Goodbye big ships. Hello profitability

Goodbye big ships. Hello profitability

I love the container shipping industry and the ways in which it behaves. There is some predictability to it and it provides good material to study business strategies employed in a highly commoditised market. It is not a very adventurous industry.

While everybody watches everybody else, all of them watch the biggest one and try to copy their moves. After the trend-setter moves, the other carriers, more or less, fall in line copying business model modifications of the first mover.

Breakthrough innovation is not a feature of the shipping industry, so business model changes are not drastic and tend to be implemented slowly. The 2008 financial crisis unsettled the industry and caused some carriers to buckle down, but the prevailing wisdom of following the leader remained. In the period that followed, Maersk decided to move on weaker carriers and grow their market share by ordering ultra large vessels, discounting the rates, and accepting ‘temporary’ stress to profits. The key aspect of that strategy, having the lowest slot cost possible, seemed like a good idea at the time.

In the meantime, on the other side of the world, a major economy decided to throw more money at developing heavy industries capable of consuming oversupply of steel mills and employing the ever growing supply of labour. Their decision, coupled with cheap stimulus credit, fuelled, among others, the shipbuilding industry. Fierce competition among the shipbuilders resulted in abundance of bigger and bigger ships at lower and lower prices. Suddenly, every carrier was able to follow Maersk toward the ‘ultra-large ship, low slot cost’ nirvana.

In the wake of this trend, major container ports had to make some Airbus A380-sized infrastructure and equipment decisions. Bigger ships require wider channels, stronger berths, farther reaching cranes, and bigger yards. Infrastructure investments are not cheap, they take a long time to deliver, and even longer time to obtain financial returns. Fears of being left behind led many ports into mega investments to accommodate the mega ships.

What a difference a decade makes. Earlier on in 2019, the CEO of Maersk, the instigator of gaining market share and cost advantage by supersizing the ships, called the end to the trend. He also stressed the need to stop thinking of growing market share and to focus on profits. The message was somewhat lost on Maersk’s competitors, who either already took deliveries of newer ultra large boxships, or were still awaiting them. The big question at the end of 2019 is whether other carriers will also stop fighting for market share and continue following the leader.

The answer so far is that some are keen to focus on profits, while others, among them CMA CGM, see the opportunity to capture more of the market and worry about the profits later. Other major carriers have not publicly stated their intentions, but guesses can be made as to which path they could take.

There is a big difference from a decade ago – the onset of digitalisation on the shoulders of new developments in machine learning algorithms, artificial intelligence, and optimisation algorithms. These technologies enabled greater speed and precision of decisions, important factors in being competitive in a commoditised industry. In a world full of platforms exposing and comparing rates, showing ship positions, forecasting demands, and predicting ports’ capabilities to handle ships and volumes of cargo, it is not easy to be old fashioned. Processes relying on human brain power, tons of paper and email driven workflows have no chance against machines. The algorithms can see better, don’t miss scenarios worth evaluating, and can drive very fast communication exchanges with digitally-enabled partners and customers.

In this new world, a carrier embarking on a market share first or a profitability first strategy with their old fashion e-commerce portals and human-powered workflows is doomed to see no significant difference from their choice. As they make their own processes open to standardisation and transparency, seen in the Digital Container Shipping Association initiative, they are levelling the visible field of play. What they do in the digitalisation of their internal field of play is going to make the real difference and we are yet to know who is more ready today – the profit makers or the market takers.

Related Posts

4 Comments

  1. Avatar
    Chris
    September 11, 2019 at 5:12 pm

    Interesting read

    The one things that gets me here, everyone / every other area of the market in the container industry thrives on being different to each other. One haulier with 5 trucks and 2 customers can compete and make a similar return versus the corporate haulier with 1000+ trucks and all the juicy contracts. Freight forwarders can also vary widely and all compete well in an open marketplace. Different service levels and areas of expertise allow for this. so why its it that all the shipping lines appear to be and act the same as each other? I appreciate specialization may be tricky when moving everything for everyone but if we agree that the shipping lines may not be on the right path, or may not have been in the past, why are they all seemingly follow the same medium to long term strategies?

    1. Avatar
      Martyn Benson
      September 12, 2019 at 9:53 pm

      Chris,
      I reckon one answer toy your question could be scaleability. A trucker with five trucks can still compete against a bigger operator and freight forwarders have specific niches but global container carriers are at the top of the pyramid (some would say at the bottom) and they have no choice but to grow or die. The amounts of investment $$$ and the sheer size and breadth of information and marketing coverage means that they have to follow broadly the same path to maintain their path.
      It can be seen that Evergreen was once No. 1 but did not expand to the same extent as White Star Line and now they are playing a very late catch-up…….not even in the Top 5 any more.

  2. Avatar
    Richard
    September 12, 2019 at 11:26 am

    …..and right on cue:
    https://splash247.com/evergreen-confirms-newbuilding-project-for-ten-mega-boxships/

    The conservative nature of the industry and the bandwaggon effect of doing whatever everyone else is doing would appear to be behind the continual bubble & bust cycle in shipping.

  3. Avatar
    Martyn Benson
    September 12, 2019 at 9:48 pm

    I was just about to say that Mr Kosmala had missed the latest announcement when I read Richard’s remark above.
    Another Splash writer, Andrew Craig Bennett, was penning an article a few weeks ago about ‘Peak Container’, so he also missed the prior announcement from EVG about 11 x 23k TEU’ers.
    Surely what Skou told his BoDs was that digitalisation was going to achieve both aims – profit and market but, if all the majors sign up to the DCSA and join all the digital clubs that are popping up everywhere, then the algorithms might end up wagging the dog and then there could even be a digital meltdown similar to the Stock Exchange Black Friday.
    I wonder how the managements of the liner companies are going to manage their fleets and anticipate yield optimalisation if the machines are making all the decisions when the managers have lost track of what is going on and don’t have the personal “feel” or intuition for shipping as they once did.
    Processing mountains of data is one thing but having a common sense understanding of what is behind the business and what should be done is another thing. Hopefully that gut feel will not disappear as this digital nirvana approaches.