Fair Trader cries foul, not understanding that consolidation of shipping is a global phenomena

Sri Lankan agencies over the years have built confidence in the shipping lines by running competing operations independently and have done it successfully – Pic by Shehan Gunasekara

By the Son of the Sea

Reading the poorly-worded article published in Daily FT under the heading ‘Strong monopoly regulations a must if Sri Lanka needs to be an international centre of excellence,’ I thought it is right to respond to this malicious attempt to spread baseless allegations against the entire shipping industry as it affects the reputation of the industry. 

As I read the article it was evident that a party who has lost an agency is spreading hate speech against few companies. Let’s analyse all those points in detail.

Minister’s speech

Quoting few extracts from the Minister’s speech at the CASA AGM, the Fair Trader assumes that the Minister is trying to protect few companies in the industry. As a person who attended the AGM, let me enlighten the reader of what the Minister actually said. 

He very clearly stated that his interest is to protect and encourage the local entrepreneurs who have contributed to build the industry and that any foreign party who wants to invest in the industry are welcome to bring substantial investment in the form of a FDI. He further said that the intention is not to sabotage the open economic model but to ask foreign companies to bring in a minimum investment without compromising Sri Lanka’s sovereignty and national interest.

Speaking of monopolisation he stated that the large shipping lines will select their agents in Sri Lanka based on the agent’s performance and that all agents should compete with each other to acquire an agency. He said if a few companies were getting multiple agencies, they would have proved their excellence to the principal and that the Government did not wish to intervene in such decisions. 

The Minister has a very valid point in this regard as any government which believes in a free market economy will not try to control such decisions. It is similar to one apparel manufacturer in Sri Lanka being selected as the contract manufacturer for many global apparel brands as the manufacturer has proved to be an efficient manufacturer. It is purely a decision taken by the brands, considering performance and price. 

Role of SMEs

It is glad that Fair Trader is now concerned about all the 129 members of CASA, most of whom are small and medium scale entrepreneurs who would have suffered badly if foreigners were allowed to own 100% of the shipping agency companies. Most of the large companies will anyway survive because they have diversified their respective businesses but SMEs would have suffered badly as they depend on the Agency business. 

For Fair Trader, the SMEs become relevant in arguments against monopoly but become irrelevant in arguments for liberalisation. What he forgets to mention is that these SMEs also now have the equal opportunity to represent global shipping lines in Sri Lanka by competing with other local companies. It is strange why Fair Trader doesn’t see this as a fair trading practice where competition is encouraged. 

Intervening for what reasons 

The writer claims that two conglomerates have intervened in the public litigation case requesting the courts to dismiss the case which again is a false allegation. After investigating to this I learnt that these conglomerates have not requested the court to dismiss the case but to include them as there are several false allegations made against them. They have requested intervention to place before the court all facts and material enabling the court to come to an informed decision. 

It is surprising how the author wants an industry body such as CASA to intervene on behalf of a legal issue of few companies. CASA has always stood for the rights of all members and has never represented few companies. All members have equal voting rights and leaders are appointed by elections. I’m sure the author is aware of this but is trying to portray a false image. 

Animosity created by international alliances

The writer also claims that shipping alliances are only possible in a global context but not locally. He claims that globally alliances are allowed to share assets and plan route sharing with the understanding that the companies are run independently with separate profit and loss accounts and balance sheets. But the writer assumes that this can only happen globally but not in Sri Lanka. He claims that some shipping agents who represent multiple principals engage in sharing information through shared services and engage in price fixing. This shows the ignorance of the writer and his/her poor business acumen. 

I have a simple question. Will the global shipping lines select an agency if they suspect that the said agency shares sensitive information with other competitors? Don’t you think that these agency companies have won the confidence of these large conglomerates to be able to represent competing shipping lines under one group for so many years?

These Sri Lankan agencies over the years have built confidence in the shipping lines by running competing operations independently and have done it successfully. In fact it is the very shipping lines that request local companies to join together locally to represent them! This shows the absolute ignorance of the writer who obviously has never worked in a shipping agency or understood the shipping lines changing requirements with changing times. 

Bringing the example of the apparel manufacturer, will the global apparel brands be comfortable in sharing their designs with the contract manufacturer if they suspect that the manufacturer would share the designs with competing apparel brands? Isn’t it the sense of confidence our Sri Lankan companies have built to be able to secure these global brands for Sri Lanka? I leave it with you to decide. 

The writer doesn’t seem to be aware of the many industries that have two to three leading players having a high percentage market share. Brandix and MAS in the apparel industry, Maliban and Munchee in the biscuit and confectionery industry, DSI and DI in the footwear category are few examples of dominating players in their respective industries whilst contributing to the Sri Lankan economy. This doesn’t make any of these industries a monopoly. Look at Singer Sri Lanka and Softlogic which sell different international brands such as Sony, Panasonic and Samsung. What do you call it? Monopoly? 

How come the writer doesn’t question industries where goods and services provided to Government or local market have monopolies where the price to consumer is actually higher as a result and trade actually restricted? This is where the economy will suffer. The high market share if at all in the shipping industry among a few players as a result of global consolidation in liner industry (not monopoly!) has not made any of the customers suffer as freight rates are at a historic low and shippers are enjoying this after many years! Trade is not restricted in any way as there are plenty of services in and out of Colombo Port in fact even excess. So what is the problem? 

Shared centres are common in today’s business to achieve operational excellence and optimise resources. These shared centres are run with strict standard operating procedures and confidentiality agreements. It is sad that the writer is not aware of these business realities but is talking about making Sri Lanka a hub. 

The writer also claims that pricing and capacity can be controlled by the agents which once again shows the writer’s ignorance. Prices in the shipping industry are set by the principal. Factors such as oil prices, demand and supply of equipment and capacity will determine the prices announced by the shipping lines. The shipping principals are governed by strict anti-competition guidelines which are enforced on the employees of the local agencies as well. 

The local agents are operating as independent organisations managed by different people and both importers and exporters will be negotiating rates with these lines separately. These agents in turn will talk to the respective principals and negotiate for better rates on behalf of the importers and exporters of this country. This happens because all these agencies are competing for the same business and is responsible for their P&L. 

Impact to importers and exporters

Freight is the income of shipping lines and ship owners and is determined by cost and commercial considerations. Freight rates are fetched globally based on demand and supply for cargo between destinations and largely on the ship owners cost structure. They are based on various factors such as distance between two ports, size and costs of the vessel, crew costs and insurance and bunker costs. Port cost also form a large part of the ship owners cost structure. In this context I can’t understand why the author is stating that the local agents are controlling prices and affecting the competitiveness of importers and exporters. 

Importers and exporters of Sri Lanka have worked with these agencies for years and has commented that they get lucrative rates because the agents are strong in negotiating on behalf of them. They also know that most of the time agents quote better rates than single represented shipping lines. Importers and exporters have always had a very good relationship with these local agents whom they consider as business partners who has the common objective of securing the most competitive freight rates for their customers. The writer doesn’t seem to be aware of the intermediary the freight forwarder who marks up the rates offered to exporters. 

“The very definition of monopoly is a market structure characterised by a single seller selling a unique product in the market” – this very definition disproves the case as there are more than 100 shipping agencies in the local market!