COVID-19 hit the ocean freight industry hard. First, it was the disruptions, as global supply chains crashed under historical consumer demand and sky-high expectations aired with equally meteoric slowdowns and shutdowns.
But the rapid evolution of shipping and logistics didn’t stop as pandemic-time regulations lifted. Industry leaders now have the tools, insights, and track records to keep pace with consumer demand, heightened expectations, and other unique complexities that define the post-COVID landscape. And by continuing to build on three key fronts—digitization and automation, infrastructure, and alternative transportation routes—the ocean freight industry can keep building on its recent wins, benefitting manufacturers, carriers, and consumers. Here’s what it looks like.
#1. Accelerating the impact of digitization and automation
One of the most notable industry success stories is the rapid digital transformation emerging from pandemic demands. To enhance efficiency and reduce costs, the industry had to quickly lean into digitalization and automation—technologies like blockchain, artificial intelligence, and the Internet of Things (IoT) were no longer for early adopters but, instead, become mainstream, streamlining operations, enhancing visibility, and improving supply chain management.
Now, these high-tech solutions are table stakes. Shippers track cargo in real time, reducing delays and boosting customer satisfaction.
#2. Increasing infrastructure investments
Over the last three years, the U.S. government and private sector have substantially invested in port infrastructure and logistics networks. Upgrades to ports and other large-scale projects like the Panama Canal expansion have increased the capacity for larger vessels, enabling faster, more reliable transit times. This has been a major win for shippers and clients—now, teams can transport larger volumes of goods in less time, bringing costs down and efficiency up.
#3. Alternative transportation route
To mitigate risks associated with COVID-time congestion and delays, U.S. logistics providers were pushed to explore alternative transportation routes. Many decision-makers focused on diversifying ports of entry and looking to intermodal options such as rail and trucking to optimize transportation networks. These alternative routes provided shippers and clients with increased flexibility and improved supply chain resilience—a benefit then and now.
Infrastructure investments mentioned above have also supported these alternative routes. The federal government has invested billions of dollars in infrastructure projects such as roads, railroads, and ports. This investment has enabled the industry to keep pace with the increasing demand for shipping and has helped reduce congestion, especially in ports and highways.
Challenges after the COVID-19 shipping surge
Despite these recent wins, the ocean freight industry faces unique challenges—many coming out of the COVID-19 shakeups.
One of the major hurdles: container shortages and imbalances. The pandemic-powered surge in demand and disruptions in global trade led to container shortages and imbalances. The unequal global distribution of empty containers drove added delays and increased costs for shippers and clients. Addressing this challenge requires improved container management and a more balanced global supply.
Likewise, port congestion was and continues to be a significant issue in major U.S. gateways. Increased volumes and labor shortages led to delays in vessel berthing, longer turnaround times, and increased dwell times for containers. To overcome these hurdles, shippers and carriers must find new methods to support these congested ports, or we’ll continue to experience extended lead times and higher transport costs.
Lastly, freight rate volatility continues to disrupt supply-demand dynamics. This volatility began during the pandemic shipping surge when rate fluctuations made it harder and harder for shippers and clients to forecast costs accurately. Early in the pandemic, shipping surged, which drove rates up as carriers struggled to keep pace with demand. These rate spikes created significant financial burdens on shippers and clients who, almost overnight, had to pay more for shipping their goods. Additionally, the surge in demand made it difficult for shippers and carriers to predict shipping times, which led to increased uncertainty and risk.
Despite the supply chain beginning to level off and stabilize, shippers and clients need help with cost estimation. The industry must establish transparent pricing mechanisms and foster long-term partnerships to mitigate these uncertainties.
Moving forward with predictability and consistency
Given these challenges, shippers, carriers, and clients must reimagine their workflows with expectations that better align with the new freight landscape. One key consideration? Flexibility. Shippers must be prepared to adapt to changing circumstances, such as delays in shipping times or container shortages. Organizations may also consider alternative modes of transportation, such as air freight, to ensure goods arrive on time.
Carriers must also be prepared to be flexible, as they may need to adjust routes and schedules to meet changing demand—investing in new technology, such as predictive analytics, can help better predict demand and ensure carriers can meet customer needs.
Clients, too, need to embrace this more flexible mindset. On the client side, ordering and delivery schedules may need to be adjusted to account for delays or shortages. Clients may also need to consider alternative suppliers or transportation modes to ensure they can continue meeting customer demand.
Given these unified hurdles, stakeholders from all corners of the supply chain must also commit to greater collaboration and support. Shippers, carriers, and clients must work together to identify and address challenges and to find solutions that benefit everyone. This may involve sharing data and insights or working together to develop new technologies or processes that improve efficiency and reduce costs. With that added clarity and transparency, organizations will be best equipped to accelerate shipping and delivery and boost customer satisfaction and end-to-end success.
The ocean freight industry is facing multiple challenges that are driving significant changes in the way carriers operate. From environmental concerns to digitization and automation, and increasing price competition, carriers must navigate a complex landscape to remain competitive and profitable. With governments and consumers increasingly focused on sustainability, carriers are under pressure to reduce their carbon footprint, adopt more sustainable practices, and implement sustainability clauses in their contracts. At the same time, the COVID-19 pandemic has accelerated the adoption of digital platforms and automation, as carriers seek to improve efficiency, reduce costs, and increase visibility. Lastly, consolidation and new technologies are driving increased competition in the market, forcing carriers to compete on price while finding ways to reduce costs and improve efficiency. Let’s explore these challenges and the strategies carriers and shippers can adopt to navigate the changing landscape of the ocean freight industry.
Environmental Concerns
The focus on environmental sustainability in the ocean freight industry has been growing steadily over the past few years. With increasing concerns about climate change and its impact on the planet, governments and regulatory bodies around the world have been putting pressure on the industry to reduce its carbon footprint and adopt more sustainable practices.
One of the most significant ways in which carriers can reduce their environmental impact is by using low-carbon fuels. Currently, the majority of vessels in the industry run on heavy fuel oil, which is a significant source of greenhouse gas emissions. However, there are alternative fuels available that are significantly less polluting, such as liquefied natural gas (LNG) and biofuels. These fuels emit fewer pollutants and have a lower carbon footprint than traditional fuels, making them a more sustainable option.
Another way in which carriers can reduce their environmental impact is by implementing more efficient vessel designs. Newer vessel designs can be more energy-efficient and emit fewer pollutants, which can help to reduce the industry’s carbon footprint. For example, some carriers are now investing in vessels with hybrid or electric propulsion systems, which are significantly more efficient than traditional propulsion systems.
In addition to these practices, carriers may also push for contracts that include sustainability clauses. These clauses can include commitments to reducing carbon emissions, using sustainable materials, and implementing sustainable practices throughout the supply chain. By including these clauses in their contracts, carriers can demonstrate their commitment to sustainability and differentiate themselves from their competitors.
Ultimately, the focus on environmental sustainability in the ocean freight industry is not just driven by regulatory pressure, but also by consumer demand. As consumers become more aware of the environmental impact of their purchases, they are increasingly looking for sustainable options. By adopting more sustainable practices, carriers can meet this demand and position themselves for success in the future.
Digitization and Automation
The COVID-19 pandemic has had a significant impact on the ocean freight industry, accelerating the adoption of digital technologies and automation. The pandemic highlighted the need for more resilient supply chains and increased the demand for real-time data and visibility. As a result, carriers have been investing in digital platforms and automation to improve the efficiency and agility of their operations.
Carriers are more commonly adopting digital platforms for booking and tracking shipments. These platforms allow shippers to book and manage their shipments online, providing real-time visibility into the status of their cargo. By adopting these platforms, carriers can streamline their operations, reduce paperwork, and improve communication with their customers.
In addition to digital platforms, carriers are also investing in automation to increase operational efficiency. This includes the use of robotics and artificial intelligence to automate certain processes, such as cargo handling and documentation. By automating these processes, carriers can reduce costs, improve accuracy, and increase the speed of their operations.
The adoption of digital technologies and automation in the ocean freight industry is driven by the need to improve efficiency, reduce costs, and increase visibility. By adopting these technologies, carriers can improve the customer experience, reduce the risk of errors, and increase the speed of their operations. As a result, we can expect to see an increased focus on digitalization and automation during the current contract season and beyond.
Increasing Price Competition
In recent years, the ocean freight industry has seen a significant increase in competition between carriers. With more carriers entering the market, established carriers are facing pressure to compete on price, which can lead to a squeeze on profit margins.
One of the main drivers of this competition is the ongoing trend of consolidation in the industry. Over the past few years, we have seen a number of mergers and acquisitions among major carriers, which has led to a reduction in the number of players in the market. This consolidation has created a more concentrated market, with fewer carriers controlling a larger share of the business. As a result, carriers are increasingly competing on price to maintain their market share.
In addition to consolidation, the rise of new technologies and digital platforms we discussed above has lowered barriers to entry for new players. Startups and tech companies are entering the market with innovative solutions that are disrupting traditional models of ocean freight. These new players are often able to offer more flexible and efficient services, putting pressure on established carriers to adapt or risk losing business.
The increased competition is putting pressure on profit margins for carriers, who are struggling to maintain their margin while still competing on price. This pressure is being felt across the industry, from small regional carriers to the largest global players. To remain competitive, carriers are looking for ways to reduce costs and improve efficiency. This can include investing in new technologies, optimizing routes and vessel capacity, and streamlining operations.
For those looking to move freight, the increased competition can be both a blessing and a curse. On one hand, the competition can lead to lower prices and more options for shipping goods. On the other hand, it can also lead to instability in the market, with carriers coming and going and pricing fluctuations that can impact supply chains.
Overall, the increasing competition between carriers is a trend that is likely to continue throughout 2023 and beyond. Carriers will need to adapt to this new reality by finding ways to remain competitive while maintaining profitability. For their customers, the key will be to stay informed and agile, adapting to changes in the market and working with carriers to find the most cost-effective and efficient shipping solutions.
The shipping and logistics industry is always changing, like everything else. Businesses adapt to shifting conditions, and the past few years have certainly altered the landscape. Whether they’re environmental improvements, digitization and automation, or simply decisions or investments intended to stay competitive, you can safely bet that businesses will do what they can to meet the market’s demands. But keeping up to date on these kinds of changes and how they’ll impact your business is extremely difficult—and potentially expensive. We recommend working with a partner who can help you find the best possible solutions for you, regardless of what’s changed. Let’s talk about how we can help you.
The February 2023 jobs report showed some serious job growth, estimating that over 300,000 new jobs were added to the economy. During an average year, that would be tremendous; during a period of economic hardship, like the current global marketplace is still struggling through, you would typically expect those numbers to be big news. Job growth (or the lack of it) is one of the most commonly used statistics economists look at to make their projections and otherwise assess the health of the economy, because the number of employed people impacts everything else—for example, consumer spending.
But, for some reason, other current statistics aren’t showing that much of an increase at all, which is odd. Not all of the stats correlated to job growth are necessarily positive ones, either—for example, increased inflation usually correlates with increased employment numbers. That aside, the majority of other economic metrics are typically the ones associated with healthy, growing economies.
Think about everything that happens when someone is hired as an office worker, for example. Not only does that person get added to payroll and begin drawing a paycheck (and paying taxes, and often receiving benefits—health insurance premiums, 401k contributions, etc.), there are countless other small economic activities that take place from this new hire. The business will often purchase their equipment, like computers, possibly office furniture; coffee in the office will be consumed a bit faster and need to be purchased more often or in greater volume; and frequently (though less typically than a few years ago) that new employee will have some type of commute. A generously short 10-mile commute will consume a gallon of gas every day, and that’s assuming the new employee never makes any stops along the way at a coffee shop.
The point here is that additional jobs correlate with additional economic activities, and those other activities have historically increased right alongside job growth statistics.
So why isn’t the shipping market bouncing back alongside these statistics?
We’re still in a strange economic situation
Consumer spending habits have changed so dramatically that traditional data analysis methods may not be viable, at least until things change. Think back to the early days of Covid, back when toilet paper and hand sanitizer was next to impossible to find, but think about everything else that went on, too. There was a huge spike in consumer purchasing for all sorts of products, not just consumable or wellness products, partially fueled by stimulus distributions.
A significant chunk of the middle class kept their jobs and shifted to remote work. That meant they still received their paychecks, but also received “unexpected” (at least at the beginning of 2020) windfalls from these stimulus checks. A surprising number of these people used that money not just for maintaining their standard of living, as you normally expect (covering housing payments, putting food on the table, paying bills, etc.) Many used those checks ($1,200, $600, and $1,400 per eligible person, plus additional funds for dependents; the maximum benefit for a married couple with three child dependents totaled $13,900 between April of 2020 and March of 2021) to make purchases they otherwise might have put off. These are long-term, durable purchases—recreational vehicles, televisions, living room furniture, and other high-ticket items that will last for years before they need to be replaced.
But… how many couches does someone need to buy? Not one every few months for the next ten years. The same goes for RVs, televisions, and more of these types of durable goods. But for a few quarters, demand skyrocketed for those types of items. In response, businesses started ordering more of their products, just as you’d expect them to. The problems began when factories started getting overloaded and ports saw significant slowdowns in their turnaround time for unloading. The shipping backlog dragged on for months—but demand started slowing down as the market cooled off from that flurry of stimulus activity. So businesses suddenly woke up one day and realized that they had (in some cases) doubled up on their inventory, and slowed down or stopped their ordering activity in favor of inventory liquidation.
To summarize: a surprising number of long-term, high-value products saw a tremendous spike in demand and sales, businesses overordered to meet that demand, and when the pendulum swung back in the other direction, they dropped their high volume and began selling what they already have. Businesses are now making much smaller, more tightly focused orders for these types of products, rather than focusing on stocking up ahead of time.
Basically, the United States economy packed in a few years’ worth of purchasing activity into one year, and it’s going to take some time before demand rebounds. But that’s compounded by other unusual circumstances:
Economic uncertainty has changed public psychology
For the first time in many years—for some in the younger generations, maybe the first time in their professional lives—interest rates are no longer at fire sale rates. Interest rates were cut way back and kept low for years, which meant one thing for lots of people: very cheap financing. That’s part of what was fueling big ticket sales like RVs during the Covid demand spike: buyers were able to finance it at extremely low rates. Cheap, low-interest loans are much harder to find. In Q1 of last year (2022), the average 30-year fixed mortgage rate in the United States was just over 3%. This week, it’s 6.5% (source).
This is intended to reduce inflation, and it will, but it will also make consumers less likely to spend money on unnecessary items even if they have it. Everyone who’s been to the grocery store in the past few months has noticed how much prices have gone up across the board. For some items, even sale prices are higher than their old regular price—certain types of coffee, for instance. Add on rumors of issues with some banks and whispers of “recession” in hushed voices, and you have consumers wary of overextending their budgets.
Many consumers have begun questioning what constitutes a “necessary” expense for themselves. Remote work, for example, means that many employees aren’t stopping for a coffee on their way into the office, buying less gas, eating out less often, and a thousand (or more) other small (but, combined, significant) purchases that they have decided they can live without.
We need new types of data
All of this combined means that old indicators of economic strength (or weakness) may no longer be as accurate as we’re accustomed to. Jobs reports like February’s are still great news to hear, but they no longer mean that we can necessarily look forward to increased consumer spending anymore. Enough consumers are being cautious and keeping an eye on their spending habits closely enough that the data we used to rely on may no longer be viable. This means economists will need to start looking for new sources of information to make their predictions.
Until we have methodology that’s as solid as we’re used to, it might be hard for some businesses to accurately anticipate the demand for their products. That means that the current state of freight shipping and inventory ordering will likely remain as it is for at least a while longer. Currently, many businesses are on a beak-to-trough system, ordering only what they know they’ll need—and will be able to sell. That’s perfectly understandable. In short: when consumers are watching every penny they spend, businesses would be smart to match their caution, and keep a close eye on their own inventory practices. Too many overextended and found themselves in tricky situations—full warehouses with too few customers to sell to—and were seriously damaged as a result.
Businesses should work with a partner who can help them manage their ordering processes step-by-step, from factory floor to last-mile delivery. The more efficient you can make these processes and the more agile you are with your operations, the better you’ll be able to respond to a rapidly shifting market landscape.
