Big carriers and big shippers say go big or go home, but isn't that a recipe for mega ships importing mega woes?
 While consolidation among ocean carriers is both enormous and scarifying, it is hard to say whether it is a good or bad - perhaps only a necessary evil.
True, President Joe Biden, addressing corporate concern as a traditional leftist terror, has directed agencies in his administration to scrutinise consolidation in an attempt to increase competition. One industry explicitly called out was the ocean freight market.
"In 2000, the largest 10 shipping companies controlled 12 per cent of the market," said a White House press release. "Today, it is more than 80 per cent, leaving domestic manufacturers who need to export goods at these large foreign companies' mercy."
President Biden specifically called on the Federal Maritime Commission to look into the high detention and demurrage fees that increased consolidation itself increased. This is a practice the FMC was already investigating before the executive order, but agency will now work with the Department of Justice's Antitrust Division on enforcement.
Shippers and regulators have always scrutinised consolidated market with suspicion. Container shipping is a carrier's market right now, and after continued supply chain disruptions, shippers and regulators alike are beginning to cast a forensic eye on whether industry consolidation has contributed to the recent shipping woes.
Twenty year ago, there were 20 global carriers - now we are down to half that. CMA CGM, the world’s third-largest carrier, had in 2015 acquired APL to spur its growth. But shortly after Hanjin’s collapse, CMA CGM was back on the acquisition trail.
"With the collapse of South Korea's leading carrier Hanjin, there was to be a wave of consolidation in the sector and CMA CGM is on the look-out for opportunities should they arise," said CMA CGM chief executive Rodolphe Saade.
By the end of the following year, seven more large carriers – and many terminals around the world – had either merged or been acquired, noted Washington, DC, Supply Chain Dive.
It wasn't just carriers who acted alone in the '90s and early aughts that led to consolidation. Large importers also played a role, according to Gene Seroka, executive director at the Port of Los Angeles.
"At the same time, we started to see global companies, those in retail footwear, fashion, even furniture, say that you need a presence - in order to earn our cargo - on a global basis," he said.
That meant carriers needed routes on the transpacific and transatlantic with a footprint in Europe and Asia. At the time, there weren't many carriers that offered this.
Hanjin Shipping’s bankruptcy in 2016 didn’t begin nor end the process of consolidation. But the aftermath of the shipping line's bankruptcy and its exit from the market provides an example of how consolidation - usually taking place in the form of mergers, acquisitions or in space-sharing agreements.
Mr Seroka said the industry was already looking to consolidate when he was working at APL in the '90s.
It wasn't carriers who acted alone in the '90s and early aughts that led to consolidation. Large importers also played a role, according to Mr Seroka.
"At the same time, we started to see global companies, those in retail footwear, fashion, even furniture, say that you need a presence - in order to earn our cargo - on a global basis," he said.
That meant carriers needed routes on the transpacific and transatlantic with a footprint in Europe and Asia. At the time, there weren't many carriers that offered this kind of global service, he said.
"There was a need from the shippers, so that's what the carrier has delivered," said Lars Jensen, CEO of Vespucci Maritime when asked about shipper's role in the consolidating market.
Mr Jensen said carriers focused on two elements of scale, and both of them encouraged further consolidation.
It was soon appreciated by shipper and shipping line alike that the larger the vessel, the lower the unit cost, from the slot cost to the cost of the stock keeping item on retail shelves.
But to invest in larger ships, a carrier needed volume. And partnerships and mergers were one way to ensure these larger ships had larger volumes, Mr Jensen argued.
Similarly, the more weekly services a carrier offered, the lower the cost, because it could cut down on transshipments, he said.
"Size matters," Mr Jensen said. "That's why a carrier wants to become larger."
Mr Seroka said industry consolidation started with a space-sharing agreement between APL, OOCL and HMM that eventually led to the creation of The New World Alliance.
It "kicked off kind of some inertia around how can you get better economies of scale, wider service coverage, and find a way to cover your cost of capital for new investments if you could partner up with other people," Mr Seroka said.
Over the next two decades, carriers would further refine the agreements to eventually use alliance structures that allowed them to share space and add port calls to each other’s networks.
Carriers then banded into alliances, three of which controlled more than three-quarters of global container capacity.
When the 2M alliance joined Maersk and MSC, then announced it was adding HMM to its vessel sharing agreement, it was argued that this was good for the carriers and shippers alike.
Mr Jensen said these alliances do help carriers get the scale they look for by adding more weekly services to their network.
"That clearly is an operational advantage," Mr Jensen said of alliances. "Now, we should not forget that an alliance is just that: operational. The carriers are under no circumstances allowed to coordinate on pricing."
But there are disadvantages for the carriers in these alliances when there is less demand in the market.
The shippers can "play the alliance partners against each other because they're not allowed to coordinate on pricing and quite a number of shippers were very good at playing that game when the market was weak," Mr Jensen said.
Shippers, regulators scrutinise consolidated market
Container shipping is a carrier's market right now, and after continued supply chain disruptions, shippers and regulators alike are beginning to wonder whether industry consolidation has contributed to the recent shipping woes.
But there are disadvantages for the carriers in these alliances when there is less demand in the market.
The shippers can "play the alliance partners against each other because they're not allowed to coordinate on pricing and quite a number of shippers were very good at playing that game when the market was weak," Mr Jensen said.
While there is much to make industry stakeholders from the ocean carrier to the retailer uneasy about what must be admitted is the uncreditable extent to which consolidation has gone. But it is also clear that it is not the same old story of carrier bullies beating down hapless shipper. That is because both sides sought economies of scale to increase profitability by shrinking ship crews while increasing ship sizes.
The real problem is addressing the two surviving adversaries in this conflict, that is, the small players versus the large. As large-scale stakeholders can muscle out smaller players who still exist in the shipper and carrier camps, this has produced a "go-big-or-home" operating principle that has come to dominate the industry.
There have been corporate giants of the past - photo film maker Kodak and typewriter manufacturer Smith Corona - who in the end filed for bankruptcy when faced with new technology that replaced what they were selling.
No prospect of a repeat of such a phenomenon comes to mind in mitigating against corporate giantism today, but one is struck by the success of Hawaii's Matson line offering a premium D2D (door to door service). One might make a start at looking to Matson to find a technique to do an end-run around the mega ships with their mega congestion that super-sizing inflicts on customers and carriers alike. |
