Shipping cartels to become illegal
The international shipping industry in New Zealand has long enjoyed an exemption from the Commerce Act. Shipping companies routinely publish advertisements saying that representatives from a number of lines met and collectively decided to increase their prices by a certain amount effective from a certain date.
Anyone else in any other industry trying to do the same would most probably face prosecution, followed by
The Importers Institute has argued for a long time that there is no reason for the exemptions. Shipping company clients – both exporters and exporters – have to compete in environments where price collusion is illegal. The current government decided to refer this issue to the Productivity Commission and the commission’s chair Murray Sherwin said “Current exemptions for shipping companies from the Commerce Act should be removed so that normal competition laws apply.”
The government decided to accept this recommendation and announced that “international shipping to and from
New Zealand will be regulated under the Commerce Act, improving oversight and delivering competitive outcomes
for exporting industries.”
The Imports Institute applauds INCOMING:
An update for importers this decision and looks forward to the efficiency improvements that usually
result from increased competition.
Producer cartels continue to under-perform Like the shipping cartels of yesteryear, some producer cooperatives owe their existence to political decisions to exempt them from anti-trust laws. In 2001,
the Dairy Industry Restructuring Act exempted the dairy industry from certain sections of the Commerce Act and paved the way for the creation of Fonterra. So, how is the cooperative faring?
It is difficult to assess the success or otherwise of our dairy quasimonopoly.
As we said back in 1998, in correspondence with the then Dairy Board, “we know that the performance
of [State export] monopolies is indeed very good, mainly because they keep saying that it is. It is, however, apparent that it is not good enough to withstand competition from other exporters.”
One way is to look at what economists call the ‘counterfactual’. We know that Fonterra is doing well but, could or should it do as well as, say, Nestle?
We know that free competition leads to efficiencies everywhere and that is the main reason why centrally planned economies invariably fail. What is so special about producing milk or kiwifruit that requires us to protect producers from normal market disciplines?
Take the case of infant formula. Fonterra was negligently hoodwinked by its joint venture partners in China
who had no qualms in poisoning babies by adulterating milk formula for a quick buck. Ironically, this resulted in a strong preference by Chinese parents for infant formula made in New Zealand. In a normal competitive market, a normal competitive company would have spotted the opportunity and met the market demand quickly.
Not Fonterra, though. Selling of infant formula was to be done through their approved channels only and
in a time-frame that best suits the bureaucrats who run the cooperative.
So, enterprising Chinese traders started buying cans of infant formula in New Zealand supermarkets in large
quantities and shipping them for sale in China, for a handsome profit (cans of imported formula can retail in China for as much as $70 each). There was so much of that happening that local supermarkets started rationing sales.
One of our freight agents in Hong Kong asked us to quote freight costs for 40 containers per month. We
declined to quote, on the grounds that we anticipated that the authorities would put an end to this embarrassing trade, sooner or later. And so it came to pass: the Ministry of Primary Industries and Customs swung into action and lowered the boom. Products that had been approved as being safe for New Zealand consumers would in future be exported to China only by State-approved exporters.
Five years after the melamine adulteration scandal, Fonterra announced plans to launch its own infant formula brand in China in 2013, looking to grab a share of a market estimated to be worth US$6 billion annually and projected to double by 2016.
In the meantime, Chinese companies have started buying up land and setting up factories in New Zealand to produce their own brands.
What is 3PL and why is everyone doing it?
3PL is an acronym for third party logistics; what used to be called contract warehousing and distribution. The idea is that, instead of each importer or exporter having their own storage and handling facilities, they subcontract those functions to a specialist. In recent years, the move to contractors has accelerated, as evidenced by the number of large new facilities being built every month around airports and other industrial areas.
The economics are compelling. Take an example of a small importer, who rents a small warehouse cum showroom with an office on the mezzanine floor. The office employs the boss and two clerks; the warehouse has a manager, a forklift, some racking and one picker. The sales are outsourced to commission agents and temporary warehouse workers are employed during peak times. The annual cost of the warehouse and equipment rent, plus staff, amounts to at least $200,000.
Any 3PL operator should be able to handle that importer’s volume for about $50,000. An experienced operator should be able to offer significant improvements in operational efficiency. The boss has a clear choice: continue business as usual or add $150,000 to the bottom line. Surely it’s a no-brainer.
The 3PL model enables efficiencies that are not otherwise possible. Take, for example, the case of some clothing retailers that we work with. A significant proportion of their sales is of base products, which can be more or less predicted quite a bit in advance. In those cases, it makes sense to have them packed by store in China, where labour costs are still marginally lower than ours.
On arrival, the 3PL operator simply cross-docks the cartons and immediately ships them to the final destinations, after recording the movement for tracking purposes. The rest of the stock is received in bulk and put away in locations, to be distributed daily against store allocations. All items stored and shipped, whether cross-docked or picked locally, have total visibility through a tracking website.
The same model applies in reverse for exports. The 3PL operator can consolidate orders to be cross-docked on arrival by his agents overseas and manage stocks for local fulfilment.
The key to both of these models is that the 3PL operator must have a robust network of experienced overseas agents capable of accurately sending and receiving the large amounts of data involved, providing real-time visibility.
The ability to handle large volumes of data and reporting movements accurately is at the heart of a successful 3PL operation. At DSL Logistics we like to or move large amounts of cargo throughout the world are not necessarily those best suited to do local 3PL work. Taking care with the appointment and negotiation of the contract will pay handsome dividends.
Beware forwarders who charge freight at both ends
Most contracts for the supply of goods internationally include terms that describe the obligations of each party. These terms were defined by the International Chambers of Commerce and are known as Incoterms. For example, the definition of CFR (and CIF) is that the “seller must pay the costs and freight to bring the goods to the port of destination.”
In New Zealand, some importers from China have been charged freight on shipments where the freight was supposed to be paid by the exporter. This charge, sometimes described as a “China Fee”, is typically zero-rated and is normally accompanied by a set of grossly inflated and imaginary destination fees, such as “Port Security”.
This is how the scam works: the exporter gets quotes in China for $1,000 to send some goods to New Zealand. The terms are CFR, which means he is responsible for paying the freight. One of the forwarders, though, comes up with a quote for $800 and naturally gets the job. That quote is less than the forwarder’s cost (from the shipping companies) but, no matter, all that he has to do is to charge the importer in New Zealand the difference of $200 and call it a “China Fee” or something like it.
The Importers Institute asked the Commerce Commission to investigate these practises, but the Commission found that too difficult a task, saying “In the absence of any sales agreement between the New Zealand importer and the Chinese seller, it is difficult to establish what exactly was agreed upon”.
Importers that have been stung by this scam have successfully obtained refunds after referring complaints to the Disputes Tribunal. But the best way in which importers can defend themselves against these rip-offs is by changing the agreements with their suppliers.
Importers bringing in LCL (less than a container load) shipments, should change their terms from CFR (or CIF) to FOB and obtain binding quotes from local forwarders. The quotes should include the freight
We deliver 3PL (third-party logistics) solutions, international forwarding and customs clearance.Tel (+64 9) 255 0266 Email [email protected] Logistics Solutions• Flexible software developed in-house – fits the way you do business.• Live web tracking to final destination.• Garment care division equipped with steam tunnel and presses, for on-hanger delivery of garments into store, in perfect condition. boast that our warehouse management system is very good as it includes every error that we have made in the last 15 years! The fact that we developed it in-house has helped a lot, as off-the-shelf systems rarely cater for more than one type of industry and, when they try, they become too complex, expensive and inflexible.
So, what can go wrong when moving to 3PL? Quite a lot, really. Importers and exporters need to satisfy themselves that the intended contractors have the ability to accurately manage their stocks and report movements. They need to have robust and tested software – and that does not mean Excel spreadsheets! The contract itself needs to be well designed, with performance targets that are measurable and reviewable.
Some importers want the selected 3PL provider to operate their legacy warehouse management system, going so far as to provide remote terminals with VPN tunnels to their own network. This may help to keep down the costs of integration, but it is not true 3PL; it merely amounts to outsourcing the warehouse rent and employment of pickers. The major efficiencies of 3PL are simply not possible under that model.
A true 3PL model involves the trader exchanging information with the 3PL operator, system to system.
The best way for an importer or exporter to assess the suitability of a 3PL provider is to talk to existing client references, particularly in same or similar industries. When no reference sites are provided, importers shouldn’t rush to be the first. Companies that own lots of ships and planes and all the destination charges.
Importers who leave the selection of the forwarder in the hands of their suppliers run an increasing risk of being ripped off.
Daniel Silva is the Secretary of the Importers Institute and Managing Director of DSL Logistics, an import services company and 3PL provider based in Auckland. [email protected]
Shipping cartels to become illegal