pandemic profits. CH Robinson Worldwide Inc., one of the country’s largest warehouse and logistics companies, made $ 614 million in profit in the first nine months of 2021, up from 477 million. million dollars over the same period in 2019, nearly a 30% jump.
Big companies have always had the advantage of scale, said Senthil Veeraraghavan, professor of operations, information and decisions at the Wharton School of Business at the University of Pennsylvania. But now that the capacity of the supply chain is being pushed to its limit, “the first to be rushed are those who place small orders.”
The past 20 years have seen an explosion of direct-to-consumer online brands and small e-commerce businesses, such as Ross’s snow globe company, which rely on imports, while the background of the supply chain has tended to consolidate. “These are not centralized systems, there are thousands of companies with millions of people doing their own things,” Veeraraghavan said, and it worked to a point, with small importers placing orders. more than six months to get deliveries in time for the holidays. . “Then it all fell apart at the same time.”
“Year after year we talk about how a little bit of variation in the supply chain spreads across the spectrum,” Veeraraghavan said, “and unlike financial volatility, where stocks go up and down almost instantly, it’s like a ripple in molasses. “
As import demand declines in early 2022, freight prices are expected to continue to decline. Companies that have tried to grow to meet demand will end up with excess capacity and suffer the financial consequences. Businesses that have embraced the crisis, delivered goods late and charged high prices can settle into a soft landing at pre-crisis rates.
That’s little comfort for Ross. She spent 20 years growing her snow globe business from a hobby to a $ 2.5 million per year business, making custom products for clients such as Yves St. Laurent and the Modern Art Museum. She has spent the past three months anxiously watching most of her drives – and it’s been a strong year for drives – getting stuck a mile offshore.
“We’ll be here next year,” she said, hoping to break even on her inventory in 2022. “But it’s a slap in the face.”