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November 12 2018

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34 The Journal of Commerce | November 12 2018 Beneath the Surface Gary Ferrulli IT'S BEEN SAID for years that contain- erized shipping has become commod- itized, a one-dimensional offering of basic services for price. Carriers expanded basic services to include inland movements, and most set up third-party logistics providers to vary- ing degrees. Recently, there has been movement toward providing an end- to-end package of services, replicating what non-vessel-operating common carriers and forwarders have done for years — inland transport, distribution, adding updated technology — to provide a menu of options for services under one umbrella. Carriers are taking different routes: One carrier buys into a well- known 3PL, another folds its own 3PL into the core company and starts pur- chasing technology-based value-added services in its quest to provide an all-encompassing package. Another practice is being revised and expanded: government-subsi- dized or -supported services. I've previously noted that China, Korea, Taiwan, and Japan subsidize and/ or otherwise support their mari- time-related entities. One recent report said some European Union representatives are upset with Ko- rea's subsidies to Hyundai Merchant Marine, not only to continue to cover its losses, but also to expand its fleet — at Korean shipyards. Some are asking the EU to pressure the Asians stop the practice. Others are recommending the EU do the same: subsidize shipbuilding and shipping industries domiciled in the EU. When I started at Sea-Land Service in 1972, the major players included nine US-flag carriers in US foreign commerce, all but one subsidized; five Japanese carriers, one Korean, 10 European, six South American, two Australasian, two Mideast-based — all receiving direct or indirect subsidies. Over time, many countries elim- inated subsidies, causing most of the carriers to be merged, acquired, or to cease services. Some indirect subsidies still existed in the forms of favorable tax treatment, favorable port and terminal costs for flag ves- sels, and national cargo support. But in recent years, some countries have started to write multibillion-dollar checks, notably China and Korea, and Taiwan with tens of millions of dollars. This has prompted the EU to consider how to react. Asking the Asians to stop subsi- dies seems like a waste of time. They will do what they believe to be in their best interest. Eventually, the EU will come to the same conclu- sion: Do what's best for the EU. It's hard to predict the outcome. What decisions will they make? But if they try to level the playing field by subsidizing their maritime inter- ests, it's analogous to the creation of quasi-utility companies. Supporting the maritime interests isn't related solely to maritime interests; it's part of a support system for the country's export business, including manufac- turing, agriculture, and technology. This is especially true in Asia, where vertical integration of business entities is standard. Banks, manufac- turers and others all fall under one umbrella. In China, that umbrella is the government, and we're seeing it more in Taiwan and Korea. The collective good drives the decision-making. Local businesses are protected and supported by a required maritime industry, the costs considered to be valuable in main- taining the larger export interests, not to mention imports. They also employ tens of thousands of people with high skill levels, important to the national interests in a global economy. These actions make shipping companies very non-business like, not having to make money to sustain themselves. They become similar to a public utility, necessary to support the national interests, like electricity. As I consider my 46-plus-year involvement in containerized shipping, it's hard to imagine anyone wanting to invest in the industry. The average rate of return over that time is under 3 percent. Because of the significant growth in global trade since 1986, absent the downward spiral in 2007-2009, the investment required to be in the busi- ness has exploded and is one reason we see fewer large containerized shipping companies. Mergers, acquisitions, and bankruptcies have led to where we are today. Subsidies keep several compa- nies afloat with a distinct possibility that more will follow. What are the implications? Specu- lative, at best, but for carriers, the Asia- based are already there, receiving what- ever benefits, so little change there. Europe-based carriers make up four of the world's top five global container carriers, an interesting situation. Over the past decade, the bottom lines and rate of return, with few exceptions, are less than spectacular. Subsidies would be a great benefit, depending on what strings are attached. So what's the downside of being subsidized? At Sea-Land, which was never subsidized, it was manage- ment's fear of not being able to make unbridled business decisions, losing flexibility to political and governmen- tal interests. We watched what hap- pened to several US-flag counterparts, which were forced to build ships that weren't commercially viable. Is that the case with China, Taiwan, Korea, even Japan? Again, speculative, but who cares? Government money can be spent, accept the cargo offerings from your "country relatives," and don't worry too much about the bot- tom line or stock market. Asia- and Europe-based shipbuild- ing, ports, and terminals are in the same boat as carriers. It must be nice to know that cargo interests or large service providers don't really need a profit to sustain themselves. JOC Gary Ferrulli is chief executive of Global Logistics & Transport Consulting. Contact him at gferrulli@globallogistics Weighing benefits of subsidies We watched what happened to several US-flag counterparts, which were forced to build ships that weren't commercially viable.

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