Slipping Lines

“Are the Shipping Lines Their Own Worst Enemy?”, Xeneta’s Patrik Berglund asks.

“Scene: The elite of industry liner executives and their partners are meeting over coffee and croissants. There are moans and groans about tough times in container shipping. Not to disappoint, a container shipping leader tells financial news correspondents what bothers the industry, that the state of the external marketplace has placed everyone in the industry at a growth disadvantage. Profitability is nowhere to be seen. He calls for better rates. Now pan over to trade journals and wire services that will keep posting news of rates in the highs and lows. ‘Ocean Freight Costs Reach Dramatic New Lows,’ miraculously followed by ‘Cargo by Ocean: It’s Gonna be a Wild Rate Ride.’

“What’s going on? Overcapacity? Falling freight rates? Surges in freight rates? Collusion in freight rates? Price wars in freight rates? Are the container shipping lines genuinely hurt because of the price of oil, the slump in world economies, effects of labor unrest, the crisis confronting the euro? Why does the only knee-jerk reaction to all these outside forces seem to be chaotic pricing with not much reflective rhyme or reason?

“The answers are not comforting. Analyst after analyst point to a fragmented industry and misguided practices. Top container shipping line executives are not wrong when they cite unfavorable economic conditions affecting their industry. They are, however, not seeing the light in how to best cope.

“One outspoken critic has been John Lu of the Asian Shippers Council. Speaking as chairman last year, Lu blasted the lack of regulatory oversight that would ask for a closer reflection of shipping supply and demand. Container shipping lines’ critics include those who suggest a cartel in freight rates that go up and down regardless of the business environment. Shippers in turn have repeatedly called for less volatile pricing. Adding to the criticism of how the industry is steering itself into more troubled waters, auditors have focused on ocean freight records and have raised a hue and cry that more than ten percent of container shipping invoices are incorrect. Rate volatility has not helped to clarify the matter, but has only added to headaches of businesses discovering their invoices may be incorrect. That frustration only adds to the criticism of unfavorable business practices with unilateral hikes in freight rates.

“Simply saying well, that’s the way the shipping industry is, get used to it, does not hold much water with them, either. Business customers themselves have invested in the time and learning curves to evolve into smarter systems with greater transparency, better information systems, and better management. They find it difficult to turn the other cheek to tolerate a poorly managed carrier trade which is also draining their profit margins.

“The Boston Consulting Group last year delivered a bracing verdict: Shipping Lines need greater discipline. According to the group’s in depth assessment, many of the industry’s setbacks are the result of internal, not external, forces. Translation: They have few to blame but themselves.

“‘To be sure, as an industry with low margins, container shipping is inherently sensitive to cost and rate volatility. But we believe that the events of 2011 and 2012 show that the industry’s economic problems are self-inflicted; they are not an inevitable consequence of market forces beyond its control’. The BCG researchers say it is really business 101, whether one builds hospitals, designs robots or ships containers: Failing to sustain a supply-and-demand equilibrium in a business environment of excess capacity and slow growth is a recipe for disaster.

“That is not to dismiss the bad cards dealt to the industry. To be sure, notes BCG, this is an industry with low margins and with an inherent sensitivity to cost and rate volatility. In 2011, liners were negatively impacted by the economic downturn, experiencing record losses and depleted cash reserves. Oddly, though, BCG found that global container traffic was not as unhealthy as one might think, growing at a clip of 6.5 percent. Nonetheless, container-shipping companies lowered rates even at the expense of making profits; price wars were the result, with rate in some lanes falling 60 percent. Even with finger in the dike measures – slow steaming to save fuel and debt restructuring, and accepting cash injections from governments – cash reserves fell by almost 20 percent.

“BCG’s study issued the following recommendations: more discipline and a bigger focus on the bottom line. To arrive at this destination the company says commercial management should be strengthened with what it calls a value-based perspective, which involves demonstrating the value of both commodity and premium services to customers, monetizing all services, using a strong marketing position to raise rates and securing greater operational efficiency.

“BCG noted that in addition to greater discipline, operators of container shipping lines are going to adjust to a new normal – growth rates between 5 percent and 7 percent, not the high numbers seen in earlier years. Industry investments to achieve better discipline and equilibrium will include good IT infrastructure; better market intelligence; and metrics that motivate employees to stick to business objectives.

“Meanwhile. Leading business consultants from IBM have been studying the state of the container industry and there is an important message for those industry leaders who will prefer to do nothing: New, more agile entrants will show how better business can be done. They will challenge the way industry players approach asset optimization and container relationships.

“IBM business consultants say the liners need a change of mindset, a change in the ways they work: IBM’s recommendations indicate a confidence that in time container shipping lines will take on the business principles that will make all successful businesses run well. Looking ahead, The IBM watchers believe that leading container shipping lines will have a focused business model and a precisely targeted value proposition.

“They believe that the shipping lines will leverage the power of information technology’s tools to deliver accurate performance metrics. They will also discover the advantages of using advanced data analytics so that their businesses can stay resilient to changing market demands.” –

[Both the above “groups” used the same canned jargon they use for all their clients. Not a word was said about liner overcapacity, worldwide unemployment, or the “fanning of corporate feathers”.]