Commentary: Disruption in liner shipping

The liner shipping industry will see “profound change” in the next two decades, as macro-economic & demographic shifts are altering trade patterns, industry consultant Lars Jensen said in his book, Liner Shipping 2025 – How to survive and thrive.

   Shipping industry consultant Lars Jensen says his new book, Liner Shipping 2025 – How to survive and thrive, is aimed at “providing fundamental understanding and inspiration for anyone wanting to partake in the disruption of the maritime liner shipping industry,” which he believes will see “profound change” in the next two decades.
   “Macro-economic and demographic shifts are changing the trade patterns” that have evolved around east-west trade, he writes.
   According to Jensen, future population growth will take place “outside of the main geographic focal areas of liner shipping” today. At the same time, populations are aging in Europe, Japan and the U.S., and consumers are spending less on tangible goods and more on services like tourism and health care. Populations are also becoming more urbanized, and new cities may result in new manufacturing centers, which “would create a dispersal of the production-led part of the supply chain.”
   If it appears IT developments will be the driving force behind change in the industry, Jensen says “in reality, it is more fundamental.” Industries are “not disrupted because of a technological gadget or a new application. They are disrupted because that new gadget or application fundamentally changes the processes related to the production, distribution, sale and use of the product.”
   While the shipping industry may be “literally begging” for disruption, he says the companies that have appeared in 2015-2016 “have all chosen different partial elements of the full chain…not the full chain.” That, he says, is indicative of the “daunting task of transforming the entire industry.”
   Jensen’s book focuses on strategic challenges facing the industry, but notes companies may move in different directions for tactical reasons. Many carriers, for example, have located service centers in lower-cost countries, which may be quite sensible in the short term, but “should be done with a longer-term plan in mind,” he says.
   The real question, according to Jensen, is, “If you can define a task with such clarity that it can be shifted to a low-cost standardized environment, then why not automate it instead?”
   Due to structural overcapacity in the container industry, shippers “have essentially had most of the pricing power since the financial crisis. This has enabled them to benefit financially from the cost savings measures brought about from the shipping lines,” such as slow steaming, the increased size of ships, vessel sharing, and skipped sailings.
   But while shippers “have the power in terms of pricing, they have almost no influence on the quality of the product—at least not when quality is equated with aspects such as transit times, service frequency, reliability and cancelled sailings,” writes Jensen.
   Could customers paying more incentivize carriers to offer premium service? Jensen says larger ship sizes make that less likely. A 14,000-TEU ship, for example, might have a customer willing to pay more for such a service taking 1,000 slots, but the remaining 13,000 TEUs going to shippers that aren’t interested in paying that premium rate.
   Ships ordered in 2014 and 2015 will continue to be delivered over the next two years, meaning high levels of scrapping are likely to continue, notes Jensen. But he also notes that in 2019 and beyond, “a disproportionate share of feeder-sized vessels will be reaching the end of their life-span,” and orders for their replacements are likely to surge. The good news is their relatively small size means “the impact on the overall global market will be limited.”
   Another chronic problem for carriers is what are known as “falldowns”—containers that are booked by shippers, but never show up. In response, carriers overbook space on their vessels. But if shippers have their cargo rolled to a later sailing, some will hedge their bets by entering into freight agreements knowing full well they will not be able to fill all the slots they have ordered.
   This creates a vicious circle, and Jensen says the emergence of online freight platforms for spot shipments exacerbates the problem. “A shipper with a contract at a freight rate of $1,000 will be strongly tempted to renege on the agreement if he can easily book passage on the same trade lane at $500,” he writes.
   He also notes that new contract types are now being tested where shippers pay a minimum collateral when they book freight. If they back out of a commitment, a penalty is secured against the collateral. Pilot tests of such contracts show they result in a “substantial reduction in the amount of non-conformances,” and this could lead to a two-tier system where shippers who pay the full-freight rate upfront receive a discount, similar to a non-refundable airline ticket.
   “For larger carriers, the markets will gradually evolve toward enforceable contracts,” he predicts, because carriers need a “higher degree of predictability of their cargo flows, and shippers similarly need predictability for their own supply chains.” He contends the question is not “if ” contracts will become enforceable, but “how this development will unfold itself.”
   Jensen also writes that while there are some exceptions, port-to-port container service is becoming more commoditized, adding that “it only requires a single major shipping line to succeed with digitization and automation to accelerate the commoditization.” The implication for management is that when automation is successful, there is no need for manual intervention. As a result, carriers will need to focus more on “exception management” and solving problems, and employees “will need to have a very high skill level in devising impromptu solutions.”