With supply chains extending around the world, ocean carrier service has become a critical link in the global networks of every major manufacturer and retailer. More than ever, business success depends on reliable service and competitive rates from the small group of container lines that dominate the major lanes between Asia, North America and Europe. To find out what shippers can expect from the ocean carrier industry in the year ahead, GL&SCS recently spoke with Vincent Clerc, vice president of North American line management for Maersk. With 500 vessels, 1.4 million containers and operations that extend to ocean terminals, inland transportation and logistics, Maersk is the largest liner carrier in the world.

Q: Maersk has projected 13 percent volume growth for the Far East to Europe lanes in 2007. Do you think the Far East to North America trade in 2007 will be as strong?

Clerc: No. The delocalization of production started earlier on in North America than it did in Europe, so today, much of what can be outsourced from North America to Asia and elsewhere has been done. North America will be a strong import market, but we do not see quite the same market growth on the Asia-to-North America lanes as we do on the Asia-to-Europe lanes. Also, the economy in the U.S. is probably going to be slower than what we expect in Europe. These two trends suggest that we will see stronger growth for the Far East-to-Europe volumes.

Q: How much of Maersk's worldwide volume is export from the Far East to North America and to Europe?

Clerc: The Far East-to-North America trade represents about 18 percent of our total volume, and China amounts to nearly 75 percent of this traffic. The Far East-to-Europe trade is 27 percent of our total volume.

Q: What other trades are growing rapidly?

Clerc: There is a boom right now in the short sea trades intra Asia. It is a different dynamic from other trades, but it is growing very quickly. We also see growing exports from the Far East to Latin America and the entire Southern Hemisphere.

Q: While the superior economics of operating these huge ships is clear, many shippers see a downside, i.e., service limited to fewer ports, congestion and delays at a handful of mega-ports worldwide, as well as more complex and more costly inland logistics. Are shippers missing something with these concerns?

Clerc: The trend toward larger and larger ships has been going on for some time. The EMMA Maersk (11,000 TEUs)  and the other new E-Class vessels have just raised the bar. Ships of this size will serve the trunk lines between the main ports of Asia and the main ports of Europe. We have not just built the ship and started the service. For years, we have been preparing our infrastructure, terminals, systems, dispatch and contracting so we can handle the larger volumes-not just on the bigger ships themselves-but for end-to-end moves. We strongly believe we can handle the greater throughput these ships bring to the terminals. We heard the concerns you mentioned when we started with post-Panamax ships, and we are hearing it again now with the even larger ships. We can meet the challenge.

Q: Manufacturers and retailers now have long supply chains that have their source thousands of miles from their main markets, so carriers like Maersk are critical links. But this global strategy brings risk of disruption and delays. What concerns do these companies voice to Maersk, and what do you tell them to allay their concerns?

Clerc: Service reliability is their primary concern. As customers extend the length of their supply chains, reliability becomes the key factor. Maersk focuses tightly on on-time arrival. Our ships are 92.5 percent on time within six hours. We are probably the only carrier in the industry that measures reliability on a six-hour window. We spend a lot of time and money on building and maintaining schedules that we can meet. We also have the technology and the terminals to turn the ships ever faster. Another big concern both in Europe and North America for customers is terminal capacity and landside infrastructure. Volumes continue to grow, but there are very few new terminals coming online. There are certainly not enough to handle the expected growth. There are bottlenecks on rail networks, especially in Southern California. Trucking capacity in our service area is not growing fast enough to cope with the increased volumes. Shippers still focus their concern on the ocean portion of their supply chain, but they need to shift this concern to the landside for the risk of disruptions.

Q: What is Maersk doing to deal with these landside issues?

Clerc: Maersk is large enough to take on these challenges on our own. Our big terminal project (APM Terminals) in Portsmouth, Va., is a good example of what we are doing to alleviate these landside risks. We have added new capacity, state-of-the-art technology and on-dock rail service to improve the reliability of the supply chain for our customers.

Q: With so much traffic coming out of Asia, what are the implications of the heavy imbalances on these trade lanes?

Clerc: Imbalances are probably the biggest challenge for us. There is a growing disparity in all trades in and out of North America, not just on the Pacific. All of the empty containers have to be repositioned to Asia. The export cargo from North America tends to be base commodities with low rates, so the cost burden is increasingly shifting to imports. We have seen this cost shift on the ocean leg for some time, and now it is also happening on the inland legs within North America. Now, the portion of the rate that applies to the inland transportation is far greater than the ocean leg. As we see the repositioning of the ocean containers and rail cars from the hinterland back to the ports becoming a bigger burden, that shifts the pressure to the imports to cover these costs. The repositioning costs have to be built into the import rates.

This severe imbalance causes two problems. Because capacity is fairly well adapted to meet the import demand, there is an oversupply of space for the export cargo. Rates have deteriorated. For at least the past 10 years, export rates have not really covered the true cost of transportation. They cover only the incremental or marginal costs. With export rates too low and the fact that every second container going out of Los Angeles is empty, the only possibility is for the import cargo to pay for it. For the containers coming out of Asia, we are basically selling a round-trip ticket. This is a fact that shippers need to understand. They may not use the containers going back to Asia, but to have them back in China when they need them, they need to pay for a round trip.

Q: Maersk's revenues increased substantially in 2006, but net income actually went down. Is this drop purely a result of the large fuel cost increases?

Clerc: Fuel costs have been the main component of deterioration of profitability. We have to pay for fuel on the ocean leg, and sometimes on the rail and truck movements. The other major financial issue in 2006 has been the misperception of an oversupply of tonnage, especially on the Pacific. This belief has resulted in rate decreases that were not justified by the real supply and demand. This decrease was an overshoot. Every year, as new vessels come on, there is a tendency to predict a gap between capacity supply and demand. We have yet to see that gap. The headhaul continues to grow to meet new capacity. Higher fuel prices have also forced some carriers to redeploy vessels, which has reduced the available capacity on the trades. To manage costs, we reconfigure the networks to maximum efficiency. We slow-steam where possible. Revenue is the real issue. The drop in real rates last year was driven by perception, not reality. It cost the whole industry a lot of money last year. It has been predicted for the past two years that capacity would grow faster than demand, but it has not. We see the same reports this year, but we look at these predictions with a very cautious eye. The ratios used by many analysts are just not accurate.

Q: Maersk recently announced that per container rates into the U.S. on the Pacific would increase by about $300 and $500 on the Atlantic. Do you see these increases sticking?

Clerc: This industry often overshoots or undershoots rates, so we have to correct for these errors. We see the increases as a necessary correction of what happened last year. We still see very strong markets, so we are cautiously optimistic that these increases will stick.

Q: Is more consolidation among ocean carriers likely in the next year or so?

Clerc: More consolidation is unlikely to happen in the near future. Many shipping lines have governments as major shareholders, or they have powerful national interests behind them, who want to maintain independence. There could be a small level of consolidation among the alliances, perhaps in the form of closer partnerships. We don't see many carriers consolidating or being acquired, as we did with P&O Nedlloyd.

Q: What worldwide business trends do you see impacting Maersk's business in the next 12 to 24 months? Which of these excite you? Worry you?

Clerc: What excites us this year is to correct the pricing in the markets and the perceptions about too much capacity. We see growth being very solid, so that gives us challenges to improve infrastructure, port facilities and so on. We will continue to work on these issues. We are very excited to get Portsmouth on line in the middle of next year. We are also excited about our Pacific network redeployment, which we think will really optimize the product we offer our customers. Those are the challenges. At the same time, we know we are concerned about bottlenecks on the inland legs. There is a perception gap for our customers about how severe this problem will be in the next couple of years.

Q: What issues are you spending most of your time on these days?

Clerc: It is always tempting to slide back into just dealing with the problem of the day, but recently we have been able to work on more strategic issues such as our redeployment on the Pacific. It all centers on how we are going to continue providing a second-to-none service to our customers despite the challenges we expect over the next three to five years. That is how I spend most of my time.