When Maersk announced a major refocusing of its business and combined the maritime and logistics businesses under one roof, the world of shipping took notice. After all, moving millions of containers around the world is Maersk’s core competency, so there was a lot to like in the idea of better door-to-door integration, guaranteed transit times, and lower costs. On the other hand, there was the question of why, prior to the announcement, a brand owning a container line, terminal operator and a logistics provider could not provide the same level of integration.
Competing objectives were perhaps one of the key reasons. Under normal circumstances, a strong carrier like Maersk can demand the terminal to give it preferential windows, volume discount breaks, and lower costs per move. The terminals, facing increasing costs of operations, would be vigorously defending their pricing and their bottom lines. The objective of the logistics provider is to provide the lowest possible offer to their customers, thus having good reason to press multiple carriers to give it the lowest possible price per slot and press the ports to give it the fastest possible turnaround. These competing objectives would now have to be reconciled under one roof to the satisfaction of internal and external stakeholders.
How will that work in case of the renewed Maersk? If the carrier stays firm on rates, its terminal and logistics arms will be squeezed on margins. If its logistics arm maintains low rates to keep their customers happy, it will squeeze the carrier’s margin and force the carrier to negotiate for lower fees or greater discounts with the terminals. It is a complicated circle of dependencies and impacts. Establishing some sort of equilibrium between the benefits and the pressures between the three aspects of the shipping chain will undoubtedly be a challenge for the management team.
Unlike Maersk, Cosco might not have similar organisational obstacles. Cosco’s objective, mirroring that of Maersk’s, is to establish Cosco as a global leading services provider of integrated logistics and supply chain. Cosco Shipping Lines has publicly stated it wants to become the largest container fleet operator in the world resulting in network reach and size comparable to that of Maersk’s. A majority of readers of this site polled believe the Chinese carrier will overhaul Maersk size-wise within the next 10 years. Cosco’s terminal acquisition strategy, meanwhile, is underpinned by the government’s desire to make the One Belt One Road successful, even if the cost of those acquisitions may appear too high. The company’s current terminal network is about half that of Maersk’s, but its growth and presence ambition will see them it for parity. The Status of Cosco’s logistics operations is similar to that of Maersk’s. More about it later.
How will competition develop?
The maritime network of both carriers is similar in size and capable of reaching every market in the world. Maersk is still ahead in number of vessels and total capacity and both carriers can continue to grow organically and through acquisitions. Their growth strategy is predicated upon cost leadership. In the eyes of their customers, they cannot sacrifice reliability to their cost cutting objectives. While in the case of Maersk costs management was a genuine focus for quite some time, Cosco may not be under similar pressure to reduce its costs in the short term. Let’s call it ‘temporary advantage’ to Maersk.
The terminal network strategy will look differently for both. Given the size advantage of APM Terminals, its focus will be to optimise existing assets and increase profitability through the addition of smaller carriers without weight to demand deep discounts and other preferences. Cosco in the meantime will have to pour money into adding terminals and refashioning them for the 21st century. I can see Cosco repeating the Piraeus acquisition and subsequent optimisation as a model for the foreseeable future. In my opinion, Cosco’s strategy of investing in inland rail terminals on the China-Europe link has a lot of foresight. The acquisition of the Khyrgos terminal was a brilliant move on its own, but there are a number of other terminals along the route that will be constructed to play important roles as the side trunk lines serving South Asia and the Middle East get built. Let’s call it ‘temporary advantage’ to APM Terminals.
Having a fleet and terminals though is not enough to become a leader in integrated logistics and supply chains. This leaves the land logistics part of Cosco’s and Maersk’s operations as a matter of concern and ground zero of competition between the two giants. Both operations can in principle deliver it all, but neither has the same global footprint and scale as their carrier side. Both would have to grow through acquisitions, as growing organically would be too slow for the global supply chain provider vision to materialise quickly. Buying a company like Expeditors could provide the early advantage. Both Cosco and Maersk will face fierce competition from other established, and much larger, players as well as highly fragmented lesser competitors holding established relations with their clients.
The advantage in supplying end-to-end logistics and supply chain services is built upon the physical network of highly automated assets, detailed understanding of end-to-end customer needs, extended network efficiency, full chain visibility, and the full digitalisation of business processes. Notwithstanding the prevalence of paper, or non-digital means, in many end-to-end transactions, the approach of both companies to digitalisation has been underwhelming, but both have the information technology base to build on. Both companies provide physical track and trace capabilities, although Maersk has a slight upper hand here with the remote container management feature available with the latest generation of its reefer containers. Both are capable of modelling, designing and executing end-to-end supply chain flows, although with third party tools. Last, but not least, both companies launched initiatives around blockchain and artificial intelligence – key ingredients of success in well performing supply chain operations. And they both provide customers with digital platforms enabling booking and payment for whole freight forwarding packages, but others are farther ahead in digitalisation of last mile and delivery point processes. I could envision a gap-filling acquisition by either company. A juicy morsel of Cainiao got swept by Alibaba, but there are a few more technology innovators worth a look.
If you consider all things being equal, the differentiation will have to come from the size and reach of the organisation. That can only be achieved by acquisition, ideally of a large established player. If Cosco is the avatar of Chinese government investment strategy into dominating global logistics links, then Cosco will be in a much more flexible position to move quickly on promising targets. Yes, there will be cultural clashes and pains of integrations, but not bigger than those faced by Maersk growing exactly the same way. On the basis of Cosco having that flexibility in financing its global expansion, I will venture to say that Cosco, and not Maersk, may be the one to beat in the global door-to-door integrated logistics game.