Category Archives: Shipping

Shipping Solutions

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Port of Honolulu (photo: Foreign Trade Zone #9)

Port of Honolulu (photo: Foreign Trade Zone #9)

Almost any company is saddled with shipping problems – whether its moving products out to customers, or getting supplies or inputs in. You don’t how bad it can be, though, unless you live on an island. First off, your options are limited. No train, no trucks. It’s gonna be by air or by sea. Take your pick. Either one has limited competition compared to anyplace on a continental mainland, so you know your shipping costs are going to be high – probably at monopoly or oligopoly prices. You gotta cope with that, but how?

If you are doing business in Hawaii – or plan to visit our fair islands this summer – the Hawaii Pacific Export Council (which I just happen to chair at the moment) is joining with the Hawaii Department of Agriculture to stage Hawaii’s first Shipping Fairs so you can examine all the available options for shipping in or out of islands. The Shipping Fairs will be 1-day events on Oahu and Maui in June – and on the Big Island and Kauai in July.

Join us for the first-of-its kind Shipping Fair throughout the State! This program will give you the opportunity to discover or refine the best method to get your goods to a neighbor island, a mainland state, or an international destination! … a dozen shipping experts … will be on hand to provide you with information so that you can leave the Fair with pricing and routing information for your product, in the markets you specify.

The fairs will offer short presentations by reps of shipping-related companies, ample time for one-on-one meetings, and visits to 2-3 actual shipping facilities so you can see how they work. And whether they would work for you.

Here is the info you need for scheduling and registration:

When: Oahu: June 14th | Maui: June 27th | Big Island: July 19th | Kauai: July 26th

Cost: $35/person – includes lunch, materials, and transportation to shipping facility tours.

Register: http://tinyurl.com/SWIF2013

More info: http://tinyurl.com/SWIFInfo

Questions: lharvey@hawaiiexportsupport.com

When Express Delivery … Isn’t

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We only had 48 hours. My client was in Honolulu, hurrying to finish the bid documents for a project in Somalia, and he was late on meeting the deadline. I called my friend Jimmy Maturo, manager of the old Emery Worldwide in the Pacific, and he put his guys to work delivering the bid documents to Mogadishu. I don’t know what magic they used but they delivered the bid package in Somalia ahead of the deadline. Not an easy thing to do – even in the 1980s.

They made it to Somalia.

They made it to Somalia.

Emery is no longer around, though I think UPS bought the name and uses it for an express freight service. But all of today’s express delivery companies face the same kinds of problems every day. And what irks them most is the global uncertainty of customs clearance. You pay a premium for express service, so you expect your packages to be delivered on time no matter where you are sending them. All that can be defeated by a closed customs office, an arbitrary change in the rules, or even an official with his hand out. The result is lower profits for the express delivery company and an unsatisfied customer. The World Economic Forum/World Bank/Bain & Company study on international supply chain and logistics issues took a careful look at the problems of the express delivery industry.

Most developed countries have made life easier for the express delivery services, automating their clearance systems and employing effective risk analysis strategies in deciding which packages need to be opened up and physically inspected. Developing countries apparently aren’t so trusting or won’t invest in the new risk assessment systems.

In the US, where customs officials target only potentially high-risk parcels for inspection, 92% of Express Delivery Services Co. shipments are cleared prior to shipment arrival at the border, and not all of the remaining shipments are physically inspected. In the Netherlands, officials rely on an analysis of electronic information to determine which shipments will be subjected to physical inspection, reducing the need for examination to just 2% to 3% of parcels. In Mexico by contrast, authorities physically inspect 10% of all shipments and sometimes carry out a secondary inspection by independent contractors to guard against customs errors or wrongdoing. The 10% inspection rate in Mexico is an improvement over the previous regime, where, like in other countries, customs officials inspect 100% of shipments.

Out of 114 countries for which they had information, only 37 use risk analysis to target and limit their inspections. Eighteen inspect every single item that crosses the border, causing massive delays, and the rest inspect inbound express shipments randomly or on the whim of the customs officer on duty. Timely clearance of express shipments is often up to luck in most of the world’s countries.

Another headache is the opening hours of customs offices. In the United States or the European Union, most customs offices at the airports the express delivery companies use are generally open 24/7 year-round. It is not like that in the rest of the world. Express companies complain about unreasonably restrictive hours in China, India and most of Latin America. This forces the delivery companies to schedule their flights around the customs opening hours, often delaying flights. There can be problems even when the customs offices are open because some countries, China and Brazil were named, don’t seem to base their customs staffing on shipping volumes and don’t have enough inspectors on duty. The express companies can sometimes provide extra staff of their own to keep things moving if the customs people will accept their help.

Some problems are surprising. The European Union, for instance, doesn’t have a standard, coordinated clearance process across its member countries, which can lead to confusion when a shipment lands in one country but is bound for another. There can be differences even within EU countries. In the Netherlands, express shipments are greeted by a standard, centralized clearance system that is the same at all points of entry. Further along the Rhine, however, in Germany, that isn’t the case. Germany has no centralized customs clearance, requiring the delivery companies to have people on the spot at each port of entry they might use to fill out the documentation.

The World Customs Organization (WCO) partially addressed the standardization issue by identifying a set of best practices. Under the WCO’s Kyoto Convention guidelines, countries should aim to create simplified custom procedures that can be carried out in a predictable, consistent and transparent environment. Customs should make maximum use of information technology and risk analysis to speed up the clearance process and maintain its integrity through the application of objective tests and procedures. WCO recommends that customs agencies use “single window” electronic procedures, whereby documents are submitted once and are easily transferred across agencies and borders. Just 81 of WCO’s 178 member states have signed on to these common sense procedures, although many others adhere to its recommendations.

Sometimes the express companies run up against infrastructure limits. The United States is covered with efficient airports and has its excellent Interstate Highway system that speeds internal deliveries once the border is crossed. Brazil just doesn’t have that. Airport coverage of the country is one-third of the density in the United States, and the Brazilian road system is woeful. The companies can sometimes invest in their own infrastructure at sub-standard airports, but they can’t realistically build highways for the last mile of deliveries.

Delays at border crossings and the need to hire extra staff in many countries can drastically alter the cost of making express shipments. The company in the study reports that Venezuela and Kenya, in particular, cause them to increase the handling charges they pass on to their customers, making these countries less competitive. On the other hand, handling charges for express shipments are especially low in places like Mexico and Qatar. And Singapore may be the easiest of all.

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Jimmy did a fabulous job of getting that bid package to Somalia, so I owed him one. He is a wonderful French chef, and has run a cooking school in his checkered career, so you are always nervous cooking for Jimmy. But I make a killer Caesar salad. Jimmy knew the original Caesar (of salad fame, not the Roman) and tells me that mine is the closest he has had to the original. He has one complaint. I don’t much care for anchovies and don’t put them in, but Caesar always used anchovies. I think Jimmy delivered them.

Crossing The Russian Border

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Fun at the Russian border.

Fun at the Russian border.

There is a reason that the Russian import market doesn’t see many small companies. Just wait until you see the problems the big boys have to put up with. The World Economic Forum/World Bank/Bain & Company study on supply chain problems in international trade makes it clear: it can be very tough to get your products into Mother Russia.

The study focuses on an unnamed U.S. computer company that sells desktop computers, laptops and spare parts, some of them new, some refurbished. The company is said to have the 6th largest market share of computer companies that sell to consumers in Russia, so they must be pretty big. But being big doesn’t save them at the Russian border where, depending on the products being shipped, documentation issues and import licensing requirements can cause delays ranging from ten days to eight weeks. That will put a dent in your profit margin.

Products built for wireless communications such as Bluetooth generally have an easy time of it. Shipments of wireless mice, keyboards and the like don’t require import licenses. But computers with wireless capabilities do need licenses, whether desktops or laptops. And, worse, you can’t apply for these licenses until the computers are at the border awaiting entry. First, they have to be “tested”. I don’t know if this is rigorous scientific testing – or border guards watching YouTube – but it can take two weeks. Second, your importer needs to get an import license from the Ministry of Industry & Trade. This, of course, requires presentation of copious documentation. Let’s see, there is a purchase agreement, a certificate of tax registration … Altogether, testing and licensing can take six weeks to negotiate. Your importer also has to pay $300 for the testing and another $80 for the import license.

Security fears on the Internet and elsewhere mean that many computer products today contain an embedded cryptography capability, which, in turn, attracts the Russian security apparatus. The security guys apparently want some of this stuff (routers, some computers, VPNs) because they have set up an “expedited” clearance process. It only takes about ten days to notify the Federal Security Service and get their approval, bypassing the Ministry of Industry & Trade. Others aren’t so lucky, meaning they take about four weeks to get approved by the security guys and then they can start on another four weeks at Ministry & Trade. Better allow for two months of down-time at the border before you can start selling your products. And it gets worse if you are selling something like a PC that is both wireless-capable and has built-in encryption.

Some products fall afoul of Russia’s reference pricing system. For these products, the customs inspectors ignore the actual prices on the invoices – which they assume are false – and rely on a schedule of minimum import prices on which they collect an ad valorem customs duty. This creates a price floor for applying duties and is applied on a discretionary basis, so your importer cannot predict when he will have to pay more than he had planned for based on the invoice value. The importer is in a double bind. He can challenge the use of the reference price, which will further delay the shipment and require a sea of supporting documentation to prove his original lower price (things like bank documentation, consumer price lists verified by officials in the exporting country, statements from the seller). Or the importer can just accept the reference price and pay the higher duty. But if he accepts the reference price too often, he is open to investigation for customs fraud for continually trying to sneak goods in at a lower price. It isn’t easy being a Russian importer.

Shipping To The Saudis

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It looks straight-forward. Tariffs are low or even zero in many Middle Eastern countries, but that can prove deceptive. It’s the non-tariff measures that are likely to get you in trouble. At least this is the conclusion of a case study for selling computers that I found in the World Economic Forum/World Bank/Bain & Company study of supply chain problems in world trade. This particular case reports what a major manufacturer of personal computers, servers, portable devices and more encountered as they developed Middle Eastern markets, particularly Saudi Arabia. As is their practice, the authors of the study didn’t identify the company. The firm sells in over 150 countries with annual revenues above $15 billion. They have facilities and employees in more than 50 countries. Before any readers with SMEs stop reading, let me remind you that small firms can experience the same troubles – only with fewer resources with which to solve them.

Our company’s global sales plan has targeted the Middle East and Indonesia:

The Gartner Group forecasts that PC sales in these markets will grow at a pace of better than 20% through 2016 to some 34.5 million units. In none of these attractive new markets do traditional quotas and tariffs present a significant barrier. In the Middle East, duties on imports are uniform and low, at just 5%. As a party to a free-trade agreement with China, Japan and India, Indonesia accepts most shipments of imports duty free.

It can take a long time to get your product to Riyadh. (photo: BroadArrow)

It can take a long time to get your product to Riyadh. (photo: BroadArrow)

That’s the bright side. Strict rules of origin, standards and inspection requirements, local content rules and other non-tariff measures can create challenging barriers. Take this Catch-22 between Saudi Arabia and Egypt: The Saudis require that importers apply for certification and get samples tested BEFORE the products they buy are actually manufactured. The Egyptians, just across the Red Sea, require exactly the opposite – nothing can happen until AFTER the goods are manufactured. Things might get easier in either market if your company is well-known and large. Smaller companies may face up to three weeks of waiting while their goods are certified to local product standards. That costs money.

Product labeling is a constant issue in the Middle East where most labels must be in Arabic. The source of the problem is back at the factory where none of your workers may read Arabic and so won’t realize that they are putting on the wrong labels for a particular shipment. The mis-labeled products can then be held up for weeks while the misunderstanding gets sorted out – and the products get re-labeled. (The case study doesn’t even mention the snafus that can happen if a label or documentation even hints that the company might trade with Israel.)

Saudi Arabian government agencies are known to suddenly issue new rules and regs with little or no warning – and to enforce those new rules rigorously from the moment of announcement. This, unfortunately, catches out any shipments that are already in process, especially those that are moving by sea. And it hits heaviest on smaller suppliers who may not have a staff that is constantly watching Saudi Arabian rule-making.

Saudi customs stations at the land borders shut down during holiday periods, which can catch out any shipments entering the country by road. A holiday festival like Eid can keep the offices closed for a week – producing a steadily-lengthening line of tractor trailers waiting to get in. Experience tells our computer company that it can take an additional two weeks before Saudi customs catches up with the backlog and the last truck in the line can start rolling again. Pilferage on truck shipments into Saudi Arabia is normally about 1-2%, but this can multiply during the holiday stoppages at the border. Our company has learned to warehouse all Saudi-bound shipments in Dubai until agents in Saudi Arabia tell them that the border backlog has cleared. This, of course, adds warehousing to the shipping costs and delays deliveries to Saudi customers.

Pilferage aside, there is an unexpectedly high damage rate for truck shipments into Saudi Arabia. This is due to lack of decent equipment at the border stations. Cargoes have to be unloaded from the trucks for inspection and the border stations often don’t have sufficient forklifts to cope with heavy pallets. This leads to dismantling shipments by hand with far greater chance of damage (and pilferage) for high-valued tech items. The damage rate can run upwards of 5% at the Saudi border (compared to less than 1% in Europe or the United States). Damage and pilferage together probably raise our computer company’s costs by 6-9% for movements from Dubai to Saudi Arabia.

Our company has found Dubai to be a congenial home for its Middle East operations, but Dubai does have one big drawback. By choosing to ship products to Dubai for re-distribution to other markets, including Saudi Arabia, shipping times to end users in other countries are about 50% higher than if the company could ship directly. But they will only do that if the non-tariff hindrances in markets like Saudi Arabia can be reduced first.

As mentioned above, our computer company is also putting a big effort into the Indonesian market. Again, they are not unduly concerned about customs duties. (The study only hints that our company manufactures in China with which Indonesia has negotiated a free trade agreement.) Customs clearance issues in Indonesia mean that a shipment that has to travel from Shanghai can take four weeks before it is in the hands of the customer in Jakarta. Demurrage charges add up quickly in Indonesian ports, too. Each container is charged $200 for each day of waiting during the first week – and a whopping $600 a day thereafter – even if the delay is caused by the Indonesian Government. It can be tough out there.

Into Africa

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Folks are increasingly more confident about economic (and political) growth in Africa. Rightly so, but that doesn’t mean we can relax about the problems that face each of the 40-some countries that make up Africa. Another case study from the World Bank/World Economic Forum/Bain & Co. study on supply chain issues takes a broad look at the difficulties that companies might run into in sub-Saharan Africa. As in previous case studies, the authors have either disguised the company or have pulled together the experiences of several firms in the same line of business. This time the field is consumer packaged goods, roughly anything you might buy in a grocery store, and the fictitious firm is CPG Co., supposedly a global producer. (Note: There is a real CPG International, but they make building materials in Pennsylvania and Alabama.)

Doing business across the African continent is as fraught with complexity for multinational companies … as it is filled with opportunity. In Nigeria, Ivory Coast, Kenya and Zimbabwe, the company struggles against an adverse business environment that elevates its risks and a patchy infrastructure that undermines operational efficiency. These barriers limit Africa’s integration into global supply chains and the breadth of goods available to African people.

Many of us assume that African countries face coups, insurrections, revolutions and civil wars continuously. They don’t, but the media doesn’t report good news, so most of Africa goes under-covered. Still, political uncertainty is a constant in many countries and CPG Co. has run into it in several target markets. The case study finds, for instance, that the company has had to shut down its operations in Nigeria more than once. In a prescient move, the company stocked up its supplies in Kenya by 200-300% before a contentious election that led to violence and disrupted markets and ports.

Africa’s often disruptive political environment increases personal safety and security concerns that lead many companies to decide not to enter problematic markets. For those that do, crime rate and theft across the transport chain drive up operating costs. Though less dangerous, endemic corruption further burdens operations. So-called “soft corruption” in the form of bribes paid to officials at borders and ports in order to speed up the shipment process has a negative impact in the form of severe delays on companies … that refuse to pay. The World Bank has estimated that corruption can absorb some 3% of revenues for business in Africa, roughly equivalent to what they pay in security costs.

Our company has found it necessary to withhold credit in Zimbabwe and Malawi, insisting on cash payments. Yes, this is tough on CPG’s customers, mostly local retailers, but the policy also rebounds on CPG itself, limiting its ability to grow and invest. CPG produces products in these markets and lagging cash collections have sometimes forced factory shutdowns for a month or so. Currency uncertainties can be daunting. In one African country, sudden currency depreciation led to a $7.9 million loss – and CPG decided against further investment there. But as countries become more stable, Zimbabwe for example, the company has come back in. “For an investment to get a green light, its expected return on investment (ROI) and payback period must be on par with global standards – typically, an ROI of between 25% and 50% with a payback period of less than four years, depending on the investment.” That is not hard and fast; the case study mentioned a decision to build a warehouse in Nigeria that did not meet its ROI rule, but was necessary to improve logistics and distribution in the country.

Mombasa - just where did that box get to?

Mombasa – just where did that box get to?

Ports are a special problem, with almost all African ports trying to operate at way beyond their designed capacities. Mombasa is the major port for all of east Africa, not just Kenya, and congestion means that shipments can be delayed between five and fourteen days for docking and unloading. Deficient communications make it easy to “lose” a container within the port and ships have been known to leave Mombasa half empty because the containers consigned to them couldn’t be found in time. Inland transport problems have led CPG and others to set up more plants and storage facilities than should be needed just to have enough product in the pipeline to cope with the inevitable transport delays.

Business in Africa is improving, especially with the advent of good cellphone service, but attention and investment still needs to be paid to its ports, roads and politics.

Papered Over

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You have seen the TV ads for stuff that is supposed to help you create a paperless office. Just imagine the paper problems that shippers, freight forwarders and air freight carriers see when they are handling thousands of shipments, each of which may generate 30 or more documents to go along with them. It is a nightmare that slows international shipments and costs big bucks.

Where are the documents? (photo by Peter Griffin)

Where are the documents? (photo by Peter Griffin)

The International Air Transport Association (IATA) saw this problem coming and developed a solution in 2005 called e-freight. E-freight is an electronic system that creates and stores all the documents needed for an air cargo shipment, transmits them to all concerned parties, and even allows partial clearance of cargoes before an aircraft has touched down at its destination. Beautiful in concept, e-freight has only been partially accepted – which cripples its usefulness. It is one of those ideas that needs all players in a transaction to come on board to make it fully effective. Today, a company might use e-freight to speed its cargoes through part of a trip, put have to resort to old-timey paper documents to get across the last border in the chain.

Air cargo is only 2% of world trade by volume, but 35% by value – which means that anything that slows down delivery can have an outsize economic impact. Air freight tends to be high-value goods, like jewelry, electronics or art. Or emergency freight needed for disaster relief or spare parts to allow a ship to get back to sea. Perishable products, such as food, flowers or pharmaceuticals often go by air. And time sensitive products such as high fashion or time-sensitive publications. And the mail.

Zara, a “fast fashion” retailer, exemplifies the benefit of reducing air cargo shipment total transit times. Zara updates clothing lines at least once a month. Its ability to track, in real time, what is selling lets management know immediately what styles and colours are drawing customers to its stores – information it immediately sends to its manufacturers. But the Zara business model works only if it is able to get its designs into stores in a matter of days or weeks, not months, which makes it a heavy user of air transportation.
~ Enabling Trade: Valuing Growth Opportunities

IATA estimates that e-freight could eliminate 70% to 80% of delivery delays that are caused by paperwork. But there have been obstacles to implementing e-freight. The biggest stumbling block is lack of action by governments around the world, reluctant to give up the perceived “control” they feel that paper documents give them. Some of this is simply the usual inertia that holds up change, but others likely fear the productivity increases offered by e-freight, which would call into question a lot of jobs for underemployed people at broder crossings, airports or seaports. Electronic documents may also lessen the opportunity to demand grease payments to get a fast clearance. Some shippers and air cargo companies have delayed implementation due to the cost of learning new software and installing updated equipment. And there are air freight forwarders who fear that electronic systems may lessen demand for their services to navigate the world’s byzantine document requirements.

The Bain/World Bank/World Economic Forum study on global supply chains that I have drawn from recently emphasizes that the biggest holdups are often in countries that could benefit the most from more efficient clearance procedures – pointing to China, Brazil, Russia and India in particular for holding things up. China now has a pilot project for electronic documentation and Russia is showing signs of movement, but Brazil and India are still in the paper document dark ages.

What could we save if e-freight or another electronic document system were universally implemented? The Bain/World Bank/WEF study guesses that shippers might add $9.4 billion annually to their bottom lines, $4.2 billion from direct savings and another $5.2 billion from increased traffic as efficiency improves. Air carriers would save about $1.4 billion, much of that by avoiding penalties they now have to pay for inaccurate or incomplete paper documentation. And even those complaining freight forwarders would save $1.2 billion in document preparation costs and the cost of archiving all that paper for years. The bottom line is that the world would save about $12 billion a year. And you would get your goods faster.

… Cathay Pacific led a switchover from paper airway bills to a paperless system supported by a data messaging platform called Ezycargo. As Hong Kong’s dominant carrier, Cathay Pacific was able to create and enforce a process where freight forwarders it works with use Ezycargo data entry for all shipments it carries. Cathay has enjoyed a boost in both productivity and traffic gains from the change to electronic documentation. As e-freight came into full effect between 2010 and 2011 in Hong Kong, the number of shipments Cathay carried jumped from 300 to 3,600, while those carried by its rivals increased from 600 to 6,400. Productivity at Cathay, measured by the level of manpower saved or reassigned to other tasks, rose 19%.
~ Enabling Trade: Valuing Growth Opportunities

Keeping Up With The Jones

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730_Trailer_Bridge_SmI enjoyed the thorough reaming that the new World Economic Forum/World Bank/Bain & Company report on trade barriers gave the Jones Act. As a young economist, newly hired by the U.S. Maritime Administration, I was asked to do a study of the benefits the United States had derived from the Jones Act. I couldn’t find any.

The Jones Act was created in 1920 to preserve the American merchant shipping fleet and to keep U.S. shipyards operating, so that both would be available in time of war. The Act is intended to do this by reserving carriage of cargoes between American ports (this is called “cabotage”) to American flag vessels, owned by Americans, crewed by American seamen and built in American shipyards. Fifty years later, when I did my study, the U.S. merchant fleet had shrunk, we had fewer shipyards, and their prices for new ships were incredibly high – way above world market prices. Small surprise that shipping rates between U.S. ports were among the highest in the world. My conclusion was that the Jones Act had merely demonstrated that when you grant a monopoly, competition disappears and prices go up. My political bosses did not like that conclusion and the study was not published.

Let’s see what conclusions the folks at Bain and Company (they did most of the writing) came to in their new report released a couple weeks in Davos. Their mandate was to examine hindrances to trade that impact supply chain management. Shipping restrictions are prominent among them. Does the same conclusion prevail after another forty years?

The Jones Act is the most restrictive of global cabotage laws and an anomaly in an otherwise open market like the United States. Political advocacy for the Jones Act is unwavering, led primarily by shipyards and associated industries, maritime labour unions and congressional delegations from the noncontiguous states of Hawaii and Alaska. Critics of the law include domestic and foreign shippers (and their consumers) as well as international logistic companies.

The U.S. International Trade Commission has consistently found that the Jones Act adds tremendous costs to U.S. exports and imports if they need to be moved around the country. The Jones Act is a major bone of contention here in Hawaii, with exporters and importers complaining about the excessive costs of shipping between Hawaii and the U.S. West Coast. I know shippers who send product on foreign vessels to Vancouver to get lower shipping prices. And others who will wait for a foreign-flag vessel to take their goods to Europe rather than suffer the Jones Act penalty of carriage to Long Beach, followed by train or truck across the country, then another sea shipment to Rotterdam. Of course, their votes are outweighed by the political clout of Matson and Horizon Lines, so Hawaii’s Congressional delegation is among the staunchest supporters of the Jones Act. The little guys count for nothing in the halls of Congress.

The alternative to using international shipping services for relay in the United States is typically to move goods via land. Estimates suggest that more than 500,000 qualifying international containers moved over highway and rail in 2012. If these containers were allowed to stay on the water and trans-ship on international liner services, the economic benefit to supply chain participants – shippers, carriers and consumers – could exceed US$ 200 million. In addition, the potential reduction in road congestion and environmental impact would be significant: Trucks and rail are substantially less energy efficient than ocean vessels.

There you have it, folks. After more than 90 years, the Jones Act is still a bad idea. Unless you happen to be among the few U.S. shipping companies or shipyards that remain in existence and have members of Congress in their pockets.

Oh, the WEF/World Bank/Bain study did talk about another country that has a similar scheme: China. But they concluded that China’s law isn’t as bad as America’s.