First came the $600m profit warning. “The container shipping market has deteriorated beyond the group’s expectations,” Maersk groaned on October 23.
Then came the news that one of Maersk Line’s 18,000-teu Triple-E containerships had been laid up.
And today the Maersk Group announced 4,000 redundancies, plus another 200 and further lay-ups at Maersk Supply Service, and a cost-cutting programme that will aim to reduce the group’s annual sales, general and administration (SG&A) cost run-rate by $250m over the next two years.
And how have industry experts reacted to the news today? With complete and utter lack of surprise.
The imbalance between supply and demand for container slots is here to stay for the foreseeable future. Container shipping is a cycle of boom and bust, and revenues will be hit hard while companies weather the low point of the cycle. SG&A costs represent less than 15% of a line’s total spend, but they can also be an easy target that can return fast gains in cost efficiency.
“Maersk Line has for several years been working hard on improving their internal productivity, and the logical consequence of improved productivity and low growth in container volumes is a reduction in the need for employees,” Lars Jensen, CEO of SeaIntel Consulting, told Splash today.
“Of course it can look drastic when it is announced the way it is, and they have also stated that they are implementing it at a faster pace than originally envisioned, but this is in reality a development that was to be expected,” Jensen continued.
Andy Lane, a partner at CTI Consultancy, said Maersk’s technological savvy and focus on improving processes and productivity puts the group in a good position to scale back staff and spending without the measures affecting its customer relationships.
“Maersk has a process, IT and service center maturity, which allows them do this without negatively impacting customer experience,” Lane told Splash today. “It means that they can further lower the cost bar, allowing them to make a 10% return on lower revenues that are loss-giving for the competition – it’s the Dell vs HP model.
“The service centers and overall cost leadership strategies are not new, they date back to 2002 and process excellence really took off in 2007 – all prior to the global financial crisis, which has subsequently crippled the industry, whilst the competition was sleeping.”
That brings us to Maersk’s competitors – how will they be affected by the grand measures implemented by the world’s biggest container carrier by volume?
CTI’s Lane says the competition should remain concerned, especially if they have not yet begun programmes similar to Maersk’s that put cost-efficiency at the centre of their operational processes.
“The big money, albeit harder to reach, is how a line or, more to the point, an alliance can further optimise its vessel network – that’s where 70% of the costs are,” Lane said.
“2M has maybe a reasonably cost-efficient network – in alliances with more members, it becomes more difficult to optimise due to silo thinking and behaviour, an inability to share (regulatory) and a wish not to share (confidentiality). This is however where the big bucks are hiding and can be realised with the right approach and determination,” he added.
Jensen said Maersk’s swingeing cuts are simply “a development that we should also expect to see from other container carriers as they start improving their own internal productivity”.
Maersk is lowering its cost bar even further below its competitors’ cost levels, and its rivals should be running scared – today’s news is a wake-up call for Maersk’s rivals to streamline, strip out the deadwood, save money and save themselves.
In fact, many container lines already seem to be in a state of disarray. Hapag-Lloyd has reduced the target of its initial public offering by €200m since it was first announced. APL is up for sale. China Shipping and Cosco have long been rumoured to be planning a merger, and Korean lines Hyundai Merchant Marine (HMM) and Hanjin Shipping could well follow suit. Something’s gotta give.
It looks like 2016 will be a year of consolidation, which will shake up alliances too. China Shipping looks likely to quit the Ocean3 if it merges with Cosco, while Hanjin’s and HMM’s continued participation in the respective CKYH and G6 alliances remains unclear.
Today’s news from the Maersk Group has thrown fuel on a fire that was already burning, but for the real fall-out you ain’t seen nothin’ yet.