To cut costs or to grow? The question of focus for container shipping

Another quarter, another year, and another painful reminder that the container shipping business is not for the fainthearted. The most recent numbers released by NOL show how far a company has to travel to look like a reasonable, profit producing business. Entering a fourth consecutive year of losses for a company that is the pride of the Singapore-based marine industry must feel pretty daunting. No, running a business at loss year after year is not the “new normal”. Yes, there is the “half-glass” positive feeling of losses at NOL being significantly reduced year on year, but the road to financial “black” is still measured in tens of millions, not spare change in the industry struggling with rates, overcapacity, and unwelcome macroeconomic developments.

Numbers reported by NOL’s competitor, the mighty Maersk, show that the container shipping business can float above the profit/loss breakeven line. It seems like a few other companies can achieve profits or merely report small losses, but looking below NOL in the ranking of the largest carriers, one can see an ocean of red ink. A closer look at the balance sheets of individual players shows that efficiency gains from years of cost cutting are getting smaller. Each new round of cuts is getting tougher than the last and the rewards of those measures are shrinking.

The return on assets in the shipping industry seems to be linked to overall economic performance and lags behind changes to global economic trends. Slower growth between 2012 and 2014 resulted in a diminished flow of containerized goods. And even though lower building costs and lower fuel prices have led to increased efficiencies, demand and sales are not dramatically increasing to affect the bottom lines. Any signs of renewed growth, and there are very few to find yet, will not be seen in the financial results of the liners for a few more years. Therefore one must ask a question: is there a limit to bottom line improvements from mostly cutting the costs? An answer must be “yes”, there is a hard limit and additional cuts will not amount to achieving sustainable annual profits.

Scan the comments accompanying releases of financial results by carriers, and one will see that, unfortunately, more of the same lies ahead. The lines all seem to be relying on a continued focus on cost discipline and search for operational efficiencies. Hardly anybody talks about aggressive growth over cutting of costs. Yet companies don’t enter the business to focus on shrinking costs, but to grow the business and generate revenues well in excess of the incurred costs. For example, Maersk’s objective of bringing 18,000+ teu vessels into the fleet was not only to reduce the slot cost, but also to enhance their current offerings and seek volume markets capable of filling those vessels time and again. It does not mean that all other carriers need to take the same route. They can outsmart Maersk and grow, not by buying even larger vessels, as is being tried by a few, but by finding markets for which the size of the vessel matters less, offer products and services that Maersk cannot or is not interested in offering, and focus better on enhancing currently offered network services to match the demand.

To grow the business, the lines need to look at how they evaluate demand and how fast they can re-optimize their network to capture that demand. A look across the various lines and their methods to achieve that, shows a scattershot approach to an integrated analysis and planning between demand and network supply. The obvious issue, that many in the industry are uneasy to admit, is that there are too many factors driving demand and supply, and that demand and network optimization methods are too outdated for the job. The planning departments by necessity ignore large swaths of data, because their spreadsheet-based models and legacy demand forecasting tools require too many manual interventions to accommodate the complexity of data, rules and constraints. The legacy optimization tools produce outcomes that are subjected to further amendments by humans. When all interventions are performed, most of the demand forecasts and demand-driven network plans are at best inaccurate, and at worst, completely useless. This leads to suboptimal allocation of network resources to support growth, suboptimal utilization of the fleet and terminals, and misalignments of the equipment pools.

The inaccuracy of demand and network planning decisions is further amplified by the lines relying on the resources of their alliance partners. Lessons learned from the current alliances show how poor data combined with inaccurate demand and network planning by each alliance member prevents, rather than stimulates, growth. Human factors aside, using more advanced planning techniques and tools would enable better planning outcomes, but the planners have to first admit that the planning strategies and tactics of today, while sufficient for cost cutting, are inadequate to support growth strategies. And that may not be an easy thing to admit.

Kris Kosmala

Kris Kosmala is a partner at Click & Connect where he advises companies trying to leverage digitalization to change their business competitive position.
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