The future of container shipping may be smaller than we think

By: | Issue #646 | at 08:43 AM | Channel(s): Ports & Terminals  Ports  

The future of container shipping may be smaller than we think

In a post-commoditization era, niche ports will emerge as value differentiators.

By Michael Vanderbeek, Deputy Port Director for Massport, Port of Boston

The term “economies of scale” is so ubiquitous in container shipping today that its perceived merits are virtually axiomatic. Vessels are getting larger to support greater economies of scale.  Ocean carriers are consolidating and collaborating in unprecedented ways in pursuit of greater economies of scale.  Ports too are expanding and collaborating as never before in order to achieve, what else, greater economies of scale.  

The logic behind this emphasis on scale is compelling in today’s industry.  Rates are low, growth is tepid and lots of capital has already been spent both on water and on land.  So the reduction of operating costs through rationalization of existing assets makes sense for container shipping just as it has proven to make sense for other industries.  Yet the question remains: how long can the industry stay afloat simply by focusing on the cost side of the equation?  Scale, while helpful, is not a panacea and at some point ocean carriers and ports alike will need to differentiate themselves from their competitors on criteria other than available capacity and rock-bottom rates.

Show Customers What They Want

Steve Jobs famously said of consumer electronics that people don’t know what they want until you show it to them. This may apply in equal measure to container shipping. It is currently difficult to imagine a return to the days in which ocean carriers offer different products at different price points, selectively pursuing shippers that fit their respective service delivery models and leaving those that don’t to find other dance partners.  The current landscape is simply too competitive and there are too many slots that need filling.  But scale must ultimately result in value creation, not just cost reduction, to resolve the industry’s stubbornly persistent woes, and service must ultimately trump scale as a means of creating that value.

It would be difficult to argue that the current trend toward scale at all levels has changed the container shipping industry for the better. Ocean carriers are less profitable, large load-center ports are more congested, roads and highways are more crowded, and shippers are less satisfied.  Yet the next few years portend a doubling down on the current “bigger is better” strategy, even though it seems highly unlikely that doing more of what already is not working will make things better.  Perhaps it is time to learn from other industries and rethink scale in terms of networks rather than nodes, and value rather than cost.  Perhaps it is time to show customers what they want rather than hope they learn to want what they are being shown.

You Can Get There From Here 

Like ocean carriers, air carriers have pursued network scale relentlessly for years using global alliances and industry consolidation as means to increase efficiency and reduce operating costs. Unlike ocean carriers, air carriers have managed capacity effectively, focusing on network scale rather than individual aircraft scale. 

According to the US Department of Transportation’s Bureau of Transportation Statistics, from 2000-2014, the average seat capacity of the total US commercial aviation operating fleet increased just 4% compared to an increase in average TEU capacity for the combined fleets of Alphaliner’s top 20 global ocean carriers of 28% during the same period. This “right sizing” of hardware to match market size has allowed U.S. air carriers to continue to compete in markets of different sizes while achieving a 15% increase in total system load factors, a 4% improvement in on-time arrivals and overall net income in 2014 that was more than two and a half times what it was in 2000 – all despite a decline in average U.S. domestic airfares of 16% during the same 15-year span.  You may get pretzels now rather than meal service, but from both a cost and yield perspective, the airline industry has figured out how to use scale to its advantage, not by cascading larger and larger aircraft into fewer and fewer markets, but by increasing the number of markets served and actively managing the size and frequency of aircraft deployed in those markets so as to balance supply and demand. The container shipping industry should learn from this.

A Role for Niche Ports 

Increasingly, activity at large U.S. ports is characterized by higher volumes of inbound non-local cargo whose final destination may be hundreds of miles away, sometimes even in another port city.  This trend is predicted to intensify in coming years in conjunction not only with the continued deployment of larger container ships in both east-west and north-south trades, but with the perceived inevitability of service consolidation that is expected to follow the current round of ocean carrier merger and acquisition activity and alliance reshuffling. The theory goes that ocean carriers’ path to profitability lies in replacing 30 ships of capacity 5X deployed on three separate services with 20 ships of capacity 7.5X deployed on two services.  By deploying larger ships to fewer ports the operating costs associated with those 10 extra ships could be eliminated while sustaining similar overall capacity in the trade.

The problem with this strategy from a shipper perspective is that rather than offer more options and more flexibility it offers fewer options and less flexibility. Worse still, rather than distributing millions of containers across multiple gateways so as to minimize choke points and mitigate risks associated with single-point failures, the funneling of more cargo through fewer gateways leads to highly localized congestion, equipment imbalances, and stress on other resources, all of which have downstream and upstream impacts not just on shippers, but on the entire supply chain as well as the general public. In effect, rather than eliminate cost this strategy at best shifts cost from the waterside to the landside, and at worst adds cost as a result of congestion, thereby amplifying not just logistics challenges but environmental challenges and community tension as well. According to a July, 2015 report released by the Federal Maritime Commission (FMC) “…the elimination of congestion is today’s most critical and relevant trade-related issue.”  In light of this it is hard to imagine how acceleration of deployment of larger ships to fewer ports could have a positive impact on container shipping.

There are viable alternatives to this approach, however.  Some ocean carriers – such as MSC and COSCO in the case of the Port of Boston – have understood for many years that while it takes time and resources to build a niche market organically, there are long-term benefits to doing so, not the least of which being the ability to offer a more efficient and higher-value alternative to customers compared to the standard product being offered by competitors. Other ocean carriers would be wise to pay attention and follow suit and indeed some are doing just that.

Deploying larger vessels and concentrating more cargo in fewer ports may reduce vessel operating costs, but it also weakens ocean carrier pricing power by effectively commoditizing containers. It is the equivalent of substituting station-to-station bus service for door-to-door car service. There is a market for bus service, but that does not make it optimal. Nor does it mean that buses should be the only mode of transportation available to customers. The market requires and demands alternative service delivery models. Uber and Lyft are good examples of the market finding a way to offer customers a product that they didn’t know they wanted until they saw it.  Autonomous vehicles are fast becoming another example.  The barriers to entry for container shipping are obviously far higher than for urban passenger transport, so this is not a perfect analogy. However, the substituting of scale for service in almost every facet of the container shipping industry is rapidly creating a value vacuum for customers by virtue of eliminating product and service differentiation while adding both risk and cost to the overall system.

Niche ports are poised to fill this vacuum by offering ocean carriers more direct access to local customers while at the same time offering shippers more reliable alternatives to the long queues, congestion and overall poor service that increasingly characterize larger ports burdened by unmanageable lift counts and unsustainable growth patterns.  The Port of Boston, for example, has attracted eight new ocean carriers just in the past two years and has set a new record for container volume each of the past three years.  At the same time, the Port has consistently sustained average truck turn times, including dual transactions, of just over 30 minutes while increasing productivity by 30% since 2012. Ports that handle 10, 20 or even 30 times the volume of containers that a niche port like Boston handles can easily dismiss such statistics as irrelevant since a port that handles fewer than 300,000 TEUs per year does not have the same kinds of challenges that a large port does. But that’s precisely the point – not all ports do have the same challenges and shippers are starting to understand this and reward ports that demonstrate the ability to offer superior service.

From Bigger to Better

The inherent competitive nature of people and so too of ports dictates that growth in volume and market share is almost universally considered a net positive and something to be celebrated. The flip side of this is that decline in volume/market share is considered a net negative and something to be avoided like the proverbial plague. Yet in order to resolve some of the container shipping industry’s most fundamental problems, a wholesale shift away from a mentality of “or” and toward a mentality of “and” whereby it is possible to lose market share and still be successful or, conversely, to gain market share and still be unsuccessful, must eventually occur.  Large intermodal gateways are critical to an efficient supply chain and will not decline in importance any time soon. But for large ports to continue to be successful, they must resolve the many challenges that have resulted from the very scale that created those challenges.  While it may seem counterintuitive, in some cases the answer to the challenges that large ports face may be to concede a certain amount of local volume to niche ports within the region in order to focus on improving the quality of their core non-local intermodal business. The industry will be better served in the long-term if growth in volume and/or market share at a given port is dictated by targeted efforts to improve performance and deliver value rather than by short-term cost-cutting measures driven by the relentless pursuit of perceived economies of scale.

Ports of all sizes are acutely aware of the near-term challenges that larger vessels represent and, large or small, all ports must continue to make the necessary capital investments, including both dredging and landside improvements, to meet those challenges. But sacrificing service in pursuit of scale is a race to the bottom, not a blueprint for future success. Cargo, like water, will always follow the path of least resistance. By focusing on service over scale, productivity over price and overall customer experience over bragging rights, niche ports eliminate many of the unintended negative consequences that economies of scale have forced upon larger ports.

The first 15 years of the 21st century have witnessed a clear shift toward commoditization in the container shipping industry as the relentless pursuit of scale at all levels has steadily eroded nearly all distinguishing attributes among service providers, particularly ocean carriers.  To the extent that trends in other industries can be viewed as reliable proxies for the future of container shipping, the next 15 years can and should witness a slow but sure shift away from scale as an instrument of cost reduction and toward market and product customization as instruments of competitive advantage.  Niche ports will increasingly emerge as differentiators in this environment by offering customers the one thing they most want: value. [end]


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American Journal of Transportation