Why Cosco, not Maersk, may be the one to beat in door-to-door integrated logistics

Why Cosco, not Maersk, may be the one to beat in door-to-door integrated logistics

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.

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10 Comments

  1. Glynn Thomas
    March 9, 2018 at 6:18 am

    You seem to be ignoring market share and APM parts and terminals through the P2 agreement. On the current market penetration and existing logistics infrastructure in my opinion your conclusion is way wide of the mark.

    1. Kris
      March 10, 2018 at 7:34 am

      Thanks Glynn. I appreciate your comment. If we only consider the port-to-port portion of the supply chain, then I would agree with you. However, integrated logistics and supply chain does not begin or end at the port and it implies much more than lifting a box. There is also one more aspect of fleet and terminals – buying them is not a barrier to entry and Chinese government was very clear in their desire to have COSCO matching Maersk size for size. As to advantage of being in alliance, well alliances are just that – temporary agreements between multiple players each optimizing for their own gain, not for the greater good of the pool.

  2. Gunther Ginckels
    March 9, 2018 at 5:57 pm

    The analysis is correct. The take-over of Sealand in 1999 doubled the number of terminals being part of the “Line” not handling competition, no financial transparency and showing an average asset utilisation of less than 40%. APM Terminals as independent terminal operator was born. The history of Damco (MCC, Maersk Logstics etc…) is a different story and was always considered by the “shipping boys” as just another forwarder. Placing these activities as separate business units was a necessary move although it widened the gap of expectations between internal suppliers and internal customers. Handing over “Land Based Activities” to APM Terminals was a mistake. They had no clue what to do with it and as profitability was below expectations they simply sold-out railway companies, inland terminals and hauliers. Consolidating these 3 activities and business units is the right move and long overdue provided they maintain transparency and visibility on both economic and service performances. Key to this is the ICT platform through the partnership with IBM and Microsoft. Sure COSCO has the potential to be a top-3 key player in the market, however unless they have a business model in place showing economic and service performance transparency it could produce some unpleasant surprises on the bottom-line. True, the OBOR project is a strong key element and will have an impact on east-west trades. The real challenge is that “all things equal” is not applicable when Chinese parties are part of the development. COSCO is not obliged to play according to “Free Trade Economic Rules” as Xi Jinping will – if necessary – write a cheque ensuring that all things are not equal.

    1. Kris
      March 10, 2018 at 7:39 am

      Thank you Gunther. Appreciate your comment. I would only like to add to the ICT part of the comment. To me Microsoft is not the innovator in developing exciting technologies supporting integrated logistics operations and logistics optimization. History of IBM and iLog would also vouch for IBM’s capability and conviction to really innovate in this space, their blockchain PR splash with Maersk notwithstanding.

  3. Budha Majumdar
    March 9, 2018 at 6:46 pm

    Great article, Chris. Insightful and thought provoking.
    Taking Gunther’s points onwards, I can see a major rationalisation within Maersk to fully integrate all their land-based operations and operate as a full shipping line entity offering the total seamless door-to-door service under a single brand name and unified control. No confusion, no contradiction, no blame to a ‘separate’ service provider for mishaps and a final invoice based on the total and complete service delivery.
    Ditto for COSCO except for a deeper penetration into emerging markets than Maersk have the stomach (and deep pockets) for.

    1. Kris
      March 10, 2018 at 7:40 am

      Thank you Budha. Not much to add to your comment, you are right. Thanks for adding to the discussion.

  4. Antonio Zuidwijk
    March 9, 2018 at 10:46 pm

    The comment by mr. Ginckels is very interesting and one might add a further aspect: Now the attention is focussed on the East West Trades, linking China with Europe and the U.S.A.,which is logical.
    But China is looking much further ahead and its influence in all continents, including South America, is growing very fast. Maybe China will pay more attention to this trade and especially to the East Cost of S.America.
    For what some people consider as “strange reasons”, the freight-rates between China and the East Coast of S.A. are again the highest in the world. (This was a fact when most S.American countries had “State-fleets with flag-reservations”, but rates became “normal” when the flag-reservations were abolished and “normal competition “eliminated the state-fleets).
    Just have a look at the SHCFI : spot-rates rates for conainers from China to the E.C.S.A. are double the rate of a container to North Europe. But the explanation might be that this happened after the carriers withdrew step by step 40% of capacity in 2015 and 2016 and became Drewry´s example for the whole world.
    Moreover on the landside all “logistic-costs” are much higher than in other areas, because no country has paid much attention to proper “Transport Policies”, not to talk about very necessary INTERMODAL TRANSPORT POLICIES. Brazil is improving, but still has a long way to go.
    In Argentina 93% of all cargoes, which are mostly basic products, are transported by trucks, over distances of 1.500 km. over roads running many kilometers parallel to one of the most important rivers in the world, the so-called “Paraguay-Parana Waterway”. There can be no doubt that implementing the plans of Maersk and Cosco in the trades of the E.C.S.A. could be fore-runner for other areas, as the overall savings will be very high from the beginning. And here China has the best chances for the future. Just have a look at the many railway-projects in Argentina which are financed by China.

  5. Kris
    March 10, 2018 at 7:43 am

    Thank you Antonio. Very good observation.

  6. Hans
    March 12, 2018 at 8:07 am

    Neither of them. Top nortch forwarders are in better position to integrate end to end services.

  7. Antonio Zuidwijk
    March 12, 2018 at 10:07 am

    Dear Mr.Komala. Your article clearly shows the “operational problems” for liner-companies to offer full “door to door” or “point to point logistics” with good economical returns for them. Do you think it is worthwhile to add something about the “legal problems” and the consequential insurance problems?
    A year after the economic crisis of 2008, liner shipping-companies entered into their worst crisis in history and lost interest in the Rotterdam Rules which were accepted in the General Assembly of United Nations on December 11th 2008.These need 20 ratifications to enter in force as a worldwide compulsory rule. So far only 2 ratifications have been obtained. Chinese universities adviced their government not to ratify the convention, but a very important university changed that advice at the end of 2017 and now found reasons for China to ratify the Rotterdam Rules. This might have a domino effect and if this happens, again South America will be a special case. The reason is that no country in this continent allows limitation of liability of carriers and this is the reason that very few transactions are made with UNCTAD-I.C.C. Rules for Multimodal Transport Documents, which is not a “convention” but applicable if parties clearly agree to use these rules.
    But in most traffics in the world, these rules are widely used and have made “door to door” or “point to point” transactions possible. .