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Category: Global Supply Chain

Global Supply Chain News: Container Carriers Starting to Take Different Strategic Paths


Some Look to Complete Global Logistics Solutions, while Others Focus on Core Shipping

Jan. 9, 2019
SCDigest Editorial Staff

Among the factors behind the general financial woes of ocean carriers in the past few years is the lack of differentiation among providers – they were all basic box movers, unable to capture any price premium for differentiation.

But that may be starting to change, according to the analysts at Drewry Shipping – even though some industry pundits in the past have said it is not possible to attain differentiation in what is inherently a commodity market.

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It remains to be seen which of these strategies is the most effective, but the biggest risks are being taken by the global integrators.

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"Even to long-time industry watchers such as Drewry it has often been hard to distinguish one carrier from another with few observable unique selling points aside from obvious regional affiliations and size," Drewry notes. "However, things may be about to change as there is growing evidence of a divergence in corporate strategies among carriers that could drastically alter the shape of the industry."

Drewry sees container carriers adopting one of three different types of differentiation strategies:

Strategic Group 1 - Global Integrators: This group, Drewry says, wants to create end to end global logistics services.

The two main carriers moving down this path are Maersk and CMA CGM. Last year, for example, Soren Skou, Maersk CEO, said that "We are building a company that is a global integrator of container logistics – a company very similar to UPS and FedEx; and I hope they will be considered peers of ours when we are done with this transformation journey in three to five years; a network-based, asset-based global logistics company."

CMA CGM, meanwhile, in November agreed to purchase the outstanding shares of global 3PL CEVA Logistics.

Drewry believes carrier choosing this ambitious path ae doing so after have already been through the economies of scale revolution – which did not deliver sustained profitability. So in a twist, they now want to leverage their size by delivering service across more parts of the supply chain in a bid to claim more of the revenue and profits.

This strategy is being pursued either through acquisition, organic investment or by incorporating existing logistics entities into the main liner business, or any of these in combination.

This is not a new strategy, Drewry notes, as similar attempts were made in the last decade when a wave of consolidation swept the shipping and logistics industry in response to the rapid globalization of supply chains and acceleration in worldwide trade. But none of these ewere especially successful, the result of the challenge of integrating disparate entities with different business models and skills sets.

But Maersk and CMA CGM see new technology as leading to a better result this time around.

"Digitization and automation of basic logistics transaction tasks have provided opportunities that did not previously exist," Drewry says.

The risk: The size of the task involved and investment required to achieve it are huge. It will take expert management to navigate this new course and there is a danger of taking the eye off the ball for the core shipping business.

Strategy Group 2 – Core Product Focus: The exact opposite of the strategy of the global integrators, this group will attempt to just get better at global container shipping.

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Here, for example, is a quote from Hapag-Lloyd CEO Rolf Habben Jansen: "Size is not the name of the game anymore, but customer orientation. It is obvious that customers expect more reliable supply chains, so our industry needs to change and invest more. At the same time, we know that people are prepared to pay for value. Going forward, delivering value to get the most attractive cargo on board is at the heart of our new Strategy 2023. To be number one for quality is the ultimate promise to our customers and a strong differentiator from our competitors."

Carriers choosing this path will likely follow Hapag-Lloyd, which has promised to put network optimization and revenue management at the forefront, and focus on providing "unrivalled levels of reliability and service quality."

However, Drewry says it questions whether "trying to be profitable and offering a good level of service can really be described as a strategy. It should be taken for granted. In our opinion, carriers that follow this lead will have essentially opted out of the big ship arms race."

The strategy will look good if the more ambitious carriers crash and burn in their supply chain adventures. The risk though is that if the global integrators are in fact successful, carriers focused on core shipping will look second-rate and vulnerable to takeover. Moreover, the emphasis on the rather nebulous term "service quality" assumes that other carriers, irrespective of strategy, won't also up their game, Drewry says.

Stategy Group Number 3 – Economies of Scale: This approach has already been tried by the global integrators and most other major carriers. However, there are still some carriers that are playing catch up and haven't heeded the warnings about the risks of ordering lots of megaships.

The most obvious example is Korean container carrier HMM, which in November doubled down on its intention to secure a bigger slice of the containership market by ordering an amazing twelve 23,000 TEU and eight 15,000 TEO vessels.

In doing so, HMM reaffirmed its desire to grow its fleet to 1 million TEU, which is more than double its current capacity.

Drwery says that "We suspect that the list of carriers solely focused on growing rapidly is small; limited to companies with state backing or ties to shipyards in need of assistance. While lines will always be looking for a cost advantage, the rest of the market appears to have moved on from this blinkered lone strategy."

The obvious risk: Buying more super megaships when there is already excess capacity will delay the shipping industry finding a way to a better balance between supply and demand that could sustain greater profitability.

So there you have it. In conclusion, Drewry notes that "It remains to be seen which of these strategies is the most effective, but the biggest risks are being taken by the global integrators who could be about to leave the more cautious competition behind."

But it, it notes, "If – and it's a big if – they are successful in achieving their aims the competitive landscape will change completely in the liner world and simply being good at shipping won't cut it any longer. It will be about how wide your reach is."

Which of these container carrier stratgies do you think will be most successful? Let us know your thoughts at the Feedback section below.


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