Know Your Customer

By Thomas Jelenić, Vice President of External Affairs

There has been a lot of discussion in the maritime industry lately about knowing and understanding your ultimate customer. That seems to make sense. You can’t serve your customer’s needs and maintain a long-term business relationship if you don’t know and understand your customer. And it would seem obvious to identify who your customer is: the folks who pay you for your product or service.

But it’s that word “ultimate” that has recently been added to “customer” that has made a mess of this seemingly obvious notion. By declaring that they are serving the “ultimate customer”, an organization is freed of the pressures of serving their immediate customer and can claim to provide value to the customers further down the value chain for products or services that they do not directly provide.

In California, there has been a recent trend among landlord ports to declare that their ultimate customers are the beneficial cargo-owners. You can see the attraction that would have for ports; container ports are ranked by cargo volume and cargo owners often select their preferred gateway for moving cargo into and out of the country. There is only one problem with this seemingly natural relationship: there is no actual business relationship between the port and cargo owner. In most cases, it is at least two parties removed and sometimes more.

There is a real risk to this type of “customer service” approach. Landlord ports do not negotiate shipping rates with cargo owners, they do not negotiate terminal charges with ocean carriers, they do not order or pay labor, they are not a party to the PMA/ILWU collective bargaining agreement nor a party to the byzantine process surrounding disputes and arbitrations, they do not invest in equipment, and they do not move cargo.

When landlord ports “negotiate” with cargo owners to serve their customer’s needs, landlord ports only have half the story: what the cargo owner wants. Unfortunately, the missing half of the story, what cargo owners are willing to pay for, is not of particular concern to landlord ports because landlord ports do not incur costs for moving the cargo nor will they be compensated by the cargo owner. And this is something that you cannot ignore because it is customer pressure from cargo owners that has turned the marine freight business into a commodity business where low rates, not value-added services, drive cargo-owner decisions.

In fact, this arrangement can be ideal for the landlord port because their revenue model is based on cargo volumes through a terminal regardless of whether those volumes were profitable. If volumes decline, though, landlords are protected through guaranteed annual minimums from their tenant. This structure was based on the long-standing relationship where landlords developed facilities and terminal operators moved cargo.

As landlord ports begin to claim they exist as a hybrid between a landlord port and an operating port, there is a real risk that the normal incentives of the customer relationship will be seriously harmed. Imagine if a property developer declared that the supermarket was not their customer, but the supermarket shopper was the developer’s “ultimate customer.” While the developer will not be successful unless the supermarket is successful, the developer’s customer is not the shopper. While the developer can do a lot of things to make the shopper’s experience better, the developer does not make the day-to-day decisions that will make the supermarket successful.

It is probably obvious to everyone that the developer’s customer is the supermarket and what the developer needs to do is provide the best product (the storefront) for the money. The problem with identifying the wrong customer is that one can end up responding to the wrong pressures. It will not matter how happy the shopper is that the developer installed an electrical vehicle charging station if that same customer decides that the groceries inside are too expensive. In the end, both the developer and supermarket will lose.

If landlord ports are going to be increasingly inserting themselves in the relationship between terminals, carriers, and cargo owners, it may be that the old business model is no longer valid. Since landlord ports are increasingly dictating modes of operation, capital equipment investments, and weighing in on labor issues, it may be that lease structures should not only provide for upside gain to landlords, but landlords should face downside risk. If landlords are unwilling to share the downside risk, then landlord ports should stick to what they have done so well: developing world-class facilities and letting their customers manage the risk and reward of working with their own customers.