Does anyone still remember the excitement of Maersk’s EEE (18,340 teu) coming into service in 2015? Any passion still left in you about the 2017 arrival of the MOL Triumph (20,170 teu)? How about the reportedly imminent order for nine 22,000 teu vessels by CMA CGM? Worryingly, while the ordered vessels sizes are going up, the prices of those vessels are going down inviting even more future orders. How to reconcile this investment optimism with the pessimism of the last few years?
The ultra large vessels mentioned above have all something in common. Each one of those orders was justified by the Asia-Europe tradelane. If you consider the total volume of bilateral trade on this lane, you quickly realise we are about to approach a new phase of war for market share to utilise all of this new capacity. It is like watching the endless re-runs of the movie Hunger Games played with the unarmed assets each worth about $150m to $200m.
In 2016, that very same war claimed Hanjin Shipping. Irrespective of the business management missteps by Hanjin, it seems that the industry has totally ignored the self-defeating cycle of ordering excess capacity, applying cutthroat pricing, and living with long-term transfer of value to suppliers and customers (i.e. commoditisation). It is hard to imagine how to avoid experiencing another Hanjin moment, as many carriers with stretched balance sheets will be tempted to replicate Hanjin’s tactics to survive the inevitable. Will they hunker down like Evergreen or PIL? Will they attempt ‘friendly’ consolidations like that of MOL+NYK+K Line? Any misstep in planning and execution of corporate strategy will cost them dearly and be punished quickly.
From the flurry of new order announcements and knowing what is already coming down the delivery pipeline, it seems to me that the only sure strategy to persist is one that we know in economics as tit-for-tat, or a similar ‘prisoner’s dilemma’, game theory. Just as tit-for-tat strategy is implemented in games with repeated moves, so is the ongoing carriers’ strategy. The economic framework of tit-fir-tat nicely explains how carriers interact with each other in competitive environments and what will be the outcomes of their strategies. Since regulatory frameworks don’t allow them to collaborate (or collude, if you prefer that word), they are forever forced to play the uncooperative version of this game theory. In the business environment which also includes long lead times for new capacity, low barriers to entry, high barriers to exit, perishable inventory, high elasticity, the uncooperative game theory has only one outcome – one prisoner goes free and the other one gets a life sentence.
As a shipper, you might be watching these developments with glee in your eye. If you are crossing your fingers for a return to a rates war due to overcapacity in shipping, be careful what you wish for. The increasing monopoly accumulating through acquisition strategies of the largest carriers won’t be without consequences to ports and shippers. The dominant four lines could progressively dump unsustainable capacity on smaller carriers, cut down on unprofitable services after getting rid of the competitor(s), remove inefficient ports from rotations, and align capacity so that they can exert greater pricing power at the ports where they dominate the volumes. That means increased costs in supply chains and greater inconvenience to the shippers. What usually follows are higher safety stock inventories and higher prices on the shelves. The moment the cost of capital goes up, the increased costs of keeping those pare inventories will be paid up by final buyers and consumers.
I am a strong proponent of using smart and intelligent applications of information technology to upset the seemingly impossible way to cut the Gordian Knot of shipping, but even the cleverest of technologies needs the soundest business strategy to go with it. With that in mind, you might wonder how much time will pass, before the industry starts mourning another RIP like Hanjin.
To read Kris’s superb Hanjin Shipping obituary from earlier this year, click here.