So a topsy-turvy 2012 is almost about to end and a lot of companies are in the process of closing books for 2012 and formulating strategies for 2013. Whilst it is difficult to cover all aspects in one go, this blog will be updated with my personal views on a monthly basis and with some special sporadic posts for some topics if I feel the need to do so.
2012 - The Year Gone By
Shipping
From the international shipping perspective, it was one of the worst years as the Baltic Dry Freight Index hot a 25 year low [that is even more dismal when adjusted for inflation] After a busy 2007-2008 when carriers prided themselves on fastest transit times and congesting ports with residual cargo, shipping lines find themselves in an absolute commoditized phase with excess capacity, depressed demand and financial pressures. This year saw many carriers being forced out of the market whilst leaving many others to depend on equity infusion from other entities [internal or external] and a dramatic slow-down in vessel speeds to artificially create some demand and bring in some room for dynamic pricing to enhance yields.
The root cause of this problem has been unrealistic volume growth projections and excessive capacity introductions with large mother vessels [in the hope that the trans-Atlantic and trans-Pacific trades will grow in perpetuity at over 10% levels!!!] As we move forward to a turbulent 2013 with more challenges to come on the general economic front, the megatrend in shipping will be depressed rates, excess capacity and these knee-jerk reactions of creating demand artificially will not help in any way in my personal opinion.
The leaders in shipping industry have gone ahead and created their own shared service centres in emerging markets like India, China, Philippines to reduce personnel and administration costs. More insights on potential turnaround mechanisms will be discussed in the January 2013 post.
Airlines
As is the case with sea carriers, air carriers too have been battling it out for cargo with excess capacities and lower cargo volumes. Adding to the woes of the carriers has been exorbitant fuel surcharges and a skewed demand-supply situation. Greater China / Hong Kong segments continue to witness huge demand for both inbound and outbound legs with depressed prices whilst India continues to be a market with too many fragmented customer segments and lack of customer loyalty
Due to complexity and of operations in the passenger / cargo segments, back-office operations setup for carriers has still been a major challenge to rationalize costs. There is clearly more room for consolidation in this space
3PL / 4PL Segments
3PL has been an over-hyped segment in the last decade or to put things in better perspective, there is a lack of willingness to pay on the client side. From a client perspective, transportation costs continue to be at par with that in Europe or North America but most of the spend is what one can classify as 'dead-weight loss' on account of high fuel prices, toll taxes and unreceipted payments to police / transport authorities across various toll-gates, important border/checkpost points. It was a delight to read the book '10000 Kilometres on Indian Highways' with refreshing comments from one of the stalwarts of Indian logistics Mr. Soman Nambiar. I was surprised to see that the book was extremely well received in Europe whilst many leading professionals in the Indian logistics space still don't know that such a wonderful book was released by an Indian journalist.
With FDI in retail finally seeing some movement, this space should witness volume growth but it is still a far cry away from being sustainably profitable in the short-run. There have been a lot of entries by players of different sizes into the 3PL/4PL space and also exits due to losses by almost the same number. In general, profitability of 3PL/4PL players is supposed to be around 15% net of taxes [Profit After Tax] and it is very unlikely to change in the near future.
Personnel Issues
This area continues to be a challenge for most organizations. With too many players entering the business segment [and most often than not with Private Equity / Venture Capital] there has been steady demand for employees and at the same time, the frequent exits by bleeding companies has left a lot of people without jobs or on the edge of a cliff. A disturbing trend has been steep hikes in salaries that are not really commensurate with the economic value added by employees. An employee should add value by generating at least 3 times that of what s/he draws from the company [1 time to recover own costs, 1 time to cover for the cost of operations and support functions and the last part as profit to the organization]
My personal observation on this front has been that this aspect is quite left-tailed i.e. there are some extremely productive professionals in the Indian logistics space who generate upto 5 times or even more of their remuneration whilst a vast majority of them struggle to even generate business enough to cover their own costs. This is a grave issue for both employees and employers alike and there are many aspects to be covered. This will be covered in more detail in my January 2013 post.
To summarize, the good news as well as the bad news of 2012 is just the beginning [tip of the iceberg if one wishes to call that] The amplifying and perhaps more disturbing trends will come in 2013 and these will be covered in due course of time. So enjoy the festive season, welcome the new year with 'Plans for Worst Case Scenario and Hopes for Good Scenarios'
2012 - The Year Gone By
Shipping
From the international shipping perspective, it was one of the worst years as the Baltic Dry Freight Index hot a 25 year low [that is even more dismal when adjusted for inflation] After a busy 2007-2008 when carriers prided themselves on fastest transit times and congesting ports with residual cargo, shipping lines find themselves in an absolute commoditized phase with excess capacity, depressed demand and financial pressures. This year saw many carriers being forced out of the market whilst leaving many others to depend on equity infusion from other entities [internal or external] and a dramatic slow-down in vessel speeds to artificially create some demand and bring in some room for dynamic pricing to enhance yields.
The root cause of this problem has been unrealistic volume growth projections and excessive capacity introductions with large mother vessels [in the hope that the trans-Atlantic and trans-Pacific trades will grow in perpetuity at over 10% levels!!!] As we move forward to a turbulent 2013 with more challenges to come on the general economic front, the megatrend in shipping will be depressed rates, excess capacity and these knee-jerk reactions of creating demand artificially will not help in any way in my personal opinion.
The leaders in shipping industry have gone ahead and created their own shared service centres in emerging markets like India, China, Philippines to reduce personnel and administration costs. More insights on potential turnaround mechanisms will be discussed in the January 2013 post.
Airlines
As is the case with sea carriers, air carriers too have been battling it out for cargo with excess capacities and lower cargo volumes. Adding to the woes of the carriers has been exorbitant fuel surcharges and a skewed demand-supply situation. Greater China / Hong Kong segments continue to witness huge demand for both inbound and outbound legs with depressed prices whilst India continues to be a market with too many fragmented customer segments and lack of customer loyalty
Due to complexity and of operations in the passenger / cargo segments, back-office operations setup for carriers has still been a major challenge to rationalize costs. There is clearly more room for consolidation in this space
3PL / 4PL Segments
3PL has been an over-hyped segment in the last decade or to put things in better perspective, there is a lack of willingness to pay on the client side. From a client perspective, transportation costs continue to be at par with that in Europe or North America but most of the spend is what one can classify as 'dead-weight loss' on account of high fuel prices, toll taxes and unreceipted payments to police / transport authorities across various toll-gates, important border/checkpost points. It was a delight to read the book '10000 Kilometres on Indian Highways' with refreshing comments from one of the stalwarts of Indian logistics Mr. Soman Nambiar. I was surprised to see that the book was extremely well received in Europe whilst many leading professionals in the Indian logistics space still don't know that such a wonderful book was released by an Indian journalist.
With FDI in retail finally seeing some movement, this space should witness volume growth but it is still a far cry away from being sustainably profitable in the short-run. There have been a lot of entries by players of different sizes into the 3PL/4PL space and also exits due to losses by almost the same number. In general, profitability of 3PL/4PL players is supposed to be around 15% net of taxes [Profit After Tax] and it is very unlikely to change in the near future.
Personnel Issues
This area continues to be a challenge for most organizations. With too many players entering the business segment [and most often than not with Private Equity / Venture Capital] there has been steady demand for employees and at the same time, the frequent exits by bleeding companies has left a lot of people without jobs or on the edge of a cliff. A disturbing trend has been steep hikes in salaries that are not really commensurate with the economic value added by employees. An employee should add value by generating at least 3 times that of what s/he draws from the company [1 time to recover own costs, 1 time to cover for the cost of operations and support functions and the last part as profit to the organization]
My personal observation on this front has been that this aspect is quite left-tailed i.e. there are some extremely productive professionals in the Indian logistics space who generate upto 5 times or even more of their remuneration whilst a vast majority of them struggle to even generate business enough to cover their own costs. This is a grave issue for both employees and employers alike and there are many aspects to be covered. This will be covered in more detail in my January 2013 post.
To summarize, the good news as well as the bad news of 2012 is just the beginning [tip of the iceberg if one wishes to call that] The amplifying and perhaps more disturbing trends will come in 2013 and these will be covered in due course of time. So enjoy the festive season, welcome the new year with 'Plans for Worst Case Scenario and Hopes for Good Scenarios'
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