How Shipping Overcapacity Could Be Maersk’s Salvation
These two graphs explain why Maersk is splitting its shipping business, which is reeling from overcapacity; from its energy business, which is reeling from low oil prices:
As Tolstoy observed, “each unhappy family is unhappy in its own way.” With floundering profitability at both businesses caused by very soft market pricing, Maersk has decided to give each unit full independence to choose and implement the right solutions for climbing back to full profitability.
Giving individual business units full rein to operate independently has precedent at Maersk. Back in 2012, the company decided to transfer IT decision-making powers from the corporate level down to individual business unit CIOs. In an interview with the WSJ, then-Corporate CIO, Stephen Fraser, explained why:
“their growth trajectories and priorities are so different that a shared services model can’t serve them effectively”
There’s one more chart that sheds even more light on reasons for the split. In 2015, Maersk Transport and Logistics generated nearly 75% of Maersk’s revenue. But that hadn’t been the case. There have been some sharp EBIT changes across the Maersk units.
Overcapacity and Survival of the Largest
The new unit, merging Maersk Line with DAMCO, Svitzer, APM Terminals and Maersk Container Industry, will be called Maersk Transport and Logistics. It’s quite clear how it reached its current financial predicament. And it seems pretty clear that this strategy will continue to be their path forward. They are are using technology as a catalyst, and planning to win the looming battle for consolidation within the industry in the wake of overcapacity.
Maersk’s aggressive vessel purchasing behavior over several years has helped drive the current capacity glut in container shipping. The first Maersk E Class ship was delivered in 2006 and was able to carry 14,700 TEU, a world record at the time. In 2011, Maersk announced the Triple-E class, another world-record sized ship at 18,270 TEU. Twenty such ships were ordered. These twenty ships alone represent nearly 2% of current global TEU capacity.
And they continue to be a prime driver of overcapacity within the industry. Nearly 13% of the world’s TEU capacity on the order book belongs to Maersk. The total TEU capacity of ships on its order books is over 375,000 TEU. In and of themselves, these shiny new ships would be enough to rank as the world’s 7th largest container fleet.
Building and rolling out the world’s largest container ships … twice … is a clear indicator of the role the Danish conglomerate has played as a catalyst for current overcapacity within the industry. Not maliciously, of course, Maersk Line’s profitability grew from -$482 million in 2011 to $2.5 billion in 2014. Even as overcapacity grew, Maersk Line’s business was still soaring and the company saw no reason to slow down.
Even when Maersk’s profits drastically fell to $1.4 billion in 2015, the entire industry was still scrambling to order new ships. This is primarily because the cost of new ships was set to soar. Under IMO Tier III regulations, ships with keels laid from January 1, 2016, face costly emissions compliance mandates. The industry had a narrow window of time to build cheaper ships and wanted to take advantage.
While Maersk is now reaping the trouble that it sowed, opportunities lie ahead. However stressed the business may be, in the long haul Maersk can weather the storm better than most and can turn the current situation to its benefit. It’s telling that the newly separated Maersk Line’s primary goal isn’t increasing profitability. Instead, according to the WSJ, its primary goal is increasing market share through organic growth and acquisitions.
This isn’t a new strategy. Back in June 2015, Maersk CEO Nils Andersen told the WSJ that:
“it’s highly unlikely there will be an easy way to make a profit going forward for a small or midsize carrier.“
Maersk, of course, is big – and plan on getting bigger. While Nils Andersen was switched out by Soren Skou in mid-2016, Maersk is continuing this exact strategy. They have the deepest pockets and are willing to continue to push overcapacity, while taking years of loss, in order to eliminate competition and dominate in the long-term.
“During the Chinese economic boom, carriers and logistics providers alike had little incentive to change. These days are over. While technology is playing an important role in reducing costs and increasing efficiency, Maersk’s strategy – of contributing to over-capacity, weathering the low profit storm and then leveraging it for increased market share – is certainly a threat to midsized carriers.”
Zvi Schreiber, CEO of Freightos
Driven by Technology
Maersk is complementing this strategy, building on economies of scale by harnessing technological efficiencies. It’s already equipped over a quarter of a million refrigerated containers with technology to provide instant, on-demand visibility of conditions within each container, as well as the ship’s location as it sails around the world.
Maersk is also exploring online booking of cargo slots; 97% of Maersk customer bookings take place on their website, up from 60% in 2013. That said, the company admits that it still needs to build that into an end-to-end capability.
The Bottom Line
While technology can increase profitability (75% of forwarders believe direct carrier-shipper online sales to be on the rise), and reduce costs (Maersk Triple-Es only requires a 19 person crew to function) there’s only so much more efficiency that can be squeezed out of the ships. For instance, it’s hard to see how fully autonomous ships can provide much in the way of cost reduction, if that only translates to a reduction of 19 employees whose cost, allocated over 18,000 containers, is marginal.
Twenty years from now, ocean liners will likely still be the mode of choice for large-scale shipments. But there is only so much more efficiency that technology can squeeze.
And on the shipping side, despite a brief respite caused by the Hanjin bankruptcy, it also appears that ocean freight shipping rates will continue to fall. For Maersk, this means some tough hits to the bottom line, as it slugs it out in the battle for market share.