Category Archives: Shipping

Burdened by Bigness

Suppose your company invested billions of dollars in new equipment. And suppose now, very shortly after taking delivery, you’ve discovered that your investment was misguided. The machines you’ve bought are threatening to destroy your business. What would you do?

That, in essence, was the subject of a conference I spoke at in October at the Copenhagen Business School. Shipping is a very, very big business in Denmark, and of course Maersk Line, the world’s largest container shipping company, is headquartered on the Copenhagen waterfront. Maersk itself built the first of the megaships — ships that carry as much cargo as 8,000 or 10,000 trucks — back in 2006, when it launched what it called its E class (hence such clever ship names as Emma Maersk and Evelyn Maersk). There are now roughly 150 vessels this big or larger on the seas. More are on the way: the South Korean government just agreed to finance ships the size of 12,000 trucks. This is not something the world needs.

I’ve been spending some time of late studying how the megaships came to be, and I’m convinced that they are a colossal error. The ship lines that commissioned them, by and large, were transfixed by the idea of economies of scale: if you can actually fill one of these giant vessels, they can carry a single container for about 30 percent less than a ship half the size. But filling them has been a persistent challenge. Moreover, the people obsessed with achieving economies of scale at sea largely ignored the fact that these behemoths would create diseconomies of scale on land. With fewer ships calling but each ship discharging and loading many more boxes, ships spend more time in port, the ports are half-buried beneath mountains of containers, and service for the manufacturers and retailers who ship goods in containers has become much less reliable. These days, when a containership arrives in port, it’s behind schedule nearly half the time, and when the goods will reach their final destinations is anyone’s guess.

The ship lines have been praying that international trade will grow faster, as it did before 2009, and fill up all those half-empty ships. Some thoughtful people, including the experts who monitor shipping for the United Nations Conference on Trade and Development (UNCTAD), think this will happen. My own view is that it’s highly unlikely. The world economy itself is likely to grow more slowly than it has in recent decades; China’s years of 10% annual growth are over. Adding to that, the gradual shift of manufacturing closer to end markets and the desire of manufacturers and retailers to minimize risks from malfunctioning supply chains will suppress demand for container shipping. Managers of ship lines, in my view, need to think very hard about where they’re going to make money, because they are probably not going to make much from operating ships.

Many of the people I met in Copenhagen, including the authors of a new McKinsey study envisioning the shipping industry of 2043, seemed to agree with my analysis. There was much discussion about the digital future. What that seems to mean is that ship lines might figure out how to use information technology to provide higher-value services to their customers. In other words, they might become logistics managers, coordinating the efficient flow of goods around the world for individual customers, rather than simply selling cheap transportation. It’s an alluring vision. Many start-up companies are now pursuing similar strategies, without the burden of owning all those money-losing ships. Ocean carriers have to figure out how to turn their underutilized floating assets into a competitive advantage even as they transform themselves into technology companies — and given the fairly bleak profit outlook for the shipping industry, some of them may not have much time to get it right.

Thin Ice

The news that Maersk, the container shipping giant, is sailing a containership from Vladivostok to St. Petersburg along the northern coast of Russia has drawn new attention to the consequences of climate change in the Arctic. While the warming of northern climes is sadly real, it is unlikely to bring about a major change in container shipping.

For ship owners and their customers, the attractions of the Northern Sea route are obvious. By sailing north rather than south from Shanghai, Busan, or Yokohama, a ship bound for Europe can shave several thousand kilometers off the trip, saving a couple weeks of travel time, a great deal of fuel, and the need to pay a steep toll to pass through the Suez Canal. A small number of commercial ships have traveled this route over the past couple years, carrying commodities, heavy equipment, and other cargoes. Some ports in northern Europe have begun to dream of becoming centers for exporting to Asia.

The Northern Sea route may well develop into a useful artery for bulk ships and other vessels on one-off voyages, but it seems quite unlikely to become a highway for containerships. First and foremost, ship lines employ their containerships in what is called “liner service,” meaning that they offer scheduled port calls at regular intervals. Between Asia and Europe, a carrier might create a “string,” a route calling at eight or ten ports from, say, Busan to Antwerp and back again, with enough identical vessels assigned to the string that it can guarantee an Antwerp-bound ship calling at Dubai every Tuesday and a Busan-bound ship dropping by Algeciras on Thursdays. The Northern Sea route is poorly suited to this sort of arrangement because, for the foreseeable future, it is likely to be navigable only a few months each year. If a ship line serves the route between June and September, what will it do with those ships the rest of the year? This is no small question: vessels are the most expensive part of running a container shipping operation, and ship lines that can’t keep their vessels operating near capacity tend not to survive.

A second challenge to the success of the Northern Sea route is that its most protected, least ice-prone areas, close to the Russian coast, have shallow water. This means that shipping companies would have to use vessels that are about a fifth the size of the biggest containerships in use between Europe and Asia today. The cost of providing a “slot” for a single container is much higher aboard a small ship than aboard a big one, so ship lines won’t be eager to employ such small vessels on lengthy routes. They could use larger ships by sailing farther from the coast, but that route is blocked by ice for a greater portion of the year and is more likely to require the use of icebreakers.

A third challenge is that there are no great population centers en route. Ship lines select the ports in each string carefully, estimating the average number of containers they will take on here and put off there, in an effort to keep their vessels as full as possible. There may not be enough cargo from Antwerp to Busan to justify running a ship that makes no stops in between.

As a recent study by economists at the Copenhagen Business School points out, my hypothetical trip between Busan and Antwerp covers 7,248 nautical miles via the Northern Sea route, 33 percent less than a voyage between the same points through the Suez Canal. In theory, there is money to be saved, even after extra costs for having icebreaker and emergency equipment on standby. But given the practicalities of container shipping, it’s going to be difficult for the Northern Sea route to live up to the headlines.

The Language of Globalization

I speak German, or at least I used to. I believe — I hope — that the decline of my fluency isn’t a sign of advancing senility. Rather, I think, it’s an artifact of globalization.

This has been on my mind since my recent appearance in a series of excellent programs about containerization broadcast by Austrian Radio. The host, Anna Masoner, speaks English better than I do; I offered to be interviewed in German, but she interviewed me in English and then arranged for a voiceover translation. Once I listened to the programs, I was very glad she had done it that way.

It’s not just that my German is more or less German German, a far cry from the language spoken in Austria. The more serious problem with my speech is that I use German words that native speakers have ditched for English alternatives. As a result, I feel a bit like a character out of Shakespeare walking onto a twenty-first-century stage. My language is fine. It’s just that people don’t talk that way any more.

It seems that every business in Germany, Switzerland, and Austria now has a Marketing Abteilung; words like “Vermarktung” and “Vertrieb” seem to have fallen into disuse. I know of one company that advertises its interest in making “Investments in Wirtschaft und Logistik,” and another that deals with investors through its “Investor Relations Abteilung.” If a firm wants to start selling abroad, it opens up an Import-Export Geschäft; “Einfuhr-Ausfuhr” apparently is no longer used. When employees want to talk about how the business is doing, they have “ein Meeting.” Younger people might be more inclined to have a “Meetup.” Whether that Meetup is masculine, feminine, or neuter I have not the slightest idea.

English, of course, is the language of globalization, so I can understand all this anglicized German when I hear it or read it. But it’s not so easy to speak it correctly if you don’t spend a great deal of time in German-speaking Europe, soaking up the latest linguistic advances. In effect, globalization has devalued my language skills. I’m glad that when ich wurde interviewt by Ms. Masoner, we spoke English.

Setting the Standard

The Australian National Maritime Museum, in Sydney, has mounted an unusual exhibition about the history and consequences of the shipping container, a subject near and dear to my heart. Appropriately enough, the exhibition is housed in containers spread around the museum’s grounds.

When the organizers asked me to write a post for the museum’s blog, I took the opportunity to explain why standardization has been so important to the growth of container shipping — and asked readers to imagine how tangled world trade might be if the same basic 40-foot container was not in use everywhere. The first containers used aboard a ship in Australia were 16 feet 8 inches long. No ship in any other country has ever carried boxes of that size, and you can imagine how difficult it would be for Australia to engage in international trade if its containers couldn’t easily be used abroad. The post is here. Many thanks to the museum’s staff for coming up with some great pictures and drawings to illustrate it.

Information and Competition

It seems that competition regulators at the European Union are looking into whether “Big Data” is a potential threat to competition. The concern, apparently, is that a company may be able to use a trove of proprietary data about consumers in ways that foreclose competition — and that the assets changing hands in a merger could include enough data to give the merged firm an insurmountable advantage over would-be competitors.

There’s no doubt that control over data can affect competition. But it’s not so obvious how to ensure that consumers benefit.

Consider the logistics business. Every containership line publishes a schedule with the rate for moving one container from, say, Shanghai to Los Angeles. In practice, though, almost all ocean freight moves under confidential contracts between shippers and carriers. These contracts may be filled with contingencies providing for bonuses and penalties if the parties exceed or fail to meet their respective commitments. A large retailer, manufacturer, or freight forwarder has many such contracts in force at any one time, and it is always negotiating new ones. This means that big shippers have lots of up-to-date information about current shipping rates.

Now, imagine a small shipper, a modest retail chain rather than a Walmart or a Carrefour. Because of its size, this firm has only a handful of contracts with ship lines, and it may go months without negotiating a new one. It therefore lacks the current rate information its bigger competitors possess, so it will have a tougher time bargaining for the best rates. It may use a freight forwarder to get better rates, but then must pay the forwarder for its trouble. Either way, the smaller company’s information deficit will force it to pay more to move its goods than its larger competitors do.

This information disadvantage is one reason smaller retailers and manufacturers have been having such a difficult time. Their supply chains are comparatively costly to operate, on a per-container basis, and their higher costs make it hard for them to match their competitors’ prices. I suspect this is one reason we’ve been seeing increased concentration in so many industries. The big benefit from their control of big data about shipping costs; the small are harmed by their lack of information.

Is there a solution to this problem? Of course there is: it could be made mandatory to publicly disclose information about shipping costs. We actually tried such a policy in the United States in the early days of railroad deregulation. What happened? Railroads were reluctant to offer discounts to individual shippers when they knew that publicity would lead other shippers to demand similar discounts. Little freight moved under contract and rates remained relatively high. Only after confidential agreements were permitted did railroads’ freight rates fall and their service improve.

I think there’s a lesson here. Control of information can be anti-competitive, no question. But public disclosure of information can be anti-competitive as well, potentially raising costs for consumers. The EU will face a challenge getting the balance right.

 

Uncomfortable Questions About Our Ports

Sometimes people ask questions to which they really don’t want the answers–especially when the answers might be inconvenient. A new government report that purports to look at how U.S. container ports are performing is a good example.

Container shipping, as I document in my book The Box, was an American invention. Newark and Houston were the first ports anywhere in the world to have terminals designed specifically to handle containers, and container terminals were developed in ports such as Oakland and Baltimore years before containerships reached Europe and Asia. But U.S. ports have long been laggards when it comes to efficiency. The world’s most productive ports, by most measures, are all in Asia.  No U.S. container port comes close.

In 2015, Congress directed the Department of Transportation to prepare an annual report on port capacity and throughput and to “collect port performance measures.” Unfortunately, the department’s first annual report on port performance, released in mid-January, carefully avoids saying anything about container ports’ performance. It charts the number of acres covered by each port’s container terminals, the number of cranes, the number of linear feet of berth, and the number of containers passing through. But nothing in the report allows a reader to judge whether, say, the Port of New York and New Jersey is as efficient as the Port of Savannah. The average number of container moves per hour for each vessel call; the number of containers handled per acre of terminal area; the average time an incoming container spends in the storage yard before being removed for delivery; the number of dock workers per million containers; the number of containers actually handled as a percentage of theoretical capacity: all of these statistics would shed light on ports’ performance. None of them appears in the report.

Why might that be? Let me hazard a guess. True performance measures might reveal that many U.S. container ports have built far more capacity than they need, that poor management and union rules cause some ports to take far longer to handle a large ship than other ports, and that some ports use workers and storage space much less efficiently than others. They might also show that most U.S. container terminals make far less use of automation than the best-run terminals in other countries. It doesn’t take much imagination to figure out who might not want such measures of port performance to be highlighted. If they were, the public might start asking uncomfortable questions

What Happens After the Container Shipping Crisis?

Until 1978, dozens of airlines flew the U.S. skies. Then, with the passage of the Airline Deregulation Act, competition increased and profits became scarce. Decades of consolidation followed, as Allegheny, Eastern, Frontier, Ozark, Pan Am, and many other venerable names were merged out of existence or went bust. When the turbulence finally subsided, four giant carriers—American, Delta, Southwest, and United—controlled 70 percent of U.S. domestic passenger traffic and, through agreements with foreign carriers to share services, dominated international routes as well. Such measures have enabled the airline industry to rake in profits as never before.

Something similar is now going on in the world of container shipping. Excess capacity and slow-growing demand are forcing down the price of shipping, driving companies deeply into the red and bringing a wave of bankruptcies, mergers, and joint ventures. The August bankruptcy of South Korea’s Hanjin Shipping, the world’s seventh-largest container carrier, and the announcement, in September, of the restructuring of A.P. Moeller-Maersk, by far the world’s largest, are signs of a consolidation process that still has far to go. And although the industry is likely to remain troubled in the short term, in the long term, today’s troubles will lead to less competition among those carriers adept enough to survive. That in turn will mean higher rates for shippers, increasing the cost of moving goods around the world.

I’ve recently written an article laying out why I think this will occur. You can find the full text over at ForeignAffairs.com.

Boxed In

There may be few business decisions more treacherous than buying a new containership. These aren’t purchased off the shelf; a ship line must make educated guesses about size, engine characteristics, propellers, and dozens of other factors—and then hope that its choices prove wise over a useful life of three decades or more. Once constant since the start of container shipping 60 years ago is that ship lines that guess wrong about which vessels to buy end up dead.

One of the questions shipping executives now ask their crystal balls is, “How fast should our ships go?” This was not a great concern in 2008, when the high price of oil and a slump in the amount of cargo first led ship lines to slow down their vessels, as it was assumed that speeds would be raised once business returned to normal. Since then, though, most of the dozens of new containerships that have come on line have been built to steam at 18 or 19 knots (roughly 33-35 kilometers per hour) rather than 24. This slashes fuel consumption and reduces emissions. It also sops up the excess capacity that ship lines have created by ordering mammoth new vessels, since more ships are required to provide the same frequency of service on each route.

Ship lines may love slow steaming and ships that carry 10,000 containers apiece, but their customers don’t. Megaships can take longer to load and unload than smaller vessels, and slow steaming means that it takes three to five more days to move a container across the Pacific than it did a decade ago. All of this increases longer transit times, which means that shippers must hold on to their goods for a longer period before selling them, raising costs. For companies moving time-sensitive products, such as apparel, longer transit times also increase the risk of losing sales when a product becomes “hot” and consumers are hungry for more.

Slow steaming looked brilliant when oil sold for more than $100 per barrel, as it did in 2008 and again from 2010 to 2014. Megaships seemed attractive when the demand on key containership routes was growing six or seven percent per year. With oil below $40 and the world economy heading into what looks like a prolonged period of slow growth, neither circumstance applies today. Which leads to the question of whether ship lines will again pay the price for having guessed wrong.

Chain Stores in Chains

Chain stores have a lot of advantages over mom and pop. By purchasing in enormous quantities, they can obtain volume discounts from manufacturers. By signing contracts to ship thousands of containers, they pay far less for freight than a retailer that ships only a handful. By maintaining strong credit ratings, they can lease better locations, at lower rents, than smaller competitors. All of this can help the chains keep customers coming through the door.

Yet chains face some disadvantages, too. Sheer size is foremost among them. When a chain does something wrong–which is to say, something that fails to satisfy customers–the problem can be very hard to fix, because it affects hundreds or even thousands of stores and may have irritated millions of shoppers.

There have been many recent examples of this challenge. Tesco, which only a few years ago fancied itself a challenger to Walmart for global retail leadership, still can’t figure out how to respond to British shoppers’ unexpected attraction to discount grocery stores. Wet Seal, which sells clothes to teenage girls, couldn’t cope with the fact that shopping malls are out of fashion; it has filed for bankruptcy and closed 338 stores. Target Stores, which marched noisily into Canada two years ago, is abruptly leaving with the admission that it failed to please Canadian shoppers. And then there is Walmart itself, which is struggling with U.S. consumers’ newfound preference for shopping close to home rather than in gigantic outlets miles away–a change of taste that presents an obvious problem for a company that has 606 million square feet of space tied up in “supercenters” across the United States.

Last week, at the annual meeting of the Transportation Research Board, a Walmart distribution executive, Douglas Estrada, provided some interesting color about how Walmart is trying to adjust to this trend. The company is opening smaller supercenters to fit in reviving urban neighborhoods, he said, but the company’s growth in the United States is likely to involve opening traditional grocery stores, small grocery stores with limited stock, and even convenience stores with gas pumps out front. Kiosks, now being tested, may compete with e-commerce, allowing a shopper to order anything available in a nearby supercenter and have it delivered to the small neighborhood store the same day.

This sort of innovation is a nightmare for Walmart’s distribution department. Walmart has more than 170 distribution centers across the United States. They are extraordinarily efficient at what they are designed to do: take in containers by the trainload, sort the contents, and pack merchandise into the 53-foot trucks that deliver full truckloads to each supercenter three or four times a day. But they are far less efficient when it comes to loading 28-foot trucks to deliver to urban grocery stores, and even less so in loading 16-foot trucks to replenish inventory at convenience stores. Walmart is trying to cope with this challenge, Mr. Estrada said, by using its supercenters for the purpose. The small-format stores will receive deliveries from a distribution center only once or twice a week; the rest of the time, they will be resupplied by vans coming from the nearest supercenter, often with merchandise picked directly from the supercenter’s shelves.

This means, of course, that goods headed for a smaller store will be handled more than goods going to a supercenter. Can Walmart do this and still offer the low prices its customers expect? Or will the small stores come to be treated as an inferior sort of Walmart, with higher prices and less selection than the real thing? Its distribution costs may determine whether the company succeeds in loosening the chains that bind its chains.

If It Can’t Go On Forever, It Will Stop

The American economist Herb Stein, whom I had the privilege of meeting a few times before his death in 1999, is famed for the aphorism, “If something can’t go on forever, it will stop.” I found myself thinking of him often a few weeks ago during my first trip to Dubai.

Dubai has the feel of a boomtown. The airport, of course, is one of the world’s largest — and yet not large enough, for a second airport, to be even larger, is under development a few miles away. The container port, also among the world’s largest, has just opened its third terminal, and plans for terminals four, five, six, and seven are on the drawing board. Forests of skyscrapers would leave Manhattan in the shade. Dubai Mall, reachable by riding no fewer than seven automated sidewalks from a station on Dubai’s automated metro, boasts Bloomingdale’s, Galleries Lafayette, Marks & Spencer, a two-story walk-through aquarium, an ice rink, a dozen stores selling high-end wristwatches and two dozen selling diamonds, and even a bagel shop.

And the boom is isn’t over. Construction cranes are visible in every direction. An entirely new freight railroad linking the United Arab Emirates and Saudi Arabia is under construction. When one of my interviews fell through and I decided to go to the beach, I found that much of the beach was closed for refurbishment. I mean that literally: the municipal government fenced off not just a few hundred yards, but five or six miles, effectively rebuilding the emirate’s entire beachfront in one go.

It’s all extraordinarily impressive. And it’s successful because Dubai has positioned itself as a place that works in the midst of a lot of countries — South Asia on one side, Africa on the other — that don’t work so well. If India were ever to have smoothly functioning infrastructure and Tanzania to develop an honest and efficient customs service, Dubai might be a much less busy place.

Dubai is also a relentlessly optimistic place, at least at the official level. Doubts and doubters are not encouraged. Yet one can’t help but wonder whether a shakeout is coming in the oasis business. A few miles to the northeast, Dubai’s sister emirate, Sharjah, has its own international airport, its own container port, its own dreams of expansion. A few miles to the southwest, Abu Dhabi has much the same. All of this is happening at a time when the growth of international container trade is slowing and the price of oil spiraling down. Since many of the big investments are being undertaken by entities that don’t publish reliable financial statements, it’s hard to know which parts of Dubai’s investment boom are paying off. But Herb Stein’s words offer a useful caution: the boom can’t go on forever, and at some point it will stop.