More Details Emerge in AlixPartners Ocean Cargo Study
April 01, 2014 - SCMR Editorial
As noted in a recent AlixPartners study, there’s likely be even more disruption in the ocean cargo carrier arena.
For shippers, the study recommends closely monitoring the financial health of the carrier base, not “over-consolidating” the carrier base (so as to have alternatives should markets brighten), considering index-linked contract options and benchmarking rates and service levels via objective third-party resources. For investors, the study recommends paying close attention to the widening chasm between the haves and have-nots, and working with experts to determine which companies have viability and which may not – while also keeping an eye out for attractive asset sales, as many lines may move to divest themselves of assets, especially non-core ones, moving forward.
Meanwhile, for carriers themselves the study recommends divesting non-core assets, exiting unprofitable trades, adopting a laser-like focus on cost control, reassessing all value propositions, and partnering where partnering makes sense.
“For all the challenges facing all the players in the container shipping industry today, there are also a lot of opportunities, including the promise of the much greater profitability that a streamlined, resilient industry might bring, as has been the case in many other industries,” said Lisa Donahue, managing director and global head of Turnaround & Restructuring Services. “But to make the most of those opportunities will take insightful analysis and then firm, decisive action. It’s been done in other industries, and it can be done in this one as well.”
In an exclusive interview, SCMR asked Esben Christensen, director of the business advisory firm for a few more details on supply chain implications.
Supply Chain Management Review: Do you anticipate any sudden shift in rates?
Esben Christensen: AlixPartners’ analysis suggests that the number of parties controlling containerized transportation on critical trades is shrinking through operational alliances and - potentially in the future - through carriers exiting the business. This would have a profound impact on the supply-chain managers who rely on these services, in that the consolidation often brings with it less choice and higher prices. In the longer term, however, the change that’s on the horizon could be largely positive for the carriers who survive with more efficient ships and greater pricing power. In the shorter term, though, shippers should probably expect rates to remain at low levels as the market sorts out all these changes.
SCMR: How supply chain managers mitigate risk?
Christensen: The report suggests that supply-chain managers can mitigate the risks related to financial distress amongst the carriers by closely monitoring the health of their providers, contracting with groups of carriers representing diverse alliances (as opposed to over-consolidating their volume with just a few carriers or alliances), and keeping at least one non-vessel operating common carrier in their provider base. In the shorter term, these important steps should help allow supply-chain managers to proactively direct their volume to healthy and stable partners, sustain a disruption without it reaching catastrophic scale, and tap extra capacity as need dictates to address contingencies. In the longer term, savvy supply-chain managers should probably also consider the merits of index-linked contracts that could protect them against wild price movements.
SCMR: Finally, will the financial distress in the container shipping industry lead to greater reliance on air cargo, even though it’s more expensive?
Christensen: Probably not in a structural sense. There may be some freight that moves to air to compensate for disruptions, but our study does not anticipate a reversal of the long-term trend of air cargo moving to slower, cheaper modes. Rather, in the longer term it is likely that more container capacity in fewer hands will lead to more reliable sailing schedules, which, in turn, could bite further into the air cargo volume.
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