The Hidden World of the LCL Consolidation Market - Part II

12:55am 14th September 2020

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In the first part of this series, we discussed the reasons why global forwarders rely on consolidators to support their less than container load (LCL) shipments. We now look at the challenges, threats and opportunities facing consolidators in the near future.

The challenge for any consolidator in building any new LCL trade lane between two port pairs is getting a baseload volume or anchor customer. A baseload volume or anchor customer is shipment volume that a forwarder or consolidator can rely on through thick and thin, rain or shine to arrive at the container freight station for loading on a daily or weekly basis. The easiest way to do this is to focus on clients that can offer stable, regular volumes on a certain port pair and to get them committed on long term contracts at below market rates. Once such volume has been secured, the service can now begin as a regular business, albeit an unprofitable lane.

The next phase is to get other clients to join on this regular baseload at margins that push the consolidation box into profitability. For most port-pairs, it’s a huge challenge getting regular volumes from one port to another if either port is not a transhipment hub. The easiest way is to route their cargo via such hubs instead.

The growth to a mature LCL service is to provide a direct connection bypassing the hub altogether, which means building a high share of demand on specific freight corridors to obtain lane density, which in turn can command lower prices from carriers since there is now a regular scale and volume of cargo flow. 

The goal of any LCL network is one where the forwarder’s network sets up more direct routings and the port pair weans itself off its reliance on any one transhipment hub. One way to build a profitable tradelane is to concentrate spending on key carriers and focus on high-margin clients, but there are trade-offs to balance: higher paying cargo usually comes at the expense of volume, and high volume at the expense of high margins. 

The LCL market is facing some threats from other transport modes, such as rail between China and Europe. Road freight is emerging as a serious contender and alternative to sea freight between Singapore, Malaysia, Thailand, Vietnam and China. Transit times by truck overland from Singapore to Thailand can take two days with lesser customs requirements, while the same journey by sea from Singapore to Bangkok can take four days if you factor in port congestion and more stringent customs clearance formalities. Short-term drops in overall LCL market growth globally may tend to benefit consolidators because smaller and larger forwarders may scrap their own weekly service offerings and co-load more of their volumes with a consolidator that can offer a dependable, regular service.

A longer term threat is that as existing volumes grow along port pairs, the easier it is for global forwarders to create more of their own internal LCL services by pooling their own cargo, thereby taking that volume away from consolidators. After all, most basic LCL services only need to be done on a weekly basis to meet most clients’ transit time requirements.

As forwarders grow and take more of their regular lanes in house, LCL consolidators have to find other ways of supplementing their growth. Some have resorted to going after the shipper market directly, bypassing their forwarder customers. This requires strategic calculation and finesse with managing the risk of fallout should there be repercussions from doing so. As markets become more fickle and as price transparency becomes more prevalent, this seems the most effective way of mitigating the impact of falling LCL business from a forwarder. The other way is to move upstream and take over ownership of or management of a CFS so that the costs can be pooled and margins can be squeezed elsewhere while maintaining their relationship proximity with the forwarder.

For co-loaders, routing cargo through transhipment hubs is critical to ensuring maximum container utilization and regular weekly frequencies. The most popular transhipment hubs in Asia are Hong Kong, Busan and Singapore. Singapore is mainly used as a hub for cargo originating or arriving in South-East Asian countries while Busan serves as a hub for cargo originating or arriving in Japan, Korea or Taiwan. Hong Kong is a gateway for China but also straddles what Busan and Singapore cover, overlapping from time to time but never truly dominating. 

Each transhipment hub, sometimes even within a single forwarder, competes against the other for cargo to tranship at its port by offering rebates to origin offices and in turn collecting the rebate plus an operating profit from the destination office. Some co-loaders, in a bid to reduce internal competition, have designated certain hubs for certain segments of their Asia-Pacific region so there is no overlap.

Consolidators can make themselves relevant to the large forwarders by focusing on exotic lanes, provision of dangerous goods cargo services and providing regular reliable and dedicated weekly services (regardless of the weekly profitability of their boxes). LCL perishable cargo transported in reefer containers remains a frontier development for consolidators, but it is unappealing due to the seasonality of transporting fruits, flowers and vegetables and the varying temperature requirements of such cargo. This results in a lack of a regular baseload volume which is the first jigsaw piece for any consolidator to build their LCL service around. For that reason, airfreight direct service is more commonly used as a preferred alternative due to rapid transit times, dedicated perishable facilities at both origin and destination airports and quick clearance to ensure freshness. 

A more realistic option for LCL development is through the sea-air/air-sea product. This is a more natural evolution of the LCL product and offers a third option in between the conventional air or sea freight choice for the customer. Most sea-air/air-sea products move through hubs and can be used effectively to manage costs on the go by savvy supply chain managers. Dubai and Singapore are popular gateways for cargo transiting between U.S. and Europe going back and forth to Asia. However, the product itself is not very popular due to the perceived complexity surrounding it, and it has traditionally been used as a last resort triggered by the occurrence of a crisis or major disruption to global supply chains.

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