QUOTE: Ed writes:
I personally like captive customers. It enables me to make good margins. That is the goal. |
|
Your customers understand you completely. That's the goal that will cause your clients to outsource to where the captive market doesn't exist. The inexorable operation of capitalism that will put you and your company out of business. "Good margins" will be replaced by no business at all if the customer perceives them as unfair, or perceives you as taking advantage of them.
Everyone sees it coming.
From
Railway Age, November 2002, by Luther Miller:
...
[C]aptive customers insist that they're being under-served and overcharged in ways never intended by the Staggers Rail Act of 1980, nor by the Surface Transportation Board's approval of mergers that severely eroded rail-to-rail competition (particularly, for chemical shippers, the Union Pacific/Southern Pacific consolidation).
Solvay America President David G. Birney told Senator Breaux: "One of our major operations with thousands of railcars has seen an increase in the average transit time from 7 to 9 days on loads and from 10 to 15 days on returning empty railcars. This has forced it to add 250 cars at an annual cost of $1.7 million. To add insult to injury, railroads now claim that the chemical industry has too many railcars and have instituted punitive demurrage charges of up to $100/day for cars held out on their lines; shippers are left with no recourse because there are no competitive options available."
Sunoco Chemicals ships and receives 38,000 rail carloads annually. According to Senior Vice President Bruce Fischer, railroads "are willing to offer service accountability on select competitive movements, yet are unwilling to stand behind their service products on lanes where no competition exists. Our ability to deliver products competitively from two of our single-railroad served plants is hindered by the local carrier being inflexible on economic demands, often necessitating supplying a customer from a much more distant competitively served site producing the same products." [China?]
Petrochemical manufacturer BP, whose transportation costs add up to $110 million a year, put this into the record: "We have 80% of our business captive at origin or destination. One of our major businesses is significantly disadvantaged by lack of competitive access. Despite the efforts within the business to reduce manufacturing, site logistics, corporate overhead, and other supply chain costs, we continue to be faced with high rail costs. In this business alone, we pay an approximate premium of $9 million in rail freight annually, on a total spend of $35 million. This premium along with other competitive factors has caused BP to rationalize the business and shut down production sites and lines. Competition, much of which will be foreign in the future, requires us to have lower costs to compete. It is essential we have congressional support to allow us to be effective in meeting current and future competitive challenges."
Celanese Chemicals President Lyndon E. Cole said discriminatory pricing is going from bad to worse: "For Celanese, a freight premium of 30% to 40% is typically imposed at our plants without rail competition. This value gap is increasing, as railroads lower their prices in competitive markets and offset the revenue loss by increasing prices where they have no competition. Ultimately, this impacts decisions on where product is made, putting the economic viability of many existing plants and their communities at risk."
DuPont is "very concerned about the lack of competition in the rail industry," said Gerard L. Donnelly, Global Director, Logistics. Noting that the post-Staggers rail industry has "dramatically improved its overall financial situation," Donnelly said that "the competitive marketplace forces Congress had correctly relied on to 'regulate' the industry have all but disappeared." The result, he said, is "a less responsive and innovative rail partner and the imposition of a 'monopoly premium' in excess of 30% being imposed on captive shippers."
The build-out option, a condition imposed by the STB in approving the UP-SP merger, is one escape for captive shippers, though a costly one. A company that has taken this route is Basell North America, whose president, Charles E. Platz, represented not only his own company but the American Chemistry Council at the Senate hearing. Platz noted that Basell has production facilities in Lake Charles and Taft, La., as well as in Bayport, Texas, and Jackson, Tenn. "Basell is not captive at Lake Charles," said Platz. "But one of the railroads at that location [Union Pacific] does have a monopoly on rail service at Basell's Bayport facility. That railroad uses its market power to obtain leverage over our Lake Charles traffic. Because of this situation, Basell and three other shippers of chemicals have joined with another railroad [Burlington Northern and Santa Fe] to create San Jacinto Rail Limited, a partnership whose mission is to introduce and provide competitively priced rail service options. Although my company would prefer to invest in plastic resin production facilities rather than rail assets, current regulatory policies compel us to do so."
Texas Senator Kay Bailey Hutchison, October 23, 2003:
"For manufacturers facing tough economic times, the story is different. In the absence of competition, shippers are forced to pay arbitrary rates. It is common practice for captive shippers to send their goods without knowing how much they will pay for carriage, and without a guarantee of on-time delivery. Every day captive shippers face the choice: pay the rate or close the business.
"Almost 35 percent of the nation's railroad traffic is now considered captive. Not surprisingly, captive shippers pay a premium per mile compared to those served by more than one railroad. In Victoria, Texas, a shipper once had three railroads competing for business. After the mergers, only Union Pacific remains. With no competitors, UP has added new fees for carriage of empty cars, dispatching and storage until overall shipping costs rose more than 35 percent for this shipper in Victoria.
"Toyota currently operates five major manufacturing plants in the United States, some captive, some competitive. Captive facility rates were so much higher that Toyota adopted a policy dictating that no plant could be built without service from at least two railroads. Ultimately, Toyota chose to build its sixth plant in San Antonio, TX but not until our Legislature threatened to build a spur to the site so another railroad would be able to compete with the incumbent.
"In San Antonio, a build-out was an option, due to the relative proximity of a competing rail line. For most captives, this is not the case and build-outs are prohibitively expensive.
"The Staggers Act was explicitly intended to protect captive rail shippers and preserve competition. However, Congress had never anticipated that the Staggers dispute resolution mechanisms would have to function in a market of only five Class I railroads. Bringing a rate case under Staggers is slow and expensive. We need to bring the law into the 21st century."
STATEMENT OF GLENN ENGLISH, C.E.O. National Rural Electric Cooperative Association. Surface Transportation Board U. S. Department of Transportation October 19, 2005 STB Ex Parte No. 658:
Twenty-five years after the Staggers Act, deregulation is clearly not working for “captive” rail customers in many vital industries, as evidenced by the experience of consumer-owned electric cooperatives. Today, cooperatives that are “captive” under current practices and decisions are subject to the unrestrained monopoly power of the rail carrier upon whom they are dependent.
With some rare exceptions, cooperatives that are “captive” are not able to negotiate reasonable commercial relationships with their monopoly carriers. They have rates and terms of service dictated on a “take-it-or-leave-it” basis – rates that are significantly and unreasonably high when compared to non-captive shippers. In addition to exhorbitant rates, captive shippers often receive poor service and suffer from a lack of rail capacity.
...
NRECA has determined from a recent survey of our members, however, that at least 40-percent of our coal-fired generation and transmission cooperatives are subjected to captive rail rates for their shipments of coal. This issue is particularly important to our nearly 40-million consumer-owners because about 80% of the electricity produced by cooperative generators is fired by coal. And we should all be aware that when consumer-owned, captive electric cooperatives are charged arbitrary and unreasonably high freight rates for that coal, those increased costs make it even more difficult for our industrial, manufacturing, processing, and agricultural producers to be competitive in domestic and world markets, and impairs their ability to retain and expand jobs, facilities, and operations.
Best regards, Michael Sol