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The liner revolution eats its children

The liner revolution eats its children

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What do you call a multi-billion-dollar global business in which the boards of directors of almost every large company in the trade, finding that they are losing money because they are making more of their product than they can sell at a profit, decide to make much, much, more of it?

Answer: liner shipping.

There are two possibilities: either the directors on those boards have the brainpower of jellyfish, or they thought they had a cunning plan.

The cunning plan was to cut their unit cost of manufacture of their product, carriage by sea for ISO containers, by building ever bigger ships and gaining economies of scale, to the point where competitors would just give up and get out of the business, at which point the last men standing, one of whom would be Danish, would jack the rates back up again and, combining their low unit cost with quasi-monopoly control, they would become immensely rich.

The cunning plan looked quite good to start with.

Ever since Temasek gave up on Neptune Orient Lines, and particularly since the Korea Development Bank threw in the towel and stopped propping up Hanjin, liner companies have been merging.

When businesses merge, it is said that the devil is always in the detail. The grinding of the gears that accompanies a merger makes the merging businesses less efficient for a while. Certainly this is true of those mergers which are brought about, not by the ability of the acquiring company to pay more for the target company than the target company’s shareholders think it is worth, but by what is politely known in East Asia as ‘administrative guidance’. These mergers never happen when times are good, only when times are dire, and they are accompanied by the gentle tinkling sounds of breaking rice bowls.

So far, so good for the cunning plan.

The liner shipping industry is experiencing the fate that some of us predicted for it when Directorate-General IV of the EU Commission hearkened unto the European Shippers’ Councils and decided that conferences were a bad thing. The upshot is likely to be that the world is left with perhaps half a dozen ‘full service’ containerlines, plus a number of regional trade liner companies sitting more or less comfortably in the niches that they have carved out for themselves.

This makes life particularly grim for the smaller fry; the multitudes of private and family companies, often highly geared, who are owners of tramp boxboats. Just a few years ago, these people thought they had found the golden ticket – all they had to do was to order bog standard boxboats, man them with warm bodies, and charter them to the big liner companies, who were no longer much interested in the dull business of running ships. Which was fine until the big liner companies built behemoths.

Today, the tramp containership owners are starting to discover what it was like to be an independent tanker owner in 1983… the year in which Elf Aquitaine scrapped the world’s second biggest ship, the ULCC Pierre Guillaumat – named after their chairman – at six years old. Who wants a panamax boxboat, now?

Meanwhile, the next part of the cunning plan, seen by the staff of the big liner companies as ‘The Good Bit’, comes into play, as the surviving giant containerlines can at last do what their staff have wanted to do for decades, and put the bite on the forwarders, by jacking up their rates and shutting them out.

But the problem with the cunning plan rears its ugly head. Owners of unwanted tramp boxboats can either scrap them, at tender ages, or do something else with them, just at the time when big forwarders, controlling worthwhile cargo volumes on certain routes, find themselves shut out.
The solution is obvious and not even difficult to put into effect– Non-Vessel Operating Common Carriers become Vessel Operating Common Carriers, by chartering ships, cheap, from the desperate tramp owners. The NVOCCs know all about the liner business; all they need to do is to hire a few operations people, appoint agents, and buy bunkers.

Presto! A whole new generation of liner shipping companies, carrying negligible debt or overhead, springs up like the dragon’s teeth and starts to out-compete the ‘legacy’ big shipping lines.

And thus the container revolution eats its children. Amongst the legacy liner companies, few are very old. They saw off the old guard of the conference carriers – even the boys in blue were once ‘tolerated outsiders’ – and soon they, in turn, will be swallowed up by, in effect, ‘virtual’ liner companies.

Who loses in this orgy of value destruction? At first glance, the banks, but the banks are bailed out by the taxpayers. Which is to say, gentle reader, that the people who lose are you and I.

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Andrew Craig-Bennett

Andrew Craig-Bennett works for a well known Asian shipowner. Previous employers include Wallem, China Navigation, Charles Taylor Consulting and Swire Pacific Offshore. Andrew was also a columnist for Lloyd's List for a decade.

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7 Comments

  1. Santosh Patil
    December 7, 2016 at 12:19 pm

    Bang on Andrew…

    During my container shipping days I often used to wonder where is the demand for all these mega vessels being built.

    Despite the fall of 2008 there were no lessons learnt and the big boys went on shopping for tonnage.

    When asked why buy more tonnoage, one of the Danish co’s executive once smugly told me that the boys in Copenhagen know what they are doing and they always think ahead of their peers.

  2. Gopal Sethi
    December 7, 2016 at 1:21 pm

    Excellent and thoughtful write-up Andrew.
    To me Liner Shipping today looks like ‘cunning stunts’ and the only place we see this is a ‘Circus’!!!

  3. sorrel
    December 7, 2016 at 2:40 pm

    Andrew you inspired me today… https://drybulkpelagos.wordpress.com/2016/12/07/this-remains-to-be-seen-hillary/

  4. Chris
    December 7, 2016 at 10:39 pm

    I agree with nearly all you say with one exception : yes we surely we lose as taxpayers but don’t the gains as consumers in a global market place outweigh those loses? Otherwise spot on. Everyone with the same MBAs and the same spreadsheets doing the same calculation and coming up with the same answer. Lots of very clever individuals combining to do something colossally stupid.

  5. Vivek Sood
    December 8, 2016 at 1:43 am

    If I had to make a list of all the strategic missteps of the shipping industry – right from leaving the door open for 3PLs, losing the network effect in the world’s first network business, to fragmentation of thinking – I would have to write a whole new book. In 2004, I wrote an article – Shipping and Strategy – Are the Poles Apart? I just read it again at http://globalscgroup.com/manage/uploads/articles/Shipping%20and%20Strategy%20-%20are%20they%20poles%20apart.pdf – and I find that nothing has changed since then, despite the funds flooding this industry.

  6. George
    December 8, 2016 at 2:27 pm

    Hi Andrew! once more spot on.

    as for the collective dumbness in the industry’s BoDs: Maersk launched the 3Es because they wanted to preempt the market. They have the pockets, they have the network and the know-how, i don’t see why not.

    Smaller competitors bit the bait and went long with cheaply borrowed money and this is where the soup went bad. Big ships became a thing of fashion. Every arms race leaves only one afloat, it has been historically proven.

    If one opens a standard textbook of industrial organization, it is all there. Even where we stand, the boys from Denmark still are bound to win, given the practically unlimited sources of liquidity, compared to their peers and competitors. Those who will not be acquired, they will be resolved.
    Unless forwarders revolt and take advantage of cheap tonnage available as you suggest

    all remains to be seen

  7. Ummo Bruns
    December 11, 2016 at 7:32 am

    Excellent article! Having been in the (container) shipping industry for a substantial part of my professional life I have seen quite a lot of ups and downs. Some ship owners should have gone bankrupt a long time ago, but for some strange reason these were always kept afloat…. Now it seems that the battle is really on and that even shipping companies are treated like “normal” companies. It is almost like the global political trend; monopolies are around the corner and that – in my modest opinion – is not good.