Why large shipping lines should think about asset-sharing

Why large shipping lines should think about asset-sharing

Container xChange’s CEO Dr Johannes Schlingmeier writes exclusively for Splash today.

In the past, companies have tried to optimise and unearth efficiency gains through value chain integration. Reason was that it is easier to communicate and optimisze within a company than with external partners. Examples from container logistics include Maersk Line acquiring Damco as part of the P&O Nedlloyd acquisition and Amazon aiming to consolidate the entire value chain from factory to last mile delivery.

In the literature, the explanations focus on lower transaction costs when communicating within an organisation compared to the outside and the risk of ‘hold-ups’ being more manageable if you can observe the entire value chain compared to just a small fraction.

Extrapolation: You can argue that these factors and risks are the only reason why we have companies at all, those are basically just a way for humans to work together and communicate efficiently. In a sense, a company is just a collection of specialists who work together on a ‘platform’ called a company.

Technology reduces those underlying costs and risks. Today, technology and digital platforms reduce transaction costs and remove risks. This makes the traditional company borders obsolete. We see that in the ‘gig’ economy where specialists (from highly paid professionals such as lawyers and consultants to poorly paid, uneducated ‘hands’) chose not to get a job in a company but instead offer their workforce on platforms – think of Uber, Fiverr and even Deliveroo. Interestingly, this does not quite fit into the B2B vs B2C vs C2C logic of the past but is rather P2B (Platform-to-B) or P2C: As a company or as a consumer I only need to join a platform to get access to a wide range of services without further need to search, compare or contract.

We see the same happening in B2B. M&A activity will not remain the only logical way to increase efficiency along the value chain and to achieve economies of scale. Instead, platforms and digital technologies allow companies (no matter how small or specialised) to work together across company borders. On successful platforms, this is powered not only by efficient online processes, but supported by platform activities that increase trust such as peer reviews, performance information or payment handling.

Here’s an industry perspective. A simulated large, consolidated company which operates equipment in an efficient, market-driven pool. Other examples that come to mind are platforms focused on the optimisation of hinterland intermodal moves—improving communication between container carriers, freight forwarders, and truckers. We expect this along the entire transportation value chain in the future.

Thinking about the future of shipping industry, we will see further deconstruction happening. Multiple ‘neutral’ platforms will link together specialised actors along the value chain. Actors on the value chain will be much more specialised than today and instead of seeing mega carriers covering the transport chain end-to-end, we’ll have actors such as equipment owner, vessel owner, vessel operator, slot marketer, agents in POL and POD, equipment tracking technology, ports, terminal, truckers, depots.

Here’s an example. From an economic viewpoint (and when removing transaction costs / communication barriers and holdup risks) it makes only very little sense to have ‘vessel operation’ and ‘equipment ownership’ done by the same party.

In the case of equipment: Managing a pool allows you to balance out company-specific imbalances and reduce empty container moves. Container leasing companies are a prime example where this already happens.

Of course, this does not need to be fragmented down to the individual micro-service at all stages. Thinking back to our example before, that would mean that we don’t even have companies here anymore but just individual freelancers. Such companies can then also contribute 2, 3, 4 steps but we think the underlying logic is important: Deconsolidation makes sense.

Additionally, there will be some clients who prefer buying from a consolidated entity instead of plugging-and-playing services on a platform. Consider a large shipper who wants to have a reliable long-term contract with stable rates and a single-point of contact – this role will still exist and also create value (as they cater to a specific demand). Here you’ll also find strong consumer / client facing brand names such as Maersk. However, the way this consolidator then provides the service will change completely from an inhouse solution to an on demand platform solution.

What we see in shipping is that fully integrated liners act like a “one-stop-shop” and try to offer everything even though their core business is ocean freight. Why shouldn’t forwarders or shippers bring their own containers and only book the vessel slot? When shippers bring their own boxes, containers are so-called shippers owned containers, SOC container in short. Such containers increase flexibility and create a win-win for shippers and carriers: Forwarders save demurrage charges, while carriers avoid time-consuming planning and can focus on what they’re good at: moving goods between continents and the sale of vessel slots!

More and more shipping companies increase their SOC activities because online platforms provide them with access to global capacity and streamline processes of booking containers separately to the vessel slot.

You can stop the “race to be the largest and most integrated actor”. In the future of shipping you’ll need to be super specialised and able to play multiple platforms instead. In a corporate finance viewpoint there will be no more “conglomerate cover-up”, every activity needs to be performed at par with or better than the best. Because markets will be so efficient, that customers are not willing to pay for sub-par parts of products anymore.

What does this all mean for you? Firms should ensure they are preparing for an eco-system future—or what “eco-systematisation” will mean for them. Specifically, they need to dedicate resources to understanding which services are available, as the landscape is evolving quickly. More and more platforms are evolving that might evolve into an eco- system services—just think of Alibaba and WeChat. They need to decide what they are really distinctive at and exit or source marginal activities. While this has always been a good idea and strategic exercise, it is becoming more important than ever (examples could be COSCO’s divestment of its shipbuilding/shipyard arm). And finally, they need to create plug and play architectures, not just in a technical sense, but also in how they contract (e.g., shorter duration). And in some cases, they may need to organize themselves into a set of discrete internal services to allow inter-operability with the external market.

Zapier is a really good example for pushing plug and play architectures, it basically is an online service that “connects” distinct services to provide additional user value. Easyjet is a good example for an “unbundling” of services into micro-services: You can book everything, but you don’t have to—that aligns very well with the market and is profitable in itself.

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1 Comment

  1. Avatar
    Martyn Benson
    August 15, 2019 at 11:45 pm

    Should there not be a big “ADVERTORIAL” statement above this article?
    Maersk’s acquisition of Damco had nothing to do with efficiency gains and, even if it was the aim, it hasn’t (yet) worked.
    Extrapolation: replacing humans with technology won’t necessarily make the most efficient company (platform) or deliver the highest profitability.
    The ‘gig’ economy has grown because many people who were thrown out of traditional employment after the GFC had no choice but to take the uncertainty of self-employment (also because many of their jobs had moved to another cheaper part of the world) and many would prefer a steady job but the ‘opportunity’ to deliver pizzas on a moped was made easier because there are now consolidated platforms for ordering and networked delivery.
    As for the comment about only getting access to a platform, it would be interesting to hear how that guarantees, controls or manages quality of service, especially when many of the B2C platforms state that they are only a vehicle and not responsible for service or final product.
    “Actors on the value chain will become much more specialised than today” ………this doesn’t seem to mesh with the current strategy of Maersk, CMA-CGM, COSCO and others, who are going in the opposite direction in a bid to control more of the supply chain and to diversify away from commoditisation.
    The discussion cuts to the chase by mentioning equipment pools and leasing companies. The raison d’etre of container lessors is almost the opposite of effficiency or operational effectiveness – they are there to monetise investments in physical assets and to provide an alternative finance path for shipping lines. They are not in the container provision business to provide efficiency. Indeed, the fact that there are many different lessors with different priorities and intentions means that efficiency is anathema. In the described definition the efficiency of container leasing can only work if there are one or two providers, but even this does not work in that way when examining the US chassis leasing market.
    Why shouldn’t forwarders and shippers bring their own boxes? Simply because the majority of shippers and freight brokers do not want to be responsible for or have to invest in physical assets. The very ownership or operation of a transport asset doesn’t guarantee efficiency – it works against efficiency and introduces more cost and management time (even in the altruistic and utopian world where all containers are pooled and no-one needs to worry about condition, re-positioning or regulatory and fiscal obligations). Forwarders would not necessarily save demurrage charges because the reason for most demurrage is delays in Customs documents, or payment of fees or other processing of documentation. That means that containers will stand on a terminal, no matter who owns them (they may save container detention or rental but that is a different matter).
    To use COSCO as an example of divestment strategy is indeed strange, as they recently bought Singamas and, in any case, there is no point using a Chinese state-owned conglomerate as a business case as they don’t have the same constraints or motivations as a regular free enterprise public or private company.
    This rambling pseudo academic piece throws out erroneous, random ideas in an attempt to justify links to technology but doesn’t seem to produce any conclusion or direction. Also it doesn’t mention the previous attempts at equipment pooling (nothing new under the sun) which ran aground for reasons which would not have been solved by technology. Ultimately, there has to be an industry-wide consensus about the rights, obligations and responsibilities of all parties towards operating fleets of containers and ships (and railcars, trucks, locomotives, ro-ro platforms – you name them). Unless everyone understands and wants to take on all those aspects then it will be difficult to delegate control to all the individual players, especially when the best placed to that now are the current equipment fleet managers, who will want and need to preserve their fleet integrity to comply with their own priorities and investment criteria.