NVOs – In the middle of the supply chain

By: | Issue #624 | at 10:00 AM | Channel(s): Logistics  Liner Shipping  

Stuck in the middle – between the ocean carriers and the forwarders and their client shippers - is the NVO (Non-Vessel Owning Common Carrier).

That middle position can either be advantageous or difficult but always key to keeping the boxes moving.

In the U.S. by virtue of the FMC (Federal Maritime Commission) regulatory authority exists the NVO (Non-Vessel Owning Common Carrier).

An NVO buys space or “slots” from a containership operator and sells them often to shippers whose freight is less than a full container load (LCL). In essence, either through their own consolidation services or a third party, the NVO provides to the supply chain the important service of making full boxes from smaller loads. This puts the NVO in an unusual place. On one hand, they act very much like an ocean carrier in respect to quoting rates to a shipper, but by buying slots from ocean carriers, the NVO behaves very much like a shipper. In most places, the NVO is generally a service but of a larger transportation intermediary, like a 3PL or forwarder. But the independent NVO in the U.S. is a different critter because of the unusual regulatory arrangement.

Middle Ground

The business of both buying and selling slots makes margins very important. Although contracts were once the game, in recent years the marketplace behaves more as a “spot market” with less long term and smaller scale commitments.

According to a number of NVOs, the poor revenues for the ocean carriers reflect in poor returns for the NVOs. Essentially, the percent earned might be the same but the dollar revenue per box is down so the profits are down.

While some niche trade lanes have held up better than others, the main trade lanes Europe-Asia/Asia-Europe, Asia-US/US-Asia and Europe-North America/North America-Europe have all been depressed with Europe-Asia at historic lows. While the North-American trade lanes have held up better, supply and demand is significantly imbalanced with China’s exports slowing, and import demand in developed economies is also tepid.

But there are some changes afoot. The independent NVO business in the U.S has attracted attention from investors.

Part of the reason is that there are a large number of moderate sized NVOs in the U.S. – this makes them ripe for industry consolidation. Unlike many businesses, a shop (or in cases an individual) can hang on for many years with a minimum number of steady clients - providing the overheads are low. And most U.S. NVOs are fairly asset lean against their revenue totals.

Being lean and a critical component in the supply chain makes U.S. NVOs a target for venture capital firms looking to build out their transportation portfolio (see Matt Miller’s April 4, 2016 story – “Private Equity: An unseen hand moving the logistics industry). According to sources, offers are out there for “three to five times returns”. These numbers are far higher versus revenue than offers on other commensurate transportation pieces in the supply chain.

Although private equity is part of the reason, there are other factors. In recent years there has been a shift of control of the movement of Asian merchandise from Asia to North America. As more Asian transportation providers move into the U.S. and Canadian markets, the need to fill out their service portfolio pushes them to look for complimentary acquisitions.

With freight rates down, the buyers have the advantage but adding an NVO can be complicated. There are no guarantees that the client base will remain, particularly in cases where the “in-house” group is a direct or potential competitor to the shipper.

George Lauriat's avatar

American Journal of Transportation