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Making a fragmented and inefficient container industry more profitable through PortCDM

Logistic News - Published on Mon, 27 Aug 2018

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Japanese automakers Toyota and Honda are renowned for their relentless focus on cost reduction through first class optimization of their supply chains. In August 2018, they are reporting improving profits while US automakers are issuing profit warnings. Toyota and Honda have successfully connected operational databases from the supporting business eco-systems in such a way that databases can be analysed intensively (AI, Business Analytics, etc.) to identify cost saving opportunities utilizing the Japanese kaizen philosophy for continuous improvement. They have learned that data-driven enterprises are more successful.

In contrast, the self-organizing and fragmented nature of the maritime industry has traditionally deprived all actors of the data needed to achieve high levels of efficiency. Fragmentation is toxic to efficiency, but now we have an antidote – digital data sharing.

The maritime segment of the container industry is very mature, but it is low-profit, fragmented and too many operations are not optimally synchronized. However, the adoption of the principles of Port Collaborative Decision Making (PortCDM) as an enabler of the Sea Traffic Management (STM) concept for shipping companies (within or outside alliances), ports, and terminals could substantially reduce the overall costs. Adopting PortCDM could decrease ships’ idle-time and unnecessary bunker consumption, by maximising vessel and terminal utilisation, as well as by making port and land-side operations significantly more efficient. PortCDM is a gateway to digital data sharing and improved efficiency for all.

This concept note will start with a discussion of key actors (shipping lines, ports, terminals). Following this, the importance of alliances and the network effect of those alliances on efficiency in general will be discussed, and the concept note will end with a short description of how the PortCDM concept will substantially contribute to overall improvements in efficiency.

Stakeholder positioning and industry fragmentation in the maritime eco-system
The key stakeholders within the Maritime eco-system are the shipping companies, the ports and the different types of terminals. Terminals are part of a port, and the division of roles between the port and its terminals varies widely. We shall discuss the role of these three below to identify the lack of optimal communication due to a lack of (standardized) information.

Shipping companies
Shipping companies operating box vessels (containers) can be divided into three macro-categories: global operators (such as Maersk, MSC, CMA-CGM); medium size operators with a focus on specific trades (such as intra-regional operators); and niche carriers focusing on small volumes and high- revenue, protected trades (such as Matson & Zim). Liners, as container shipping companies are referred to, operate in an asset-intensive, fragmented industry that grew extremely rapidly between the 60s and 80s, resulting in a scenario where, for decades, companies focused more on fast expansion and volume business than on efficiency, diversification, technologies, and operational excellence.

Therefore, the industry intrinsically has very low profit margins and is particularly exposed to profit swings caused by price fluctuations for oil and steel (respectively influencing the cost of running and buying vessels), as well as global demand for containerised transportation. Above all, the imbalance between the global demand and the supply of vessels for years caused an oversupply of capacity.

As a consequence, freight rates have been on the decline during the last decade causing liner revenue streams to shrink. Many trade-lanes are imbalanced, resulting in high costs and no revenue associated with the re-positioning of empty containers. This is prevalent on the Asia-Europe and Asia-North America trades where often 50% of the containers in the “backhaul” to Asia are transported empty.

In order to survive, shipping companies have been forced to reduce costs (such as by slow steaming), increase efficiencies (such as by attempting to maximise vessel utilisation, reducing SG&A (Selling, General and Administrative Expenses), and above all, leveraging economies of scale. In particular, the latter strategy has been aimed at increasing the volume of TEUs transported and consequently reducing the average Operating Expense (OPEX) per TEU, which also helps boost the contractual power of the shipping line with banks, shipyards, ports and vendors in general. Economies of scale have been pursued very boldly by almost all the major players, resulting in three possible approaches: organic growth, mergers and acquisitions, and alliances. MSC expanded its fleet to five hundred vessels by growing organically, while companies like CMA-CGM, COSCO, and Maersk followed a completely different approach by very aggressively acquiring smaller competitors. Both strategies very effectively supported the growth of these players. Despite the huge efforts already employed to cut costs and increase efficiencies, the constantly deteriorating market conditions have further pushed the liners to consolidate their operations through engaging in alliances to increase Economy of Scale.

Alliances are not a new trend in the shipping business. During the 1990s, the first alliances were already operating: Grand Alliance, Global Alliance and Tricon-Hanjin consortiums were established aimed at reducing operating costs and maximising vessel utilisation among small and mid-size players. However, within the last thirty years, the tendency to form alliances has become the rule, given a scenario of reduced industry profitability, increased rate volatility and basically a fight for survival among shipping lines.

As of today, all the global shipping lines (thus excluding niche carriers) are regrouped into the three main alliances, namely 2M (Maersk, MSC, HMM, ZIM), The Alliance (Hapag-Lloyd, ONE, Yang Ming), and Ocean Alliance (CMA-CGM, COSCO, Evergreen, OOCL). From the liners’ point of view, the main benefits of alliances are maximisation of vessel utilisation, more flexible and efficient deployment of the fleet among different services, an overall increase of service reliability, increased port-pair coverage and frequency, and an overall reduction in costs per TEU transported.

Overall, the main trend in the shipping industry has been a centralization and consolidation similar to that of many other industries. Especially over the last twenty years, we have witnessed a reduction in the industry’s fragmentation and the disappearance of mid-size carriers due to mergers and acquisitions or even bankruptcy. A recent case was the bankruptcy of Hanjin, the seventh largest shipping line in the world that went out of business literally overnight during August 2016. Overall, the number of global shipping companies has plummeted from 27 in early 1990’s to only 14 in 2018. The future scenario, given the low return on invested capital and the decreasing profits (or even losses) posted by major shipping companies, as well as the lack of recovery of freight rates in the near future, could push for further industry consolidation. Recent rumours regarding CMA-CGM interest in acquiring Hapag-Lloyd could signal a further wave of mergers and acquisitions between major and mid-size players.

While it is possible that niche-carriers will still remain in business given their overall better profitability, mid-size global shipping companies may be forced either to accept a merger or acquisition or go out of business.

Finally, the more specific case of government-backed companies should be mentioned. In particular HMM, COSCO, and ZIM have largely benefitted from governmental support, in some cases through eased financing and even bailing out. Given their strategic relevance to national interest, these State-backed shipping companies have been protected so far, raising the concern of regulating bodies and above all of concerns from their (more efficient) competitors. While the importance of COSCO to China’s national maritime strategy might continue to bring certain financial advantages to the Chinese carrier (such as eased financing and procurement), most observers believe that HMM and ZIM will be gradually forced to fully embrace free-market logics.

Sea ports are an interface between maritime and land logistic operations. However, within ports, operations are typically mostly handled within specialized terminals. These are sections of a port specialising in specific commodities or modes of transportation (passenger, general cargo, containers, dry bulk, liquid cargo, gas, break bulk and oversized, vehicles, chemicals, grain, cement, coal, etc). Almost all ports exist for historic reasons where the land-based market place meets the ocean (such as Antwerp, Genova, Venice and Rotterdam), to further national interests (such as Singapore, Shanghai, Shenzhen, Gioia Tauro) or to support financial investments and commercial purposes (such as Dubai, Salalah, Long Beach/Los Angeles).

During the last fifty years, the functioning of ports has evolved from intermodal interfaces into a much more advanced concept, namely, an integrated platform of basic and advanced logistic services provided by a set of entities, which can be government or privately owned.

This port-centric logistic approach sees ports at the centre of several industries’ supply chains: ports are increasingly upgraded to perform a broad portfolio of maritime, rail, and trucking activities, as well as freight forwarding, customs-related events, cold chain management, stevedoring, warehousing, and distribution services.

Appendix A provides a categorisation of the 30 largest container ports, labelled according to their scope. A single container port can even host several container terminals, as is the case of the Port of Long Beach (see Appendix B for further details), which counts six different terminals managed by different stakeholder and provides a perfect example of a modern port’s complexity in terms of different alliances, shipping companies and services co-existing and overlapping on the same logistic site.

Other ports follow a different approach where all the terminal berths are managed by the same entity, in essence the port administration. This is the case for Singapore, HQ and home port of PSA International, which operates all the nine container terminals in the port as an integrated facility. Such a concentration of control is the result of the background of PSA International, originally a governmental authority with the mission of managing and expanding the business of Singapore’s port. This unique vision for the coordinated development of nine terminals has substantially influenced the efficiency and growth of the port of Singapore, which today is a global hub connecting more than six hundred ports across the planet.

The terminals within a port have not escaped the trend, and they are incrementally integrating logistic services with the more traditional lifting, storing and in/out gating of boxes. The level of integration reached by a specific container terminal can be a good indication of the character or nature of its current business. Fully integrated container terminals, performing the full spectrum of logistic services and being integrated with different transportation modes (on dock rail, barge services and trucks), can be defined as regional gateways, serving the importing and exporting activities of the surrounding region. The American ports of Long Beach, L.A. and New Jersey / New York are a perfect example of this category.

At the other end of the spectrum, we find terminals predominantly focused on transhipment activities, therefore being built not to service a geographical area, but rather positioned along the main East-West sea lines of communication (linking Far East, Europe and the US such as Tanjung- Pelepas or Colombo). These ports generally do not focus on advanced logistic services and lack an extensive land-side connectivity with rail and road infrastructures.

Hybrid terminals like Antwerp or Shanghai lie in between the two categories and they provide both transhipment services (usually as a part of a local hub-and-spoke system) as well as advanced logistic services to the surrounding inland and coastal region.

Another way to categorize the terminal is on the basis of their strategic scope, which can be motivated by business diversification of existing operations, or financial investment, or creation of a network effect. By network effect, we mean the phenomenon whereby a product or service gains additional value as more people use it. Appendix C provides an overview of the main terminal operators and their respective strategic scope.

A terminal operator like PSA International belongs to the first category. It diversified the original scope of its multipurpose terminal and stevedoring activities by expanding across the full cycle of container terminal operations. The scope of its business covers the entire span of logistic activities that gravitates around their terminals (cold chain, intermodal ramps, tugboats, etc.). Terminal operations are the main component of its activities and are complementary to the other logistic services provided.

The second case is the one of operators such as DP World or Ports of America, which are controlled by sovereign and infrastructure investment funds. The focus of these operators is on the management of financial assets – terminal activities are seen just as a revenue and value generator. Merger and acquisition followed by an asset re-organization is what leads their expansion and growth, which is based more on financial considerations than on the integration of logistic services or the creation of a network effect.

Finally, the third group includes operators owned by or associated with shipping lines. There are both financial and operational advantages deriving from diversifying from pure shipping into terminal activities. First and foremost, a shipping company calling at its own terminals enjoys total control of berth and land side operations. Priority berthing, augmented schedule flexibility, prioritisation of manpower, and equipment utilisation are among the operational advantages, which in turn enable improved customer service and more efficient inland and intermodal operations.

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Posted By : Joykumar Irom on Mon, 27 Aug 2018
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