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December 10 2018

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62 The Journal of Commerce | December 10 2018 www.joc.com Trading Places Peter Tirschwell THIS PAST YEAR has seen significant moves by a few big container lines to redefine and reposition themselves as end-to-end logistics providers. How risky is this strategy? The motivation principally of Maersk and CMA CGM is apparent: to mitigate cyclicality, create greater predictability of revenue, create value for customers and be compensated in kind, and defend against disruption by new forms of industry actors. Maersk is all but betting the com- pany on this, defining itself as a global integrator of container logistics and backing that up by offloading energy businesses and integrating contract logistics into a core offering while sidelining traditional freight forward- ing. CMA CGM has taken similarly decisive steps this year by acquiring 25 percent of CEVA Logistics in April and recently launching a bid for majority control, allowing CEVA to acquire the CMA CGM logistics unit and installing APL CEO Nicolas Sar- tini as deputy CEO of CEVA. Not all carriers see the wisdom of this direction. Hapag-Lloyd and Ocean Network Express (ONE) say they are focused on delivering qual- ity core container shipping service. Hapag-Lloyd is basing its Strategy 2023 on that idea, stating on Nov. 22 that in "recent years, our industry has not invested sufficiently in sup- ply chain reliability and quality and … that we need to change." Mediterranean Shipping Co. has begun embracing technology such as Internet of Things track and trace as an enhancement to core container shipping. But for those venturing into uncharted territory, not only do the moves into end-to-end logistics aim to reinvent the companies them- selves, but they also are a challenge to the current industry structure as well as long-standing assumptions borne out of experience that core container service and logistics are incompatible businesses. Without a doubt, forwarding and container shipping are incompatible, but the carriers aren't trying to incorporate a neutral forwarding model into their offerings. Instead, they have something new in mind. It may turn out that Maersk and CMA CGM have a glimpse of what's possible, that technology combined with shippers' demand for reliabil- ity can make control of the ships a key differentiator within a broader offering. It might be that a total logistics solution enabled by data accuracy, user experience, APIs, and artificial intelligence, inclusive of adjacent services such as contract logistics and landside transport, can drive new levels of value for retailers and other BCOs and will thus find a previously untapped market. It might be that such position- ing is a requirement when, as BCG head of shipping Ulrik Sanders told the JOC Container Trade Europe Conference in September, container shipping is being disrupted from sev- eral angles. E-commerce giants such as Amazon and Alibaba, and legacy and start-up forwarders are digitiz- ing their businesses at a faster pace than container lines, and pure digital players such as Freightos, NYSHEX, and Crux Systems are finding digital openings that could complicate carrier efforts to stake out a preferred position with customers. Further, reinvention may be un- avoidable because of the long-term unsustainability of carriers' chronic low profitability. Either a new busi- ness model is found or the solution will be more disruption from merg- ers and acquisitions, loss of indepen- dence, or further bankruptcies. But creating a new kind of logis- tics business out of container ship- ping entails risks of its own, as Neil Glynn, head of European transport equity research at Credit Suisse, told the Container Trade Europe Confer- ence in Hamburg. Speaking on the day Maersk announced the breakup of Damco, Glynn, who will also speak at TPM 2019 in Long Beach, said man- agement risks losing sight of the core business in pursuit of reinvention. "Focusing on structure change can succeed, however, if the under- lying revenue base is not actually protected, than ultimately that ends up being a problem," he said. "If underlying freight rates do not hold up … if the underlying freight rate isn't protected (and) if the pricing ethos within the industry doesn't improve, then that doesn't end up improving the situation." He suggested the carriers' mindset around pricing versus still-unproven ideas about reinvention ultimately will prove decisive. It's not like other transportation sectors haven't figured this out. In the case of international express, dominated by DHL, FedEx, and UPS, "you now have three players which are controlling 90 percent of the market, focused on quality and service levels, and getting paid for that." Glynn mentioned the trans- Atlantic airline passenger market, which is also highly concentrated among the top few carriers. In that scenario, "The decision makers … are all on the same page in wanting pricing to go up and who are actually willing to take the steps to achieve that," he said. Within that market, "that proves to be ... a more important factor than simply considering what supply is doing," he said in Hamburg. The risk of losing sight of the underlying container shipping busi- ness becomes especially relevant in light of the turbulence the industry is likely to encounter over the next two years. Global trade is slowing, as Maersk pointed out in its third-quar- ter earnings report on Nov. 14, and carriers face a challenge in recouping higher bunker costs associated with the International Maritime Organi- zation's low-sulfur regulation, which takes effect on Jan. 1, 2020. Something to consider: Contain- er shipping is a $185 billion (reve- nue) business in 2018, according to a Drewry estimate, figures that dwarf revenue from contract logistics. JOC email: peter.tirschwell@ihsmarkit.com twitter: @petertirschwell Risky business

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