Container Shipping Industry Needs New Paradigm
Op-Ed by David Rosen
The Container Shipping Industry (CSI) is in a state of imbalance since the sub-prime crisis of 2008.
The CSI needs to adopt a manufacturing production line mentality, rather than conventional maritime thinking.
Carriers currently invest in all the transport services’ production assets exposed to all the economic risks and are coupled to the huge fixed cost investments required. The main beneficiaries of these services are not required to participate in these substantial investments or share the risks involved.
In order to change the status quo, we need to “Think out of the box – To save the box”
The shipping industry is not alone in this conundrum. An article appeared in the Wall Street Journal several years ago quoting the Dow Jones news service as follows: (note the use of the term carriers referring to major telephony providers not unlike maritime carriers)
“Wireless carriers are desperate to avoid the fate of their landline counterparts, which spent billions of dollars building out their networks only to see the likes of Google take the lion's share of the Internet economy. Some believe history won't be repeated. The carriers are likely to get into the application game themselves or work with others. Industry observers note that they have access to user data like location, along with a large base of potential customers, making them valuable partners”
Carriers don't want to lose their touch point with the consumer
looks familiar.....
Historically the CSI has gone through the typical product cycle, from an unknown technology in the early 1960’s with a low level of investment and high risk, through the stages of adoption, growth and finally today, in the maturity stage, with unusually high investment, very low marginal returns on investments and high risk.
We have reached the current stage of maturity due to the lack of change and innovation.
To continue to do more of the same will only lead to the demise of modern container shipping which will be characterized by frequent business failures, leading to a fragmented and inefficient CSI with dire consequences for the global economy.
The current situation, with laid up fleets on the one hand, and the acceleration of operational co-operations on the other hand, may be the harbinger of the new paradigm, provided the right lessons are learnt and the box moving industry moves out of the current box.
In order to get out of the box we need to change our current thinking by analyzing the following issues:
A. The crisis.
B. The problem / challenge.
C. The building blocks.
D. Solution convergence.
E. The new paradigm.
A. THE CRISIS
The ongoing CSI crisis is not triggered by the shipping industry, but through global economic changes where demand for transport services not only goes up and down but also sideways when the demand supply topology changes geographically. As a recent example, the sanctions applied on Russia following the events in the Ukraine immediately changed the reefer transport topology.
The CSI, which at the best of times is extremely poor in terms of its ability to forecast future demands, is constantly caught unaware by global economic trends, some which are overt and some of which are unexpected. By the nature of its inherent structural rigidity, inefficiency, fragmentation and discrete operational mode, substantial surplus or short supply or are created in terms of vessels, containers and port facilities.
It should be evident by now that any forecast cannot be a simple extrapolation of the past. The American Consumer is the main driver of global container transport demand. Thus the basic industry axiom is:
No shopping – No shipping.
It is abundantly clear that the China port expansions and trade routes have reached their maximum distances, and thus any remaining growth can only be attributed to a number of factors rather than to pure economic growth. It is also evident that the current modus-operandi of the CSI includes substantial waste in terms of operational inefficiencies that are now being addressed by co-operative agreements, lay ups, delivery delays of new mega-tonnage and service adjustments.
To understand the reason for the industry inefficiencies we need to look at the following components of the CSI:
1. Parallel shipping services from identical origin ports to identical destination ports.
These services are offered by discrete separate carriers. The vessels of each carrier call the same ports in the planned parallel schedules thus performing sub-optimally from a vessel and port utilization aspect.
Vessels contain multi-port containers, port call durations are extended and vessels’ operating velocity is hampered to the extent that it may spend more time than needed in ports than at sea. A vessel’s operating velocity is the ratio between sea time and port time. Under the current operating environment it becomes necessary to stop start all the vessels in all ports, leading to an excess of vessels and sub optimized port asset utilization.
2. Discrete container stocks
Container inventories are separately managed by each CSI company. These discrete stocks are spread over the whole CSI network, on vessels, in depots, at customer sites and in the ports. Each stock is owned by each carrier separately and optimized within its own discrete network and by its own equipment management organizations. All the containers are owned or leased by the particular carrier. The container volumes are a function of the number of vessels, port topologies and customer / commercial behaviors.
3. Discrete vessel investment
Each carrier develops its own vessel investment strategy targeting similar markets in an effort to maximize market share. These duplicate efforts create substantial asset over investments even at the best of times. Oversupply leads to deterioration of freight rates and ludicrous freight wars in an effort to maintain a hold on the market. Most of the time rates are being eroded continuously on the main trade routes. Consequent to the optimistic market forecasts shipyards are bursting to the seams, vessel prices going through the roof and the bill paid by the carriers with no consequence to the users of the service.
4. Loss of market control
This is caused by the substantial dependence on large customers particularly forwarders. These forwarders do not share the investment risks and costs on the one hand but have managed to increase their customer base share to a substantial level of about 70 percent on the other hand. In market crisis situations, CSI assets are laid up on account of the carriers, while the forwarding industry, which is labor intensive, can lay up personnel without the carrying costs of the human resources that have been cut.
The forwarding industry has played a major role in the development of global supply chains, benefiting from the outsourcing strategy that has made manufacturing more efficient. For the shipping industry forwarders have contributed a substantial reduction in the cost of sale, providing wholesale type of benefits. Nevertheless the cost / risk benefit of these two parties is not shared equitably and this needs be rectified.
5. CSI organizational stagnation.
Most carriers are structured in very similar organizational topologies. The industry is extremely inbred with a small community of executives that have very long tenures in their own organization or may float between similar shipping organizations.
This is an opportunity and a threat.
The opportunity is present in the ability to create a smooth information flow between parties, often substantially enhanced by excellent social relationships developed over the years. The threat lies in the development of tunnel vision when out of the box ideas may be required to deal with out of the box situations. These solutions will require a total reorganization which will threaten the current power and authority structure. Of all the change inhibitors, the organizational and cultural barriers may be the most difficult.
B. CONTAINER SERVICE PRODUCT BUILDING BLOCKS
The building blocks are the basic components that comprise the container service product. It is extremely important to realize the nature of the product concept. Moving containers and managing vessel fleets are simply the production lines that create products. Container shipping is not a service industry, as many seem to think, but a manufacturing industry, with very physical production lines, product designs, raw materials and related production factors.
Following are the basic components of the industry:
1. Containers.
2. Container vessels.
3. Ports of origin and destination.
4. Customers.
5. Operational management.
6. Commercial management.
C. SOLUTION CONVERGENCE
The convergence is based on an attempt to achieve optimal application and management of all the components. The current usual vertical integration of these components in closed discrete operating structures leads to a suboptimal utilization particularly in an environment of highly distributed global implementation / manufacturing. The principle of the solution is to manage in an effective manner each component in an optimal manner by aggregating the required utilization globally, to minimize the unit costs of each production factor.
Following are the principles of the solution in summary:
1. Managing aggregate demands from origins to destinations.
2. Joint container stocks managed by joint operations entity.
3. Joint fleet operations management by a dedicated operations entity that “owns” the combined existing fleet of the participating carriers.
4. A separate and particular marketing and sales organization that will continue to be branded and differentiated by each carrier organization.
5. The sales organization will buy products from the joint operations company at the agreed cost price.
6. Container utilization costs are to be charged separately from the sea transport product cost, to avoid container misuse on the one hand, and to enable container utilization as required by the customers and to be paid for, on the other hand. In practical terms customers will pay a container leasing cost from date of out-gate for export to redelivery following import. This cost will include an imbalance factor.
7. An important factor in the implementation is the fleet allocation method.
Current fleets are allocated to preset rigid schedules with a set of port calls. Every vessel calls every port as long as the schedule is maintained. The proposal is to allocate vessels in an adaptable manner according to port pairs in order to fully utilize the vessels on the one hand and minimize port calls on the other hand. This will be enabled by the aggregate bookings in each port and allocation of the right vessel size from the vessel pool.
Obviously transit times will be shorter and vessel round trip velocity will be increased, providing maximum round trips, a minimum of port calls and optimal asset utilization. Port operations will be faster due to the homogeneous port mix on each vessel. From major origins to major destinations we can expect round trips with only two port calls-shuttle services.
D. THE NEW PARADIGM
1. The transition from a shipping company to a container product manufacturing company.
2. Improvement in service levels in terms of transit / reliability / cost.
3. Optimal allocation of production factors.
4. High level co-operation between asset owners for mutual benefit.
5. Focus on product development rather than operations.
6. Better port utilization due to higher homogeneous loading profiles with less vessel calls.
7. Lower slot costs by higher loading factors with shorter roundtrips.
8. Lower fuel consumption – improved environment.
9. Improved container inventory / vessel capacities ration due to aggregated inventories utilized by larger vessel fleets and wider port ranges with shorter roundtrips.
10. Improved customer satisfaction due to better products.
E. THE REGULATORY ENVIRONMENT
Obviously any implementation has to take account of the existing strict regulatory environment in which the shipping industry operates. At the end of the day it is recognized by the EC / FMC that operational cooperation and consortia helps to improve productivity, by rationalization and economies of scale in the application of production factors, thus enabling lower transport costs by the efficient carriers or groups of companies operating in consortia as the case may be.
F. SUMMARY
The current CSI situation and global economic crisis has opened up the minds of industry leaders to the benefits of closer co-operation. The purpose of this article is to suggest that substantial benefits can be derived from a transformation of the industry into a manufacturing type structure based on a much wider and enhanced co-operation.
The implementation can and should take place within the legal frameworks that regulate liner shipping. The industry should not return to old paradigms when the situation improves, but progress to a new paradigm based on the open mindset that has evolved with the current situation.
The current developments of joint services / consortia are steps in the right direction.
David Rosen has been in the container industry since the 1970’s as a member of the set up team of Zim Container Service and as co-founder and operations manager for Maersk Israel. He is currently CEO of IDILITI maritime consulting practice and lectures widely on shipping in corporate and academic programs.