London 22.08.2017 – Global shipping industry consolidation and alliances will prompt a major shake-up in Latin American service structures in 2018-19. Container terminals across the region now need to develop a more nuanced approach to value, pricing and utilization, argues Michael Kaasner Kristiansen in this guest editorial ahead of TOC Americas 2017
“There will only be 5-6 major container carriers left 10 years from now”, Soren Skou, Maersk CEO
Container shipping industry consolidation has continued in recent months with Cosco’s proposed USD6.3 billion acquisition of OOCL. There seems only one major hurdle left for Maersk Line to acquire Hamburg Süd – regulatory approval from Brazil, where both lines command significant reefer market share. The recent deal for CMA to buy Brazil-flagged Mercosul Line from Maersk is intended to help with this. If we fast-forward to final integration of Japan’s Ocean Network Express (ONE), that brings the number down of container carriers with a global market share of 1% or more down to just 12.
The implication is thus not only that lines the size of Hyundai, Yang Ming and ZIM cannot survive on the global stage (PIL and Wan Hai are still mainly niche trade oriented), but that someone else will need to go. Hapag-Lloyd, Ocean Network Express and Evergreen are today number 5, 6 and 7 respectively. Will it really take 10 years to get down to 5-6 as the Maersk Line CEO predicted recently?
Alliance formation is another form of consolidation. It cannot capture the full benefits of an actual acquisition – notably in overhead and IT expenses – but it does enable many other scale advantages. The Ocean Alliance and THE Alliance have just completed the largest-ever re-deployment of container vessels, with 2M also making adjustments to accommodate Hyundai and Hamburg Süd.
Most trades relevant to the Americas are still outside the scope of these alliances. But this will change and we must expect a major shake-up of Latin America service structures in 2018-19. The Hamburg Süd acquisition will be a major catalyst, breaking up some key regional agreements. The first could be the Asia-Mexico-West Coast of South America trade, where CMA CGM, Cosco and Evergreen will partner up.
Liner shipping in the Americas has waves of change still to come. But many terminals are already struggling under existing conditions, let alone what is coming towards them. Larger tonnage has increased both operating and capital expenses, without bringing in more volumes. Fewer services have increased the stakes in contract negotiations, bringing prices down – often unnecessarily. Overly optimistic outlooks have led to a slew of new terminal projects or expansions, leading to over-supply and putting extra pressure on pricing.
“There is no one-size-fits-all strategy as each terminal and market is unique, but the key is a continuous re-balancing of the business to ensure the highest asset utilization, at the highest possible prices, with the lowest possible cost, over time. There is nothing new in those basic objectives for a terminal but the new reality calls for some changes in execution, balancing and prioritization”
Asset utilization is of course important, but is often limited by how a terminal defines itself. A terminal may view itself as a facility transferring containers between a ship and truck or train. This is the lowest point in the value chain. It may also look for other ways to optimize revenue/margin per invested dollar through diversifying into higher value-adding logistics services, or into different cargo segments. There is significant unused capacity in most terminals and major value can be created identifying matching volumes. The new reality calls for a broader view on how a terminal can be utilized.
Highest price is another obvious part of the successful formula, but it may not get the attention it deserves. First, a lack of segmentation often leads to pricing that does not support – or even works against – other objectives. Second, an all-or-nothing view leaves little room for nuances and focus then is typically on maintaining existing tariffs or minimizing tariff reductions. The new reality requires a nuanced pricing strategy, in support of asset utilization, and sophisticated segmentation that shows where tariffs may go up, and down.
Lowest cost often becomes a focus area only when margins or utilization are going down. It should always be a focus area – but it is not. It should be balanced against other objectives, with the aim of optimizing the bottom line, over time. Any terminal should have a systematic approach to continuous cost erosion.
All the above objectives require a balance between them, and balancing to optimize results over time.
The conventional response is to resolve the here-and-now and secure a contract – often at reduced prices – to bring short-term improved performance. But the new reality calls for changes. It is time to allow nuanced views into the strategy, to re-balance objectives and re-define what a terminal “is”. The storm is here and it will not abate anytime soon.
Michael Kaasner Kristiansen is Owner/President of CK Americas, a logistics consulting firm that he founded in 2013 following a 24+ year career at the A.P. Moller – Maersk Group. He is a frequent advisor, speaker and moderator at TOC Americas and this year chairs the Supply Chain Roundtable Discussion on October 17 as part of the Container Supply Chain conference. TOC Americas runs October 17-19 in Lima, Peru