Unstoppable transformation

posted on 15th August 2019
Unstoppable transformation

Increasing transparency, including of freight pricing, is inevitable – which is good for shippers and forcing logistics companies to become more efficient, says Ivo Aris, vice president of CH Robinson’s Europe Global Forwarding division and chairman of Air Cargo Netherlands

Freight and logistics group CH Robinson is a household name in the US and the market leader in its largest business activity – North American surface transportation. Founded in 1905 in the fresh produce and road transport business, the company started to expand more rapidly in the 1980s after going public and now has 15,000 employees, 124,000 customers and 2018 revenue of US$16.6 billion.

But it’s less well known outside North America and its international freight forwarding business is relatively new, making up just 5% of its business until 2012. That changed with the US$600 million acquisition of Phoenix International, which doubled the group’s air and ocean freight activities. Further acquisitions followed, including Australian forwarder APC Logistics in 2016, Canada’s Milgram in 2017, and Space Cargo in Spain this year.

The global forwarding business now accounts for around 20% of CH Robinson’s turnover, says Ivo Aris, head of the group’s Europe Global Forwarding (EGF) business since July 2013. CH Robinson has been in Europe since the early 1990s, but in his six years at the company it has “made a lot of changes, and in the last five years, Europe Global Forwarding has doubled in size”.

That broadly mirror’s the growth of the group’s global forwarding business as a whole. “We’ve been growing double-digit percentages every year, but we’re not yet the size of a market leader in this global forwarding market,” Aris notes.

Market softening

That market has slowed since April, especially in air freight.

“Air freight in our industry is the first indicator of economic change. The question is always whether this is just a little blip; but it’s the start of a downturn,” he says. “The market has been a seller’s market for a number of years; it will most likely switch to being more a buyer’s market again, which is not good news for the people who own the capacity. Normally for forwarders, it’s less of a problem: the art of forwarding is adapting fast, or anticipating.”

Aris says it is not just the US-China trade dispute that has weakened the air freight market in the last few months, with issues such as a salmon disease in Scandinavia and the ‘dieselgate’ scandal in Europe, “which is really affecting all the automotive business, especially in southern Germany, with automotive suppliers suddenly moving a lot less air freight. There’s still the amount of shipments there, but the size of the shipments is getting smaller.”

Aris says some people are quite optimistic the market will pick up after the holiday season, as is the usual annual pattern, but he points out that the market is getting looser – estimating that air freight exports out of Europe are down by around 20%. And global figures for the first half of 2019 indicate a 5% decline in worldwide air freight volumes, year on year.

“But it’s not like 2008-2009, when everything crashed,” Aris stresses. “And, of course, a lot might have to do with trade wars.” That’s not just about US-China, but also the recent threats from US President Trump to put tariffs on other markets such as Mexico and Europe.

“These things have an effect on the markets,” he notes. “With the trade war with China, we already see some textiles business production starting to move towards southeast Asia and India.  And even if China and the US reach an agreement, there are still things like Brexit.

“It can still potentially end up in a good end outcome with free trade agreements; but some capital already has left the country and people will not just say: ‘oh it’s cool’ and then go back.

“So, there are already changes; and for forwarding companies, it’s a matter of adapting fast. You have to keep the finger on the pulse.”

Ocean freight is not really affected right now – “although I see a spike of LCL shipments”, Aris notes. “That could also be a sign that the market is getting a bit softer, although consumer spending is still relatively stable. It’s a bit down in the US, but it’s still stable.”

Block space agreements

Whether there is a prolonged downturn has profound consequences on freight forwarders’ freight capacity strategies.

“What forwarders try to do is commit to certain blocked space on some lanes so they have the space available for their regular customers,” he notes. “When they expect that the market is getting weaker, they want to commit less to the carriers, so they will not have dead freight: if they have a fixed allotment and don’t deliver the freight, they still have to pay. So, they want to avoid that.”

But even those forwarders that make the right capacity decisions face problems because there will be some “that didn’t do the math well, and they have all this space left, and they have to pay for it. So, they go to the market with really low rates – because it’s better to get a low rate than pay for empty space. So, that’s a problem.

“If the market gets tighter, and forwarders commit to exactly the right size allotment, then they can win, because then companies who don’t have enough space need to buy ad hoc in the market and have to pay very high prices.

“In an up-trending market, they can continue offering good rates to their customers. But, in a down-trending market they are hurt anyway – if they have the right size allotment or not.

“When the market was getting really tight a few years ago, some really suffered – because if they have a multi-year contract with a big customer for a fixed rate, they cannot just say: ‘oh sorry, the price went up, you have to pay more’. So, they start to make losses.

“In down-trending market, everyone has a problem. But right now, we’re not yet in a crisis mode whatsoever.”

The move by some shippers to explore different sourcing and manufacturing decisions, due in part to the US-China dispute, has highlighted the need for a diversified and balanced network, Aris says.

Asia-Europe rail option

“One of the things we’ve done, over a year ago, is start a rail service from Asia to Europe,” he highlights. That currently runs from eight industrial cities and areas in China to nine destination in Europe. “Every customer we introduce to that service is likely to book again,” he notes.

Aris says all of the rail freight services from China to Europe are “heavily subsidized” by the Chinese national or provincial governments, because they see that as a strategic infrastructure channel for distribution. He estimates that “probably more than half of the costs are subsidized – especially certain routes they want to further develop. The question is, how long will they want to continue that? There’s no sign that they will stop.”

Capacity is currently not a problem, although there’s a significant imbalance, with more business coming from China than to China. “So, especially the rates to China are really low,” Aris notes. “I would compare it to the old air-sea product, which always went in and out of fashion based on whether there was a peak in Asia or not. But that was not subsidized.”

He says few, if any, companies approach him offering air-sea these days from China to Europe, with the rail product apparently replacing that as a solution falling between the speed and costs of ocean and air freight.

Cross-trades

For CH Robinson’s Europe Global Forwarding business, traditionally the most important trade lane is the transatlantic; but traffic to and from India, Oceania and China, is also developing fast. “One of our goals is to further strengthen the balance in the network to offer customers an even better service experience across the globe. The recent acquisition of the Spanish freight forwarding company Space Cargo is a good example, with its well-developed position especially on the Europe-Latin America trade lane,” notes Aris.

While EGF is quite strong in the Germany-LATAM trade for the automotive market, one aim is to link Space Cargo’s Europe-LATAM strengths to the group’s air freight ‘gateway system’.

Aris explains: “We have established air freight gateways like Amsterdam, Frankfurt and London, and in those gateways, we build optimised volume mixes. That’s our business: filling volume, mixing low- and high-density freight and creating lower buying rates. With this, we can offer our customers a better service costing less in a sustainable way. The differentiator is that these three gateways are now linked closely together to become one virtual gateway, optimising the mix on a European scale and creating a competitive edge.” Consolidation experts in different locations talk to each other all the time, identifying potential traffic to mix and coming up with service options, including transit time and price.

Technology play

While that part of its business may be relatively unreconstructed technologically – done largely ‘the old school way’ – CH Robinson has made massive investments in technology, including an in-house technology team with more than 1,000 staff.

“In the last decade we invested over US$1 billion in technology, and we plan to do that again in the next four to five years,” he notes. “We have one global technology platform named Navisphere serving all of our activities and services: road, air, ocean, everything.”

At CH Robinson, “a very strong part of the business is our analytical tool and the customer-facing technology side of it”, he says. “Everyone is working basically on one system, so you don’t have to key in things twice, and there are a lot of big data solutions on the back end, and with that they can advise and give customers full visibility of their supply chain, in an advanced way. Additionally, we sit down with customers, to learn exactly what they need, what they do. We have the relationships with carriers, with other providers, customs; we can connect things and build it exactly to the customer’s needs.”

He says the team at CH Robinson does “a lot of logistics engineering type of analysis – and then translates that to a tailored solution”.

While customers of all sizes can benefit from Navisphere’s “full supply chain transparency”, how far the integration can go depends on the size of the customer and how advanced a customer is, technologically.

“We have a very ‘brick and mortar’ type of relationship with some customers, but with big players we have really integrated solutions.”

Visibility issues

Although operations people in the air cargo side of the business often complain about a lack of connectedness within the fragmented parts of the air freight chain, and therefore a lack of visibility, for a major freight forwarder with relatively advanced IT capabilities, that is less of a problem.  “Of course, sometimes it depends on your systems – like with status updates, you need to have reliable data,” Aris notes. Since some of the status updates come from carriers that are not on the direct payroll of forwarders, it is not possible to fully control how accurate those are.

Aris also sometimes wears another hat, as chairman of Air Cargo Netherlands (ACN), an organisation aimed at developing the Dutch air freight forwarding industry, linking freight forwarders, airlines, handlers, truckers and other service providers. Functioning as an industry “innovator, supporting research and providing vision”, the organisation also “acts as lobbyist and promotes Dutch airfreight”, says Aris, describing ACN as “the go-to organisation for air freight in The Netherlands”.

Linking silos

He continues: “Linking the silos was always our main topic. The airlines, forwarders and handlers only saw each other when they had an issue. Since we have Air Cargo Netherlands, they sit together and talk about optimisation of the whole chain at the airport, and they’re really forward with that. Meanwhile, airports like Singapore, Brussels and Frankfurt have chosen a similar approach.

One key example has been trying to find solutions to reduce truck waiting hours at airport cargo terminals – where “the truck brings your air freight to the handler, and then has to wait there for six hours because there’s not enough personnel”, with some of the airport cargo community initiatives making significant progress recently with that.

There are still some significant inefficiencies – such as the need for trucks to make multiple pick-up and delivery stops around the various air cargo terminals, although that’s an area ACN has also helped bring progress, via the so-called ‘Milkrun Project’.

“Trucks moving from the forwarder’s warehouse to the handler’s warehouse used to have an average load factor of 25%,” Aris notes. “By combining freight of more forwarders into a Milkrun truck, supported by a technology solution, we managed to increase the load factor to 60-80%, reducing costs, total waiting hours, as well as CO2 production.”

He notes: “In general, during the last 40 years, not enough progress has been made of that physical process. It’s always a big problem in the industry: you have all these different silos. At the same time, we have to acknowledge that air freight has grown a lot over the years and the requirements in terms of security have also completely changed the landscape and made it more complex.”

Aris says all players have to keep in mind that “the silos need to continue to work more closely together, as the real competitor for the traditional air freight supply chain is the integrator that controls all supply chain functions within one company, speeding up decisions and developments and taking market share.

“Fortunately, though, a lot is being done now with digitalisation, connecting people, and that’s what ACN has been doing with different partners including Customs, with the aim to make the Dutch air freight product second to none.”

He continues: “We need to cooperate better than we already do, more closely. With digitalisation, of course you see all kinds of efforts so that the flow of information becomes detached from the flow of goods, which used to be attached to the pouch. That is also one of the reasons that today’s air freight forwarders don’t really need to have their own handling facilities; as long as you have good SOPs, you can digitally integrate them. Then you can work with different parties.”

Where digitalisation and connectivity used to be enabled via time-consuming EDI, we now see the emerging API connections and Internet of Things developments leading to more applications and “less cumbersome” connectivity – where you can better connect different parties with each other – as well as new opportunities. “We still need to see how or when blockchain technologies will start to affect the air freight supply chain,” Aris adds.

“ACN will continue to be on the forefront of exploring new opportunities to further strengthen the air freight supply chain.”

E-commerce opportunity

Aris sees e-commerce more as an opportunity than a threat. On tech-driven logistics disruptors, he notes: “There are a lot of new entrants with all kinds of technology solutions, and there’s a lot of marketing around it. But I think it’s difficult for some to back it up, because they often lack a proven relationship with a lot of carriers.”

On e-commerce, he says: “There are a lot of types of e-commerce, whether it is business-to-consumer – where there are a lot of Customs issues companies are still figuring out, and Customs organisations are really struggling with that – and business-to-business solutions, where there are different roles because you can still consolidate a lot of the shipments and move them as normal air freight shipments, and then distribute via specialized companies.

“It’s not a threat to the air freight community because it’s just how the world is developing, so you just have to adapt. That’s one thing forwarders have been good at: adapting to new situations. Back in 1998, my boss said he was ‘leaving this business, because 10 years from now, forwarding as we know it will no longer exist’. Ten years later, we are stronger than ever. I was personally involved in shipping the first e-freight shipment in 2008, if I recollect well. That was 11 years ago!

“Digitisation is an evolution, not a revolution.  So, I think innovating forwarders will always continue to exist. And with e-commerce, we have to adapt again. Anticipate, adapt… some do it faster and gain market share.

“There are a lot of companies that are ‘the next-generation forwarder’… But I believe there are only a few big ones that can really back it up.”

Instant booking

Digitalisation among carriers has also been progressing, with a wave of airlines moving to market their capacities via booking and pricing platforms, including instant spot pricing in real time. Aris notes that there are different models; and forwarders can also offer similar tools to shippers – some available off the shelf – enabling them to start integrating them in their own operations.

Aris believes it’s unstoppable that there will be more and more transparency of freight pricing, which will change the business. “In the old days, forwarders were making a lot of money because the shipper didn’t know what was going on in terms of market freight price trends,” he notes.

But this is rapidly changing, he says, highlighting one growing digital ocean freight rates platform where they ask forwarders to supply the rates they pay for full container loads on certain lanes; in return, forwarders get access to the market information. “Because there are something like 20 other forwarders doing it, they don’t know who’s offering what, but they know where the market is,” he notes.

“But customers, shippers are now also on that. And of course, if you can do that for ocean freight, you can do it for air freight, you can do that for local (distribution) charges.

“It is just a fact in life that there will be more transparency – which is good for shippers, and which is also forcing logistics companies to become more efficient. The market will force service providers to spend less man hours – to increase the number of files, shipping documents, per head – and with better service and less errors.

“And quality nowadays is a given,” he adds, meaning the opportunities to compete on service are more limited – “similar to how consumers cannot buy a bad car anymore.

“You have to not only be smart with customer-facing technology and globally harmonised account management, but also internally – to be efficient and still offer the quality. So, there’s a lot of transformation going on.”

For CH Robinson, Aris says the quest for efficiency is “just one of the reasons for making substantial investments in technology: to really bring down the cost per shipment in line with the expected shrinking of margins following increasing rate transparency. In general, we feel that technology expenditures in our industry as a percentage of total expenditures will further increase.”

But he says there is still a broad spectrum of different types of forwarders, including “very niche, small, very relationship-driven forwarders that have a few customers where they have a 25-year relationship, almost like family”.

Chosen ‘inefficiency’

The aim is to provide the right balance between efficiency and service. “We have quite a strong global network, but we still like to be close to our customers, via our branches, and still have that very direct relationship, alongside digitalisation,” notes Aris.

“It is a bit like ‘chosen inefficiency’ – because you could bring together all these modest-sized branches and make one big branch, and then manage everything from there. But for us, it works better to be close to the customer – especially in Europe, where if you go 100 kilometres to the left or the right, you’re in a different business culture. So, you need to be in Turin if you want to tap into the local automotive market.”

He says the next generation of logistics managers and buyers – who are likely to be “more tech oriented” – may have a different approach.

“But, at least in Europe, it’s still really important.”