Shippers can be a demanding lot, no doubt. They are constantly asking for better, fully integrated services at reduced prices. But by doing so, are they inadvertently sowing their own seeds of destruction by ensuring only the largest freight transport operators survive at the expense of competition?

With supply chains extending like never before to feed the insatiable glut of Western nations for cheap Asian products, freight transport has become of massive importance. As in past eras when industrialisation spurred consolidation, the same thing is happening in the logistics industry today.

2005 and 2006 were the years of the transportation sector, which contracted like never before to a point where it is finally close to having its own Andrew Carnegie, John Paul Rockefeller or Bill Gates. But is this a good thing for shippers?

A controversial issue

Daniel Huang is in a unique position to ponder the pros and cons of fewer players in the express sector. As an ex-seafarer turned T-shirt manufacturer, with a factory near Yantian churning out up to 10,000 garments a week for his global customers, Huang points to the liner shipping industry as a precursor and warning to shippers surveying the changing industry.

"Consolidation in the container industry has created de facto cartels that charge what they like and reap enormous profits," he says forcibly. "For that reason alone I will continue to use smaller express operators, because competition is paramount or else my profits will be hit."

This theme is picked up by Sunny Ho, Director of the Hong Kong Shippers' Council, who deems the whole consolidation issue "controversial".

"On the positive side," he says, "consolidation might bring about more comprehensive services as operators may be able to complement with each other in terms of services and also achieve greater economies of scale after the merger. On the negative side, mergers reduce competition."

On the liner front, Ho notes how shippers have felt the "negative effect" from the predominating position of Maersk Line, which through the years has absorbed Sealand, Safmarine and in 2005 P&O Nedlloyd.

With fewer players, liners have successfully manipulated the trade, he contends, appearing united in order to introduce countless charges and rate rises. "Had it not been for the increased concentration in the liner shipping market, carriers could not have enjoyed such good results in the past few years," Ho notes.

Spreading the risks

Companies that use a one-stop shop are very vulnerable if that provider goes out of business.

The transport consultancy arm of IBM regularly likes to point out that there are as yet no companies that have grasped the "hollow crown" of being a complete end-to-end logistics provider, though the likes of DHL and Maersk are the nearest to achieving this feat. But despite the billions spent to become comprehensive logistics service providers offering one-stop shopping for shippers, are their plans what the market actually wants?

"Consolidation is a good thing," says Henrik Anker Olesen, Transport & Logistics Leader Asia Pacific for IBM Global Business Services. "It is both inevitable and necessary in a very fragmented industry with too many players."

However, the Unisys Global Shippers' Survey 2006 suggests that the market does not welcome such consolidations. Asked if they intended to move toward one-stop shopping, 70% of the shipper respondents said "no". A number of the shippers said their logistics strategy was "not to put all the eggs in one basket".

Such precaution comes after the dramatic consolidation in the air cargo and logistics industry, such as Deutsche Post's purchases of DHL, AEI, Danzas and Exel, and many others.

Having multiple suppliers forces the chosen ones to constantly improve their services and keep prices competitive. A single provider might become complacent, regardless of their size and capabilities, the respondents said.

Companies that use a one-stop shop are also "very vulnerable" if that provider goes out of business, says Larry Woelk, consultant for the UK-based Triangle Management Services, which conducted the survey interviews. "Look at what DHL, UPS and Schenker are doing. It's certainly not what shippers are vocalising," says Woelk. "That doesn't mean that their strategy won't ultimately prevail or be proved right, but there is no evidence for it yet."

Taking a step back

There is always room for small freight forwarders.

Maybe, the findings from this survey and others like it are finally hitting home at the boardrooms of the major express operators. At the end of last summer, TNT, the original exponent of the one-stop, multi-sector transport provider, sold off its logistics division to private equity investor Apollo Management.

When private equity investors pile into transport, traditionally it signals the sunset of a cycle. This was a sharp policy reversal for TNT, which as recently as 2005 was still in expansion mode snapping up Wilson Logistics. Following TNT's sell-off of its logistics unit, Deutsche Post has announced it will sell VfW, the provider of reverse logistics services that it acquired only two years earlier along with Exel.

Integrating massive mergers has proved tough; note not just the VfW sale, but UPS' difficulties swallowing Menlo Worldwide, Maersk's troublesome P&O Nedlloyd merger and Hapag Lloyd's painful acquisition of CP Ships. Such difficulties irk customers.

Certainly there are advantages of using a single third-party logistics provider (3PL). There is one management fee and you have greater leverage in terms of volume-related discounts.

However, the more complex supply chains get, the less well the single-supplier scenario works because these mega mergers are still being bedded in. Most 3PLs are strong in one geography and weak in others. In racing to build global service networks, 3PLs have responded with everything from acquisitions to forging alliances with foreign providers to initiating their own operations in new geographies, notes Robert Lieb, supply chain management professor at Northeastern University, Boston, in his most recent annual study of the 3PL sector.

"The task of designing, building and effectively operating these broad networks is challenging, to say the least," he says.

Levelling the playing field   While small and medium companies might feel the increasing pressure of competition from the behemoths of their industry, technology available today can help level the playing field to a certain extend. These companies usually have tight budgets and limited resources for investing in sophisticated IT platforms that allow them to comply with demanding electronic data exchange standards imposed by big shippers. However, with Digital Trade and Transportation Network (DTTN), SMEs can, with very little or no investment, communicate with their clients in all the common standards and pay only a small fee based on the number of transactions they make.

Consequently, for all the consolidation, there is still a need for smaller players with specific sectoral or geographic expertise. Says Sunny Ho: "There is always room for small freight forwarders. However, they should focus on niche markets and offer tailor-made services to special customers."

Kenneth Chow, Managing Director of Grand Express Limited, a Hong Kong-based freight forwarder with 30-plus employees, is confident that small forwarders like his provide the kind of services that large logistics companies cannot.

"Our clients are themselves SMEs," he says, "so if they seek services from large logistics companies, they would be reduced to just a number. However, we would treat them as VIPs. Regardless of their size, we would treasure their business. Since our network is not as strong as those large, global logistics companies, we must compensate that with a highly personal service and great efficiency."

In fact, a personal touch is the competitive edge of small freight forwarders, says Chow. "If you call a big logistics company, you'd have to wait a long time listening to the answering machine and waiting for your file number to be pulled up. With us, you can always expect a real person to pick up the phone, and our clients like that."