State of Ocean Cargo: Shippers still seeking sustainable performance from carriers

According to a new report by The Boston Consulting Group (BCG), ocean container lines must accelerate their internal transformation efforts and extract more value from their alliances in order to restore profitability.

Drawing on analysis of data from proprietary benchmarking databases and other tools, BCG anticipates continued overcapacity in the container shipping industry, with no market recovery in sight. Carriers—especially midsize global players—are struggling to generate returns sufficient to cover the cost of capital.

In fact, the recently released report, titled The Transformation Imperative in Container Shipping: Mastering the Next Big Wave, contains many of the same observations on collaboration that will be addressed when the Agriculture Transportation Coalition meets in San Francisco this month.

According to the report, the carriers’ attempts to turn the situation around by investing in new mega-vessels are only creating temporary competitive advantage. Worse, such moves are accelerating the vicious cycle that initially spawned the excess capacity and low returns plaguing the industry.

At the same time, analysts note that carriers have launched improvement programs focused on reducing costs. However, to survive in the future, they add that carriers will need to take a more holistic approach to transforming themselves.

In particular, says BCG, carriers will have to do more than respond to a systemic impulse to raise rates without delivering much more value. What’s more, they will need to extract more synergies from their alliances by adopting more sophisticated business models. 

“We don’t expect the container shipping industry to see any significant recovery soon,” says Ulrik Sanders, a BCG senior partner and coauthor of the report. “Overcapacity will continue to be the norm; therefore, container lines should focus on speeding up their transformation efforts and on unlocking the scale advantages promised by their alliances. If they can accomplish these changes, we believe they could begin to lift their earnings to meet—and possibly even exceed—their cost of capital.”

Holistic approach will help shippers
Shippers continue to demand sustainable service on all trade lanes. For this to happen, say analysts, carriers must change their culture by offering a broader range of vessel deployment options.

BCG maintains that carriers can build on earlier programs aimed at reducing costs by taking a more holistic approach to transforming their operations and culture. The report’s authors recommend a process that begins with “funding the journey,” whereby carriers generate short-term cost and revenue improvements by sharpening their strategic focus and rethinking their approaches to network design, pricing, procurement, and project execution.

The authors also contend that carriers must use the resulting gains for “winning in the medium term,” which includes defining a business model with a compelling value proposition. They identify four models that merit consideration—regional scale, deep-sea scale, short-sea specialist, and product specialist—although some companies may define a hybrid model.

Once a carrier chooses its business model, it must back it with the right operating model and also deploy “next frontier” cost and revenue levers that deliver more enduring competitive advantages. Finally, carriers need to sustain the gains they achieve by establishing the right organization structures, building transformation-leadership teams with the right skills, and fostering a performance culture.

While more holistic transformation efforts are important, “they are not enough to pull midsize global carriers out of the vicious cycle they’re trapped in,” says Lars Faeste, a BCG senior partner and coauthor of the report. Fæste notes: “These companies also need to consider adopting more sophisticated alliance models to leverage the scale advantages required to compete with the market leaders.”

Conventional alliance models tend to focus on optimizing slot costs and extending network reach. More sophisticated models, which the authors have termed value-added and integrated alliances, could help carriers derive more value from these partnerships.

The reason? Such models could unlock synergies among alliance partners through practices such as joint procurement, joint operations, equipment pooling, back-office consolidation and shared services, as well as joint IT development.

“Analysis of carrier-specific data derived from BCG’s shipping benchmarking database suggests that advanced alliance models could deliver annual savings in excess of $1 billion,” says Lars Kloppsteck, a BCG principal and coauthor of the report. Total annual savings, he adds, would reduce a midsize alliance’s estimated operating expenses by up to 3 percent.

Alliance models
Logistics managers are insisting on more accountability at the same time. The Global Shippers Forum (GSF), for example, has called for a manageable, but rigorous set of monitoring key performance indicators (KPIs) that can provide the required level of confidence to shippers that carrier alliances can deliver tangible benefits in terms of reduced costs, competitive ocean rates, and improved services for shippers.

Chris Welsh, secretary general of the GSF, recently outlined the need for shipping alliances to reach out to shippers and start showing demonstrable improvements in service quality and innovative solutions. According to Welsh, a necessary first step is to sort out the current lack of reliability and predictability of their joint operations. “Shipping alliances need to take responsibility for monitoring, measuring, and benchmarking their performance on key trade routes to demonstrate enhanced alliance performance, and make that information transparent to regulators and their customers as evidence of their commitment to showing the pro-competition benefits of improved alliance services,” says Welsh.

According to GSF, that “confidence and trust” will be withheld so long as alliance members continue to discuss, fix, or agree on rates on rate guidelines in conference or discussion agreements, such as the Transpacific and Inter-Asia discussion agreements.

The GSF says that the alliance agreements represent a new breed of enhanced cooperation in the liner shipping sector that go well beyond traditional consortia or vessel sharing agreements. “The alliance lines leadership should take the ultimate confidence building step of pulling out of all conference and discussion agreements,” says Welsh.

By doing so, Welsh adds, shippers would be given assurances that there would be no exchange of “sensitive information” that could compromise contract negotiations. This includes pricing information within alliances to prevent abuses of their market power or erect barriers to market entry. “While we recognize that the world’s main regulators and competition authorities have different regulatory approaches, there is some commonality and convergence in outcomes,” acknowledges Welsh.

In that connection, the GSF has welcomed the markers laid down by the U.S. Federal Maritime Commission (FMC) and the Chinese competition authority, MOFCOM, with regard to the P3 agreement. Most notably, they applauded the monitoring conditions recommended by GSF and introduced by the FMC to monitor capacity and rates, and in China’s anti-monopoly laws which led them to ultimately reject the P3 last year.

“The GSF therefore calls on the EU, U.S., and Chinese regulatory and competition authorities to share monitoring data and information to prevent potential competition abuses in the interests of shippers and consumers,” says Welsh.

He adds that shippers understand that they have a “shared interest” with the liner companies to provide a long-term sustainable framework for investment in liner shipping services and the wider maritime logistics supply chain.

“Clearly the 2M, G6, CKYHE, and Ocean Three leaderships believe that mega-alliances are the answer to a sustainable future for the liner shipping industry,” adds Welsh. With that, he encourages shippers to develop a workable and rigorous set of monitoring KPIs that can provide the required level of good faith. “Our door is firmly open to contribute to such confidence building measures,” he concludes.

Carriers “on message”
Ocean cargo carriers seem to be listening, say analysts for the London-based think tank Drewry Supply Chain Advisors. They say service reliability across the three core East-West trades hit a five-month peak in May with an aggregate on-time performance of 64 percent.

Many shippers are saying that it’s about time. Indeed, in earlier reports this year, Drewry analysts told Logistics Management that carrier performance would have to improve if rates were to be raised. The latest result represents an 8.5 percentage point gain over April and is the second-best average (after October 2014) since the start of the new data series in May 2014.

The improvement seen at mid-year was the consequence of much improved services in the Asia-Europe trade and gradually easing congestion on the U.S. West Coast following the resolution of the port labor dispute. However, services on the trans-Atlantic took a backwards step in the month.

The most reliable carrier in May was Maersk Line with an average on-time performance of 81 percent, followed by K Line (73 percent), Cosco and Mediterranean Shipping Company (both 70 percent). At the bottom of the rankings were Zim (39 percent) and Pacific International Line (38 percent).

“It’s good news for shippers that service reliability is on the rise, although it comes from a low base and the industry average still has plenty more scope to improve,” says Simon Heaney, senior manager of supply chain research at Drewry. “We expect the upward trend to continue as U.S. West Coast operations return to normal, but the sharp drop in Asia-Europe freight rates is a risk as carriers could look to make cost savings detrimental to reliability.”