The Hanjin Effect: The end of shipping as we know it

Hanjin’s collapse could not have happened at a worse time, with cargo volume at near-peak levels ahead of the year-end holiday season. Uncertainty is permeating down the entire supply chain and paralysing the logistics industry. Without doubt, this is going to have a serious negative impact on the top and bottom lines of major retailers around the world.

Hanjin Shipping is the 7^th largest container carrier in the world, with 98 ships and a 3.0% market share. In comparison, A.P. Moller-Maersk, the world’s largest container carrier, commands 617 ships and 15.4% of the market according to Alphaliner.

As of last week, 66 Hanjin ships dispersed across the globe have been left stranded as ports, tug boat operators and cargo handling firms refuse their services, sceptical of the Korean shipping giant’s ability to provide new financing. Retailers were forced to store empty Hanjin shipping containers as port terminals were not accepting their routine return and a total of US$14 billion in floating cargo remains tied up at sea, compounding their problems.

Long regarded as a stalwart of this industry, Hanjin’s sudden and spectacular collapse has sparked great feeling of insecurity regarding the future of shipping and retailing. Due to the complex web of relationships and shipping alliances, companies would find it hard to even put a number on their exposure to Hanjin.

Confidence in the shipping industry has never been lower, with 11 out of 12 of the biggest shipping companies announcing enormous losses over the past quarter. This is evident despite the fact that shipping prices between Asia and US have soared; (40-50% increase). Industry analysts expect these freight hikes to be temporal as an onslaught of new capacity comes on board.

The South Korean government’s decision not to bailout Hanjin has the market even more concerned than ever, leading to investors pulling out of the shipping industry in a hurried move to de-risk. Hanjin’s parent company, Hanjin Group, will contribute US$90 million to help resolve the crisis but that has done little to assuage the concerns of suppliers and cargo handlers. Korean Air Lines, Hanjin’s biggest shareholder at 33.2%, has yet to make a decision on a bailout plan.

Will what we do today be enough for tomorrow?

With cracks appearing in the chain, logistics players have been taking steps to better prepare for the future.

1. Bigger, faster, but is it better?

Maersk Line built the world’s largest ship, Triple-E, to deliver more goods while using less fuel. Triple-E stands for efficiency, economy of scale and environment where it is designed to be environmentally friendly with a unique hull design and an energy-efficient engine and system. Major shipping lines are seen to be heading down this trend as well.

However, mega-container ships are unlikely to solve the problem due to overcapacity; 18% of the world’s container ships are anchored and idle today. In the last quarter, global shipping capacity increased by 7% while demand lagged behind at 1%. Furthermore, 60% of the cost savings of the most recent container ships are due to more efficient engines and not due to economies of scale. Bigger ships cost more to build, maintain, transport and handle at the ports. Not forgetting the more expensive insurance premiums arising from higher risks of piracy due to potentially higher value of cargo concentrated on one ship.

The costs clearly outweigh the benefits when it comes to mega-sized containers.

2.  Internet of Things & Big Data

As mentioned in DHL’s Internet of Things in Logistics, it is already possible to track and monitor a container on a ship in the middle of an ocean and more accurately time the arrival of vessels in port. What we do expect is advancements making it faster, more accurate, secure and most importantly predictive. The hope is in predicting issues and resolving them before they materialize.

Big data is an avenue for increased performance with the rapidly increasing number of connected devices, embedded sensors and analytics. Capacity sensing, planning and reporting, energy-efficient management, and proactive fault/problem detection and resolution are just some of the examples present today. This continuous feedback loop would enable carriers to improve their operations over a span of time.

With the increasing speed of innovation in recent years, the technology chasm between industry leaders and the average logistics provider can only widen. It is paramount to take advantage of the technology available to make more efficient use of transport infrastructure, higher engagement with customers and more informed decision making.

3. Shipping Alliances

Be it B2B or B2C, everyone demands frequent and predictable transit lines. Ocean liners have been hard pressed to offer this service as ship sizes have only gotten larger. This has led to multiple alliances such as 2M (Maersk and MSC) and G6 (Hapag-Lloyd, NYK, OOCL, APL, MOL and HMM) which will further reorganize in coming years. Alliances allow ships to share vessels in order to provide better services without buying more vessels. Analysts at Mckinsey believe that these alliances will eventually expand to landslide operations.

Carriers stand to benefit the most due to these alliances. However, there has been a multitude of negative externalities imposed on other players. Importers have complained to regulatory bodies that they often have to pay congestion charges due to these delays. Smaller players view these alliances as anti-competition gestures.

It remains to be seen if regulatory or competition policy approaches will be applied to deal with these issues.

4. Empty Container Exchanges

The Boston Consulting Group (BCG) has launched xChange, a web-based marketplace to facilitate exchanges of idle equipment between ocean carriers, container leasing companies, intermodal operators and other logistics companies. This would potentially reduce movement of empty containers by as much as 30% and reduce the carbon footprint. It is currently being tested by the largest global ocean container carriers and leading leasing companies.

Final Thoughts

These are but a few forms of innovation that the industry has and will continue to come up with, as businesses desperately seek out ways to keep themselves afloat in these rough waters. It’s sink or swim, and no longer are minor tweaks to the value proposition or enhancements to operational efficiency enough – disruption is imminent.