Tag Archives: Maersk Line

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.

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.

Cooperation at Sea

Capitalists, in my experience, are often less than enthusiastic about competition. To be sure, they (and their speechwriters) know to praise the virtues of market forces. But the reality is that competition can be bad for business: all other things equal, it erodes profits, costs jobs, and drives firms to failure. It is always tempting to cooperate with the enemy.

How much cooperation to tolerate was one of the subjects of an unusual event today in Washington. The discussions at the first-ever joint meeting of shipping regulators from the United States, the European Union, and China were private, but it’s a good bet that a proposed collaboration among the world’s three largest container shipping lines was the major topic of conversation.

Between them, Maersk Line of Denmark, Swiss-based Mediterranean Shipping Company, and the French line CMA CGM control close to 40% of the world’s container shipping capacity. These companies have battled for market share for many years, to the benefit of freight shippers and consumers. But now, if the various governments agree, they would like to work together. They propose to create something called the P3 Network, through which the three companies would share space on up to 180 containerships sailing between East Asia and Europe, Europe and North America, and North America and East Asia. The companies would not share price information, and each would strike its own agreements with customers. But by working together, they could squeeze capacity out of the market, which might help prop up shipping rates.

The container shipping industry is awash in excess capacity, which is great for shippers but terrible for ship owners. A number of major carriers have been bringing very large vessels on line at a time when demand is growing slowly; the largest of these can carry more than 9,000 standard 40-foot containers. All this capacity has depressed rates and driven most ship lines into the red.

Given the economic importance of container shipping, cooperation among the three largest sip lines would be no small deal. Shippers could obviously face higher rates, but ports, stevedoring companies, railroads, and trucking companies might be even more severely affected. As part of their proposed agreement, Maersk, MSC, and CMA CGM would be able to consolidate the land side of their operations. This could mean that their vessels would stop serving some ports and expand at others. They would be able to bargain jointly with stevedores and land transportation companies, using their very large combined market share – the three companies jointly carry about 41% of container traffic between Europe and North America, for example – to demand lower prices. On the plus side, shippers might benefit from more frequent service between certain ports. Also, the three carriers may try to establish joint barge or feeder-ship services to move containers among U.S. ports, something none of them alone has enough traffic to do profitably.

As they weigh the P3 proposal, competition authorities and shipping regulators will be very much aware that it is not the only collaboration in the works. The six carriers in a competing group, the G6 Alliance, have shared vessels between Asia and the East Coast of North America since last May, and now they are seeking permission to cooperate on services between Asia and U.S. Pacific coast ports.  Meanwhile, several container lines are rumored to be seeking merger partners.

All of this is very much in line with the history of the container shipping industry. Since its earliest days, it’s been a treacherous business; each time rates rise, shipping lines order new vessels, overcapacity returns, and the most troubled companies exit. That’s the way capitalism is meant to work, but it’s a tough way to make a profit.