There is a feeling among some high-and-heavy manufacturers that the prices they pay to logistics providers do not always correspond to the service they receive, particularly in relation to the car industry. But should such OEMs be more grateful, particularly to shipping lines, whose services are essential to their global success? Thomas Cullen reports.
The construction and agricultural vehicle segment of the ‘high-and-heavy’ business may not attract quite the profile that passenger car production and distribution does, but the sector nevertheless represents a major demand generator for inbound and especially outbound logistics. Its supply chain geography is actually, in many ways, even more global than that of passenger cars, with manufacturers exporting substantially out of production centres in Europe, North America and North Asia to markets in Asia, South America and the Middle East. To make things even more complicated, Chinese and South American production has been expanding its exports to markets in the West at a more developed rate than in the passenger car industry. The result is substantial demand for ocean and ro-ro transport–more than the passenger car sector relative to its size.
High-and-heavy business is an important sector for both deep-sea and short-sea car carriers, but not all is necessarily well among the heads of logistics at manufacturers. Some have felt for a time that they have not been treated in the same way by a shipping industry historically designed more to serve the needs of the big passenger carmakers. Articulating this sentiment most poignantly is Joannes Van Osta, general manager, group transport and logistics at UK-based construction equipment manufacturer, JCB, who says: “When looking at the pricing…I am sometimes under the impression that some people seem to think ‘This is special cargo, they can afford it!’”
Such views provoke the ire of the shipping companies, with some responses even too passionate to publish. However, one of the more articulate is from Christopher J Connor, deputy CEO and chief commercial officer of Wallenius Wilhelmsen Logistics (WWL). He is emphatic that high-and-heavy manufacturers get a competitive deal. “Yes they pay more, but that’s because their units are bigger and cost more to handle. In any case, like in any business, competition drives the price”.
Understanding the costs of high-and-heavy
Van Osta is not convinced of Connor’s argument. “You will understand that freight rates are confidential between the contracting parties, so this isn’t exact science. However, if we take the footprint of today’s cars and apply a similar w/m rate to construction equipment and other high-andheavy material, then it becomes apparent that we pay quite a premium for the privilege…I understand the price for a larger machine will be higher in total, but why does it need to have a different cost per cube or tonne? I do not see the relevance as such. Driving a JCB backhoe loader on a vessel doesn’t take any longer than driving a [BMW] Mini on board”
The perspective at agricultural and construction equipment OEM John Deere is similar but with a qualified difference. John Deere has a ‘hands-on’ approach to logistics management that it believes gives it better visibility on cost. David Panjwani, John Deere’s global logistics manager for Asia Pacific (and until recently the head of logistics for Europe, Middle East and Africa) comments that the issue of cost is complex, as the logistics of John Deere vehicles do differ from those of passenger cars.
“Not to say I disagree with Mr Van Osta, but I would only point out that we are not comparing like [with] like. Car manufacturers provide the majority of the freight volume and tonnage–and therefore contribution to–the vessel carriers. It would therefore be my assumption that they can negotiate based on a different total volume perspective. High-and-heavy also creates a unique cost challenge to carriers in the area of special handling and stowage planning”.
But Van Osta pushes things further. “In the end we are all in business to make money. What I am not sure about is whether all ro-ro carriers genuinely have a ‘see-through’ and ‘total cost’ model in operation, which allows them to pinpoint those customers that [they] hardly break even on–or even lose money with–and those with whom they make a healthy profit. We may have a smaller number of machines, but I wouldn’t be surprised if high-and-heavy is responsible for a large proportion of the profit. That is, however, just my guess.”
Unsurprisingly, Höegh Autoliners disagrees with this assessment. Echoing Panjwani’s point, Trond Sjursen, head of region Europe, comments that “High-and-heavy cargo needs to pay more [as]…the cost of handling these units is higher. Loading, discharging, securing and terminal costs for these units are higher than for passenger cars, the space needed on the vessels is higher and the volume is lower than the larger volumes of passenger cars.”
He also adds that “the rates for high-and-heavy cargo vary quite a lot depending on what trades we are talking about and it is not a clear-cut fact that these rates are always higher than the rates for passenger cars. There are examples where the rates are indeed lower and this is especially true for larger shippers in high volume trades like the Atlantic.”
Besides rates, there is also criticism of the service levels that high-and-heavy producers receive from logistics providers. JCB is the third largest producer of construction equipment worldwide, with strong positions in South Asian and Middle- Eastern markets. Its lean outbound logistics are particularly demanding of transport services and so possibly it is even more sensitive to quality issues with transport than other producers. Consequently, it needs high levels of dedicated services, something that it does not feel it always gets. Van Osta comments: “We have historically been dependent on–and also limited by–the trade lanes where major car volumes have been shipped. Until recently, vessels were also designed with mainly cars in mind and high-and-heavy was an extra ‘cherry’ or ‘icing on the cake’.”
While WWL’s Connor acknowledges that the vehicle shipping industry has been predicated on car transport, he stresses the critical role that high-and-heavy plays for his company. “We have evolved our fleet to have stronger decks to carry high-and-heavy. Just look at our new Mark V ro-ro ships with over 30,000 cubic metres of high-and-heavy capacity on each new-build. Our commitment to the industry is strong.”
Van Osta is admittedly pleased with such changes, “I welcome...the design of some of the new vessels that I have seen recently. The new generation of ro-ro vessels are, among others, much more flexible and have been designed with highand- heavy as part of the base load in mind.”
The issue of the use of container shipping for high-andheavy movements illustrates the sensitivity of this issue. Construction and agricultural vehicles can, in many cases, be put into 40ft containers. Because of the modular nature of many of these vehicles, they can be partly dissembled and then reassembled at destinations (gaining tax and duty breaks in some cases as knockdown units). Using a container is a capability that high-and-heavy manufacturers are increasingly willing to use.
Both Joannes Van Osta and David Panjwani warn that the extra costs associated with loading and unloading a container no longer make their use unviable compared with ro-ro. Van Osta comments that the use of containers is not just the short-term exploitation of rock-bottom rates in the sector. “The extended use of containers is something that could be used on a sustainable basis on the higher, but even more so on the lower volume routes. In those cases where we are seen as a ‘niche’ or ‘a special case’ by one and as ‘fitting the box’ or ‘standard’ by another, then that is where the two sub-modes may compete with each other on certain segments.”
But Van Osta also acknowledges that it’s necessary to look at the long-term trends and implications of switching to containers. “We as a manufacturer have to ensure we make the right long-term strategic decisions and not just the short term win, that is for sure.”
The view at John Deere is similar. “I believe that on certain routes this is not a temporary reaction but one that will probably be put in place for years to come,” says Panjwani. “There are some trades where the rate gap is simply too large to ignore.”
The response from the shipping lines is characteristically strong. “The prices of the container carriers also tend to be more volatile than those of the car carriers,” says Höegh’s Sjursen. “Agreements with car carriers are often for durations of two or three years while container rates fluctuate a lot more depending on the present economic situation. Some of the high-and-heavy shippers have taken an opportunistic view on this and as a result they always shop for the cheapest price. They may get a short-term bargain with a container carrier, but when the container rates increase again, the same shipper may not get the priority with the car carriers they may want.”
A different sort of relationship?
One of the characteristics of the automotive supply chain has arguably been a very price-orientated relationship between the vehicle manufacturers and their logistics service providers, with OEMs putting considerable pressure on providers to cut costs. Some would argue that the high-and-heavy business has not been quite as heavy-handed in cost pressure as the car business, which is perhaps one reason why these manufacturers tend to pay more than carmakers.
But David Panjwani is not so sure. It is true that John Deere has been looking to create closer relationships between itself and the big shipping companies with longer contracts, explicitly rejecting the notion that high-and-heavy transport on land or sea is a commodity purchase. Yet, here he is careful to remind the market that John Deere is keeping a close eye on prices, too.
“We are still performing competitive assessments on a scheduled basis to ensure our base ocean freight rates are competitive. We also must ensure that the required space for John Deere is always obtained in all global trades; special port handling is occurring and we want to achieve a more stable year-over-year rate position verses riding the typical and dramatic swings in freight rates.”
The perspective at JCB is slightly different. “I believe we are as competitive as our colleagues from within the car industry,” Joannes Van Osta observes. “What we may not have done as an industry is to create the same level of long-term partnerships, or even joint ventures, with the ro-ro carriers in particular. Let’s not forget that a number of car manufacturers have had important stakes in one or more ro-ro shipping lines– specifically, but not only, in the Far East. I don’t have to explain that this may well drive a certain ‘dynamic’.”
But perhaps the construction and agricultural equipment manufacturers should be more grateful. As WWL’s Chris Connor points out, the capabilities that the car carriers offer are vital to the these manufacturers. “If not for the capability created by the car industry demand, what sort of high-andheavy equipment distribution would there be?”
And of course he is right. The construction and agricultural vehicle market has grown wondrously in the past decade, driven by markets in Asia, Eastern Europe and South America. How would these manufacturers have reached those markets if not for the infrastructure of the ocean car carriers and their supporting terminals? Are high-and-heavy producers too slow to recognise that their whole supply chain model rests on this shipping trade?
To an extent, shipping lines and their customers are always going to argue over price and to an extent this is the basis of the disagreement. However, there is something more than mere antagonism in these comments from OEMs. Undoubtedly, this end of the market was neglected at one time as the demands of passenger car manufacturers dominated the sector. But the ro-ro sector has also changed considerably– long gone are the days of the Japanese ‘industrial carrier’ focused on shipping cars from east to west. Shipping lines are now much more flexible and commercially orientated towards serving a broad range of customers beyond the car industry. However, this evolution continues and the demands of a dynamic sector such as construction vehicles have been changing quickly. The car carriers have to continually work to adapt to the requirements, but that is not easy and it means almost continual adaption of routes as well as hardware.
