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That year was 2009, one in which every carrier posted massive losses due to the repercussions of the global economic downturn and even OOCL couldn’t escape the vortex.
But the Hong Kong-based carrier quickly bounced back in 2010, making an operating profit of nearly $900 million to more than wipe away its 2009 losses. That was no easy feat, and something only four publicly traded carriers achieved over the course of those two years, according to American Shipper research.
A more instructive period to examine is profitability from 2009 to 2014—i.e. the losses in 2009 weighed against the five subsequent years. In that period, only industry leader Maersk Line was a more profitable carrier than OOCL, despite the fact that OOCL operates a substantially smaller fleet.
And yet, OOIL in early July agreed to sell its business for $6.3 billion to COSCO Shipping, the latest in a series of consolidations that has shaken the shipping industry to its core.
OOCL’s acquisition is particularly noteworthy because the industry holds the firm in high regard for its ability to perform well financially, even in down markets. In most industries, such a company wouldn’t feel compelled to sell. In most industries, OOIL might even be the one doing the acquiring.
But not in the liner shipping industry. COSCO, the acquirer, is a state-backed entity that lost more than $2 billion in the 2009-2014 period in which OOCL made $1.2 billion. COSCO was profitable every year in the 2000s prior to the downturn, but always at a level below that of OOCL.
Unnatural Selection. All this begs the question: how could a company that has consistently struggled to make money afford to purchase a profitable one?
The answer, of course, is that normal fundamentals aren’t at play in the liner shipping industry, where governments, sovereign wealth funds, and patriotic investors play oversized roles in the success or failure of any specific line.
In the last year alone, the number of global carriers has shrunk substantially, primarily due to mergers and acquisitions, as well as one highly publicized bankruptcy. CMA CGM has acquired APL, Maersk bought Hamburg Süd, Hapag-Lloyd has merged with United Arab Shipping Co. (UASC), Hanjin Shipping went belly up, and MOL, NYK Line and “K” Line announced plans to combine their container operations.
All of those events, with the possible exception of the Maersk-Hamburg Süd tie-up, are tinged by government or patriotic investor involvement. CMA CGM and Hapag-Lloyd both navigated the treacherous period after 2009 with the help of such investments. The merger of Japan’s “Big 3” carriers has long been suggested by analysts, and one can’t help but believe the Japanese government played a part in the decision. And Hanjin’s demise was due in large part to an unwillingness from Korea’s commercial banking sector to continue to underwrite losses.
And that list now includes COSCO’s acquisition of OOCL. Reports on the ground in China suggest that the deal was not necessarily welcomed by OOIL’s primary owners, the Tung family, but was pushed through by Beijing.
This particular deal begs another, perhaps more important question: is the liner shipping industry actually set up to make money anymore?
OOCL’s forced hand can largely be traced to decisions that were out of its control. While the company tried to focus on profits, it eventually got swallowed up by two factors: the industry’s drive to build bigger ships, and a willingness on the part of investors to subsidize loss-making businesses.
For a mid-sized carrier like OOCL, this was slow asphyxiation. It was too much to overcome the power of competitors building scale on spec with financial backing that was in no way tied to performance.
That power is precisely what allowed a bigger company to buy a better performing one.
To be clear, not all of the historic consolidation that has occurred the past two years matches this template. But even so, the dynamics of the industry have shifted considerably, and it’s unclear whether those same carriers that struggled to operate profitably when forced to compete with better performing mid-sized carriers will suddenly figure out how to do so with less competition.
That’s always been the unspoken alternative outcome to industry consolidation. Whereas most have postulated that a reduction in players would create stronger pricing power, the flipside of that argument is that not all of the players that remain have necessarily survived on commercial merit.
Profit Prescriptions. So with this period of consolidation as epilogue, American Shipper turned to a range of thinkers in the industry with a simple question: what advice would you give carriers to improve their profitability?
The panel included shippers, analysts, consultants and software providers. None are currently employed at liner carriers, but nearly all of them drew on the last decade or so as an example of what not to do.
“If you want to stop being treated like a commodity, then stop acting like one,” advised Jack Oney, principal at Oney Consulting and a former procurement and logistics executive with Proctor & Gamble.
“If you want to stop being treated like a commodity, then stop acting like one. Stop showing up to [request for proposal] negotiations only prepared to talk price. Instead, educate the buyer on the markets, logistics and best-in-class practices.” Jack Oney, principal, Oney ConsultingHe suggested carriers think in a less adversarial way about their relationship with shippers and instead seek to become trusted advisors.
“Stop showing up to [request for proposal] negotiations only prepared to talk price,” Oney said. “They need to educate the buyer on the markets, logistics and best-in-class practices. They need to offer more elite and specialty services for VIP clients. They already see that many buyers move roles every three to five years. The carriers are the continuity and experts. They should educate and build trust with the buyer to help them look good in their own job.”
Lars Jensen, chief executive officer and partner at SeaIntelligence Consulting, said carriers need to focus on pricing their product practically.
“Carriers need partly to redefine how they design and price their products, leveraging yield management tools other industries have used for decades,” Jensen said.
He also urged carriers to “phase in enforceable contracts which neither party can renege on, but which also contain penalties for both shippers and carriers in case either party does not deliver as agreed.”
Ryan Peterson, chief executive officer of the freight forwarder Flexport, had a simple message for carriers.
“Optimize for user experience,” he said. “Ships exist to serve customers, not the other way around.”
One shipper suggested carriers focus on basic contract terms and strategic partnerships, just in a more consistent way.
“Please identify key strategic partners and enter into a one- or two-year contract guaranteeing space for those customers in exchange for a reasonably competitive price,” said Arnold Kamler, CEO at bicycle manufacturer Kent International. “The pricing should be based upon real cost factors and can fluctuate each month due to the real cost of fuel and other expenses. I, for one, am willing to pay above the crazy price level to know that I do not need to worry about my supply chain being interrupted by lack of space in peak season.
“Please also stop trying to squeeze extra money during short-term shortages, and in return, we will reach our monthly volume commitments,” he added.
Smarts Over Scale. Many of the people American Shipper spoke to are either involved in selling technology solutions to the shipping industry or at the very least are proponents of expanding its use.
“Technology plays a significant role in creating better profitability,” said Cory Margand, CEO of Simpliship, a platform for shippers to secure freight forwarding services, and a former logistics executive with Adidas. “It’s really about the basics though, which carriers and shippers have yet to figure out. For example, contracts are completely broken. The way it’s set up is enabling a zero-sum game outcome every single year.
“Technology plays a significant role in creating better profitability, but it’s really about the basics, which carriers and shippers have yet to figure out. Contracts are completely broken. The way it’s set up is enabling a zero-sum game outcome every single year.” Cory Margand, CEO, Simpliship
“But every year we go through the same broken process. And I’m pretty sure the solution isn’t to enforce them,” he added. “Freight procurement in general is broken and needs to be fixed prior to addressing the rest of the flow. The large amounts of data captured in a tech solution can be used to optimize both the shipper’s procurement efforts but also the carrier’s ability to execute, such as equipment allocation.”
Adam Compain, CEO of the predictive analytics technology provider ClearMetal, agreed that asset allocation is key. Compain initially set out to help ocean carriers better utilize their assets, from vessels to containers to yard space. He also warned carriers not to obsess over scale as a means to profitability.
“Look at your assets not as physical assets but digital assets because the future of the supply chain is about data intelligence, not scale,” he said. “Pay attention to the data your assets create, use industry-tailored machine learning to cleanly structure and [normalize] that data, and use predictive analytics to make smarter decisions that differentiate your service to shippers. In other words, use software, not metal. Be smarter, not bigger.”
Compain said, as an example, carriers could use an AI-based data platform to ingest historical and real-time booking data to accurately predict shipper and forwarder fall-down. That would yield increased vessel utilization, better customer service, and dynamic pricing capabilities. Aligned with predictive technology, carriers could theoretically reduce repositioning costs and increase container availability, both of which would have clear positive impacts on margin.
“There’s a wide range of initiatives and efforts that will potentially improve their profitability,” said Patrik Berglund, CEO of the ocean rate benchmarking platform Xeneta. “Dynamic pricing, improved capacity/demand balance using data analytics, exchange-to-exchange focus to capture market shares from freight forwarders, various integrations or IT systems that automate work flows or make them more streamlined, operational efficiency like cost cutting and optimizing, continued consolidation, moving away from unenforceable contracts to index-regulated contracts.”
Berglund noted that he already sees carriers and NVOs working on many of these initiatives.
Digital Divide. To their credit, carriers have finally started to embrace digital imperatives, rather than run from them. Of course, not all carriers are embracing them equally.
INTTRA, the neutral ocean freight e-commerce platform, has tried over the years to increase the level of digitization and standardization of processes among carriers to reduce inefficiency and cost.
“In the short term, digitization and optimization of operational processes will reduce costs and help to accumulate important data for further innovation,” said INTTRA President and Chief Operating Officer Inna Kuznetsova. “As the digital divide between carriers grows, we see a lot of larger companies already moving into this direction. Yet many small carriers are only starting digitizing such processes as booking.
“However, the variety of optimization tools available today opens room for positive changes in even the most advanced operations—from new ways of repositioning empties to applying market data analytics to create a more dynamic approach to pricing. In the longer term, more carriers will be able to move from pilots to full implementations and achieve revenue growth with the help of digitization in addition to cost reductions. This may include digital sales channels, dynamic pricing and cargo mix optimization.”
One of the biggest recent proponents of dynamic pricing has been Zvi Schreiber, CEO of the freight rate marketplace and rate management software provider Freightos. Unsurprisingly, Schreiber sees the adoption of transparent pricing as key to unlocking latent revenue and profit opportunities for carriers.
“Carriers should embrace dynamic, transparent pricing and online sales,” he said. “Not only is the move online inevitable, as it has been in other industries, but online sales have actually been beneficial for passenger airlines, for example, which have increased yields and reduced cost of sale. Ocean carriers can benefit in the same way.”
Similarly, Graham Parker, CEO of Kontainers, a digital freight forwarding platform, said carriers can use current technology to make headway with a category of shippers they have largely forsaken as too expensive from a cost-of-sales and customer service perspective.
“The carriers should use the renaissance of technology in the industry happening right now to re-engage directly with transactional BCOs,” he said. “Over the past 20 years carriers have effectively outsourced their sales function to freight forwarders, except for large BCOs. Freight forwarders do not add any value to transactional cargo movements where a shipment just has to move point A to B. They do add value for complex movements or movements with supply chain requirements baked in.
“Transactional movements are the majority of ocean bookings,” Parker explained. “Carriers can use the wave of tech hitting the industry as a way to take back control of transactional BCO’s over the next three to five years. This would have a dramatic impact on their bottom line. First, it would increase their margins with higher direct rates. Secondly, they could transact digitally and cut their current operational overhead. Third, they could cultivate the relationship by using the technology to upsell more digital solutions.”
Process Automation. Another budding technology provider executive said that even with consolidation, it will be hard for carriers to build pricing power and product tiers. Instead, their focus should be on further cost reduction through automation of processes.
“Unlike airlines, which can convert cabins to increase high yielding business class and first class capacity, or can buy larger aircraft with bigger premium class configurations, the steamship lines just can’t upsell space on a vessel, except in those times when demand is strong and even that is not sustainable,” said Fauad Shariff, CEO of CoLoadX, a marketplace that connects forwarders and neutral non-vessel-operating common carriers.
“In the absence of such technology, the only other path to increased profitability for liners is through continued digitization of their existing business processes,” he said. “Essentially, liners need to accept the commoditization of their business model and attack fixed costs, rather than move up the value chain with service offerings that their existing customers already provide.”
Shariff also said carriers should consider investing alongside governments and shipbuilders to create vessels that run on renewable energy and the supporting facilities.
Matt Tillman, CEO of the global transportation management software startup Haven, had a list of priorities on which carriers should focus based on what he called “the two primary inputs into owning and operating a carrier: the cost of capital to purchase or charter the assets and the cost of labor associated with utilizing and maintaining the assets.”
The first priority, Tillman said, should be to renegotiate the cost of capital.
“In order to negotiate better rates with lenders—public or private—one must be able to tell a growth and/or stability story,” he said. “Most carriers receive annual commitments from brokers (freight forwarders), which enables the vendors to see a future in which they recoup their costs and make money. Otherwise, banks end up owning ships, and it’s not the business they’re best suited to.”
The second priority? Reduce the cost of labor.
“Laying off workers and closing services to increase profits doesn’t exactly tell the market a story of growth and, as such, affects your cost of capital. Assuming that service quality, frequency, and volume remain constant, you need to increase the efficacy—i.e. the cost per ‘unit of economics,’ also known as a TEU—of your labor force.”
Tillman said the logistics industry does a great job of using standard operating procedures (SOPs) around labor.
“Nearly every carrier [and forwarder and NVO] is operating roughly the same SOP, which is why it’s so easy to switch jobs in this industry,” he said. “Once a carrier uses SOPs, and they all do, they can start to move jobs from high-cost areas to low-cost areas. This isn’t just done once, as it’s often the case a region you move to becomes expensive over time—i.e. China, Singapore, etc.”
The final part of the cost of labor input is technology.
“In the ‘80s, most of the major carriers added mainframe-based systems to log customer information, which reduced the number of faxes and other asynchronous forms of communication,” said Tillman. “This meant that all offices, no matter how remote, had in theory the same information as HQ and even the ships themselves. In the ‘90s and early 2000s, they added systems for communicating and coordinating the booking and release of various pieces of documentation to ensure proper clearing. Each of these systems reduced the amount of hours of human labor per shipment, and as such, increased profitably for a short time.”
But technology doesn’t stand still, and Tillman implied that carriers have remained in place for far too long as technology has raced by them.
“Technology is relatively easy to adopt, and very quickly, competitors purchase similar systems, sales people agree to lower pricing and volume rules in order to service the already low cost of capital,” he said. “Workflow automation, autonomous ships, and online platforms are simply the modern day equivalents of the arms race to develop low-friction paint for the bottom of a ship, saving on fuel; the policy of lobbying for exclusive ownership of a terminal facility; and perhaps most important of all, the signature of an easygoing banker.
“In the end, the only clear way to profitability is through the successful adoption of new tech and, ultimately, competition.”