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.