Financial Journalist

Asian Business - September 1992

So you’ve got an export contract. Now how are you going to get the goods to their destination? It may not be as easy as you thought

By Gerry O’Kane

It’s 6.30 on the morning of April 29, 1992, 180 nautical miles (330 km) east of Hong Kong. The 504 passengers aboard the German cruise liner Europa are asleep, as are most of the crew. Suddenly both passengers and crew are woken by the noise of rending metal. They are thrown from their beds as a great gash is torn in the stem of the 37,000-ton cruise ship by the bow of a Greek freighter, the Inchon Glory.

Despite flooding of the Europa’s aft engine room and water in the number one and two holds of the Greek ship, no one is hurt. After an uncomfortable couple of days the Europa’s passengers arrive in Taiwan. The Inchon Glory limps back to Hong Kong.

While the holidaymakers have had a shock, the owners of the freight being carried on the Inchon Glory are in for a much bigger one. The vessel, including its cargo, is held by the salvage company until the ship’s insurance company can post a bond guaranteeing payment for the cost of the salvage operation and any subsequent costs.

Shipping by sea, as the owners of the cargo on the Inchon Glory found out, can be fraught with perils. And those dangers vary with the waters a ship is cruising. ‘South Korea [for example] has a completely different legal system from many of Asia’s countries,’ says Chris Gordon, a shipping and cargo legal specialist with Robertson, Double solicitors and notaries. ‘While Hong Kong lawyers may seem quick off the mark to have vessels held, in Korea it can be done at the drop of a hat and [ship and cargo] sold without any scrutiny.’

The story of the Inchon Glory is a not unusual example of one of the hazards which companies face when they ship goods, whether by sea, land or air. If the carrier makes a mistake, it can cost both the shipper and his customers a great deal of time and money. Indeed, the cost of delays in the movement of goods may go well beyond cash. It may also mean the loss of contracts.

For companies with products to ship, being aware of the possible problems is of vital importance. Finding reliable freight forwarders is often not easy, but it is essential. Later in this article we’ll tell you how to protect yourself. But first here are the pitfalls.

The liability minefield
Small suppliers who ship relatively small quantities have little hope of guaranteeing goods will arrive at the other end on time. The horrible truth —and it comes from the mouths of industry analysts, lawyers, shippers and even forwarders themselves —is that only the ‘big boys’ have any clout in the market.

‘The fact is that carriers and forwarders are not as draconian as the 18th century carriers [were] in admitting absolutely no liability. But they are not far off,’ says Gordon. International laws such as the Hague Convention for shipping and the Warsaw Convention for airlines offer only limited legal rights for shippers, Gordon says.

For example, under the Hague Convention a carrier is liable for damages assessed per unit. ‘The problem,’ says Gordon, ‘is that the carrier is likely to define “unit” as a “20 foot container unit” (TEU) and that one unit could contain half a million small items valued at US$10,000 each. But the [limit] of liability on one TEU is relatively small.’

Let’s look at a fictional worst case scenario —one which people in the business say is not at all far fetched. Indeed, they say, this sort of incident happens regularly.

Mr Luk in Hong Kong is shipping watches to a new client in Thailand. The watches need to be in Bangkok by Tuesday night. He tells Mr Wo of Wonky Freight Forwarders that if he can deliver the watches on time, his company can have the ongoing business.

‘No problem,’ says Wo. ‘We’ll put them on a plane tonight. And to save you money we’ll consolidate the goods.’

What this means is that the shipment of watches will be placed with other goods to create a bigger unit in the aircraft’s hold. But Wonky is a small operation and it doesn’t have anything else going to Thailand that day. So Wo calls an agent —Mr Chan. ‘No problem,’ says Chan. ‘I have space in a container leaving for Bangkok first thing Tuesday morning.’

Luk’s watches are put in Chan’s container. But as the container is waiting to be loaded after passing customs, the cargo executive of DodgyAir International gets a call from another client, Makin’ Money Ltd. Makin’ Money has had an emergency and needs to get a five-tonne container of spares to Thailand. Makin’ Money spends US$6.5 million a year with DodgyAir, compared with about US$75,000 from Chan. Chan’s container —with Luk’s watches —is bounced off the flight. Thursday morning Luk calls Wo, the freight forwarder, ‘The watches haven’t arrived in Bangkok.’

Wo calls Chan. But neither Wo’s representative in Bangkok, nor Chan’s, knows anything about the missing container. They only earn a nominal fee for their troubles in any event, so they haven’t really put much effort into tracking it down.

Chan calls the cargo executive at Dodgy International. ‘Didn’t we tell you we didn’t have room on that flight?’ says the cargo exec. ‘Your container leaves this morning, but I’m afraid you’ll have to pay one night’s warehouse fees.’ Luk’s watches arrive in Bangkok on Thursday night. Suphot, who wanted the watches two days before, has received his bill of lading and paid the bank, so the watches now belong to him.

But although the watches have cleared customs and are waiting at the airport, Suphot can’t take them. He doesn’t have the airway bill from the airline —Wo the forwarder left that part of the transaction to Chan the agent, who decided that DodgyAir should take care of it. DodgyAir dutifully printed up one copy of the bill on the morning of the flight and posted it to Bangkok.

Suphot finally gets the airway bill in the mail on Monday and goes to collect the watches. He finds that while the consignment sat in the warehouse some of the watches have been stolen.

The luckless shipper, Mr Luk, has been paid for his watches, but he has lost any other business he might have done with Suphot. He approaches Wo for compensation. Wo tells Luk to read his contract Wonky is not liable. DodgyAir and Chan can’t be sued for the delay either, because their contracts, too, protect them from liability. In any case Luk has a contract only with Wonky. The thefts are not the carrier’s liability either —the goods went missing from the Bangkok warehouses and DodgyAir has no intention of bringing up the matter with the airport authority and spoiling relations over a few watches.

And to add insult to injury Luk is the one who is stuck with paying for the one night’s warehousing in Hong Kong and the three nights in Bangkok.

The paper chase
Problems concerning bills of lading are also of increasing concern. Willy Lin, managing director of Hong Kong-based Milo’s Garments, told delegates at last year’s FIATA (Federation of International Freight Forwarders) World Congress in Singapore that he was worried by the growing use of agents employed by the receivers because of the conflict of interest.

What happens, Lin asked, if an agent releases freight without the bill of lading because of the relationship he has with the receiver? The shipper could end up not getting paid, especially if the customer was in financial difficulties.

So far such occurrences have been rare in Asia. But in South America examples of goods being handed over without a bill of lading have become commonplace. ‘We’ve had complaints,’ says Gordon. ‘[The shippers] have never seen their goods or money again. As far as South American [customers] are concerned, if goods go through the carrier and bond then they should be delivered regardless of the bill of lading.’

Court cases against carriers which have released goods without bills of lading are proceeding. But with local laws and customary international law often in conflict, the cases are certain to be protracted and expensive for the shipper.

Bills of lading aren’t the only type of paperwork causing headaches for shippers. ‘For the type of [hi-tech] goods we ship, we have to have precise details on the forms —letters of credit, bills of lading, airway bills, insurance certificates,’ says Gary Robinson, managing director of Arnhem Technology, which has offices in Taiwan, Hong Kong, Beijing and Southampton, England. ‘Many of these [forms] are filled in by the forwarders and no matter how many times we tell them how to fill them in, and how important precise information is, they sometimes do not follow instructions.’

The result of slipshod filling in of forms has been goods held up in China and Taiwan. That puts Robinson’s company in the difficult position of having to obtain permission from Chinese banks to amend documentation so that the company’s clients can get their orders delivered.

‘We use several different freight forwarders from Britain, the US and Asia, and we come across [these and other] problems time and time again,’ says Robinson. ‘We’ve had goods in Beijing that have cleared customs but there’s been no airway bill. It can take up to two weeks to get the airway bill [causing delays when] the goods could have been moved in 24 hours. It’s frustrating.’

Mark Wilson, general manager of Benair, a freight forwarding company that specialises in moving cargo from Asia to Britain, also says that airway bills can be a problem. ‘A good freight forwarder should be able to pre-clear goods for the other end,’ he says. ‘And that includes providing the overseas office with an airway bill. We call it the “wheels-up system” while the [plane’sl wheels are [still] up we’re already clearing goods for entry.’

Custom-made problemsWhile Hong Kong and Singapore are noted for easy customs clearance and efficient service, some shippers (who wish to remain nameless) complain that it is sometimes necessary to grease palms in other Asian countries such as Indonesia and Thailand.

But worse than corruption, says Arnhem’s Robinsdn, is the abundance of stupidity and carelessness. ‘We supply a hi-tech gel to use on the production line of fibre optic factories,’ he says. ‘It is highly toxic and delicate. We had a case in the UK where customs [officials] off-loaded the drums for inspection, did not inform us or the forwarders and did not take the documentation from the carrier. They claimed they thought it was flame-thrower fuel and without reading the documentation they proceeded to stick ladles in it.’

The result: The gel was ruined, and in any case the ship had sailed without it. And Arnhem wasn’t even informed that its goods had been off-loaded until the day they were due to arrive in China. Arnhem paid the costs. The company has also had goods seized by customs while changing vessels and again, no one thought to inform the company. The goods were late arriving and Arnhem got landed with customs authority storage charges.

‘[These problems are] very common for anyone shipping unusual goods to North Korea, China or Vietnam,’ admits Robinson. ‘The base line is that any customs authority has the right to do it.’

Benair’s Wilson agrees that in many cases little, if anything, is done by the forwarder to help with problems in transit. But that, he says, isn’t necessarily the forwarders’ fault. ‘Once it is cleared by customs it’s difficult to get a shipment back,’ he says. ‘And once it’s on the way, we can’t know what is happening to the shipment unless the carrier tells us. But if you do use an established forwarder they often have the scope and pull to get answers and solve the problem.’

What can a shipper do
‘What you do depends on whether you are a big or a small player,’ says Chu Tian-Cho, a partner and shipping expert with McKinsey & Co management consultants. ‘If you are a big player it pays to shop around.’

For very big shippers it may pay to create your own transport division to make deals directly with shipping lines. (It won’t work with airlines; they have a pact with freight forwarders not to get involved in the forwarding business.) To be considered big, according to Chu, you need to ship about 500 tonnes a year by air (probably one percent of an airline’s freight business) and 50,000 tonnes by sea. The vast majority of firms simply aren’t that big.

One big shipper is Hong Kong-based Sono Centra. A low-profile sourcing company for German department stores, with offices from Karachi to Japan, Sono contracts with factories to make products to its specifications and then ships to Germany. It turns over somewhere in the region of US$306 million a year.

‘We have our own transport company with a just-in-time computer system,’ says Helmut Henkel, Sono’s managing director. Once we know goods are ready to leave the factory we use forwarders.’ But while many other firms simply allow the forwarders to take over completely from that point, Sono takes a more active interest in the process.

‘We tell the forwarder which ship to put the goods on, the estimated time of departure and if the goods are to wait and be consolidated with other products. The [forwarders’] only job is to consolidate goods and put them on the ship.’ Henkel says that this works well. Sono rents space on vessels directly from the shipping lines and the goods are picked up by the customer in Germany within 22 days.

‘For us it’s not too difficult,’ he says. ‘We have five shipping lines under contract and we just don’t have problems.’ He never uses forwarders or carriers in the conventional way. ‘[To do that] would be too dangerous for our business.’

A company which can consolidate its own goods and use its financial muscle is in a better position to deal with airlines as well as freight forwarders. ‘A smart shipper will negotiate his own terms and conditions with a forwarder [so as] not to get caught by some of the get-out clauses,’ says Wilson. ‘But they’ll need a lot of buying power.’