I could have called this The Emperor’s Got No Clothes, but I will go with Charlton Heston’s line from the 1968 film, Planet of the Apes, “You maniacs! You blew it up!”
Only the bosses of the great liner shipping companies of today could have been stupid enough to respond to falling freight rates by building strings of much bigger ships.
Yes, we know that the cost per slot is less on a bigger ship. We also know that responding to an excess of something – in this case slot capacity on the major trades – by making a lot more of it is not a way to get the price back up.
So why are the grown men in charge of liner shipping – men entrusted with billions of dollars’ worth of investments and on whom thousands depend for their livelihoods – so terminally stupid?
Two quotations are pertinent:
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
That is the most quoted line – the one that everyone knows – in Adam Smith’s Wealth of Nations.
“Freedom in a commons brings ruin to all.”
Garrett Harding, a slightly less well known, but much respected, economist, in his article The Tragedy of the Commons, in “Science” in 1968.
Both of these statements are true.
Customers, and in recent times governments, prefer the first, the people of the same trade or profession prefer the second.
Oversupply of liner shipping is a tragedy, or more precisely, a dilemma, of the commons, a concept much studied in modern game theory. The over exploitation of a finite resource which is shared in common, be it public grazing land or, as in this case, people who want to move finished and part finished goods by water – by people acting in self-interest, be they cattle owners or, as in this case, shipowning liner companies, chasing cargo, leads to the destruction of the resource, in this case destruction of the possibility of covering your costs in the market by overtonnaging.
The really sad thing is that there is nothing new here – very far from it.
The very earliest liner steamship owners – back in the 1870s and 1880s – did just the same thing, for just the same reasons. They bankrupted each other. A solution was found – the liner shipping conference – and for almost a hundred years liner shipping was efficient and moderately profitable.
In two nations – Britain and Japan – the liner conferences actually received the blessing of the exporters and importers of liner cargo, but over time the voices of the Cargo Interest grew ever louder, the voices of the shipowners grew weaker and the most important conference of them all – the Far East Freight Conference – closed its doors in 2008, when the EU, under pressure from shippers and importers and succumbing to a dose of theory, which it is prone to, as it is run by civil servants with little knowledge of real life, abolished the exemption of liner conferences from EU competition law .
Here’s a thing – all the giant containerlines of today, from the big blue one on down, and including the new grey and green one, were not, in the beginning, full members of conferences – they were all ‘tolerated outsiders’, benefitting from conference rates without contributing to the work of maintaining those rates. Nobody in the boardroom of a major liner company outside Japan has been inside a conference. They have all risen to corporate power outside the conference system.
They all thought, like the bankers 10 years ago, that the rules have changed, and that eternal verities ceased to apply just because of new technology – the computer and the grey box carrying Freight All Kinds. They were wrong.
None of them have a clue.
And they blew it up.