Fergus Kuek and Jonathan Challacombe of the University of Plymouth quantify the future of independent port agents

Kuek and Challacombe: looking for answers.

Business practices today lay heavy emphasis on electronic commerce, information technology, cost efficiency as well as economies of scale. These practices have given rise to disintermediation, where “go-betweens” such as agents, brokers and representatives, are increasingly removed from the corporate chain.

Given that these specific trends are prevalent in today’s business climate, no better evidenced than in the liner industry, some practitioners from within the shipping industry have begun to question if independent port agents are indeed a dying breed. While it would be convenient to brush aside this assertion as one of mere speculation, there is sufficient cause for concern when the overall business environment and the independent port agent industry is analysed as a whole. This is plainly evident when the areas of mergers and acquisitions, deregulations, together with that of the competitive environment, are explored.

Third-party representation

Third party representation is generally favoured where any of the three following factors are prevalent:

• Where trade volume has been insufficient to support an establishment of branch offices;
• Where unfamiliarity with the local environment prevails; and/or
• Where barriers to entry, insofar as legality and laws of establishment, dictate that foreign shipping companies are not able to penetrate the local market without the aid of a local joint venture firm.

While conditions in the past may have met these conditions, providing an enclave for independent port agents, the changing business environment has seen the departure of all three of these business conditions. With mergers and acquisitions, the first two barriers have been effectively lifted and globalisation, together with free-trade agreements, has forced governments to remove existing legislation that has had a stifling effect on free trade, lifting the third barrier.

Mergers and acquisitions

One of the chief effects of a merger or an acquisition is on business synergy. The refocusing of business objectives together with the streamlining of process when two shipping lines come together into one entity arguably allows the new entity, with substantially greater business volume, to do away with its local port agent. With the centralisation of efforts and dedication of trade and ocean routes, certain shipping companies have, for one reason or other, effectively internalised their once outsourced agency functions.

Added to which, a merger or acquisition is not just about market share or of physical assets and goodwill; it is also about acquiring the most important of assets: labour. Acquiring the other company’s staff is also in effect acquiring its talent pool, acquiring each and every staff member’s level of competency; his or her skills of specialisation together with his or her education, skill of languages, cultures, familiarity and most importantly his or her ability to get things done.

Therefore merged companies have not only acquired sufficient volume to internalise their once outsourced port agency functions, but they have also acquired the “know-how”, or the modus operandi, of port agency through staff.

For these reasons, the two enclaves which independent port agents once sought refuge in, have effectively been removed, by the larger, moreleveraged companies.

Deregulation

Over the years, economists have realised that while trade protectionism may have short-term gains in protecting domestic interest, the longer-term effect is that the overall economy becomes uncompetitive in the global marketplace and hence ultimately results in the economy’s overall unattractiveness.

It is therefore reasoned that free trade and deregulation is the best means forward, where minimal barriers to entry are created. So much so that foreign investors more readily invest, without the assistance of a local partner.

This too has been prevalent in the shipping industry, where shipping companies have gained a foothold in this industry via direct or assisted access. For this reason, the last remaining condition under which third-party representatives have flourished has also been dissipated.

The competitive environment

The business environment for independent port agents has always been relatively competitive, with the slimmest of margins in certain trades. This has led to certain companies invoking two-for-one deals in a bid to retain their principals. Also, it is a relatively fragmented industry, where independent agents are rarely in a position to pick and chose their clientele owing to the disproportionate number of principals to that of competitive agents. However in recent years, despite the industry’s best efforts at appropriate levels of pricing and interindustry consolidation, the level of competitiveness within the industry has only increased.

While the above illustrates the effect of mergers and acquisitions on economies of scale as well as of market penetration, the reality of any industrial consolidating is that:

1. Fewer, but more influential, companies of that particular trade exist; and
   
   
2. that these newly formed entities have not only been elevated in terms of competitive positioning, commercial and pecuniary leverage, negotiating ability and that of an overall environmental influence, such newly consolidated entities are less innate to require the services of third-party representatives, such as independent port agents.

This therefore increases the imbalance of principals to agents and additionally adds to the disparity in bargaining power between the two sets of industries, should the principal then decide to engage the services of an independent port agent. This then places the independent port agent in an even more disadvantaged competitive position, which was not in his favour to begin with.

Hard at work: The business environment for independent port agents has always been relatively competitive.

Further adding to the complexity of the independent port agent’s plight is the fact that privatised ports have added to their integrated services, offering their version of in-house port agents in tandem with a very competitive service package, that an independent port agent may generally find difficult to mirror.

Given the above comments, it is therefore inevitable that the market should question the continued need for a port agent. But while it may be true that independent port agents are in a current downturn – and evidence extrapolated on liner representation does indicate that they are a dying breed – shipping and indeed independent port agents have weathered more than 13 turbulent cycles, through periods of deep troughs and volatility. They have not perished, but rather have remained very much a part of this unique important industry.

The key to this is found in a more holistic view of the industry. Here a precise distinction between trade sustainability and trade performance must be drawn. While trade performance dictates how independent port agents currently perform, their survivability depends on trade sustainability. Trade sustainability suggests a more permanent setting and indeed considers a different set of variables which essentially bears down to the fundamental question of “is the independent agent required for his current services?”

Factors affecting trade performance, such as issues of mergers and acquisitions, deregulations and business environment, can only assess “how well” or “how badly” the industry looks set to perform. The question as to whether or not independent port agents are a dying breed stems from whether or not the trade is still required in the near and existing future.

Based on the majority vote as shown by conducted research, the core services that an independent port agent provides remain very much essential, and though trade performance seems to be waning, trade sustainability remains very much intact. Thus it is conclusive for the moment that though the breed is dying, the finality of death does not seem to be so.

 

This is an abstract from an academic dissertation, the research for which was undertaken as the final year’s honours dissertation by Fergus Kuek, a recent graduate and tutee of Jonathan Challacombe, FICS, a senior lecturer at the Centre of International Shipping and Logistics, University of Plymouth, UK.

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