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General Forum: Monday 2nd October 09.50 - 11.20 A Ship Broker's Vision - Peter Kerr-Dineen - Howe, Robinson & Co |
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Odyssey 2000 - Shipbroking in the new Millennium
Ladies and gentlemen, Good morning I was a little shaken a few months ago when I answered the telephone. "Good morning Peter, it's Andrew Jamieson here." 'Now, those of you who know ITIC's redoubtable legal director will know that doesn't always spell good news, and, to make matters worse, I though he sounded uncharacteristically nervous. Andrew has made a niche of his own in our rather peculiar world. By training a barrister, he has become something of a father confessor, head master and physician rolled into one. He is an infuriatingly discreet repository of our collective dirty washing, and, whilst unfailingly supportive can be quite firm in his admonishments. But without the sleeping draught of an ITIC insurance policy mixed with his counsel and support, few of us would rest easy in this increasingly litigious world. So what did he want? A writ had arrived ... that little weeze he thought worth trying had not come off .. but no .. he wondered whether I would speak at a conference ITIC was organising. I was so relieved I said yes, and it is certainly a pleasure to be with so many friends celebrating the 25th anniversary of our P and I Club. An occasion such as this makes us peculiarly aware of the true meaning of mutuality, and, at Howe Robinson, it is something we value highly. Whatever we might say at renewal time, we would be very reluctant to trade the relationship which over time can develop with a P and I Club, to become the customer of a fixed price insurer. So thank you, ITIC, for inviting us all to join your imaginative celebration over the next two days. Now to the shipbroker's bit of Odyssey 2000 For the purposes of this talk, I will be concentrating on those shipbrokers who provide their marketing services to the international shipping industry as independent companies, operating principally as competitive brokers paid on a no cure no pay basis. It is interesting that businesses fitting this definition began to emerge in the second half of the nineteenth century, enabled by the advent of new technology - first, of course, by the telegraph and postal services, and subsequently by cable, telex, telephone, and more recently by fax and then e mail. Throughout this period, developments in communication technology have continued to change the modus operandi of shipbrokers, but they have always had a beneficial effect on those brokers who have invested in them. Latterly the same can be said of information technology, and computerised business practice. So, despite the enormous changes seen in the twentieth century, which range from technological developments, to the rewriting of the world's commercial geography, the extraordinary evolution of new ship designs and transport infrastructure, and the development of wholly new business practices, independent brokers, performing the same simple role, continue to flourish. They flourish for a simple reason, which is that they provide their services more cost effectively and more efficiently than owners (in particular), but also charterers, could do utilising their own in house resources. They succeed in this for a number of reasons, but principally because they combine highly specialised personnel, operating with state of the art technology, and only earn commission as and when they conclude business even though they frequently put in huge amounts of time and expense developing and negotiating cargoes which never come to fruition. They also provide valuable advice (or decision support, as it is sometimes now called in this jargon ridden age), administrative and operational assistance, and the benefit of relationships which have often been built up over many years. So far, so good and now, with a whole new wave of technological advances to be assimilated, and new business practices to be exploited, brokers are once again actively considering how their shipbroking activities can be improved, and their businesses made to grow. Topics widely under consideration include:
Brokers are well aware that their responses to these challenges will be critical to their success in:
and, in order to ensure that they are best positioned corporately, companies are again reconsidering fundamental questions such as:
Now, obviously, all of these general questions deserve detailed consideration of their own, but today I want only to highlight them and put them to one side. Instead, I want to turn to a truly extraordinary development, which probably poses the greatest challenge to independent shipbrokers for at least a century. You will all have followed the explosive investment by various parties in companies seeking to develop internet based on line chartering and sale and purchase exchanges. We have a list of about 30 companies entering the fray, but have just returned from a week's holiday so it will be out of date. The impetus behind these developments come from a variety of sources including venture capitalists backing a range of internet incubators, management consultants (provided their consultancy fees are paid in cash), software providers who see greater returns out of developing on line exchanges, disaffected shipbrokers, and last but probably most significantly, large charterers. These companies, perhaps represented in the most high profile way by the alliance of BP, Amoco, Shell and Cargill which is promoting Level seas, are explicitly seeking two objectives - in house overhead savings by switching to on line trading practices and - cheaper freight rates, which are expected to flow from a reduction in brokerage charges Many of these websites have a rather patronising line towards brokers. "Brokers who add value needn’t worry. Clients will probably use them to transact business on our website" (without adding "provided they pay our fees"). Don’t be fooled. The holy grail is a website which charges a transaction fee in head on competition to current brokerage charges thereby creating a hugely profitable exchange at the expense of brokers who will be marginalised. Consider this: just three of the more serious contenders in the race have, or are in the process of, raising venture capital against valuations which give their companies a combined capitalisation in the region of USD 150 million. Never before has the shipbroking industry faced a challenge backed by such significant amounts of external capital. It is interesting to contrast this with the value of 'old economy shipbroking'. In 1998’s poor market the combined turnover of nine of the largest public and private shipbroking companies in London was around USD 100m which generated a profit of about USD 8m. These companies employ over 550 people and had an estimated combined market cap of about USD 75m. Three ideas yet to produce a cent are now valued at twice this amount. There will be plenty of opportunity over the next two days, and indeed thereafter, to discuss the extent to which the new start ups will attract business, but what is already abundantly clear is that these companies are setting themselves hugely challenging targets if, in competing with brokers who charge 1/1.25 pct on a no cure no pay basis, they are to generate profits which will support even the present expectations of their promoters These arguments will run and run but today provides a good opportunity for shipbrokers to consider the wider picture. I would suggest clear battlelines are emerging. In one camp are shipbrokers who will seek to maintain their business as intermediaries, and in order to do so will invest heavily in some of the initiatives I have already outlined. In doing so they will also deliver considerable efficiencies to their clients, as well as substantial overall brokerage savings as more and more deals will be transacted by one broker working directly with both principals. In the other camp are ranged the commercial exchanges who will, horrid word, seek to disintermediate the industry, and capture, for their exchange, a substantial part of the money which is today paid to brokers for marketing services. The chief executive of one of these companies says brokers will be 'blown away as flies before the storm'. The sub-plot of simmering fratricidal conflict between the parties in this camp is of less immediate concern to this audience. Some brokers have already taken the view that they can hedge their bets by investing in, or supporting, one, or more of these exchanges. They may well come to utilise them, but by promoting them in that way I suggest they are supping with the enemy. Instead I would call on brokers to recognise a common interest and therefore to take a different approach, and here I declare an interest as a Director of the Baltic Exchange. You will hear later from Mike Elsom who will outline the Baltic's initiative for an E platform. In essence the Baltic is developing an e-platform which will be capable of bringing huge efficiencies into the way in which raw chartering information (ship's descriptions, positions and above all, orders, are disemminated amongst market participants) and, at the same time, will offer free, confirmed, instant communication between users. It will not seek to create an on line transaction based market place (except for FFAs) but will eventually provide a facility to transact business on line with any party wishing to trade in that way. And, of course, it will be backed by a substantial bank of information ... but that is the easy bit I suggest to you that if its potential is recognised by brokers all around the world, it could provide us with a card the dot commas could not trump. And there is another reason why this product could be so powerful. In striking contrast to other players, the Baltic has very different aims. It is a strange mixture of member organisation and private limited company. It has substantial asset backing (in excess of USD 50m),much of it in liquid form. It has an existing Secretariat and 750 members who, in turn, correspond with just about all the shipbrokers in the world, to whom the new system would be made available. It has no intention to sell or float, and is under no pressure to produce a product that will support fancy p/e multiples or, indeed, generate any significant level of profit. It is therefore able to consider developing a first class product for the benefit of shipbrokers and principals alike, which will go along way to meeting the aims of the industry backers of commercial sites, whilst preserving the manifold benefits of the existing system which other on line products would clearly threaten. This is a striking contrast to dot com start ups at today's valuations, where so little of the capital being raised is required for developing their actual product, and so much goes on consultancy, marketing and various other personnel costs. So, perhaps the choice will be between eliminating brokers and creating high value exchanges on the one hand, and, on the other seeing existing practices evolve to compete efficiently through the creation of a system which has only limited capital requirements and modest financial expectations. I take comfort from the words of Brian Williamson, the highly respected chairman of Liffe when he says 'exchanges really are a rather low form of life... the business of the exchange is high yield, low value...the exchange is a servant of markets.' Ladies and gentlemen, before I finish let me highlight one more specific danger for shipbrokers which could be overcome by combined cooperation across the industry. The majority of shipbrokers operate similar proprietary shipbroking and message handling systems. Large numbers of people will be using systems designed by two different companies, both of which are presently engaged in e commerce initiatives which will change them from being service providers to the shipbroking industry into competitors with it. At the very least, they are aiming to capture transaction fees from their clients. And the very stuff of our businesses is in their hands. At the same time, new technology is available which means the cost of provision of these systems could be slashed by moving to web based products. In my view, shipbrokers would be very well advised to protect the very heart of their businesses by pooling their common interest and developing such systems. This too is an idea to which the Baltic would be receptive and I would urge any fellow thinking participants to make their views known. Chairman, and members of ITIC Thank you for asking me to speak today. To you I say one final word Whoever comes out on top, you will be needed as never before. I take some comfort from the fact that whatever the pros and cons of on line broking, it is the community of cons who are, perhaps, most looking forward to exploiting it. |