Container Shipping Canada

The box shipping industry has long been accused of lacking innovation. With the obvious exception of advancements in IT, the container shipping industry is pretty much the same today as it was in its infancy in the early 1960′s. So when  a company like Staxxon International comes out with foldable container technology, the industry ought to take notice.

As reported in this space last year, Staxxon has patented technology that allows five containers to fit into the space of a single box. This week Staxxon announced production of its foldable container in conjunction with SeaBox Inc. in East Riverton, NJ.

According to the announcement, the first containers produced at SeaBox will be used for “Convention for Safe Container testing, field testing at marine terminals and non-commercial sea trials.

The fact that a reputable company like SeaBox has taken on the project can be construed as evidence of the commercial potential of Staxxon’s technology. Make no mistake, these are early state production and trials. There is still a long way to go. But, the industry is in desperate need of this kind of innovation. And here are some reasons why.

1) Anemic U.S. Economy.  Sluggish growth in the U.S. economy due to high unemployment is impacting consumer spending. This coupled with a weak housing market has impacted import growth. Fewer imports mean fewer containers available for exports.

2) Low U.S. dollar.  The positive side of a low U.S. dollar against other currencies is the rising level of exports. According to the Journal of Commerce Exports are up 11% this year against imports at 5.4%. Again, a rise in exports mean demand for containers.

3) Container production. At the lowest point of the recession in 2009, global container production was at about 350,000 containers against the usual 4,000,000 the previous year. In 2010, container manufacturers stepped up production but not nearly enough to compensate for the demand in the recovery. As a result container shortages were rampant, mostly due to the cost/time of moving them to profitable, demand areas.  The ratio of containers to shipments is about 1.9:1, against  3:1 prior to the recession.

4) Ultra Large Container Ships. It’s not rocket science. Larger ships in service tie up more containers. This year, the Asia-Europe trade has seen 13,000 TEU + ships delivered into service, with other “smaller” ships cascading to other trades. Given the current order book, the trend will continue.

5) Export Demand in land locked areas. Import containers are generally delivered to large cities, while exports commodities are generally sourced from less populated areas. As a result, many areas are deficit of containers during peak demand times, generally in the fall through to the spring.

With the general trend in the U.S. of slowing imports and surging exports, there are bound to be problems getting containers where they need to be. Shippers are reluctant to pick up the cost of empty repositioning due mostly to the marginal nature of the commodities business, leaving carriers to pick up the tab for empty repositioning or de-selecting the business altogether, and sending containers back to Asia for the head haul trade.

Successful commercial implementation Staxxon’s technology would provide a wide-sweeping solution to many problems of container repositioning and significantly reduce carrier’s costs. . Imagine moving five containers on a rail car for the price of one. Or loading a ship where a single lift moves five empty boxes.   

Indeed, this is an idea whose time has come.

To the inexperienced it looks simple. Place the club in your hands, step up to the ball, swing the club back, and make contact. But anyone who has tried knows how difficult it can be to play Golf well. The mechanics of the swing are precise. Grip, stance, backswing, contact, all have to be consistently perfect, even for an average golfer to attain par. Elite golfers swing the club about 70 times in one 18 hole round. And the golfer’s swing must be the same every time. Even the slightest change in grip, stance or backswing will hook or slice the ball. Slight adjustments are often necessary in adverse weather conditions and changes in terrain. The best golfers in the world have the skills necessary to recover from just about any mistake. They practise hours every day. The difference between the number one and number 15 golfer in the world can be subtle, yet complex. That difference equates to millions of dollars a year in prize and endorsement money.

To the inexperienced observer, container shipping looks simple. Load a box, deliver it to the terminal, load it on the ship, transport from point A to point B, unload the box, and deliver to consignee. But those who have spent some time on the inside of a global container carrier understand how difficult it can be to effectively manage it properly and profitably.

Network design, Cargo mix and selection, contract negotiation and filing, equipment control, booking data, electronic data exchange, advanced cargo manifests, documentation, and billing (to name just a few) must be perfect to execute the booking and load the container on the intended ship. Today’s global carriers accept millions of bookings each year. They make adjustments for refrigerated and hazardous cargo. They need to have the processes in place to recover from cargo which has been incorrectly shipped, rolled, or delayed in a transhipment port. Even the most subtle differences between number one and number 15 in the world can be significant. Often it is the difference between making, and losing hundreds of millions of dollars.

Comparison of number one through 15 carriers is featured in this month’s article in American Shipper entitled the Big Rebound, Who’s Making Money 2011 by Eric Johnson. The article weighs profitability of the top 15 publicly traded shipping lines from 2006 to 2010. It then takes 2009 losses adds 2010 gains  and compares that with profits and losses each year between 2006 and 2010.

Four carriers showed a profit when 2010 and 2009 were combined – AP Moller Maersk, OOCL, China Shipping and Evergreen.  At 14.9% OOCL’s profit margin was best, followed by China Shipping (12.4%), Yang Ming (12.4%) Maersk and Hyundai both at 11.7% and Evergreen at 11.6%.  In a combination of earnings from 2006 through 2010, no less than 10 carriers came out in the black. However, when comparing profits of 2006 through 2009 a much different picture emerges.

In this case, only K-Line, OOCL, Hyundai and NOL/APL were in the black. K-Line’s profit numbers are tempered by the fact that 2006 – 2008 results included both bulk, and car carrier sectors. The clear and consistent winners were OOCL and Hyundai. CSAV, Zim and Japanese carriers MOL and NYK posted the worst results during the same period.

So what exactly does OOCL, and to a lesser extent Hyundai do differently than the other carriers outside the big three? (Maersk, MSC and CMA-CGM) Moreover, what makes CSAV the worst in profit margin?  Why is OOCL’s swing better than so many others?

OOCL’s superior performance is not limited to the last five years. In fact, OOCL has had only one loss making year (2009) from 2001 through 2010. What makes OOCL’s performance even better is that their profit per TEU is consistently better. No less than nine carriers booked average revenue per TEU in 2010 better than OOCL, yet the carrier was third in average profit per TEU at $188, surpassed only by Hyundai and AP Moller-Maersk. In 2009, the bleakest year in the history of the box industry, OOCL lost an average of $78 per TEU, bested only by Evergreen Marine Corp at $75.

Such consistent performance can be attributable to good leadership, superior processes, well trained staff, and, last but not least, top-of-the-line systems. OOCL’s 2010 Annual Report describes IT as follows:

“Our IT gives us visibility of full shipment cycles, enabling us to take prompt action on operational variations and to exploit downstream opportunities…Moreover, our information systems have developed into a common platform for collaboration and innovation. “

It has long been recognized that OOCL’s systems are some of the best, if not the best, in the industry. OOCL’s ability to squeeze profit where others cannot is a direct result of their investment in systems development and training. The machine is rich with data much more accurate than competitors, giving them the ability to make the right decisions on cargo mix and selection.

Compare OOCL to CSAV, the most unprofitable carrier in the group of 15 from 2006 to 2010. In their annual report CSAV says this of their systems:

“Contributions have become an essential element in the evaluation of business and sales management. Priority was there for given to improving the timing and quality of the entry of costs in the contribution system. .. starting in the second half control began of the quality of information in the contributions system. “

Ultimately, trade managers are judged by the contribution and volume of business they can deliver to the line. They rely on good contribution management systems to make the thousands of decisions each day on which cargo to carry and which to refuse. By their admission in a record profit year, CSAV admits to having to control the quality of information in their contribution system. OOCL, meanwhile, working with accurate data simply makes more informed business decisions.  Not only does OOCL have a better swing, they are also playing with a better set of golf clubs.

Container shipping is indeed complex. The execution of a single booking requires perfect input of data, coordination with terminals, customs authorities and container yards, and prompt accurate documentation.

Comparing container shipping to ordering on Amazon, or booking a flight, is a dangerous oversimplification. Like the golf swing, perfecting subtle, complex elements is what separates the champion from the rest of the field.

Globalization is Darwinian. As the world becomes increasingly smaller and businesses expand to new markets, there are clear winners and losers; the cost of the free market.

For years container shipping was partially protected from free market forces by way of conferences. The conference system allowed carriers to discuss aggregate supply, general pricing, surcharges and policy in a particular trade. Carriers used service to differentiate themselves from competitors. Shippers and forwarders alike expected completely different levels of service from conference and non-conference carriers. Cargo was not priced on a simple box from point A to point B basis, but by commodity. Transpacific Westbound cargo, for example, was by rated commodity, generally on a weight or measure basis. Way back in the 80′s a 20′ refrigerated container of herring row from Vancouver to Japan was priced on a per pail basis. Niche, or startup carriers, were able to thrive as independents in the conference system by pricing slightly below conference levels, shaving off thin slices of market share.

What is typical in many industries (without conference protection) today is the sheer dominance by two or three global players. Apple and Microsoft. Anglo American and Rio Tinto in Mining. Toyota and General Motors. In the box industry, Maersk and MSC.

These companies lead all aspects of their industries, not the least of which is product development, and pricing. Like Avis in the old car rental commercials, companies in the number two position try harder. Number two’s have but one goal: become number one. The fight for the number one position in the container shipping industry, long-held by Maersk line has arguably led to the rapid decline in freight rates in major shipping trades.

In the depths of the Great Recession in late 2009, carriers removed tonnage from service on an unprecidented scale. At its peak over 12% of the global fleet  was idled. As a result, heavy losses of 2009 turned to record industry profits in 2010. In contrast, MSC chose a much different strategy.

While competitors were laying up tonnage, MSC took on more, taking advantage of record low charter rates. MSC grew market share in 2008, 09 and 10. The following two charts in the USA trades illustrate their ascension. Charts show the total laden throughput in TEU both import and export for the top 15 container carriers.

USA IMPORT TOP 15 CARRIERS SOURCE JOC 2010 2009 2008

USA EXPORT TOP 15 CARRIERS SOURCE JOC 2010 2009 2008

What is most interesting is that MSC gained market share throughout the recession, indicating a clear strategic decision to grow business, while other carriers were pulling back. When the market did finally turn in 2010, MSC was poised to take advantage of the surge in demand due to re-stocking simply by having more capacity available than competitors. The strategy allowed MSC to grow not only in the major trades, but also in the North-South trades where they have traditionally been strong.

Maersk (among others, of course) in contrast responded to the recession by removing capacity, slow steaming (de-facto reduction of tonnage) and de-selecting cargo. Given its sheer size, Maersk stood to lose the most. An argument could be easily made that other carriers would not have removed capacity from the market if it wasn’t for Maersk’s lead. Number One comes with a price. In this case, Maersk’s signal to the market that it was going to remove tonnage was followed by all major carriers with the exception of MSC.

In response, post recession, Maersk has become aggressive. This year’s announcement of 10 x 18,000 TEU ships on order was a clear signal to the market that Maersk was not letting their leadership position go without a fight. New tonnage in the market was deployed immediately – mostly in Asia-Europe – and rates began their precipitous fall. Asia-Europe rates are down some 40% since their peak in Q4 last year. Due to the corresponding rise in the price of fuel, many believe a port to port box move no longer covers fixed and variable costs.

On the Transpacific head haul trade, scheduled General Rate Increases and Peak Season Surcharges have been postponed. Back haul trades are faring much worse, with rates plummeting and the anticipated box shortage failing to materialize.

Like two heavyweight prize fighters, MSC and Maersk continue to exchange blows for market share. Meanwhile, with few exceptions, the rest of the global carriers react by either adopting the same strategies , or reducing their exposure to the business. Judging by the current order book, Cosco, Evergreen, CMA-CGM and APL have adopted aggressive growth strategies. Although, Evergreen is playing catch up having no ships on order in 2008 prior to the recession. NYK, MOL and Hyundai on the other hand have few ships on order, and appear to remain on the sidelines in the capacity race.

As global demand cannot keep up with supply and in the absence of a conference system, ships are displaced to other trades which in turn become over subscribed. The Intra-Asia trade, for example, has long been dominated by niche players running 800 -1500 TEU ships between small ports in Malaysia, Indonesia and Vietnam to name a few. Historically, global carriers have left the trade to niche players like Thailand based Regional Container Lines.  Since the invasion of global carriers into the trade recently, RCL has yet to recover from the recession.

Publicly traded on the Thailand Exchange RCL stock price is currently at 7.70 THB down from its 52 week high in September of over 17.80 THB. Naturally 2009 was a loss. So, however, was 2010 with an operating loss of USD 6.7m against revenue of USD 499.5m. Compare this to 2007 and 2008 when RCL’s revenue was USD 647.5m and USD 641.0m respectively. Taking an “ if you can’t beat ‘em, join ‘em” approach, RCL announced a joint service with heavy weight Hapag Lloyd in March of this year.

With the exception of carriers protected by cabotage rules, the age of the niche carrier is quickly coming to an end. This is no more prevalent than in fast-growing South East Asia. What was once served by smaller carriers is becoming the domain of the big boys.

The fight for market share above profits between the industry’s two largest players will have an effect on all carriers. Some clearly will not survive. Is this the year we finally see some much-needed consolidation in the industry? If regulatory bodies can abolish conferences, should they be able to reject mergers and acquisitions? Under current conditions such stringent policies appear to  undermine the natural order of things.

(Note:  This article was also published in the July edition of Maritme Gateway. www.maritmegateway.com)

The Journal of Commerce recently published a report of the top 40 container carriers in the U.S. Container Shipping Canada exptrapolated the top 15 carriers in the report and ran a comparison between years 2010, 2009 and 2008. Both Import and Export charts are listed below.

MSC are far and away market share winners in the past three years. In fact, of all carriers in the top 15, only MSC increased laden throughput in recession year 2009 compared to 2008, in both Exports and Imports.

MSC’s agressive growth strategy has arguably led the freight rate race to the bottom in the Box Industry in 2011. Seems it is only a matter of time before MSC takes over the number one position from Maersk.

USA IMPORT TOP 15 CARRIERS SOURCE JOC 2010 2009 2008

USA EXPORT TOP 15 CARRIERS SOURCE JOC 2010 2009 2008

It’s a common complaint as old as business itself, but in the container shipping business the criticism has become much more audible in the last decade. What is it? What shippers grouse about most is poor customer service and a lack of understanding on the part of the carriers of their businesses. ”Carriers are not partners” they say. In fairness, not all carriers are equally guilty.

Several, if not all, of the top 20 global carriers  have good long-term business relationships. These customers, however, tend to be those who ship in the thousands, if not hundreds of thousands of TEU per year. They are assigned the most competent sales executives and are given a clear path to liner executives should something go wrong. But most of the world of shipping isn’t played by Walmart, Toyota, or General Motors.

The bulk of shippers deal in hundreds or perhaps a few thousand TEU per year. These small and medium-sized businesses are the backbone of most economies. Yet they have increasingly had little respect from carriers, who either cannot, or will not service them.

An obvious reason is the increase in size of carriers and the almost complete annhiliation of niche carriers. In 1998, P&O Nedlloyd purchased Blue Star Line. During the amalgamation of the two companies, it was apparent that Blue Star serviced smaller accounts much differently than P&O Nedlloyd. Granted the Australia-New Zealand trade lane was quite small. However, clients with 20 TEU per year were visited at least once per month, invited to all industry functions, and taken out to lunch on a regular basis. Money was of little importance in a niche trade where the margins per teu were exceptionally high.

What was even more interesting was the level of autonomy given to  sales executives at Blue Star. They had very little reporting, had smallish territories and the outcome was much more important than their behaviour.

Outcome systems (OC) and Behaviour Systems (BC) is the subject of a paper written in the Harvard Business Review (6/29/2006). The article provides insight as to why some companies service customers better than others. OC and BC systems are sales management theories operating at each end of the spectrum.

Companies with outcome control systems reward results, or the outcomes of the sales reps interactions with customers. The customer is king. Typically in OC systems, the sales representative’s compensation is determined by the customer’s behaviour. Sales people are also given considerable autonomy in OC systems, and place importance on pleasing their customers rather than pleasing their managers.

In companies with Behaviour Control systems, the manager is king. Managers reward what sales people bring to the job, and measure what they actually do – activities, hours, expenses, etc. BC systems measure sales people’s knowledge, skills and competencies. They are measured on several criteria, many of which are subjective. The bulk of their compensation is tied to salaries with bonuses tied to attitudes, behaviours, and competencies that management values. Clearly in BC systems someone is watching outcomes, but it is not the only thing that gets compensation.

OC and BC systems are at the extremes, most companies will fall somewhere in the middle with many leaning one way or the other. In the container shipping industry, there are carriers who are “much easier to deal with” than others. These tend to be those who are more focussed on the outcome. Those which are more difficult tend to focus on behaviours, are internally focussed.

Fast forward to 2006, large global carrier X is purchased by even larger global carrier Y. Carrier X is almost completely outcome focussed. Customer is king. The Senior Vice President of Sales doesn’t want sales people spending time on sales reports. “Just go out and get the business” he says. Sales people have autonomy, and can even make some pricing decisions.

Carrier Y is almost polar opposite to Carrier X. Carrier Y’s sales force has several reports to file each week. Sales Management is king. The primary goal of the sales executives is not of customer outcomes, but to feed information upward in the organization. Outcomes are not as important as behaviours and competencies are rewarded over performance. Reps have very little autonomy.

While both examples above are true, the reality for most carriers is the struggle between OC and BC systems. The sheer size of  investment of hard assets in the containers shipping industry necessitates the use of BC systems. Outcome control systems fit best when sales people have “a substantial influence on results. Sales force elasticity is high (changing…. sales people would have a big effect on results)”

What has been demonstrated in the container shipping industry, time and time again, is that changing a sales rep, makes very little difference on the outcome. Customers continue to support the carrier providing the schedule reliability, container availability and, of course, pricing is right.

Without a doubt, carriers leaning a little more towards outcome control are much easier to deal with, and their sales executives tend to be, well, happier. However, in the price sensitive world of container shipping BC systems are crucial. Long ago, shippers made their choices based mostly on cost alone. Carriers adjusted their business models to fit that choice.

As EU officials raid offices of major container carriers this week as part of a major antitrust investigation, one can only wonder how far out of touch the EU competition bureaucracy is from the real world. After collectively losing $20 billion in 2009, then soaring to a record $15 billing in 2010, 2011 looks like another losing season for the industry.

Hapag-Lloyd, APL, Hanjin, to name a few, have all reported losses in the first quarter of this year. If carriers are indeed colluding on prices, and moreover capacity, they’re awfully bad at it. OPEC this is not.

EU officials are likely responding (what took you so long boys?) to wide-spread vessel layups in late 2009, which contributed to record profits in 2010. Evidence of carriers were in cahoots, however, will be difficult to prove. The world in 2009 was bleak.

Thanks largely to the spreading contagian of the financial meltdown in the US, the global economy in 2009 was abysmal. Demand for container shipping shrunk in 2009 for the first time in the history of the container shipping business, which has come to rely on seven to 10 percent growth rates to support massive investment in larger, and larger ships. Put in simple Econ 101 terms, the demand curve shifted to the right.

Shipping is no different than any other industry when it comes to the basics of economics. An argument can be made that in the absence of conferences, container shipping is much more prone to the will of the free market than ever. As “Great Recession” wore in in 2009, there was very little evidence the U.S. or European economies would recover quickly.

Several economists correctly predicted that the recovery would be slow, job growth enemic, and much important consumer demand in negative territory for the foreseeable future. As losses mounted at an alarming rate, individual carriers had a decision to make. As many (not all) decided to remove capacity from the market, supply shifted in line with demand, and prices stabilized.

Even the most seasoned economists did not predict the subsequent surge in demand in early 2010 due to re-stocking. At the time, carriers hesitated to abruptly deploy laid up tonnage as most of the experts predicted the surge would be short lived, perhaps due to the run up prior to Chinese New Year. Of course later that year, the recovery in container shipping was in full swing and carriers slowly re-deployed tonnage. Can carriers be blamed for being cautious?

Record losses in 2009 led to the near collapse of several carriers. The fact that all of them survived is probably an indication of a lack of confidence in the investment community rather than the carriers’ strength to survive.

This year is on pace to set another record  in volume for container shipping. Ports around the world are reporting sharp increases in the first quarter over 2010. While carriers register record revenue and volume with accompanying losses, idle container ships currently stand at 0.9% of global fleet capacity with most laid up ships in the sub 2000 TEU range. Dozens of Ultra-Large Container Ships above 13,000 TEU are due to be delivered this year.

These ships are being deployed on the Asia-Europe trade, thereby cascading their “smaller” sisters to the transpacific and other trades. Rates have been falling since the fourth quarter of last year.  Experts are predicting losses to come close to 2009 levels.

Does this look like a cartel?