Analysis, trends, market movements, decision tools, globalization of transport, econometric models in logistics, transport, shipping and its industries
TRANSPORTCEO - 18/12/2018
Where do you see yourself in five years?

Carriers are starting to distinguish themselves with new corporate strategies.

It has been said that differentiation is impossible in the container shipping industry, more so in an age of large scale vessel sharing agreements when lines are all aboard the same ship, and that carriers can only really compete on price.
Even to long-time industry watchers such as Drewry it has often been hard to distinguish one carrier from another with few observable unique selling points aside from obvious regional affiliations and size. However, things may be about to change as there is growing evidence of a divergence in corporate strategies among carriers that could drastically alter the shape of the industry.

Global integrators
"We are building a company that is a global integrator of container logistics – a company very similar to UPS and FedEx; and I hope they will be considered peers of ours when we are done with this  transformation journey in three to five years; a network-based, asset-based global logistics company...", said Soren Skou, CEO of Maersk Line.

This strategy is most commonly associated with European carriers Maersk Line and CMA CGM, the latter last week agreeing to purchase the outstanding shares in CEVA Logistics. Companies that set off on this ambitious path have already been through the economies of scale revolution (that hasn't yielded sustained profitability) and now want to leverage their size by getting across more of the supply chain in a bid to claim more of the sales and profits. This strategy is being pursued either through acquisition, organic investment or by incorporating existing logistics entities into the main liner business, or a combination thereof.

It is not a new strategy as similar attempts were made in the last decade when a wave of consolidation swept the shipping and logistics industry in response to the rapid globalisation of supply chains and acceleration in worldwide trade, but none were overly successful. The challenges of integrating disparate entities with different business models and skills sets were too great. New technology offers hope that things might work out better this time around. Digitisation and automation of basic logistics transaction tasks have provided opportunities that did not previously exist.
Broadly speaking, we see three main types of strategy being presented by lines at the moment. They indicate that a company either wants to break free from its traditional confines of port to port services and expand its reach into other links in the supply chain, or consolidate its core sea product, or finally enhance its liner scale. Each approach has its own risks associated, but if the seekers of global supply chain integration are successful the future liner playing field will be far from level.

Risks: the size of the task involved and investment required to achieve it are huge. It will take expert management to navigate this new course and there is a danger of taking the eye off the ball for the core shipping business – although in the brave new world shipping would cease to be the core product, becoming just another part of the total service. Initially at least, shipping lines would be going into competition with their forwarder customers and terminal operator suppliers, some of which have similar ambitions of their own. This could be a source of conflict and potential lost business.

Ultimately, the aim is to get closer to the cargo owners as the single provider for all their transportation needs. It's not clear how appealing this will be and if shippers will baulk at the potentially restricted choice and dominance afforded to the new supply chain kings.

Core product focus
"Size is not the name of the game anymore, but customer orientation. It is obvious that customers expect more reliable supply chains, so our industry needs to change and invest more. At the same time, we know that people are prepared to pay for value. Going forward, delivering value to get the most attractive cargo on board is at the heart of our new Strategy 2023. To be number one for quality is the ultimate promise to our customers and a strong differentiator from our competitors", said Rolf Habben Jansen, CEO of Hapag-Lloyd.
German carrier Hapag-Lloyd unveiled its five-year plan on 21 November, putting network optimisation and revenue management at the forefront, alongside the "unrivalled levels of reliability and service quality" that it hopes to achieve.
The intention is clear. Hapag-Lloyd will not be following the likes of Maersk and CMA CGM deeper into the supply chain. Container shipping is what it does and it will do it better than the competition. However, this writer does question whether trying to be profitable and offering a good level of service can really be described as a strategy. It should be taken for granted. In our opinion, carriers that follow this lead will have essentially opted out of the big ship arms race (which would help address the industry's overcapacity) and are less likely to engage in M&A.
Risks: the upside here is that is if the more ambitious carriers crash and burn in their supply chain adventures, Hapag-Lloyd will be sitting pretty and won't be overly burdened by servicing debt. The downside risk is that if the global integrators are successful they will look second-rate and vulnerable to takeover. Moreover, the emphasis on the rather nebulous term "service quality" assumes that other carriers, irrespective of strategy, won't also up their game. Admittedly late to the digital party, virtually all major carriers are now investing heavily in IT solutions to improve the customer experience. Additionally, there is nothing to stop the global integrators from offering "premium" services, something CMA CGM is already trailing via its APL subsidiary's "Eagle Express" concept that offers shippers guaranteed space and faster transit times. History suggests that demand for "high quality" services is limited and certainly not sufficient to extend to an entire global network.
Scale economies
This approach has already been fulfilled by the global integrators and most other major carriers. However, there are still some carriers that are playing catch up and haven't heeded the warnings from ordering mega ships, or don't consider there to be any danger.

The obvious case is Korean shipping line HMM, which last week doubled down on its intention to secure a bigger slice of the containership market. The company recently concluded a ship order for 12 x 23,000 teu and eight 15,000 teu vessels and reaffirmed its desire to grow its fleet to 1 million teu, which is more than double its current quota.
We have previously said on these pages that HMM's ambitions are incompatible with market stability, but HMM is adamant that its growth path is a realistic target. "We see 7% market share in East-West trades by 2021 as an achievable goal for HMM with full confidence. Therefore, we believe the apprehension that HMM might have difficulties in filling up the mega containerships is unwarranted," the company said in a statement.
We suspect that the list of carriers solely focused on growing rapidly is small; limited to companies with state backing or ties to shipyards in need of assistance. While lines will always be looking for a cost advantage, the rest of the market appears to have moved on from this blinkered lone strategy.
Risks: buying more Ultra Large Container Vessels when the market can barely accommodate what is already on the water will delay the industry in obtaining balance between supply and demand that could sustain greater profitability. There is little point having mega-ships if having them means freights rates are uneconomic.

Drewry's view
It remains to be seen which of these strategies is the most effective, but the biggest risks are being taken by the global integrators who could be about to leave the more cautious competition behind. If they are successful in achieving their aims the competitive landscape will change completely in the liner world and simply being good at shipping won't cut it any longer. It will be about how wide your reach is.

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