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Changing Landscape in Container Shipping and The Implications To Shippers
Changing Landscape in Container Shipping and The Implications To Shippers
▪ Factors that will result in the Liner shipping sector struggling with profitability
pressures for many years to come…
▪ Near term fuel cost reductions will positively impact results…but beyond the short
term carriers have to find new means maximizing asset utilization and reducing
cost
1 Operating profit margin of 1H 2014 for COSCO and operating profit margin of 9M 2014 for Zim and CSAV
SOURCE: Alphaliner; Company annual reports
1 Zim turned around first time since 2012 after debt restructuring in July 2014
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1H-
15
1 Industry avg EBIT of APL, Maersk, Hapag, Hanjin, EMC, MOL, NYK, K Line, HMM, MISC, CSAV, RCL, Wan Hai, ZIM, 2Q15 excludes MSC and CSAV
SOURCE: Alphaliner
These rankings will change shortly should the Chinese carriers combine; day one they
move up to #4, their current orderbook takes them to #3 by 2017
All carriers outside what will be the top 4 will have a structural cost competitiveness
challenge and little realistic way to achieve competitive scale organically
SOURCE: Global Insight for macroeconomic indicator outlook; McKinsey Container Model (Jan 2015); Drewry
The relative “under-weight” presence of the 2M and the O3 alliance in the U.S. trades will
likely be an area of focus for the carriers in these two groups in the future…this along with
the growth of Evergreen will put heavy pressure on this trade in 2016 – 2017
• 1.5 M TEUs of capacity from Asia to North America is carried by ships of 7,500 teus or
smaller … most will have to be cascaded out of the trade
• There is ~1 M TEUs of capacity deployed in Asia Europe currently on ships below 10,000
TEUs … many will be shifted to the Transpacific
• Will be part of the dynamics that will be disruptive to the stability of Transpacific pricing
over the next few years
SOURCE: ALPHALINER
Transpacific trade has yet to see the impact of cascading from Asia/
Europe and the influx of larger tonnage on the West Coast (MSC,
Maersk and few others with some 14,000’s already but most still
operating smaller tonnage in the TP
▪ Large number of 4–6,000 teu ships currently serving the WC will begin to be
replaced by 9-10,000’s and in some cases 14,000’s
▪ The Panamax ships currently serving the USEC will become uncompetitive as soon
as the expanded Panama Canal opens in 2016/2017
▪ Low fuel prices and charter rates may keep some around longer, however the
transition to at least the 9-10,000 teu range will begin immediately upon the widening
of the canal
▪ 2016 through 2018 will see a major transformation in the ship sizes serving the U.S.
market
▪ The challenges that the carriers and terminals have today will be made more difficult
if the operating methodologies/processes the carriers employ don’t begin to change
▪ Greater “peaking” will require improvements in velocity through the terminals or
service levels will be more significantly impacted
2m
O3 +
G6
CKYH
Combining the three Japanese carriers has been talked about for years
Some very deep competitive dynamics that is at the core of these companies history
A suggestion by the Korean government that the two Korean carriers should merge has
just last week been reported in the trade press; the rumored step by the two Chinese
carriers probably the catalyst
Followed immediately by sources attributed to the two carriers indicating no interest in
doing so…a lot of history to overcome
Europe
Japan &
U.S. W/Coast U.S. E/Coast
Korea
Middle
India & China &
East
Subcon SE Asia
Latam
(Panama
ME generally has
Europe has some China and most of SE Asia New connectivity
capacity and capability
added complexity adequate capacity and capability to opportunities/changes in
for larger ships and
due to new adjust to Alliance structures…some networks driven by larger
adjusting to new Alliance
Alliance structures challenges in Hongkong (HIT/MTL) ships
structures
What are the major implications to shippers from the environment affecting
the container shipping sector?
Continuing access to rates that reflect intense competition and capacity surpluses…for a
long time to come
Carrier behavior continues to focus on reducing costs to counter revenue/profitability
pressures unfortunately, that have a habit of shifting costs to others
Continued supply chain impacts
Alliance structures that are complex and will continue to evolve
Service related challenges due to these complex operating arrangements
Consolidation, while slow will occur; some disruption in market and service structures
during each consolidation event/reshaped alliance cooperation
Reduced “choice” as a consequence of the alliance evolution…trade off is more scope
Ongoing nightmares with chassis supply and logistics; challenges to ensure sufficient
chassis supply, at the right location, and at the right time and at a reasonable cost
A growing NVO/Forwarder market share as carriers reduce customer facing/organization
to reduce costs
▪ Alliances have overall brought a number of benefits to small and mid-size carriers
through:
– Combining their ocean assets to gain significant increases in scope, aimed at
minimizing the capital investment in creating a more competitive service structure as
compared to the largest carriers
– Achieving economies of scale by enabling usage of larger vessels utilizing the
combined volumes of the group
– As a result, smaller carriers are beginning to close the gap in terms of slot costs
compared to the largest carriers (Maersk and MSC), on the trades covered by alliance
agreements (e.g. E/W)
However, there remains a number of challenges for smaller and mid-size Carriers
remain sub-scale on the landside, where carriers’ cost is largely a function of only their
volumes
Expanded alliance structures have created a dramatically more complex operational
environment, particularly on the U.S. West Coast, e.g. larger vessels hence higher move
counts, increased “peaking”, terminals operating close to full capacity, carriers decision to
exit the provision of chassis, ILWU labor unrest tied to an unresolved contract negotiation
and an alliance service structure calling at 7 different terminals in the LA/LB basin
The combination of these events resulted in a calamity, vessels stacking up unable to
berth, lack of trucks to service the flow in/out of terminals due to longer cycle times, delays
in customers accessing their cargo, a breakdown in intermodal flows, a loss of terminal
velocity and significantly increased costs
▪ Establish single intermodal entity as the operational interface with rail companies; with a single
focus to managing the planning and execution of flow improving velocity through terminals. This will
Rail have positive impact on costs for the carriers, railroads and positively impact shippers supply chains.
▪ Improvements in co-ordination will show as trucking/repositioning savings (e.g., better empty co-
ordination), but improvement in rail carrier asset utilization will translate into savings on rail spend.
▪ Form a combined trucking and truck dispatch entity to plan movement of all carrier controlled
drayage, thereby increasing roundtrip utilization. This involves boxes inter-terminal, to/from rail
Trucking ramps, common co-ordination of chassis logistics/flow.
▪ Better use of the scarce trucking resource in the U.S. (LA/LB in particular)
Overhead
▪ Combine operational teams into one single team (potentially in a new operating company) to
reduce overlap and enable the above levers
▪Pool container fleet/procurement as well as pool management as the overall fleet required is
Other probably smaller than total from each player
▪ Combine alliance level chassis requirements (within the broader “Pool” to better manage chassis
logistics
Approach described initially for U.S. operations, but principles can be more
broadly applied across the network
McKinsey & Company | 24
Clear cause for action, so where do we go from here?
Mostly a problem for the trucker, who must drop off container at one terminal and
return chassis to another.
Impairs trucker’s ability to pick up next load. Time could be spent delivering
another revenue load.
Trucker usually not paid for chassis repositioning
Some terminals have an adequate supply of chassis, while others are short
Main cause: lack of collaboration among key stakeholders
Related to Leadership
“There is a lack of leadership in the container shipping sector”
“There is a void in CEO’s taking an active role in helping to address the most
pressing issues in ports, legislation in Washington, pushing for infrastructure
changes, and bringing shippers together to solve problems. The void today is
greater than it has been in my tenure in this industry.”
“There’s nobody to talk to….local management doesn’t make the decisions”
Many seeking more Ocean carrier involvement and accountability for terminal
performance, especially at terminals the carrier doesn’t own
Stop being followers and be innovators. You have too many ocean carriers out
there today who simply “follow” the market leaders which result in severely
negative revenues. Government subsidies needs to stop as well so the ocean
carriers can conduct a business with repercussions.
“Openly work with customers on new cost containment ideas and process improvements”
“Carriers top decision makers have to adapt; options have to be more carefully
evaluated in order to prevent major problems for other players in the supply-chain”
Related to Labor
None see any changes coming in the labor negotiation/union issues that expose them to
“debilitating problems around each contract negotiation; desire to see stronger federal laws
and the will to use them (Taft-Hartley)
“The government needs to step in and pass laws that disallows both parties to
leverage their strengths and cripple the economy. This is starting to become an trend
which can be severely detrimental to the growth of US ports. Canada and Mexican
ports are certainly growing and investing in rail connectivity and we continue to lose
market share methodically from this.”
“Concern regarding the continuing efforts of organized labor to push the owner operators to
unionize; if they succeed shippers will pay more for less”
“Clearly the relationship has to be strained. This past negotiation was long, elongated,
frustrating and cost the supply chain billions. This negotiation coupled with the one
on the East Coast earlier has the shipping community weary. The PMA and ILWU
started negotiations too late and shippers concerned with disruptions moved cargo to
other gateways which led to increased congestion and costs. Negotiations have to
start earlier, and at some point need to be considered part of a national interest where
the government steps in much earlier.”
Related to Alliances
Uniform view that the expanded alliances have resulted in worse service
“Alliances are needed and there is no way around this given complexities of the
business and the widening gap between supply and demand. However the sheer
number of carriers within an alliance is the main issues. G6 as an example
compared to 2M. The effectiveness of a smaller alliance compared to a larger is
very clear on how the operations are handled at the terminals. Even with these
alliances, operationally 2M has a better grasp on operation compared to other’s
which is good as they tend to be profitable while others are not.”
Related to Communications/Visibility
“Communication gaps and inefficient coordination among shippers, terminals,
ocean carriers, and land transport companies in the scheduling and movement of
containers in and out of the ports”
A consistent message of the need for better real time visibility of event data from the
carriers and the terminals they use
“Looking for more transparency to individual terminal turn times (inclusive of trucker
waiting time”
“More accurate and timely information flow reporting arrival, berthing and container Ba
availability”
“Terminal information about container status that would readily integrate back to visibility
system/TMS (vs. separate place to go for information”
There needs to be more EDI connectivity between carriers, rail lines, dray carriers,
NVO’s and BCO’s to help manage better and effective information and to eliminate
manual data entries. There also needs to be a better structure for IPI/RIPI cargo
movements which by far is a major choke point.
Automation
Cost effective off-dock depots to get work off the marine terminals and reduce
transactions at the terminals
Standard appointment system
Improved rail and highway connectors
Improved highway infrastructure through metro areas
Stabilize rates, eliminate the wild swings.
Get aggressive with the port authorities to design terminals that fit today’s new
norm.
Take a leadership role in defining a chassis strategy for LA/LB markets.
Partner with shippers and trucking providers to design a better flow of cargo in
and out of the terminals.
Find a way to communicate more proactively when encountering issues”
“What do you see the liner shipping sector looking like in 5-10 years?