End-to-end logistics pursuit holds risks for major container lines
This past year has seen significant moves by a few big container lines to redefine and reposition themselves as end-to-end logistics providers. How risky is this strategy?
The principal motivation of Maersk and CMA CGM is self apparent: to mitigate cyclicality, create greater predictability of revenue, create value for customers and be compensated in kind, and defend against disruption by new forms of industry actors.
Maersk is all but betting the company on this, defining itself as a global integrator of container logistics and backing that up by offloading energy businesses and integrating contract logistics into a core offering while sidelining traditional freight forwarding. CMA CGM has taken similarly decisive steps this year by acquiring 25 percent of CEVA Logistics in April and recently launching a bid for majority control, allowing CEVA to acquire the CMA CGM logistics unit and installing APL CEO Nicolas Sartini as deputy CEO of CEVA.
Not all carriers see the wisdom of this direction; Hapag-Lloyd and Ocean Network Express (ONE) say they are focused on delivering quality core container shipping service. Hapag-Lloyd is basing its Strategy 2023 on that idea, stating on Nov. 22 that in “recent years, our industry has not invested sufficiently in supply chain reliability and quality and … that we need to change.”
Mediterranean Shipping Co. has begun embracing technology such as the Internet of Things (IoT) track and trace as an enhancement to core container shipping.
But for those venturing into uncharted territory, not only do the moves into end-to-end logistics aim to reinvent the companies themselves, they are a challenge to the current industry structure as well as long-standing assumptions borne out of experience that core container service and logistics are incompatible businesses. Without a doubt, forwarding and container shipping are incompatible, but the carriers are not trying to incorporate a neutral forwarding model into their offerings; they have something new in mind.
The Maersk and CMA CGM moves — a glimpse of what is possible?
It may turn out that Maersk and CMA CGM have a glimpse of what is possible, that technology combined with shippers’ demand for reliability can make control of the ships a key differentiator within a broader offering. It might be that a total logistics solution enabled by data accuracy, user experience, application programming interfaces (APIs), and artificial intelligence — inclusive of adjacent services such as contract logistics and landside transport — can drive new levels of value for retailers and other beneficial cargo owners (BCOs) and will thus find a previously untapped market.
It might be that such positioning is a requirement when, as BCG head of shipping Ulrik Sanders told the JOC Europe Conference in September, container shipping is being disrupted from several angles. E-commerce giants such as Amazon and Alibaba as well as legacy and start-up forwarders are digitizing their businesses at a faster pace than container lines, and pure digital players such as Freightos, NYSHEX, and Crux Systems are finding digital openings that could complicate carrier efforts to stake out a preferred position with customers.
Further, reinvention may be unavoidable due to the long-term unsustainability of carriers’ chronic low profitability. Either a new business model is found or the solution will be more disruptive via mergers and acquisitions (M&A), loss of independence, or further bankruptcies.
But creating a new kind of logistics business out of container shipping entails risks of its own, as Neil Glynn, head of European transport equity research at Credit Suisse, told the JOC Europe Conference in September. Speaking on the day Maersk announced the breakup of Damco, Glynn, who will also speak at TPM 2019 in Long Beach, said management risks losing sight of the core business in pursuit of reinvention.
“Focusing on structure change can succeed, however, if the underlying revenue base is not actually protected; then ultimately that ends up being a problem,” he said. “If underlying freight rates do not hold up … if the underlying freight rate isn’t protected [and] if the pricing ethos within the industry doesn’t improve, then that doesn’t end up improving the situation.”
He suggested the carriers’ mindset around pricing versus still-unproven ideas about reinvention will ultimately prove decisive. It’s not like other transport sectors haven’t figured this out. In the case of international express, dominated by DHL, FedEx, and UPS, “you now have three players which are controlling 90 percent of the market, focused on quality and service levels, and getting paid for that.”
Glynn mentioned the trans-Atlantic airline passenger market, which is also highly concentrated among the top few carriers. In that scenario, “The decision makers … are all on the same page in wanting pricing to go up and who are actually willing to take the steps to achieve that,” he said. Within that market, “that proves to be … a more important factor than simply considering what supply is doing,” he said in Hamburg.
The risk of losing sight of the underlying container shipping business becomes especially relevant in light of the turbulence the industry is likely to encounter over the next two years. Global trade is slowing, as Maersk pointed out in its third-quarter earnings report on Nov. 14, and carriers face a challenge in recouping higher bunker costs associated with the International Maritime Organization’s low-sulfur fuel regulation, which takes effect on Jan. 1, 2020.
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