final thesis 3986736- mithun sasidharan

M99 EKM Masters Dissertation

TABLE OF CONTENTS

CHAPTER 1 : INTRODUCTION............................................................................................7

1.1 : Outline of Maritime Shipping.............................................................................8

1.2 : What is Dry cargo, liquid cargo and Gas cargo?.................................................9

1.2.1. Dry cargo vessels......................................................................................9

1.2.2. Liquid cargo vessels.................................................................................9

1.2.3. Gas cargo vessels......................................................................................9

1.3 : Aim / Objectives.............................................................................................9

CHAPTER 2 : OUTLINE OF ECONOMIC CRISIS................................................................10

2.1 : What is Economic crisis or ‘Financial Tsunami’?.............................................11

2.2 : Recent history of shipping before and after crisis............................................12

2.3 : Development of containerisation......................................................................12

CHAPTER 3 : RESEARCH METHODOLOGY.....................................................................14

3.1 : Types of research methods available....................................................................15

3.1.1. Research qualities and skills................................................................15

3.1.2. The Research process and stages.........................................................15

3.1.3. Research Methodology.........................................................................15

3.2 : Choosing the Right method for research..............................................................16

3.3 : Primary and Secondary data available..................................................................17

3.4 : Framework selected for research..........................................................................17

CHAPTER 4 : REPORT / REVIEW ........................................................................................18

4.1 : SWOT analysis of Shipping and shipping logistics.............................................19

4.2 : ANSOFF growth matrix for maritime shipping market.......................................20

4.2 : How economic slowdown happen........................................................................21

4.3 : Problems to dry bulk cargo carriers......................................................................21

Mithun Sasidharan (3986736)


CHAPTER 5 : LITERATURE REVIEW...............................................................................23

5.1 Effects on shipping, losses incurred and actions adopted

by the maritime industry...........................................................................24

5.2 Credit crunch effect on the seaports...................................................................33

5.3 Credit crunch effect on the Supply chain...........................................................35

5.4 PESTEL analysis of maritime supply chain.......................................................36

5.5 Credit crunch effect on the marine environment................................................37

CHAPTER 6 : CASE STUDIES............................................................................................. 40

6.1 : Case studies of MOL (Japan) ............................................................................41

6.1.1 : SWOT analysis of Mitsui O.S.K. Lines..............................................42

6.1.2 : Losses incurred by MOL....................................................................43

6.1.3 : How MOL tackled the financial crisis...............................................44

6.2 Case studies of A.P. Moller Maersk...................................................................46

6.2.1 : SWOT analysis of the company..........................................................47

6.3 Case studies of American President Lines..........................................................49

6.3.1 : SWOT analysis of the company........................................................ 50

CHAPTER 7 : DISCUSSIONS AND ANALYSIS................................................................52

7.1 : Analysis of the problem in nutshell................................................................ 52

7.2 : New Development Areas for the shipping companies to

concentrate in the future...........................................................................59

CHAPTER 8 : CONCLUSION..............................................................................................60

8.1 : Learning outcomes..........................................................................................60

8.2 : Lessons to be learned from the crisis for Shippers..........................................63

8.3 : Further studies.......................................... .......................................................64

CHAPTER 9 : APPENDIX.....................................................................................................65

CHAPTER 10 : REFERENCES/BIBLIOGRAPHY...............................................................68



TABLE OF FIGURES

Fig. 1 SWOT Analysis...............................................................................19

Fig. 2 Ansoff’s Growth Matrix...................................................................20

Fig. 3 World sea tonnage............................................................................22

Fig. 4 U.S. Exports and Imports in the last 10 years..................................24

Fig. 5 World’s Top Ten Container Carriers and fleet composition............25

Fig.6 Growth rate of supply and demand in global container shipping......26

Fig.7 Order book of ships........................................................................... 30

Fig.8 PESTEL analysis diagram.................................................................36

Fig 9 Fleet distribution of world’s major carriers.......................................41

Fig 10 Consolidated revenue by segments in the financial year 2011........41

Fig 11 SWOT analysis of Mitsui O.S.K. Lines...........................................42

Fig. 12 MOL business performance..........................................................45

Fig.13 APM group ROIC from 2005- 2011.................................................46

Fig.14 SWOT analysis of A.P. Moller Maersk............................................47

Fig.15 APL loss/profit data for 2009 and 2010............................................49

Fig.16 Average utilisation of container and its volume................................50

Fig. 17 SWOT analysis of APL (Neptune Orient Lines)..............................50

Fig. 18 History of profits of MOL, APM and APL for the last 5 years........55

Fig. 19 MOL fleet revenue distribution........................................................ 56

Fig. 20 Maersk fleet revenue distribution..................................................... 57

Fig. 21 APL (NOL) fleet revenue distribution.............................................. 58

Fig.22 Consolidated statement of Income of Mitsui O.S.K. Lines................66

Fig 23 Consolidated financial information of A.P. Moller Maersk...............66

Fig. 24 Consolidated Income statement of A.P.L. (Neptune Orient Lines)...67



Table 1 Comparison of profit and losses before and

post recession of major shipping companies.......................29

Table 2 Change in fleet capacity of major shippers

during the crisis period.........................................................34

Table 3 Capacity and fleet volume of strategic alliance group......................38

Table 4 Growth rate for the container sector for the period 2000 to 2009.....39



ABSTRACT

This thesis reflects the severity of the financial tsunami on the maritime shipping and the supply chain. Recession was initiated with the crashing of financial institutions in the US and spread world -wide affecting global trend.

Every sector including Automotive and manufacturing suffered a huge loss .This affected world trade and shipping industry faced the heat of deadline of cargo and over capacity.

Maritime companies including Mitsui O.S.K. Lines, APL (Neptune Orient Lines), Maersk, Evergreen etc adopted strategic measures to survive and overcome the crisis and emerged as successful surviv-ors; it is obvious from the case studies of most globally leading companies that efficient implementa-tion and rapid actions for resisting damages due to similar crisis in the near future.



ACKNOWLEDGEMENT

First and foremost I thank God almighty for giving me the power for stepping strong and providing a smooth path throughout my process.

I would like to express my deep and sincere gratitude to my supervisor Professor Raymond Jarvis for his detailed guidance and comments and constant invaluable support throughout my work. His con-cise ideas and concepts have made me study, reciprocate and thoroughly learn this field of academics.

I am deeply Grateful to my supervisor Professor Richard Anderson whose patience and kindness along with his vast source of academic knowledge has been a constant source of motivation for my thesis, and had made this as my invaluable learning experience of my Life. I wish to express my warm and sincere thanks to Professor Owen Richards for his constant help and guidance throughout the term.




CHAPTER 1

INTRODUCTION


1.1 OUTLINE OF MARITIME SHIPPING

International Maritime Shipping, known as the lifeblood of global economy, carries about 90% of world trade. Shipping is the bulk transport of goods and raw materials, import and export of foods and manufacturing goods and this inter-continental trade comprises of about 50,000 merchant ships and manned by around 1.25 million seafarers. According to Jan Hoffmann (2010: 122), “Greek owned vessel that is built in Korea may be chartered to a Danish operator who employs Filipino seafarers via a Cypriot crewing agent. The ship is registered in Panama, insured in the United Kingdom and trans-ports German made cargo in the name of a Swiss freight forwarder from a Dutch port to Argentina, through terminals that are concessioned to operators from Hong Kong and Dubai. On its journey the vessels may have repairs done in a Portuguese yard, a bunker fuel in Spain and tranship containers- to be reloaded on a different ship in a different destination in Brazil”. The merchant ships are high val -ued technically sophisticated assets and ever since the world trade is growing internationally, the safe operation and reliability of ships became vital. For these governing bodies were formed with stringent rules and regulations being introduced and the major body being International Maritime Organisation or The IMO based in London. The world trade keeps growing continuously and hence shipping in-dustry have to respond to its demand for its service. The various different types of ships that carry the varieties of cargo round the globe are as follows:

1. Bulk carriers, which transport food materials, raw materials like iron ore and coal, are identifiable by the hatches raised above the deck level that covers the cargo holds. These types of vessels are known as the work horses of the fleet and the large bulk carriers can carry and transport enough grain to feed approximately four million people for one month.

2. Container ships which carry a huge volume of world’s manufactured goods and finished products and these are usually on scheduled liner services. The recent times latest container vessels can accom-modate volumes equivalent of 10000 heavy trucks.

3. Tankers are merchant vessels transporting oil, chemicals and other petroleum products and larger tanker ships can even carry over 300,000 tonnes of oil.

4. Passenger ships or Ferries and the luxury cruise ships usually perform shorter journeys for a mix of passengers, cars and other commercial vehicle.

5. Other categories of ships include roll on roll off, pure car carriers, gas carriers, heavy lift vessels, ships for supporting the off shore oil industry and other general cargo ships (International Chamber of Shipping 2008).

Outline of maritime shipping supply chain

For any global company, to reach its products to destination is depended directly on the supply chain of the maritime transport being utilised for the trade. Mak and Ramaprasad (2003) cited by Caragin Andreea Raluca, Paraschiv Dorel Mihai, Voicu-Dorobantu Roxana (2010) considers supply chain management as “a set of approaches utilized to efficiently integrate suppliers, manufacturers, ware-houses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system-wide costs while satisfying service level requirements”. For each shipping company, its supply chain is of vital importance in terms of busi-ness, market competition, and trade performance and in terms of revenue (Raluca et al 2010: 83).



1.2 WHAT ARE DRY CARGO VESSSELS, TANK VESSELS AND GAS CARRIER VES-SELS?

1.2.1 Dry Cargo carriers: The dry cargo vessels often have huge hatches or covers which secure the holds containing cargo and keep them dry. The dry cargo vessels normally transports dry bulk which includes grains, ores, coal, fodder etc, or break bulk in their large cargo holds. These types of vessels are extremely versatile and have numerous possibilities for transportation mainly as that of inland ves-sels.

1.2.2 Liquid Cargo Carriers: Liquids, mostly diesel, petrol, petroleum distillates or edible oils etc are transported in special types of vessels with double hull protective design. Since about 80% of world’s hazardous materials are transported by ships using liquid cargo carriers which are safer than other means of road or railways, these vessels have to meet stringent regulations and requirements like double hull testing in practice to prevent leakage of hazardous cargo in the extreme case of any colli-sion event. Normal type liquid carriers are the traditional tank ships which transports petroleum products and other liquid cargo. Chemical carriers with high safety standards have stainless steel stor-age tanks to carry hazardous chemicals such as hydrochloric acids, phenols etc. Some chemical tankers have tanks with protective coating for dangerous chemicals like benzene, naphthalene etc. These types also have double hulls for safety reasons.

1.2.3 Gas Cargo Carriers: The gas cargo carriers or gas tankers are extremely strong and the safest mode of transporting gases for years. Since these gases are dangerous and have the property of be-coming to liquid state when transported under pressure, these carriers have circular shapes with triple hull (Bureau Voorlichting Binnervaart 2012).

1.3 AIMS / OBJECTIVES

To understand what maritime shipping is all about and study the type of ships or cargo carri -ers based on different categories of structure and the cargo it transports.

To identify and collect vital information regarding financial crisis and its impacts on the mari-time shipping logistics.

To demonstrate the effects the shipping companies round the world faced during the crisis es-pecially with regards to dry cargo carriers.

To understand the strategies followed by maritime shipping companies during recession. To identify, study and understand from the case studies of the maritime shipping companies

from Asia, Europe and America, the actions and policies adopted to respond to the crisis situ-ation and how did they implement it.

To conduct SWOT/ PESTEL analysis of these shipping companies to withstand the situation. To investigate the loss incurred and the corrective actions adopted by the companies to tackle

the global recession mostly with regards to the bulk carriers which had the greatest effect, in-cluding the lay-offs and ballast voyages.

To research the background of financial crisis in a global perspective and its impacts on the financial and business organisations.




CHAPTER 2

OUTLINE OF ECONOMIC CRISIS


2.1 WHAT IS ECONOMIC CRISIS OR ‘FINANCIAL TSUNAMI’?

According to De Bonis, Definition of financial crisis is “A wider range of disturbances, such as sharp declines in asset prices, failure of large financial intermediaries or disruption in foreign exchange mar-kets”. In a financial downturn, the affected nation will have serious impact on its real economy and also adverse affects on employment, purchasing and production capacity with major firms unable to meet their financial obligations. Political uncertainty further worsens the economic situations in cer-tain countries. The recent global economic turmoil of 2008-09 has a lot of common patterns with those in the past including Great Depression and other similar banking crisis. The downturn in finan-cial sector normally leads to complex conditions of decline in the GDP of the country, decline in the asset prices and affect in the unemployment rates. The current crisis, according to experts, is a trough in the global economy and market after the big ‘boom phase’ that extended from early 1980s to 2006. The boom during this period was mainly due to the development and advancement in Information technology, processing and manufacturing technology and deregulations of developed nation’s finan-cial markets. Fundamental changes in the social, technical and financial rules were the driving force for the boom phase which led to globalisation. The end of this ‘boom phase’ and the start of the cur -rent crisis phase known as ‘bust phase’ began with the financial institutions in the US failing to meet its obligations and this then globally spread which lead to the global financial crisis ( Roy E Allen 2009). The global financial crisis and economic downfall started with the bankruptcy of one of the powerful financial players of Wall Street, USA, the Lehman Brothers Investment Bank and security firm in the United States. Very influential and inevitable financial turmoil or ‘tsunami’ had started since then and world economy experienced critical downturn.

Major international financial markets were affected due to the chain reactions induced by the above scenario of US bankruptcy. The global trade were tumbled; financial companies suffered and many were squashed, stock prices around the globe got affected critically (Ho, Choy, Chung and Lam 2010). The freezing of credit markets in the Wall street USA had ultimately led to global financial crisis and reflected in the failure of banks/ financial institutions, declining of currencies and crashes in the stock markets worldwide and also resulted in unemployment whose rate climbed up by 10% com-pared to the previous term.

The financial tsunami in the emerging markets have proved that investor’s confidence is very much subject to change at such short span and can deteriorate which leads to adverse market conditions and capital flow (Ghosh 2001). The crisis caused due to misjudgement of conditions of emerging market’s economy by investors and other related bodies concerned had lack of transparency as one of the main cause for the market instability in those sectors. Good governance and increased transparency would reduce the imbalances in nation’s economy and financial instability. Since the nations who suffered the turmoil had a huge financial assistance from international community like IMF, this forced them to raise the need to seek the assistance of the private sectors in the country for resolving the crisis and indulge in common investment issues (Monti 2001).



2.2 RECENT HISTORY OF SHIPPING BEFORE AND AFTER CRISIS

Maritime shipping industry witnessed a slump in global trade which led to difficult credit conditions, declining shipping rates and also defaulting customers. The shipping companies had to take actions for cost cutting and layoff of merchant ships with focussing more on consolidation. Global recession affected the dry bulk cargo the most with major companies forcing to lay off their bulk carriers, con -tainer ships and car carrier ships for months due to trade crisis. The barometer of shipping cost known as BDI (Baltic Dry Index) fell by 93.4% in 2008 end and global container volume growth percentage fell from 7.2% in 2008 to 2.8% in 2009. Container shipping demand also fell decreasing the freight rates and volume. World’s largest container shipping company Maersk experienced a reduction in shipping volume by 20% in 2009 compared to 2008. The voyage routes from Asia to US and Europe which accounts for almost 50% of the container trade are facing the heat of crisis impact. Major dry bulk cargo market, China is facing the worst performance ever. Payment stability and healthy cash flow are impacted due to financial crisis. These ultimately may lead to lower revenue realisation and increase in risk of customer default on payment. Major Japanese shipping firms like MOL, NYK and K Lines have had major impact due to low shipping rates caused due to crisis and hence were forced to revise their profit guidance. Major Asian shipping companies have tendency to keep little cash re -serves and to allot high risk contracts which have resulted them in having most significantly affected sector. Since the demand of the shipping trade were increasing before crisis began, majority compan-ies had a rapid fleet expansion with new vessels which, during crisis have led to excess capacity due to reduced trade. Major shipping companies around the world including Mitsui O.S.K. Lines, NOL, and Hapag Lloyd etc have looked into corrective actions to address the crisis by forming alliances and merging their individual services in order to cut the capacity and hence reduce the annual cost of la -bour. Companies have taken decision to lay off some of their vessels especially dry cargo vessels and some others running the vessels on slow steaming basis for economic reason of fuel consumption (Steel 2009).

2.3 DEVELOPMENT OF CONTAINERISATION

A container basically is a tank / case with sufficient strength for repeated transport of materials stuffed, de-stuffed or transhipped. The term containerisation, which has revolutionised the global transport of trading goods and commodities, is an increasing / developing trend in the global interna-tional trade. The maritime shipping industry around the world have accepted that containerisation is a major criteria for the future development of shipping trade and hence all trading ports around the world are developing to adjust and cope with the high progress rate(Sople 2007). The container trade has been one of the major portions of shipping since years and average growth rate has been increas-ing especially due to the increase in trade in Asian countries of China, Korea, Japan etc and also Latin American countries. Containers were compared on the measure of twenty foot equivalent unit or TEU and companies including A P Moller Maersk, Mitsui O.S.K. Lines, MSC, P&O NC Hangin, Ever-green, CMA CGM, Hyundai etc have vessels which carry 6000- 9000 TEUs and even bigger capacity vessels are under construction based on the order. In order to accommodate huge ships of this capa-city, the respective shipping ports also had to undergo huge expansion with greater productivity. Ports of Singapore, Hongkong etc have very huge capacity and many ports around the world are expanding at greater rates. The variation in container apart from the size factor are simple box type with end doors, box type insulated containers and reefer containers which posses temperature controlled heat-ing/ cooling arrangement (Sudalaimuthu, Raj 2009). A major area of tension was the unavailability of shipping containers during the stronger than expected financial recession recovery period. One of the



main causes for this was the halt in the container manufacturing plant during the crisis period and the decision of many companies to scrap their old ships which were in business for quite a long period. Major common issue for the exporters were in securing empty containers and the problem of equip-ment dislocation. It is learned that the outbound is affected mainly by the issue of location and not by that of the shortage. The container volume at all the US ports in the west coast in 2010 increased by 13% over the previous years but still remains lower than the figure in the year 2008 where there was no shortage of containers. One major possible factor for this is the shutdown of container manufactur -ing industries. This actually created adverse effects on the shippers and even the manufacturers in the year 2009 when the trade showed a sudden improvement / surge. The operation strategy adopted by major shipping companies of slow steaming or extra slow-steaming aggravated the shortage (Mongel-luzzo 2010:53).



3.1 TYPES OF RESEARCH METHODS AVAILABLE


CHAPTER 3

RESEARCH METHODOLOGY


Research is a systematic and methodical process of enquiry and investigation of a certain specific chosen topic of researcher’s area of interest that also increases knowledge and develops qualities and skills of the researcher to communicate the understanding of the research area.3.1.1 Research qualities and skills

3.1.2 The Research process and stages

The fundamental stages in the research processes common to all types of research are as follows:

1. To identify the topic for research.2. To define the research problem.3. To identify the way research is to be conducted.4. To collect the information and data required.5. To analyse and interpret the information/ data collected and recommend researcher’s views.6. Finally to write the dissertation in the format decided and to get the approval.

3.1.3 Research Methodology

The main different types of researches classified on the basis of the purpose of the research are Ex-planatory research, Descriptive research, Analytical and Predictive research and also Quantitative and Qualitative research. Explanatory research: Explanatory research is carried out when the research problem being considered doesn’t have any earlier studies to which researcher can refer to, for in -formational materials about the issue to be discussed. The main objective of this type is to look for patterns or hypothesis and not to confirm a hypothesis. The focus of explanatory research is to gain the insight and familiarity with the topic for further investigation deep into it at a later stage. Explan-atory research includes flexible techniques like case studies, historical analysis and observations


PERSEVERANCE

IT SKILLS

INTELLECTUAL SKILLS

INDEPENDENCE

MOTIVATION

ORGANISATIONAL SKILLS

COMMUNICATION SKILLS


which can be useful in giving both qualitative and quantitative details. The research assesses whether new theories should be developed or whether the existing theories and concepts can actually be ap-plied to the problem. This method concentrates on collection of wide range of impressions and data. Descriptive research: Descriptive research describes the phenomenon as they exist. This normally is used to obtain required information on the characteristics of an issue. Descriptive research follows a quantitative collection of data and goes further to examine a particular problem as it is used to de -scribe the characteristics of the issue concerned in the problem being considered. According to Collis and Hussey (1997), Analytical or Explanatory Research: In this case, the researcher analyses and explains why or how the characteristics of research is happening and aims to realise the phenomena by measuring and finding out the reasons for such happening and to find out the questions whose an-swers can be the solutions to the issues. Major element of explanatory research is to control the vari -able of research activity to identify critical ones. Predictive Research: Predictive research goes fur-ther than the descriptive research and even further than the explanatory type. Here this forecasts the likelihood of happening of the same type of events or situations which can or which are occurring elsewhere and focus on generalising the causal link by predicting certain happenings and its phe-nomenon from certain hypothesis and general relationships. This type of research provides the an-swers for ‘how’, ‘why’ and ‘where’ to the present events also for similar events in the future. Quant-itative and Qualitative Research: Quantitative and Qualitative research are differentiated on the basis of the approach adopted by the researcher. Quantitative research involves the collection and ana-lysis of numerical data and even statistical tests and concentrates on measuring the phenomenon. This is objective in nature. Qualitative research includes the examination and reflection of perceptions to gain and understand the social and human activities. This is subjective in nature. Applied and Basic Research: Applied research is designated to apply the findings from it to solve specific, existing issue being considered where as on the other hand basic research is the pure or fundamental form of re-search (Collis, Hussey 1997).

3.2 CHOOSING THE RIGHT METHOD FOR RESEARCH

Methodology is related to the overall approach that researcher takes towards a research process from theoretical concepts about it and also analysis of the data collected. The methodology to be considered in the research is concerned with many factors like:

- What are the data collected- Why are certain data collected- Where is the data origin- When is the data collected- How has been the data obtained- How is the data being analysed

Research paradigm describes the scientific practice and philosophies of how research should be con-ducted. The two major research paradigms are Positivistic paradigm and Phenomenological paradigm. Positivistic approach looks into the fact or causes of social phenomenon with having little concern to the subjective state, whereas phenomenological paradigm relates to the understanding of human beha-viour from the participants’ own frame of reference. Result of criticisms of positivistic paradigm leads to phenomenological paradigm. Choosing a research methodology concentrate also on type data, loca-tion, reliability, validity and generalisability of the data collected. Deciding on which methodology to be used is depended on the choice the researcher have and its limitation by the number of factors. It starts by considering researcher’s constrains regarding research problem and also the paradigm issue.



Methodologies related to research paradigm are associated with positivistic or phenomenological types and even the decision to mix both the methodologies (Collis, Hussey 1997).

3.3 PRIMARY AND SECONDARY DATA AVAILABLE

Primary data is the original data collected by the person actually doing the research. It is the original data that is collected at the source like the survey data obtained through questionnaires or observations and experimental data gathered by making experiments in a controlled situation. On the other hand, the Secondary data is that information collected from already existing sources from books, document, published statistics and reports, company accounts and personal internal records of organisations.

3.4 FRAMEWORK SELECTED FOR RESEARCH

Chapter 1: This gives an introduction of maritime shipping industry and provides an outline of differ-ent categories of cargo vessels mainly dry cargo ships, liquid cargo ships and gas carrier vessels. This section also focuses on the main aims and objectives of the research topic being considered.

Chapter 2: Outline of economic crisis provides the in depth knowledge of what exactly is economic crisis and the history of maritime shipping before and after the crisis and a look into the development of containerisation.

Chapter 3: Research Methodology gives a knowledge regarding the types of research methods avail-able and factors to consider in choosing the right method among the above types. This also provides the primary and secondary data available and describes the frame work selected for the thesis.

Chapter 4: This chapter gives the report which includes the swot analysis of maritime shipping lo-gistics in relation to recession and also gives the main reason for the cause of economic crisis and how shipping field especially dry bulk carrier cargo was affected with the same.

Chapter 5: This section deals with the literature review of the report. According to ‘Gill and Johnson’ (1991: 21), critical review of literature ‘should provide the read with a statement of the state of the art and major questions and issues in the field under consideration’. The review includes the effect of fin-ancial recession on the maritime shipping and the loss or problems the companies faced due to the crisis and the counter policies and actions adopted by them.

Chapter 6: This particular chapter considers the case studies of three major shipping companies around the world. Mitsui O.S.K. Lines is a Japanese shipping company which had to face a great problem during the crisis and they had taken vital steps in tackling the issue and maintaining their business in world trade. European and American shipping business is also looked into and considered for investigation for the same.

Chapter 7: Critical analysis of the recession effect on maritime shipping as a whole is considered from the literature review and the case studies investigated.

Chapter 8: This chapter deals with the major learning outcomes from the thesis and the areas for fur-ther research which can be considered.

Chapter 9: The final chapter consists of references and appendix used for the research.




CHAPTER 4

REPORT/ REVIEW


4.1 SWOT ANALYSIS OF SHIPPING AND SHIPPING LOGISTICS

SWOT analysis is a strategic tool to categorically identify and then use it to approach for analysing in-ternal and external organisational environment. It is a strategic framework and is a specific planning tool in understanding any company’s potential areas of strength and weaknesses. Controllable Internal factors are strengths and weaknesses and uncontrollable external elements comprises of opportunities and threats. The proper evaluation and utilisation of SWOT analysis is very vital for any firmfor its strategy to be successfully implemented (Chermack, Kasshanna 2007: 383).

Fig. 1 SWOT Analysis

Various shipping companies around the world have identified the strength, weakness, opportunities and threats in their industry by conducting SWOT analysis techniques and this enabled them to adopt necessary measures for dealing with each situation and have been classified in common, below under respective category:

Strength: Shipping is the most common form of world trade and a major portion of world trade is carried out using merchant ships. The location of ports in major continents as in China, Singapore, South and North America, and the European nations are highly suitable for the easy transfer of raw materials, oil and other finished products. Countries like Japan, China and US have trade with the shipping industry giants of Maersk, CMA-CGM, NYK, APL, K Lines, and NOL etc. The investment by the Chinese steel industry has boosted the trade between the raw material, iron ore exporting na -tions and the Asian power house. This has developed the shipping logistics sector extensively. The fast and powerful recovery from the 2008-09 financial recessions by the powerful economies of the world has also assisted in the improvement of shipping sector. Even though most of the European na-tions are yet to recover from the crisis, the nations including China, Brazil, India and even Japan have showed a quick recovery and these nations have a leading role in the shipping logistics sector and in-ternational trade. Weakness: The effect of economic downturn has led most companies to lay off their vessels which are mostly dry cargo types including car carriers, bulk carrier vessels and also con-tainer ships. This was mainly due to the impact of crisis on the global automobile sector and bulk cargo sector and has resulted in adverse effect on the marine employees. The congestion occurring in the major ports which trade raw materials like iron ore and coal have also had its negative impact on shipping and shipping logistics. Opportunities: The post recession recovery particularly in the Asian industries have given a good scope for the shipping sector and its logistics to compensate for the


STRENGTH WEAKNESS

OPPORTUNITIES THREATS


losses incurred and move forward with the new trade routes in the future. The LNG trade is too on the rise and is a boon to the shipping sector. Countries like China, Brazil etc have a faster growing eco -nomy and the improving relationship between these trading nations are helping the shipping industry to achieve new heights after the big dip during the recession. Threats: With the opportunities comes the threat for the marine shipping industry. The nations of USA and Europe are still weak in recover -ing from the downturn and together with the currency crisis and issues are posing a hindrance to the fast growth of shipping trade. The political crisis in the oil rich Middle East, the natural calamities like earthquakes and tsunamis and the rising piracy attack trouble are still the biggest threats to the shipping and shipping logistics.

4.2 ANSOFF’S GROWTH MATRIX OF MARITIME SHIPPING MARKET

Ansoff Matrix is used by any organisation to developed specified strategies considering its product – market options in order to achieve new growth heights. This is achieved after studying the matrix and understanding the opportunities based on existing and new markets/ products in the future (Richard-son 2007).

EXISTING PRODUCT NEW PRODUCT

EXISTING MARKET Market Penetration Product Development

NEW MARKET Market Development Diversification

Fig. 2 Ansoff’s Growth Matrix

Market Penetration (Existing products into Existing Market): It is studied that 80% of the com-pany’s profits are generated from 20% of its customers and hence it is very essential to retain the ex-isting customers particularly when the market faces adversity or crisis. The importance of relationship and mutual understanding between the customers, business partners and suppliers is being realised by the company.

Market Development (Existing product into New Market): Companies try hard for keeping their business intact and to maintain market position particularly during crisis when the shipping trade is stagnant. The main advantage of the company entering new markets with existing products is that it offers opportunity to make more profits and market share.

Product Development (New Products into Existing Market): Development of product and related in-novations is vital for the companies to stay competitive in the fluctuating market. Importance of mar -ket segmentation is required even though it might costs more and might take more time.

Diversification (New Products into New Markets): The process of diversification can be highly risky, mainly during the time of financial slowdown but it provides better opportunities for new business. This normally takes place by the process of merging and acquisition of companies like that of NOL took over the control of APL (Cupman 2009).



4.3 HOW ECONOMIC SLOWDOWN HAPPENED?

In the late 90s, major Asian economies, South Korea, Singapore, Indonesia, Thailand, and Hongkong etc experienced crash in their stock market and suffered great strains for banks and other financial in -termediaries. This situation of serious economic crisis or recession caused their GDP to fall and their currencies to get plunged. Unlike the other South American countries, which experienced similar situ-ation earlier where the government expenditure were not able to compensate with very low taxes, the Asian countries had financial systems which were bank based that had very little transparency. Allen and Gale (2007) considers that, in the past there were stock market crashes in 1929, banking crisis in the year 1930, recession in Brazil and Mexico in 1962, Great Depression, crisis in US in the last half of 19th century etc. Many economies and respective government adopted necessary actions that con-trolled the cause of recession mainly during 1945- 1971. Bank of England developed and adopted ef -fective stabilisation policies which helped them to ensure economic stability. France also didn’t ex-perience financial downturn from 1882 till 1924. In the US, First bank of United States and the second bank of US were formed and these federally chartered financial banks had branches all around US which played a major step to tackle crisis but later on troubles from within these institutions created smoke of crisis in the US. In banking, the investors really worry regarding soundness of the financial institutions where they have invested their funds and when in panic, they withdraw the funds and hold it within themselves in the form of liquid currencies. Seriousness of the crisis is depended on the cur -rency/ deposit ratio. Since major banks hold liquid cash reserves in the form of currencies, they had huge reserves as deposits in other banks for the sake of interests they receive. The banks could pay these interests as they lent the currencies received, as ‘call loans’ in the stock market to buy stocks on margin. Hence it is obvious that there is a link between panic in financial institutions or banks and stock market crashes (Allen and Gale 2007).

The occurrence of both banking crisis and currency crisis together known to be as ‘Twin Crisis’ which frequently occurred when commitment to the gold standard had gone weak at earlier stage. Later fixed exchange rate system and strong banking regulations were introduced. Major cause of earlier crisis in the 1930s is believed to be as a result of market, which was considered as the problem and regulatory steps adopted by respective government were the solution. Conversely at present situ -ation, it is believed that inefficient macroeconomic policies adopted by inconsistent government in the financial system is the major cause for recession and market forces emerge as the solutions (Allen and Gale 2007).

4.4 PROBLEMS TO DRY BULK CARGO CARRIERS

The maritime trade between trading nations around the globe had a great impact due to the drastic change in the economic outlook. This had a very major effect on the dry bulk cargo sector which transported a major percentage of trading commodities with more than 60% of the world bulk traffic trade done by the capsize vessels of 100,000 DWT and more. One of the major business sectors was the import of iron ore from Australia and South America to China for its steel industries. The Lon-don’s Baltic Dry Index, key element that measures shipping commodity trade by bulk carriers re-vealed the effect that the recession had on the world trade particularly the Chinese steel industry and hence bulk carrier trade. According to the Michael Broad, President of Shipping Federation of Canada, “Like everywhere else, we have experienced a steep decline of dry bulk and break-bulk cargo in all trades due to the global financial / economic crisis. In the last quarter of 2008, we estimate the tonnage figures of various commodities were down between 10% and 25% at Canada’s main ports”. The overall dry bulk cargo trade in Vancouver declined by 9% during the recession time. Even the other sector of dry cargo fleet that includes project cargo and heavy lift cargo which seemed unaf-



fected had also shown signs of softening in their demand. Global leading nations have released massive economic stimulus packages in the hope of improving global cargo demand and hence trade. The sector of bulk carriers had faced the extreme heat of recession in years 2008-09 and in the early months of 2010. Drop in the dry cargo vessel rates affected the employees of maritime shipping and the business profit of major shipping companies. The financial crisis and turmoil had resulted in worsening the dry bulk cargo trade but yet another adverse factor for this sector was the over capacity especially in the dry bulk sector of iron ore and coal trade mainly due to the huge overhang of new ships on order during the previous years. (Ryan 2009).

Fig. 3 World sea tonnage

(UNCTAD cited in The Economist 2010).

The global financial slowdown continued to affect the performance of many ports around the world during the crisis period of 2008-09. In the particular case of Canadian port of Quebec, the percentage of total trade traffic was reduced by 21% in 2009 in comparison to its previous year. The main reason for this cause was presumed to be the drop in dry bulk volumes of iron ore, coal etc. Most steel indus -tries in the US and China, which were the main importers of iron ore were working at lower produc-tion capacity (Canadian sailing 2010).


According to Jan Beringer, president and CEO of Rohde & Liesenfield Canada, “the current shipping market is one of uncer-tainty and that has created a dramatic downturn in freight rates, most predomin-antly in the bulk trades, but even now in the project cargo sector.” The world sea trade reduced by 4.5% in the crisis period but the merchant fleet volume rose by 7% which created over capacity, decline in de-mand of vessels even during the period of recovery and extra pressure on freight rates and marine companies’ business profit (The Economist 2010).



CHAPTER 5

LITERATURE REVIEW


5.1 Effects on shipping, losses incurred and actions adopted by the maritime industry

The world economy witnesses its largest fall of 6% in the global growth during the crisis period of 2008-2009 during when the financial downturn was started in the financial centres of advanced eco-nomies and then spread to other nations around the world. This also involves the decline in stock mar -kets, decline in credits and currencies and even decline in the employment rates. The impact of crisis in the dimension of Economy of each country can be viewed as the difference that has occurred in the GDP of each country from its peak to that dip during the recession. The impact on financial markets of each affected country can be viewed or measured by the difference in its stock market index during the turmoil which will also be reflected in the flow of capital and the collapse occurred in the credit growth (Llaudes, Salman and Chivakul 2010). Major Asian emerging economies of India, China and Indonesia reacted to the financial crisis situation effectively and they tackled it to avoid the danger of recession and to an extent succeeded in dealing with it. The US and Europe were adversely affected with US economy and employment falling considerably and European economy worsening due to the downturn and still in crisis. Even though Asian countries were less affected, Indian GDP fell to 5.3 from near double digits and China’s GDP, which always maintained double digit import and export rates dipped to about 6%. The main issue in this period was the effect this had on the European and US trade mainly from the China’s decline in market that caused fall in the trade of East West and Intra Asian region with the increase in oil price hike making the problem worse. The exports from the Asian countries to US and Europe which were 34% in 2006 dipped to a low of 28.7%. This was mainly due to the worsening of economies of US and Europe with slow rate of recovery and also the free trade agreement and formation of association (ASEAN) among the Asian economies (King 2012: 20).

Fig. 4 U.S. Exports and Imports in the last 10 years (U.S. Census Bureau cited in King 2012: 20)

In the year 2008, when the prices of crude oil dipped from $147 a barrel to $60, the shipping compan-ies were not able to make the most of the situation as a reason of the economic recession which con-tinued till 2009-10. Much of the gain that would have been utilised by the maritime companies in terms of slashed oil prices went in vain by the lowering of shipping freight volume caused due to re -duced trade, which first started only in the world automotive sector and then gradually spread to other



cargo commodity sectors. As a result of the global credit crunch and hence fall in shipment, leading maritime companies like A.P. Moller Maersk, Giant Alliance of MOL, APL and Hyundai reduced the freight volume/ capacity. Maersk even suspended one of the Asia Europe marine service, MOL took decision of lay down of some of its dry cargo fleet vessels. In short, the maritime shipping companies could not take the advantage created by the reduction in fuel or oil barrel price, as this decline happened much faster than the market recovery (Hoffman and Gallagher, 2008). The vessels due to get delivered in the year 2008-’09 were getting delayed, the situation being more critical in the Europe-Asia trade route where the freight rates are lowered in comparison to the African, South American and also trans Atlantic routes. The post recession periods in the year 2010, when a lot of shipping companies have recovered from the downturn or are in the path, have witnessed some in-dustry giants being ready to afford to wait out the challenging situation on the Asia – Europe route, and Maersk even ordered for ten new 18,000 TEU ships, Hanjin ordering five 13,000 TEUs, CMA-CGM of France for three 16,000 TEU vessels and Mediterranean shipping ordering for larger ships of 14,000 TEUs and more (Barnard 2011: 41).

Fig. 5 World’s Top Ten Container Carriers and fleet composition

[As of June, 2012] (Barnard 2011: 42)

Carriers particularly in the Asia-Europe trade route increased the freight rates for maintaining capacity cuts and during the peak season after the crisis recovery specifically the spot rates for the 20- foot containers increased three folds from $500 to $2000 on certain specific trade routes. But the introduc-tion of huge vessels by the industry giants of carriers of more than 16000 TEUs actually increased the pressure on them as the trade witnessed a downward decline mainly due to the European crisis and the slowing economy in China, which is a major source of imports and exports as shipping industry at present is concerned, together with the increase in the bunker prices. The trade from China to Europe fell by 2%, Japan’s and S. Korea’s export by 9.4% and 17.7% respectively. At the same time trade to U.S. from China’s export grew up by 12.8% and also Japan and Korean export saw new heights. With the expected delivery of mega capacity ships for many of the ocean carrier companies, things have gone worse in terms of maintaining capacity. All the negative ramifications caused due to recession in the global industry, China’s slow economic growth and financial trouble in the U.S. created signific-ant adverse affects on the shipping companies/ carriers (Bernard 2012).



The world GDP declined by 1% during the financial crisis of 2007-10 and trade volume by 25% in a single year. Most ship owners have suffered from diminishing profits, the ordering of new ships have been stopped and many vessels have been running on slow steaming and many laid off. The causes of recession mainly are reduction in demand in the industry for services due to poor economic growth and also trade volume together with the imbalance created between the supply and demand due to the sudden dip in the demand side which then led to overcapacity. This unavailability of trade financing during the recession is considered by many experts as the main reason for quick spread of the crisis in the global maritime industry. Even with the economic downturn and financial crashes in the global economy, maritime transportation accounts for a huge part of International trade with newer ports be-ing developed in emerging economies to join the maritime logistic network worldwide and increase in size of the vessel and fleet. Major problems caused during recession were that of overcapacity, supply of tonnage, demand drop and dip in the freight rates. The world container ship fleet expanded during the recession period. The liner market, Mearsk, MSC, CMA CGM, MOL, NYK and K Lines in partic-ular, developed during the period from 2000 to 2010 even though recession had its effects on them. Even later this period saw the increase in size of the liner ship which can be cost saving in terms of economies of scale. This in turn led to the development of existing hub and port to accommodate higher volume and larger size vessels (Chew et al 2011).

Fig.6 Growth rate of supply and demand in global container shipping (Chew E.P. et al 2011)

The impact of recession in the global car making automotive industry is high in the developed coun -tries. It is learned that there was a severe shortage in the capacity of car carriers due to insufficient orders in the past, the main reason for this being the failure of forecasting and anticipating the rapid growth of the market that occurred in the post recession recovery period. The Japanese manufactures increased their production and export of cars mainly to Middle East. The volume of cars shipped worldwide witnessed a huge hike from 7.5 million cars a year in 1980 to almost 16 million in 2008. But the industry was not able to forecast the magnitude of this huge growth. It is seen that shortfall of 10% of cars a year means that 1.5 million cars were not shipped. Downturn in the US automotive sec-tor and also slow recovery in the European economy increased the imbalance between the demand and the capacity or volume transhipped. Even though the demand for the car carrier sector are increas -ing at a very high rate, the decision for shipping companies to order for newer ships is clouded, for the reason being the uncertainty among the car manufactures and shipping companies of what lies ahead



and also due to the economy of car carrier sector. The current economic recession and recovery, fluc -tuating oil prices and exchange rates have had a great impact on the automotive manufactures’ future production level and location of production plants to make it more responsive to customer demands. The loss of capacity due to fall in trade made the shippers to decide to run their vessel on slow steam-ing which actually reduces bunker costs and is more economical and also have the added advantage of reducing harmful emissions to environment. Capacity of car carrier market increased from 15.2 mil-lion in 2008 to 17.5 million in 2010. Besides the higher cost of manufacturing car carrier vessels in order to meet the high demand in tonnage and to meet the balance between supply and demand, it takes nearly 3-4 years for the manufacture of a new vessel from the date of order till the delivery to take place to the customer, i.e. to get delivery of 10 ships, the ship owners have to wait for about 4 years. In short, the increase in cost of ship manufacturing due to increased raw materials and steel prices, together with the uncertainty of the cargo within this 3-4 years of production particularly with regards to car carriers due to the change in customers’ preference for type of cars, would add to the present crisis situation (Thomas 2008: 48). The period prior to the recession had witnessed a boom in the car carrier sector with industry facing shortage of capacity for a higher demand which made the shippers to order for larger ships capable of carrying of about 8000 cars which when got delivered in the recession period created additional problems during this time for the shippers. The vehicle trans-portation had boomed for decades prior to the financial downturn that had a greater adverse impact in this sector. The volume of global sea trade had grown by about 9.7% a year during the boom phase before 2008 when it got halted by the crisis. Together with the car carriers, the ro-ro (roll on – roll off) sector too were affected badly due to crisis as the construction , manufacturing, agricultural and transportation equipments like tractors, bulldozers, railcars etc witnessed dip in their demand due to global trade collapse. Many of the companies had to diversify their trade into other sector of shipping that again added pressure on the vehicle carriers. For instance, ICO terminal which was an automobile terminal in Belgium was turned into port of break bulk cargo facility (Bernard 2010: 18).

Top leading vehicle carriers including NYK, MOL, K Lines of Japan and Wilhelmsen Wallenius of Norway too suffered from the downturn. The recovery in this sector saw the vehicle carrier picking up the business in late 2009, when the world economy emerged from recession and this sector was as -sisted by projects driven by government. The vehicle carrier sector have taken necessary actions to re-cover by balancing the supply and demand which had included laying up and scrapping of some of their carrier vessels. The recovery has been steady with the emerging markets of developing econom-ies of the world including China, Brazil, India etc entering and investing in the automotive sector and this helps this sector to keep up with the pace of recovery with these visible changes in trade patterns mainly in these emerging countries (Bernard 2010: 18). Reefers are those types of containers with temperature controlled cargo sections in it maintaining it as required depending on the type of cargo it carry, chilled, frozen or warm. The temperature sensitive cargo is powered from external power source and these types of container carrying vessels had struggled in the financial crisis period. But in comparison to other cargo carriers like the bulk carriers and ro-ro vessels, the effect or recession on the reefer carriers are much lower for the reason that the downturn in the economies of the trading countries have very little impact on the food industry and the customers have to eat and have not changed their eating habit, also food shortage was not a part of the crisis and have not happened dur -ing this time. Instead shipping industry witnessed a rise in the market volumes of certain companies, of the reefer containers for about 10% in 2008 compared to its previous year, and most of them being the export of frozen and fresh pork from Canada to Australia and New Zealand and also frozen fish and meat from the Far East countries. The reason for the lesser impact of financial downturn on refri-gerated cargo vessels includes the absence of over capacity in reefer sector as it is seen in dry cargo vessels and also the fact that to operate modern reefer container vessels is much cheaper than the old



types of conventional ships. But the recession impact and the slow recovery in the US led to shortage of reefer equipments in the North America which affected the shipping logistics and frozen cargo was held in cold storages for quite a long time. Since 2008 witnessed a very little impact of recession on the temperature controlled reefer container sectors, major shipping companies including Maersk and Safmarine invested a lot in this sector of reefer equipment and services, with a forecast of profit in the future and to attract market and business (Canadian sailings 2009).

The container shipping industry too faced the real heat of global economic downturn which led to many shipping companies to sink, some of them to merge with others, and also forced to make changes in the acquisition terms which existed previous years. The shipping industry adopted strategies to adjust with the issue of over capacity during reducing demand. Financial turmoil erupted in the container industry when the supply and demand for the ship capacity were out of balance. The recession in the container industry led the credit market to crash and ultimately led the lenders to squeeze the borrowers who were in debt for acquiring new container ships. The volume of growth rate dropped which reduced carrier’s revenue but the operating costs and fuel prices remained on the higher part. The growth in the container vessel space was exceeding its demand and the difference was still widening since more ships were delivered later on in the next 2-3 years. The ship owner took evasive actions to reduce the effect of crisis by managing the vessel capacity particularly in the Trans pacific and Trans Atlantic routes, also by adopting the policy if slow steaming of merchant ships for more economical fuel consumption and even took policy of shuffling the vessel routes and newer ves-sel sharing agreement. Some ship owners have adopted policies to lay off their ships more often to those in the Asia Europe route and even to cancel new orders. According to Neil Dekker of Drewry Shipping Consultants, “If a number of large orders were to be cancelled; this would help the supply- demand balance”. But since the ships, which were ordered before the crisis when the business was bright, are being delivered in huge number, the carriers are finding it hard to put them due to over ca -pacity. For bigger ships ordered during favourable conditions in 2007-08 and which are delivered in 2010-11, the global economic crisis recovery was not uniformly faster to accommodate the huge ton-nage of this amount. Hence the ship carriers keep continuing to trim the vessel capacity. Some of the carriers even tried to turn the chartered ships back to the owners after the lease period which also adds more pressure on the charter market which increased the capacity for the charter market like that of the freight market. Charter rate and freight rates have fallen by 10% and 50% respectively during the period which meant that all the shipping lines lost the money in the trade particularly in Europe Asia route and most carriers cancelled the services in the transpacific and Asia Europe route. Some of the carriers took decision for putting the vessels for maintenance in the dry docks which extended longer than normal and some others in lay off in the mid sea, for instance, in Iceland the Icelandic carrier named Emiskip had uncertainties over its long term financing due to the financial turmoil affect on Iceland’s economy and also shipping industry (Leach 2008: 12). In the year 2007, the economic slow-down was visible in the container shipping industry when the price of crude oil dropped significantly and the price of primary industrial metals like aluminium, nickel, steel etc fell dramatically. This af-fected the balance between supply and demand of the capacity of container vessels which ultimately led to reduction in demand for containerised import from Europe, Japan and U.S. which were the de-veloped economies. This means that cargo demand for satisfying the supply of vessel capacity was not enough mainly because of the delivery of newer vessels. Developing nations like India and China are comparatively less affected by the economic slowdown for the reason that their exports are less depended on the foreign trade but still are affected because global industrial slowdown have occurred in the international trading world. The main factors that eat up the vessel capacity are the port conges -tion, trade growth, slow steaming of ships and faster recovery in the Asia- Europe route. In short, higher vessel delivery order and schedule for the same will create overcapacity which became un-



avoidable. The shipping companies or the carriers are also much worried about the rising cost of the bunker fuel oil together with the overcapacity (Leach 2007). The year 2008-09 also witnessed major fall in the break-bulk and project cargo shipping industry mainly in the Asian sector. These sectors are subject much to seasonal conditions. Cancellations and delays in projects were visible most com-monly in the infrastructure sector of projects from Canada to Australia. Asian countries especially China were less affected comparatively. New orders in the break-bulk and heavy lift sector saw a re -duction in this period, but the overall impact of recession on the break-bulk and project cargo sector was found to be stable even though smaller suppliers were adversely affected. In the Middle East re -gion, even with the global economic crisis, the impact was very less severe of the project related trade from China. Some of the affected nations delayed or cancelled few of their infrastructure projects. This delays and cancellations will bother the logistic challenges adversely and will in turn affect down the supply chain including the suppliers, shippers and the third party logistics and to the engineering firms. In short the global financial crisis altered the dynamics of break-bulk project shipping sector (Biederman 2009). The heavy lift market witnessed delivery of new ships despite the crisis and the is-sue of overcapacity in this sector was only short termed. Long lead times and lack of access to credits have affected the sector in slowing down many projects which means less cargo on the shipping lines. The recession has reduced new orders and some huge projects, for instance in Middle East sector have been delayed. Some companies have decided to postpone projects to negotiate for the freight rates and also for the price of raw materials which dropped globally. The effect of impact on this sector of heavy lift cargo sector is much less regarding that happened to container and dry bulk cargo sector. In comparison to the crisis in 1990 where there were a lot of cancellations in this trade, that didn’t appear to happen in this period of recession (Nodar 2009: 28).

Table 1 Comparison of profit and losses before and post recession of major shipping companies

MARINE SHIPPING COMPANY PROFIT BEFORE CRISIS PERIOD

LOSS DURING CRISIS SEASON

A.P. Moller Maersk $1.05 billion $373million

Neptune Orient Lines $121million $245million

Hapag Lloyd $24.5million $302million

Hanjin Shipping $92million $191million

NYK Lines $610million $262million

Mitsui O.S.K. Lines $576million $136million

K lines $226million $155million

(Leach, Mongelluzzo 2009: 13)



David Beiderman (2010) suggests that, considering the situation as a whole, the economic recession which affected the shipping industry has created problems in the relationship between shippers and third party logistics providers. The process of building up of ties between them started when the re -covery was happening bit faster than expected where the shippers have started to invest more on 3PLs. All the steps taken during the crisis period for cost cutting had left the supply chain network out of balance and both parties are adjusting to the alterations and modifications adopted in the trade scenarios during recession. It is learned that most successful shipping companies were those who had adopted good change management techniques. The economic recession have led a huge number of carriers and shipping logistics providers out of business and this has led to shippers searching for more competitive and prospective third party logistic providers with excellent track records and effi-cient knowledge of the industries. Shippers are engaging more volatile 3PLs in more strategic way. According to senior vice president of a global 3PL company Jim Butts, “When I started in this busi-ness, we heard that customers didn’t want to put all of their eggs in one basket, but now they are say-ing there are a lot of shaky baskets out there”. Global downturn created uncertainty and influenced many company’s supply chain in the management of transportation of goods under the total landed cost principles. The post recovery period saw the companies focussing more on the global competition in business and managing the supply chain complexity and new rules and regulations rather than con-centrating on the survival techniques. The uncertainty mentioned includes natural calamities as in Ja-pan, political unrests as in the Middle East, availability and costs of raw materials from the suppliers as seen by the rules in India to stop the export of cotton which was the world’s largest exporter of it etc, which adversely have impacts on the supply chain. Companies realised the importance of risk management together with cost management. They also learned that flexibility, forecasting and resili -ency are key factors to be taken into consideration in the scenario of economic uncertainty, fuel price volatility and other risks in the industry. This visibility and forecasting is necessary for the customers to prepare and be cautious against the economic fluctuations in terms of costs and currencies and re -duced cycle times (Biederman 2011). The figure below represents the order book of ships yet to be delivered which is shown to be 42% of present capacity and worth US $500 million during November 2009 (Clausius 2009: 89).

Fig.7 Order book of ships (Clarkson research Studies cited in Clausius 2009: 89)



During these period where most of the shipping companies reported losses including Japanese top three major container lines, Maersk, Mediterranean and few rare others announced rate hike on their major lines including Asia- Europe, trans Atlantic and also trans pacific even with the economic downturn hitting the industry hard and most of them trying aggressively to withstand the market com-petition. These companies were trying to adopt counter cyclical policy to defeat the financial down-turn. In this scenario, most shippers were concerned in adjusting and protecting to the bunker fuel price hike and this led the freight rates to deteriorate. The shippers still believe that the balance between the supply and demand still remains the prime deciding factor to stay afloat in the business (Leach, Mongelluzzo 2009: 17).

The year 2008-09 witnessed huge swing in the freight rates and vessel capacity and contract negoti -ations among the carriers, shippers and providers and the huge shoot up in the global oil prices. The industry gradually picked up and recovered which saw an improved balance developing between the vessel capacity and the industry market demand. For instance, North American trade route, which was struggling with very low rates and volume for couple of years, witnesses a sharp recovery in the ves-sel’s market demand which actually outpaced the ocean capacity. The crisis period had a very slow rate of contract signing and some contracts had even extended. The carriers and shippers were com-pelled to enter into long term contracts due to the sharp swing in rates (Mongelluzzo 2011).

One of the most important strategies that govern the shipping is the balance which exists between the supply and the demand in this sector. The growth of global economies resulted in the increase in the demand for shipping relative to supply. This high demand in turn resulted in creating strong markets. But ever since crisis have occurred, it changed the scenario especially with the slowdown in China which is one of the major trading nation importing raw materials from Australia, Brazil and other na -tions for its infrastructural and manufacturing processes and also in exporting finished products. It is very unfortunate for shipping industry in having its supply outstripping its demand in the industry with lower freight rates. So it is essential for the industry to focus on both supply and demand and in particular, give more stress and attention in demand. The supply side comprising availability of ships, capacity of vessels and ports are important but the demand side which comprises developing the global trade and business and also economic activities and risk assessment are more vital. The ship -ping rates are driven by the utilisation ratio between the supply and market demand and the freight rates are also depended on commodities, trade developments, oil prices, raw material prices and avail -ability, the availability of finished goods and port congestion and delays (Lorange 2009).

The market collapses of recent times have led to a loss of nearly $15 billion and many companies are reviving by adopting the policy of merging and acquisition among struggling carriers. Some of the ex-amples for this are the Hapag-Lloyd’s acquisition of CP Ships, Maersk’s acquisition of P&O Nedlloyd and NOL taking over of APL. Strategically the mother companies are in better position than they were before taking over which helped them to reduce their carrier cost and other benefits. It is observed that mostly container sector are much better for merging and acquisition than compared to fragmented bulk shipping companies (Bonney 2011: 1). Yet another policy adopted by major shipping giants to tackle crisis was to lay off their vessels keeping them out of service and also scrapping their older vessels. NYK, K Lines and MOL of Japan have scrapped their older ships much earlier than they had planned due to the recession. Norwegian company Wallenius Wilhelmsen decided to lay off 20% of their vessel and among the entire above, majority were from the automotive sector. Another step adopted by Hoegh Autoliners is to increase the volume of other heavy cargo including heavy lift and project cargo in the car carriers to compensate for the vacant ballast journeys. Some shipping



companies re-evaluated and changed their service/ voyage routes which witnessed more carriers building and developing their base in terminals in the emerging economies of India and China (Bie-derman 2009). The hard time of the recession period was visible by the growing number of vessels being laid off or scrapped. The reduction in demand and fall in trade together with the delivery of newer ships created serious surplus of capacity in the dry cargo fleet, for about 1.6 million TEUs of extra capacity hit the industry which were practically not required. According to Widdows, chairman of World Shipping Council and Transpacific Stabilisation Agreement, “My own view is that this is much deeper and longer than anything we’ve seen in the past. We’ve got companies around the world that is going bust every day. It’s a cycle. Companies go bust, people are unemployed, and it reinforces the desire to hold cash whether you’re an individual or a company”. The new deliveries which added the surplus extra capacity and the economic slowdown together created big trouble for the shippers who had taken measures against the increase in capacity (Leach 2008: 9).

The serious tension among the shipping industry during the crisis period was how much long will this logistical nightmare effect last and how severe it is going to be. Not only was the effect visible on the smaller companies, even the Asian car manufactures, who were the leading section among the auto-makers were struggling with the economic downturn which happened during the awkward time for them when the industry boom saw these owners ordering for new vessels of huge size and had to plan for adopting necessary counter policies. The effect was obvious and clearly visible for older and less fuel efficient vessels which were laid off or scrapped during this time, but was also visible in the sec -tion of new deliveries which struggled mainly because of overcapacity and slashing demand for carri -ers due to failure in global trade growth. The three Japanese giant automotive carriers namely MOL, NYK and K Lines adopted counter actions of excess capacity and yen- dollar exchange rate troubles, by lying off some of their vessels at anchorage and some of them to scrap yard. The world’s largest automakers, Toyota, which overtook General Motors, had to consider alternative suppliers to stay afloat in the market (Dibenedetto 2009).

Contrary to the market happening, some carriers still invested in the ordering of newer vessels even though economic crisis had pulled their profits down dampening the demand and led them to trouble of excess capacity. Some carriers, for example, BBC and Beluga still continued to invest in new heavy lift speciality ships. The ship owners were confident enough of the market compromise with the new deliveries and hence were willing to take that risk. For some owners, heavy scrapping of vessels over 20-25 years old would help to reduce the effect of surplus capacity and believed that over capa-city is not caused by new delivery vessels but from not scrapping and getting rid of old vessels. A vi -tal fact about the scrapping of ships is that, older ships which are being sent for scrap yard are 20 years aged or more and are very old general cargo type where as new delivery ships are vessels of much more efficient performance and capacity. Hence even if owners keep scrapping and order for new ships, the company gets benefit of acquiring more and more efficient vessels. According to Mark Page, Director of liner shipping at Drewery Shipping Consultants (London, U.K.), “if demand keeps going up and there’s a shortage, people are keen to capitalize. But get a market that flips and moves into something with excess capacity, and you want to have smaller ships. The larger ones are the ones most exposed to risk.”(Nodar 2009).

Apart from the ship owners, some manufacturers, retailers and even shippers formed crisis manage -ment teams in the fear of disruptions caused by global recession and to adopt serious tactical steps to tackle it more efficiently and to cope up with the flexible markets of their logistics and transportation providers. The team programme comprise discussions and meetings between the major financial and executive officers, manufacturers, logistics providers, and the sales team for adoption of steps to tackle the crisis situation from getting more troublesome. Issues regarding delay in payment from the



companies, slashing liquidity and reduction in the shipment volumes have compelled the supply chain providers to form such crisis management teams. Collapse of about 2700 truckers, struggle for the warehouses and increasing job cuts in the financial crisis period shows how the recession had its ef-fects on them. For some companies the suppliers have began to demand for immediate payment on delivery for the materials where previously they had a mutual trust on the consumers to have the pro-cess of payment at a later stage. It is seen that more powerful companies get stronger in the industry as their competitors got out of the business without able to cope up (Hoffman 2008).

5.2 Credit crunch effect on the seaports

For nearly two decades prior to the global credit crunch or financial crisis, the business of interna-tional ports and hub witnessed huge profits and increase in volume which had in turn led to port con -gestions. The sea trade market and industry business was developing so rapidly, more than the devel-opment rate of the terminal facilities. But the seaborne trade and volume saw drastic decline. With the demand in sea trade got hit badly due to global economic downturn, eventually the port services too got affected and the port dues / fees were adjusted to the change and shift in cargos between ports took place. Major categories of container cargo were that of food, chemicals, consumer goods and in-termediary cargos. The effect of crisis on food flow was comparatively less hard as the food consump-tion is not hit by the recession. The chemicals, mainly used in cars, pints, medical equipments etc were hit strongly by the crisis whereas consumer goods, which are mainly imported into Europe, were moderately affected. The intermediary container cargo mainly used to manufacture capital or con-sumer products are also among the highly affected sector. These all indicators reveal the depth of the crisis impact.

In the container section, the reefer containers were much less affected than the dry freight cargo with only 5% reduction in the comparison with 23% for the dry cargos. The case of refinery products even showed slight reduction in performance but for this product, the demand reduction has not completely led to similar effect on the production reduction. The container sector of iron ore mainly supplying for the steel plants for automotive industry too experienced an expected reduction in its flow due to trade halt in the automobile sector crisis. Also the coal cargo imports, mainly used in steel production in powered electricity plants suffered loss due to decline in its sector and its energy consumption. Before the crisis, the shippers had worked along with stevedores but later these shipping lines started to work in line with the port facilities termed as terminal operating companies (TOC). The port authorities took necessary steps during the recession mainly with the help of stakeholders in their development and also helping other ports mutually. But as a whole the loss incurred by the port was less in compar-ison with the shipping lines. In a nut shell, the port business had its effect of crisis but was not much severe that it still remains good in business. The improvement of port facilities played a major role in the fast recovery of maritime supply chain (Pallis, Langen 2010).

The recession has had its effects more on the developed economies than the emerging nations where the GDP growth were about 3-4% when the developed economies witnessed negative growth. Its sig-nificant impact was seen expectedly also on the maritime shipping, ports and logistic providers and the depth and extend of crisis specified the considerable long term impact that it is going to have on all related fields. The number and volume of ships in the East West route had declined considerably where as Asian region could see much lighter effects. It led to reduction in capacity and dip in the shipping freights mostly in the above mentioned routes and particularly in container sector.



Table 2 Change in fleet capacity of major shippers during the crisis period.

SHIPPING LINESPERCENTAGE

CHANGE IN FLEET CAPACITY

SHIPPING LINESPERCENTAGE

CHANGE IN FLEET CAPACITY

MAERSK - 8.0 APL - 19.9

CMA CGM - 2.1 MSC 11.6

MOL - 15.1 HYUNDAI - 11.9

K LINES - 21.9 EVERGREEN - 2.4

NYK - 11.6 MISC - 27.2

(Slack 2010)

Now when the recovery was expected in late 2009, the delivery of new ships made over capacity an issue and shipping companies had to lay off some of their cargo vessels to compensate and adapt to the situation. The recession, its recovery and the issues related to it made the shipping companies, port authorities and also the concerned government to take latest technological and management measures for faster re-structuring of its respective economies. The industry realised the need for transparencies among the shippers, port facilities, stakeholders and logistic providers for better information sharing and improvement. Brian Slack (2010) suggests that the economies of US and EU countries had suffered hugely because of financial tsunami where as South Asia and other emerging nations had its minor effect mainly due to the decline in trade with the developed economies. One another major step adopted by the shipping companies were the re-routing of the Asia to West trade to Europe going around the Cape of Good Hope in the Africa instead of passing the Suez Canal to avoid the heavy toll of the canal ($800,000 per transit) and to have longer voyages to compensate the capacity draught is-sue. The problem of congestion of ports in the US west coasts had lightened a bit during recession when some companies changing their trade routes toward East coast ports and Gulf. This changing pattern led to more stress in the port development in the developing economies.

Recession recovery period had witnessed more government involvement in the development and in-vestment in the port and shipping sector which had seen increasing privatisation during pre crisis terms mainly for the reason that government of any nation recognised the importance of shipping trade and port infrastructure for the improvement of economy of their respective nations. The recov-ery period of crisis had put the shippers and port authorities under pressure to take stringent steps in terms of environment issues and to make their entire supply chain more greener in terms of reduction in oil spills and hazardous gases and chemical disposals, to deal with the disposal of ballast water and antifouling paints and also sewage/ garbage issues. Most developed nations had taken actions to ad-vice the shippers to protect their coastline and environment and use low sulphur fuel to prevent harm-ful air emissions. The changes adopted in the ports and shipping industries are for long life and hence the adoption of stringent measure especially more strict Marpol rules made life of shipping companies more difficult (Slack 2010).

5.3 Credit crunch effect on the Supply chain



The supply chain sector of every organisation brings about a major portion of revenue and profit and when the companies face fierce competition in the market, its supply chain feels the pressure for prompt and better performance. . Director of Supply Chain Risk Management practice at Marsh, Gary Lynch considers that “threats to the supply chain are fundamentally predictable, we know disruptions will occur, but there are too many variables to know the impact on the supply chain”. Major issues for the shipping supply chain to be alert of are:

Economic recession (as that happened in recent times 2008-10) Natural disasters (Japanese tsunami, Iceland volcanic eruption) Export strikes (as in restriction of cotton exports in India) Quality control issues etc.

During economic crisis, new techniques and scenarios had been adopted by the maritime companies and its supply chain for staying competitive in the flexible market condition. One of the major adapt-ive policies that played a major role for the European regional companies was the CEE strategic loca-tion factor (Raluca et al 2010: 83). Prior to the crisis, shipping companies were concerned about the quality of the end product and supply risk but soon after recession, concentration was much on the li -quidity/ solvency risks related to financial disruptions. Recession effects have led the increase in sup-ply of automobile supplies from China and India to South America to almost double volume, which made the supply chain of existing companies under stress and additional new suppliers had to be in-troduced. Some companies like UPS supply chain solutions shifted its customers between modes for preventing excess inventory caused as a result of the volatility in supply and demand which created an imbalance in the supply chain balance (Biederman 2011). According to the data from U.S. con-sultancy firm Delcam, about 300 billion dollars were lost in the revenue for U.S. business logistics and supply chain firms. The impacts caused by the financial tsunami, particularly in the manufactur -ing sector have – through the ‘bullwhip effect’- amplified the after effects through the entire supply chain causing damage to company’s financial status. Every company had to stress more on crisis man-agement and forecasting, develop new techniques/ technologies than the old traditional way of doing trade. In this context, Reiner and Fichtinger (2009) introduced new dynamic model for evaluating the improvement of process in the performance of supply chain. In the global maritime trade scenario, at present all the major shipping companies try to expand their supply chain internationally and hence to withstand the market competition, outsourcing of logistic activities and precise performance of supply chain is of vital concern (Chang, Lin 2010).

In the Far East, supply chain meant a relationship between the entire ‘chain’ in the organisation from the initial suppliers to the end customers with the later controlling the major decisions and the rela-tionship. Supply chain relationships were found more effective and efficient than the traditional lo-gistic approach mostly called as the Just In Time (JIT) approach which had commenced in the Toyota manufacturing system. During recession in the Far east, supplier – customer relationship remained un-affected with customers being the decision makers. Hence the company could add or remove firms in the bottom portion of the supply base. But in west, situation during the crisis was not so mainly be -cause of the lack of trust between the suppliers and customers and both won’t move forward together easily. Recession affected in the Far East where Japan and South Korea suffered due to decline in the demand from customers for manufacturing goods mainly in the automotive sector (Lamming 2000).

5.4 PESTEL analysis of maritime supply chain: PESTEL analysis is a framework used by major international shipping companies for identifying the opportunities and risks in and outside the organ-



isation and also to develop specific strategies based on the same. PESTEL stands for Political, Eco-nomic, Social, Technological, Environmental and Legislative/ Legal factors.

Fig. 8 PESTEL analysis diagram

Political Factors: One of the recent highlights in this section was the political unrest in the Middle East which resulted in the Oil price hike. The 9/11 incident in the United States made the regulations and additional requirements stricter even in countries outside U.S.

Economic Factors: Current recession which influenced the fluctuations in the international economy resulted in decline in demand of cargo and hence shipping trade. Import and export restrictions were more frequently visible and crisis led bankruptcy resulted in financial crisis.

Social Factors: Globalisation have resulted in suppliers, traders and customers from the entire supply chain being from different nationalities and many a times it creates unexpected tensions in the links of the supply chain. This different social atmosphere creates its own adverse effects.

Technological factors: The supply chain is getting influenced by unexpected changes and risks in the field of IT or telecommunication system crisis. New and latest innovations in IT are very much needed for the companies to stay competitive.

Environmental Factors: Supply chain of every shipping company gets affected largely by the natural disasters like tsunami, volcanoes etc. and even the new stringent rules for the protection of environ-ment which are different for different regions adds more pressure on the industry’s supply chain.

Legal Factors: Customs and terminal regulations too have major impacts for the trade between inter-national countries. The formation of EU for example has made difference to the supply chain pro-viders in the Europe.

Every organisation recognises the need for making their supply chain strong and secure. According to U.S. president Barack Obama, “Securing the global supply chain while ensuring its smooth function-ing is essential to our national security and economic prosperity”. Cost efficiency and the relationship between suppliers, customers and other business partners are the vital factors influencing supply chain performance (Wright 2012).

5.5 Credit crunch effect on the marine environment



A huge number, estimated to be around 10% of dry bulk vessels which were unemployed or out of business for period more than 3 months, were lying at anchorage at deep sea, majority of them in the South East Asian area –Singapore, Malaysia and Philippine waters- where the toll for the anchorage is low comparatively. This caused the huge steel hull of the vessel to stay afloat in touch with the sea water for a long period without movement resulting in extensive quantity of bio fouling marine spe-cies to come in contact with the ship surface and get attached to it. Also the vessel carries out ballast operations transferring sea water containing micro organisms from one continental region to another for the technical reason of adjusting stability. This two processes result in movement of marine spe -cies from a region to another where this may not be suitable and can cause harm to the environment of that region. When an extensive layer of micro species are present on the ship’s hull, it causes resist-ance to the flow of water by what is called as ‘hydrodynamic drag’ that results in reduction in vessel’s speed and increase fuel consumption.

The ship owners hence apply anti fouling paints on the vessel hull to get rid of the bio fouling organ -isms, which require considerable movement of the ship. When the recession affected productivity and trade, hit badly on the dry bulk sector, owners were forced to lay off many of their vessel at anchorage which had adverse affect on the performance of these anti fouling paints which in turn resulted in the micro organisms to come in touch with the ship surface. The vessels laid off at anchorages accumu-lated the bio fouling organisms from the sea water as well as from the adjacent vessels which were then, during recovery when the trade improved, transported to another region around the globe. Most of these recovering vessels finding voyages were unlikely had their hull cleaned. Many others were planned for Dry docks where they clean the hull but since the availability of these were very difficult, it made the vessels to move their hull unclean and even if the owners invested in refurbishing the hull, it was not practically possible to clean the remote areas of the hull, and also of propellers, rudders, thrusters blocks etc. This resulted in transporting and transferring of organisms around the globe caus-ing marine environmental issues. Latest rules provide stringent rules for ballast water exchange and anti fouling paints to protect the ocean species (Floerl, Coutts 2009).

Impact of globalisation during the start of twenty first century led to boom in the maritime sector with huge development in port infrastructure and ship building sector. But the scenario was followed by immediate change in global trade and business and the crisis impact was clearly visible in the mari-time transport sector that had implemented new changes and strategies in view of designs and tech -niques. The process by which shipping companies chose various ports around the world for trading their seaborne cargo had changed and new methodologies were adopted based on many factors- the cost incurred, capacity and infrastructure facilities, stevedore availability and service, geographic loc-ation, connection to sea route and the risk involved. These in turn assisted the port authorities to in -crease their market share. It is learned that shippers and agents are concerned not only with the flow of goods from one manufacturing or assembling point to its destination port, but also the behaviour of all the above factors in order to sustain their business in the struggling market. The recession had seri -ous affects directly on the ports caused by the decline of sea cargo trade volume worldwide and is in-dicated by the drastic dip in the operational capacity of the ports and port equipments and harbour workers. When a lot of major international ports including Hamburg suffered from the financial crisis loss, ports of South East Asia, mainly Indonesia and Arabic hubs changed into being priority ports for Europe. Also US west coast ports of Los Angeles and Oakland had developed during the crisis where majority of US development were seen normally in the east coastal ports prior to the crisis. Since the container trade was most affected, major ports with container movement equipments, comprising the gantry cranes, these ports suffered a lot due to the fall in the trade. Hence it can be seen that financial and economic crisis have let the shippers witness the ports struggling with loss of business and also



some other ports, which in spite of reduction in demand, managed to keep up their business by im-proving their capacity and developing infrastructure and accessibility. The period from 2008-2010 ob-served improvement in the connectivity between the ports from different continents and had thus strengthened the transport network, by which a strategy change was seen in the global cargo trade dis-tribution. In a nut shell although the transport network of cargo carriers especially containers have di-minished during the crisis period, the distribution capacity of all the ports have not been declined completely (Laxe, Seoane, Montes 2012).

Trade melt down and capacity shift took place in short period of the economic downturn and maritime companies which got affected had to adopt strategic changes and adjustments to cope up with the situ-ation. One major development in this process was the formation of strategic alliances among major shipping companies with managerial and technical agreements. This was in view of moving forward together with sharing the trade investment and risk and controls the cost and economy for achieving their individual corporate objectives and to adjust with the dynamic trade environment. Some of the companies joined together in co operation and mutual agreement in an effort to bring about advant -ages and profits to all the alliance members, particularly in the liner shipping trade which was badly affected by shipping trade crisis. Strategic alliances formed had their objectives of co operation among the other members of the alliance for making better utilisation of ships on trade routes espe-cially East West service route. This helped companies to share their vessels and slots among each other in terms of making better efficient trade by terminal and vessel utilisation on global international scale. These strategic alliances had limited their market price fixing and ownership terms among the individual companies. Some industry giants like Maersk and MSC, which had less impact of the crisis and achieved their economic targets individually had not joined in any alliances. Since some of the al-liances formed during this period witnessed instability and issues with strategic management de-cisions, companies take additional consideration and study the market effectively before entering any alliance. Three major international alliances formed during this period and their development progress in terms of capacity and number of vessels employed in alliances is provided in the table below for the year before the financial tsunami and also for the recovery period.

STRATEGIC ALLIANCES

NEW WORLDALLIANCE

(MOL, APL, HMM)

GRAND ALLIANCE(HAPAG LLOYD,

NYK,OOCL)

CKYH ALLIANCE(HANJIN, YANG MING, K LINES,

COSCO)2006 2010 2006 2010 2006 2010

CAPACITY(TEU) 712.082 1161.468 966.570 1187.607 1046.991 1548.508

NO. OF VESSELS 223 282 350 288 354 400

Table 3 Capacity and fleet volume of strategic alliance group

In the above mentioned alliances, it was learned that Giant alliances were the most stable performing groups. These data proves that these alliances helped the companies to adopt strategic organisational changes particularly during the crisis by improving their overall capacity and the number of operating vessels. For all three alliances mentioned above, main markets or trade route were in the Europe Asia route and trans pacific service route which during crisis period witnessed a shift in concentration from



transpacific trade route to the Europe-Asia. The business performance of these alliances normally had mixed results which during the financial downturn period witnessed a negative trend in comparison to the growth witnessed during the pre crisis globalisation period. Hence more adjustments and modific-ations were made by the member companies of the alliances in terms of agreements and strategies (Panayides, Wiedermer 2011).

Economic downturn which led to trade decline has in turn resulted in decline of demand for seaborne cargo. This has affected the supply demand balance as response for the change in demand had not happened instantly. This was clearly visible in the much affected container trade and the growth rate in this sector for the period 2000 to 2009 is shown in the table below.

YEAR 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

DEMAND 10.7 2.4 10.5 11.6 13.4 10.6 11.2 10.9 4.4 -9.7

SUPPLY 7.8 8.5 8.0 8.0 8.0 10.5 13.6 11.7 10.9 5.2 (UNCTAD Review of Maritime Transport as cited in Hoffman 2010)

Table 4 Growth rate for the container sector for the period 2000 to 2009

Most companies suffered heavy losses with the reduction in freight rates and loss in demand of cargo during the economic and financial recession and were forced to adopt serious counter measures and steps to deal with it to withstand the market competition and shipping business. This has made the in-dustry witness some fast recovery for some shipping companies and some others still struggle to re-cover whereas some have gone bust in the current scenario. One of the major step adopted by com -panies were to stop the orders for new contract of vessels which were so prominent during the boom period prior to the crisis or at least delay the delivery by rescheduling the contracts with the ship yards which were manufacturing new vessels. Lay off of ships became prominent during this period when the companies did not have enough demand for trade for its fleet. A lot of ships were laid off at an-chorages mainly visible in the South East Asian waters. Some others companies had taken decisions to scrap their old vessels which were out of business and this was making the scrap yards very busy and over loaded with orders. One another significant measure adopted by companies were to run their vessels on slow steaming or slower speed which has the advantage of large number of vessels able to be employed for the same frequency of trade so that they can be kept in business and not laid off. This also had the advantage of saving the fuel and becoming more economical and even reduction in the environmental damage through discharge of toxic air emissions. But it was interesting to observe that during this period trade in the South – South route of the globe were less affected of global downturn and these developing countries and emerging economies of South Asia, African and South American continents had dealt with the recession much effectively and recovered much early. One another ma-jor development observed was the increase in Public investment in port infrastructure and shipping in-dustry by the government because it was important for shipping sector to recover quickly for the na-tion’s trade and economic development (Hoffman 2010).



6.1 MITSUI O.S.K. LINES (JAPAN)


CHAPTER 6

CASE STUDIES


Mitsui O.S.K. Lines or MOL is one of the leading Japanese maritime shipping companies with its huge fleet of containers, car carriers, bulk carriers, LNGs and other services operating around the world mainly in the Japan, North America, Europe and other parts of Asia.

Fig 9 Fleet distribution of world’s major carriers (Mitsui O.S.K. Lines Ltd 2010)

The company has around 1000 vessels operating and 10,000 employees working for it. The fleet size of the company in 2006 was of 803 vessels, which increased to 905 in 2010 and is expecting an in-crease of vessels to about 1050 in the year 2013 and then to 1200 for 2016. MOL generates revenue from most of these sectors and the figure below shows the values during the year 2011.

Fig 10 Consolidated revenue by segments in the financial year 2011 (Mitsui O.S.K. Lines 2012).

6.1.1. SWOT analysis of Mitsui O.S.K. Lines



STRENGTHS

1. Very large fleet size.2. Company reputation.3. Well spread business.4. Strong economic growth.

WEAKNESS

1. High concentration in the Japanese Market.

2. Debt burden.3. The year 2006 and effects.

OPPURTUNITIES

1. Expanding fleet.2. Container trade improvement.3. Healthy survivor of crisis.

THREATS

1. Recession and its effects2. Increasing oil prices.3. Market competition.4. Fluctuations in currency rates.

Fig 11 SWOT analysis of Mitsui O.S.K. Lines

STRENGTHSMOL, with over 900 vessels operating in global waters is world’s largest shipping company in terms of fleet volume with worldwide carrying capacity of about 66 million deadweight tons of cargo and is world leader in terms of dry bulk cargo and LNG carriers. It has a long lasting reputation of being re-liable Japanese company and world’s largest shipping company which has brought it very good name and value in the shipping industry. The company reaches a wider customer base all around the world through all types of trade sectors including bulk carriers, liquid cargo carriers, container and reefer container cargos, ro - ro vessels, ferry and passenger vessels, logistic and ware house distribution business, training sector, tug boat services and ship manning service with generating revenue from all of these operations. The business network of MOL is spread through all over the major continents, from North America, Europe, Middle East, Africa, South America and Intra Asian region and this di-versified nature of trade business gives the company flexibility in the industry. The economic growth of the company has been steady and during the period 2004-2008, MOL generated 18.2% increase in revenue and the company had 20% increase in bulk carrier revenues and 18.8% increase in the con-tainer cargo sector. This helped the company to increase its market share and withstand the recession effectively.

WEAKNESSMitsui O.S.K. Lines have a diversified regional distribution of its business over Asia, Europe, Africa and the U.S. but during the financial year 2007- 2008, it generated 95% of its revenue from the Japan-ese markets alone where as many of its competitors had distributed their base almost equally in all their regions. This large dependency of the company on the Japanese market has its disadvantages of susceptible to losses for any economic change and risks and also loosing the chance to improve their business opportunities in other regions. In the year 2008, it is learned that MOL had a debt equity ra -tio of 85.5% corresponding to a long term debt amount of $4032 million which is much higher than its competitors and has its problems of obtaining additional financial assistance further. Marine acci -dents do happen but the year 2006 had witnessed heavy accidents for its vessels including Giant Step and Cougar ace. Its impact had affected company reputation and had to invest a lot in terms of vessel safety implementation and training.



OPPORTUNITIESThe Company is highest in the world in terms of deadweight tonnage of bulk carriers and LNG vessel fleet and keeps growing at a rapid growth along with container fleet expansion of 20.8% growth. Dry bulk fleet have increasing opportunities for expansion from the ongoing projects in China. The overall container business in the shipping industry has shown growing trends with the year 2006 witnessing 10% development in this fleet. This provides MOL the opportunity to improve its operating perform-ance and expand its container fleet further in the coming years. The company has its believe that it has recovered and tackled crisis during the recession period very efficiently and hence can move forward with this confidence and experience as healthy and competitive survivor. In short opportunities are numerous for the Japanese company to flourish.

THREATSEconomic crisis of 2006- ’09 and its impact in decline in profits have led the business down and the company had tackled the situation much effectively than its competitors and have the confidence of being the healthy survivor. But the downturn has caused MOL to lay off many of the vessels espe-cially dry bulk carriers and car carriers and many old vessels have been scrapped. The crude oil prices have increased all around the world, mainly in the Middle East where the political instability together with financial crisis led to increase the barrel price. This has in turn led to increase in bunker fuel price hike for the marine vessels. For instance, the bunker prices have increased up about 40% in Singapore which is one major station for merchant navy vessels which leads to decrease in company’s annual revenue earnings / profits. In the modern global shipping industry, MOL faces tough competi-tions from its competitors, mainly MSC shipping, Maersk, K Lines, NYK Lines, NOL, Evergreen etc and all these groups compete in the international maritime environment for better service in terms of customer satisfaction through maintaining delivery times, freight rates, employee satisfactions, safety, company reputation and environmental protection. These all add to the pressure on the management for withstanding the competition and maintain their business profits in the market. Since MOL have trade contracts with different nations around the globe, the transactions in the business is carried out in different currencies and hence any fluctuation in the currency rates of other countries with that of Japanese Yen will have its effects on the company’s profits (Datamonitor 2012).

6.1.2. LOSSES INCURRED BY MOL

The global economy experienced the worst ever crisis initiated after the collapse of Lehman Brother in the United States in the 2008. The maritime shipping industry had its effect on it due to this with the customers globally becoming extremely selective in terms of selecting the shipping company for their trade contracts, the trade had fallen internationally and the demand for seaborne cargo decreased and simultaneously, the freight rates of the cargo carriers. Shipping companies lost business and ships were seen lay off in the anchorages. Mitsui O.S.K. Lines faced the heat of recession but were success-ful in anticipating and taking essential counter measures for surviving the crisis situation. Japan eco-nomy was affected and monthly volumes of automobile exports out from Japan fell by 60%. MOL had a heavy concentration of their business in the Far East and hence had the impact. In case of Dry bulk cargo sector, in which they leads the industry in terms of fleet volume, transportation demand for MOL’s dry bulk carriers decreased mainly because of the trade crisis in China’s crisis affected eco-nomy and reduction in steel raw material imports in China. In the year 2009, when the recovery had started in China and other emerging economies mainly in Asia, the bulk carrier trade witnessed slow recovery and improvement in trade. The Car carrier market of the company was the sector which had the most impact of financial crisis. Prior to the crisis, sea trade of automobiles in the car carriers from Japan and South Korea to Europe, U.S., Middle East etc were at hike and when the demand of the cargo had a great fall due to recession, the trade collapsed and car manufacturers had to reduce their



production and hence vessel business were slashed. The economic situation together with the political scenario in the Middle East resulted in rise of crude oil prices internationally which eventually led to increase in global oil price and hence fall in oil consumption globally. The situation worsened by the oversupply of ships that were ordered during the boom period prior to the crisis made the freight rate to decline by 40% in 2009. In the container sector where the industry, and hence MOL, were making high volume trade and profits with higher growth rate witnessed deep decline in trade and fall in fleet demand in container cargo by 30%. MOL has sold or returned 34 dry bulk cargo vessels, 36 car carri -ers, and 30 containers during this period as downsizing the fleet policy. The sector after 2010 is recov-ering and retaining the growth rate and demand as before mainly because of the trade to the emerging economies of China and India which recovered quickly than the industrialised nations (Mitsui O.S.K. Lines Ltd 2010).

Many of the old ships were laid off in the open seas, most of them in the anchorages in South East Asian waters. This created a situation where getting a ship for the seafarers were finding difficult and many of the employees were asked to wait for longer time for the slot availability. This had an inside problem where since MOL followed round the year pay scale policy, they had to pay for the senior of -ficers their waiting allowances. This situation was affected badly on the junior officers who had to wait long for their ships. The condition also prevented the usual hike in employee’s salary and reduc-tion of bonuses. Now since many of these ships were laid off in water for so long, when the recovery period demanded the requirement of these ships to get back on trade route, the reactivation procedure were much difficult mainly because of the rust formation of ship’s steel parts which were in sea water for months, and the idle engines and auxiliary machineries which required complete overhauls to get it back to service condition as they were idle. It took months of work to bring back to sea worthy stage. Most of the life saving and fire fighting appliances were not in working condition which made the situation worse. All vessels getting back to business had to undergo all the running in procedures.

6.1.3. HOW MOL TACKLED THE FINANCIAL CRISIS

Mitsui O.S.K. Lines is a very experienced company in the industry and is aware of the fact that the marine transport is an industry which is prone to trade fluctuations and the timely response of the management to these fluctuations have got a great impact on the performance of the company. Mitsui was one of the few companies which posted profit in the crisis hit period when many of the competit-ors had fall in their revenue. This requires experienced management teams who had foreseen the situ-ation, analysis the severity of economic condition and adopted timely counter operating policies and helped the company to move on with minimum losses. The company had adopted Midterm Manage-ment plans for the sake of fleet expansion, safety and environmental responsibilities which were as follows:

MOL STEP (2004- 2006) MOL ADVANCE (2007- 2009)and GEAR UP MOL (2010- 2012).

During the term of MOL STEP, the company had witnessed growth and fleet expansion but the period during MOL ADVANCE had the unseen threat for the company in the form of economic re-cession where trade declined and profits slashed. But MOL management had the best portfolio mix in the shipping industry with the experienced management teams together combined with marketing skills and solid financial base for the safe operation of vast fleet that helped them to stay in the black zone when all others were facing the danger of falling in the red sector. The company had faced reces -sion during the MOL ADVANCE period and quick response strategy or ‘Reverse Rudder’ strategy



was adopted by the management. By this MOL reduced their fleet size quickly which in turn reduced their revenue loss during when the market condition was deteriorating. ‘Fleet Diversification Strategy’ was introduced in order to attain balanced profit structure for the company. The Finance management section of MOL adopted Cost Competitiveness strategies to cut the cost considerably and in 2009, 77 billion yen was cut short. Even during the crisis situation, emerging economies partic-ularly for India and China had still demand for trade especially for container vessels and hence the company concentrated on it when many of their bulk carriers and car carriers were laid off. MOL shif-ted its trade route mainly to emerging economic countries which had stronger demand including Asia- S. America, Africa, and Intra Asia sea routes. They expected improvement in the balance between supply and demand. GEAR UP MOL management plans were adopted during the recovery which set for improving the recovery rate and accelerate their earnings growth and bringing back the profit mak-ing business as soon, as was in the period prior to crisis. Main strategic aim of GEAR UP MOL was the quick recovery from recession with stress on the safety and environmental protection. The com-pany is building environmental friendly vessels called ISHIN (Innovations in Sustainability backed by Historically Proven Integrated Technologies), which reduces considerable amount of carbon di-oxide emissions. MOL took genuine efforts for the development of terminal infrastructure and yield man-agement. More bulk carrier trade was available to China, Brazil and India mainly for Iron ore and coal and considers them as the main customers for dry bulk cargos in the future. One another important strategic development during this recovery period which the company implemented was the ‘Business Intelligent Platform’ where by the company stressed upon the entire members of the organisation to share their experience and specialised knowledge for the future reference for their successors, includ-ing managers and the individual workers. In this way it gives chance for the entire organisation to have their input in the progress for company. In the GEAR UP MOL management plan, the company aims to reach a rearing ratio of no more than 100% (Mitsui O.S.K. Lines Ltd 2010).

Fig. 12 MOL business performance (Mitsui O.S.K. Lines Ltd 2010)

The year 2010 witnessed recovery in business for shipping industry from the downturn and hence MOL also was in the path of speedy recovery by winning more contracts and improving customer sat-isfaction and reputation by being a healthy survivor.

6.2 A P MOLLER MAERSK



World’s largest container fleet with over 1,00,000 employees working for it and trade in over 130 countries made A P Moller Maersk one of the largest company in shipping industry and the owners of world’s largest ship. APM is based in Denmark and the company’s business saw high growth during 2000 – 2007 periods when the container trade was at its peak of its growth. But as any other group in the industry, where the global shipping capacity exceeded the cargo demand and led to drop in freight rates particularly in the Europe- US lines and Maersk faced similar trouble during the recession espe-cially more loss in revenue in its tanker fleets (A P Moller Maersk Group 2012). The company’s rev -enue got affected in the crisis period due to the fall in container freight rates and also increases in the oil prices. The fuel costs or Maersk got up by 64%in 2008. This forced the company to take measures for tackling the crisis situation by which the capital expenditures and investment got limited and this in turn led to trouble in the industry. A P Moller Maersk also cut jobs in Global Service Centre in China where 700 of its employees lost jobs and this being one of the biggest job cuts in logistics sec -tor in China, led to serious protests and loss of reputation. But the company had come back to profit-ability strongly and quickly during the recovery period with new orders of huge carriers and higher demand adaptability actions for container cargos. Maersk is focussed on and investing heavily in new innovations and for example they have introduced system of heat recovery in their new ships (CEW team 2012). Company’s return on capital invested for the previous 5 years is shown in the figure that explains the loss incurred in crisis period.

Fig.13 APM group ROIC from 2005- 2011 (A P Moller Maersk Group 2012)

According to CEO of the group, Nils Smedegaard Andersen “As expected, the A.P. Moller – Maersk



Group was still negatively affected by the challenging market conditions in the third quarter of 2009, particularly in the markets for the Group’s container vessels and tankers. The strong focus on redu-cing the level of costs continues to yield positive results, and with sales of treasury shares and issu -ance of bonds we have taken steps to strengthen the A.P. Moller – Maersk Group’s robust financial basis and long-term funding position” (Financial Times 2012).

SWOT analysis of A.P. Moller Maersk

STRENGTHS

1. Huge fleet volume2. Business diversification3. Reputation

WEAKNESS

1. Employee issues2. Losing profits with competitors

OPPURTUNITIES

1. Increasing new vessel orders 2. Port and terminal developments3. New acquisitions

THREATS

1. Recession impacts2. Growing competition

Fig.14 SWOT analysis of A.P. Moller Maersk

STRENGTHS

A P Moller Maersk operates a very huge volume of container fleet of nearly 600 vessels and offers others services of terminal operations and logistics with revenue from each of these. This large scale operations gives the company competitive advantage in the industry. Maersk also have diversified business operations with container and shipping related activities comprising of 50% of its revenue and others coming from oil and gas, off shore activities, logistics and retails sector and all of these di -versified in different geographical regions around the world. The long experience and reputation of A P Moller is its advantage in the market.

WEAKNESS



Job cutting during recession mainly in Chinese logistics sector resulted in employee dissatisfaction to-gether with the financial stress caused during recession also because of the post retirement benefits for the employees. Increasing competition with competitors especially in the container fleet of that of MSC, Evergreen, and CMA CGM etc led Maersk of decline in market share from 18.2% in 2006 to 15.2% in 2009.

OPPORTUNITIES

APM increases its fleet to meet huge demand and improving business operations. It has ordered for new vessels with the recent delivery of 8 E class vessels which are largest in the world of more than 15000 TEUs. Apart from shipping operations, company’s APM Terminal operates port and terminal operating business and a major portion of the revenue comes from it. Company also undergoes major acquisitions for increasing their level off activities and market business profit with the example of tak -ing over of Royal P&O Nedlloyd N.V. and also Mearsk Tanker acquisition of Brostorm.

THREATSEconomic downturn and the financial crisis due to recession mainly affected in the US and European economies and since Maersk primarily operates in these regions, its business had adverse impact due to fall in cargo demand. Significant drop in the volume of container cargo was experienced mainly in 2008- 2009. With all its competitors recovering well and performing in the market, Maersk have big competitive pressures. All these companies including MSC, China Shipping Lines, MOL, K Lines, NYK, NOL etc ordering new ships and improving their business in the industry and also investing in terminal operations.

6.3 AMERICAN PRESIDENT LINES



During the period prior to economic crisis, particularly 2003- 2008 witnessed huge growth in the US shipping trade and a promising future for the economy of the continent. Recession hit hard on the American market after their own financial institution, Lehman Brothers was closed down. The con -tainership segment, the break bulk cargo and also automobile carriers were the most affected sectors. This downturn took America for surprise especially the strong South American economies. The trade balance saw a downward dip during the period with a growth percentage of its strongest economy of Brazil, only 1.5% in the crisis hit year 2009 after the 5% growth in 2008. Automobile exports from Brazil, Argentina and Mexico plunged to lower scales as the demand for the US vehicles had declined globally, a decrease of about by 50% from Brazil. The only sector which was comparatively less af-fected was that of the project cargo sector mainly because of the trade between Asia and S. America. Brazil was the only region which tackled recession effectively and rejuvenated the steel industry trade sector for regaining its profits, when most other US countries struggle to recover (Leticia Lozano 2009). American President Lines or APL is world’s one of the largest shipping company in terms of global container transportation with an industry experience of more than 150 years. APL have a team of 5000 employees working for it worldwide in a vast container fleet of 153 vessels with trading in about 140 nations and is planning to introduce more 32 vessels by 2014. From 2007, APL has become a wholly owned subsidiary of Singapore based Neptune Orient Lines, for $825 million, and has a high track record for quality customer service and environmental protection in the industry (APL Co. Pte Ltd 2012).

Fig.15 APL loss/profit data for 2009 and 2010

The company, as any others in the industry faced the heat of recession in 2009 but when the container trade got unexpected recovery from the second quarter of 2010, APL started picking up and recovered so quickly in achieving demands and orders. It was one of the very few companies that stood profit -able in the crisis situation with growth revenue of 29% in the recovery period with operation of 7 con-tainer terminals in Asia and US. The company adopted quality management strategies for the quick recovery which was triggered by the huge increase in the container demand. APL introduced TURN AROUND PLAN for better efficient operation and MEDIUM TERM NOTE PROGRAMME to check the implementation of the strategies in disciplined ways, financially. Company realised the need of Cost cutting and customer relationship and also invested in improved IT technology for better oper -ations. In China, APL introduced Global Service Centre and introduced 10 new vessels called as ‘loaders’ for taking the extra load during high demand and ensuring smooth flow of business. The company ordered for new ships in crisis period which are to be delivered by 2014 and improved cargo yield by reactivating and bringing back to business all the vessels laid down during recession and im-plementing their slow steaming strategy for ships to save fuel. They concentrated more on the Trans pacific and intra Asia trade route which were witnessing quicker recovery and increase in container cargo demand. APL took advantage of the recovering conditions with quick responses and benefited from this in its container trade particularly in the reefer trade. In the year 2010, average vessel utilisa-tion was up by 94% and the company received ‘Sustainable shipping operator of the year’ for its com-


APL Revenue(in US $ mil-

lions)

Loss/Profit(in US $ mil-

lions)

2009 5618 741-loss

2010 8282 461-profit


mitment for customer service with environmental protection commitment. The average utilisation of container and its volume is given in the figure below (Neptune Orient Lines Ltd 2010).

Fig.16 Average utilisation of container and its volume (Neptune Orient Lines Ltd 2010).

SWOT analysis of APL (Neptune Orient Lines)

STRENGTHS

1. Internationalised container trade.2. Management of marine and logistic

segments.3. Reputation and experienced recogni-

tion.

WEAKNESS

1. Limited to container segment/ sector.2. Heavy debt burden.

OPPURTUNITIES

1. Quick recovery and growth of container fleet and port terminals.

2. Increased trade in specific routes.

THREATS

1. Increasing oil prices.2. Global competition in container sec-

tor.3. Exchange rate and other risks.

Fig. 17 SWOT analysis of APL (Neptune Orient Lines)

STRENGTHS



APL, which is the subsidiary of NOL, operates globally across different geographical regions in the international trade of container cargos and also in the logistics sector. The company manages both the sector effectively with 85% of revenue coming from the former and 15% through diversified logistics activities. The company have huge fleet of contained vessels and have a long year reputation in the shipping industry.

WEAKNESS

The company business in the shipping industry is limited to container cargos which gives APL and hence NOL, a disadvantage in the market which witness huge growth in the bilk carrier and auto-mobile sector. The mother company NOL have a substantial debt burden which limits the finance management section of the company to invest in future development works and expenditures.

OPPORTUNITIES

The period after crisis saw an unexpected speed of recovery in the container segment and increase in demand for the container cargos. The company had ordered for new ships during this period which helps it to meet the high demand needs. The seaborne trade is prominent and increasing in the voyage routes between the emerging economies of China, India and other South Asian countries. Marine ports and terminal operations are on rise and APL has invested in these with joint ventures and agree-ments.

THREATS

Increase in the fuel oil prices, mainly due to the recession and political instability in the oil rich Middle East have led the company to distress as it affects the financial condition and business. Strong competition in the container market with industry giants of Maersk, Evergreen, MSC etc have put the company in highly volatile industry and have the pressure of performing well to maintain market posi-tion and profits. Exchange rate issues, natural disasters and piracy are affecting the company as it does to any others in the market (Datamonitor 2010).



The information collected in the literature review and in the case studies of three shipping companies MOL, Maersk and APL (NOL) are analysed and is discussed about the lessons learned from the same.


CHAPTER 7

DISCUSSION AND ANALYSIS


The data obtained from the case studies are compared with the industry statistics and a review of the result is noted.

Three most important terms to be analysed in the studies carried out are

Globalisation Containerisation Economic Recession

Globalisation refers to the financial and business sector spreading worldwide across boundaries, the main reason being the development of technology and networking. This has led to revolution in the shipping industry with huge volume of trade increasing between importing and exporting nations. The disadvantage of this is the impact of crisis in one region on the economy of other. The companies in -cluding MOL, APL and Maersk improved their trade volume and profits by virtue of globalisation happened due to increase in demand of seaborne cargo trade.

Sea freight transportation using standard dimensional containers are increasing at unexpectedly rapid rate and mainly demands from emerging economies are at its peak. The recovery from economic re-cession has been very quick and shipping companies are making most of the situation. Industries in the economies of India and China are the main reason for this trade boom.

Economic downturn initiated in the United States spread throughout the world with developed nations suffering the most impact. This led to major financial crisis with imbalances in trade and decline in cargo demand. Maritime shipping industry witnessed serious consequences of this. Demand for mari-time trade esp. automobiles and freight rates of cargo declined considerably. Shipping companies had to take evasive actions to with stand the market pressure.

All the three terminologies, in a way, are dependent on each other. The economic recession and the financial tsunami resulted in overcapacity and further decrease in freight rate fluctuations of vessels due to decrease in demand. The period 2007- 2010 were of serious tensions for the shippers with mar-ket collapsing and profits declining. Piracy attacks particularly in the coasts of Somalia, Africa and the natural disasters in the form of volcanic eruptions and tsunamis further worsened the condition. Mitsui O.S.K. Lines, A.P. Moller Maersk and A.P.L. (subsidiary of Neptune Orient Lines) are in-dustry giants with huge volume of fleets under them and heavy market share. Overcapacity is a major problem that all the shippers had to face mainly caused due to the ordering of new ships when the in-dustry witnessed great trade improvement prior to crisis and when it got delivered after 3-4 years, the trade market was down due to recession and the vessel capacity exceeded the volume of cargo that were available for shipment. Piracy attacks off the course of Somalia have created a major trouble for the ship owners, charterers and also the seafarers. There were around 500 ships that were reported to be attacked by the piracy boats during the period 2009 to 2011. This has made some shipping com-panies to divert their vessels through Cape of Good Hope instead of the Suez Canal transit. The nat-ural disasters that had impacts on trade included Japan’s tsunami and Iceland volcanic eruptions etc.



The graph below compares the profits of MOL, A.P.M and A.P.L. (N.O.L.) for the last five years. In the case of Mitsui O.S.K. Lines, the graph clearly indicates the decrease in profits from 2007 to 2009 mainly as a result of recession. The bulk carrier and car carrier sector of M.O.L., in which the com -pany were leading in terms of freight volume, got adversely affected due to financial downturn. The profits slummed from 300 billion Japanese Yen to 30 billion Yen. But still the company was making profit during crisis when most of the competitors witnessed revenue loss.

The experienced management team of M.O.L. were able to forecast the scenario and took quick re -sponse measures of reducing the fleet size mainly by laying off of vessels carrying goods with low de-mand cargos and even scrapping some of their older vessels. The advantage of this being the replace-ment of the older ships with that of new, more efficient and bigger capacity vessels. Company ordered new vessels with regards to market demand and took care of the time delay which can cause the deliv-ery and the change in market scenario in that time span. The strategies adopted by the company were helpful for M.O.L. for being one of the best and quicker survivors in the industry. The later period 2010- 2011 witnessed fall in profits for the company because of the fall in trade caused due to natural disaster in Japan which is M.O.L.’s major hub for loading of automobiles.

For A.P. Moller Maersk, the profits were steadily increasing prior to the crisis and in 2009, it wit -nessed losses in the revenue mainly because of the financial tsunami effects initiated in the year 2008. Container sector had a quick and unexpectedly huge recovery and increase in demand of trade during the recovery season which is witnessed in the post 2009 financial data. Its huge volume of container fleet had given the company greater advantage over competitors.

American President Lines which was taken over by Neptune Orient Lines witnessed a fall in revenue in the financial year 2009 due to the crisis and recovered well the next year. Global container trade and concentration in other logistics and related activities assisted for easy recovery for the company. It was learned from the industry and mainly from the data sheet of all three companies that adversity and crisis in the maritime shipping trade together with it brings much bigger and better opportunity and it is with experience that many companies’ management make use of the adverse situation in the most effective way. M.O.L., Maersk and A.P.L. are those companies which do same business in dif-ferent ways and suffered losses during financial downturn and adopted necessary measures depending on their industry conditions to recover from the trade fall.



2007 2008 2009 2010 2011

-150

-100

-50

0

50

100

150

200

250

300

350

History of Profits

MOL APM NOL

Year

profi

ts in

bill

ion

Yen

Fig. 18 History of profits of MOL, APM and APL for the last 5 years



Mitsui O.S.K. Lines possess the world’s largest fleet of dry bulk and L.N.G. vessels and very have diversified business operations. Its marine industry is over dependent on the Japanese industry. For example, in the case of car carrier business sector, about 90% of the imports are automotives from Ja-pan and South Korea. This is a disadvantage for the company that any fluctuation in Japan’s economy affects directly on MOL’s business. For MOL, crisis period caused a loss of about USD $136 million.

51%

38%

12%

M.O.L.

1 2 3

1-bulk carrier sector2-containers3-others

Fig. 19 MOL fleet revenue distribution

Mitsui O.S.K. Lines’ diversified business division is showed in the diagram with 51% bulk carriers, 38% containers and the rest includes car carriers, tankers and others. During this time, the company’s bulk carrier and tanker sections were the underperforming sectors, and car carriers witnessed their first ever loss in the industry. The LNG sector of M.O.L. had stable earnings during this time and con-tainers were the group which had an unexpected recovery from the crisis. Improvement in the con -tainer segment is very vital for M.O.L. as the container sector business is and will keep improving than many others in the future. A lot of ports around the world are investing a lot in building and im-proving the capacity and infrastructures of container terminals. The advantages of CONTAINERISA-TION are to be utilised well by the company by investing more on this particular division.



A.P. Moller Maersk group is world leader in the container segment. About 53% of the company’s fleet are containers and another major portion of revenues comes from port and terminal related and logistics activities. The diagram below depicts its fleet distribution in recent times.

10%

53%

37%

A.P. Moller Maersk

1 2 3

1-Bulk carrier sector2-Containers3-others

Fig. 20 Maersk fleet revenue distribution

Maersk mainly concentrates on the liner trade as seen in the diagram. The company have greater op-portunities to diversify the fleet into other sectors which can give them more flexibility and the chance of recovering the financial records in case crisis affects in one of the fleet sector as the other areas can compensate the losses and get the company running forward in business. Excess capacity has been a serious problem at present even though the group had recovered well post recession mainly due to containerisation and majority of Maersk’s containers were getting fully loaded trade. This has happened due to the order of more vessels when the trade was booming. This had to be done carefully as the freight volume may retard in the future mainly because of the high increase in oil prices owing to crisis in Middle East. But the other sectors of the company including Maersk oil, tankers and ter -minal operations expect better performance. Maersk have to focus more on Diversification of its fleet most importantly at this time when the international market and hence shipping industry is facing quick fluctuations. Maersk was one of the very few companies in the industry to announce rate hike during the crisis period.

American President Lines too witnessed losses in the financial statements during crisis period. Its profit figures gradually decreased from 2007 to 2009 and the company incurred losses during 2010 and then again recovered the following financial year.



86%

14%

A.P.L.(N.O.L.)

1 2 3

1-Bulk carrier sector2-Containers3-others

Fig. 21 APL (NOL) fleet revenue distribution

A.P.L. is a subsidiary of Neptune Orient Lines and 85% of its group revenue comes from liner trade and the rest with the logistics sector. Of these liner trades, one major portion comprises of container sector and the rest shipping related activities. Weakened economy and the issue of over capacity par-ticularly in the container segment is one the major problem for N.O.L. the company lost around 478 million dollars even the recovery period 2011 and one of the main reason being overcapacity. One of the main improvements for N.O.L is the need for diversification as the company have a very high de-pendency for its revenue on the container segment which can be a serious threat to the company’s economy if the overcapacity in this segment exists in the future. Even investing more on the terminal and port infrastructure should be focussed which can give them competitive edge in the future.

The industry averages is studied to be shown a profit of US Dollar $7 billion in the financial year 2010 and a loss of $5 billion during 2011. The main reason for this to occur is the economic recession and overcapacity of container vessel which were ordered during the recession recovery time when their demands were at its peak. Hence the companies which majorly depend on the container sector have to focus more on their decision of new orders by calculating the delivery period and the possible fluctuations in the market. Shipping company managements have to go back to basics and be strong on their fundamentals to fight the unexpected changes in the global economy and also its industry.

New Development Areas for the shipping companies to concentrate in the future



From the studies carried out, it is observed that at the present scenario of global market, the trade is mainly concentrated and safe growth is obvious in the emerging economies of China, India and South American countries. A lot of new technological and infrastructure facilities growing up in Chinese in-dustry give a very strong confidence in boosting shipping trade. Iron ore and Coal imports are their main import strengths and China has been increasingly importing automotives in the recent years. It is one of the strongest economy at present and have recovered well from the recession even though its growth rate have declined from the double digit figures witnessed in the past. But still the growth rate is better than most other economies in the world. India, is yet another strong economy with high growth rate of almost 6% at present and is one of the least effected and better recovered nation from the financial crisis. Major exports of petroleum products and automobile parts make its economy rich and it is also focussed on importing coal, LPG and crude oil. Indian investment in its port and ter -minal development and infrastructure facilities makes it a good market for shipping industry in the fu-ture. South American countries of Brazil, Chile and Peru have a good export volume of Iron ore, Eth-anol, Copper ore etc and Brazil is one of the better performing and emerging economies of the world. Apart from the political disturbances, Middle East is a rich source of LPG and oil and it is an emer -ging economy with financial strength and is considered as a hub for shipping logistic activities.



In the study carried out, the scenario of the global shipping industry during the financial tsunami or recession situation was analysed. The crisis situation, comprising of the losses and impacts on all sec -tors of the industry, its effects on the maritime shipping and shipping logistics and also the impacts of crisis on three major international maritime companies of Mitsui O.S.K. Lines, A.P. Moller Maersk


CHAPTER 8

CONCLUSION


and A.P.L. (Neptune Orient Lines) were analysed and compared with the industry and with each other. The responses and the corrective actions adopted by the companies are studied. The financial status of these three companies in the recovery period and during recession, of 2010 and 2011 (as provided in the appendix), clearly shows the difference between the revenues between these two years mainly because of recession led overcapacity and trade loss and recovery of maritime trade.

Maritime shipping industry had been facing a lot of adverse scenarios and situations with the ships and seafarers facing the after effects. A strategic analysis carried out helped in understanding the cur-rent scenario and the issues / opportunities associated with it for expansion and improvement in the maritime industry sector. Strategic analysis of the supply chain market of the shipping industry provides the development areas and the important sectors of which the shippers and management should focus on and even consider on for future improvements.

Economic recession of 2007- 2010 were severe and its aftermaths affected mainly on all types of cargo carriers which can be witnessed with a lot of empty merchant navy vessels particularly dry bulk cargo carriers laid off on the coast of Singapore, Malaysia and other South East Asian countries. Some others were forced to get out of business and others even got scrapped. But many companies successfully overcame the scenario with experienced management decisions. Several opportunities for expansion and revival were available and the companies which could identify and take quick strategic actions emerged as successful survivors which gave them competitive advantages during the most im-portant recovery period. The companies and organisation are supposed to adopt strategic measures and adopt their outcomes for developing their fleet with more efficient vessels and hence the revenue. In the shipping industry, Diversification and Globalisation are the most happening revolutions taking place and appropriate strategic measures as adopted by Mitsui O.S.K. Lines, American President Lines and Maersk would definitely assist them in getting the companies to world class levels and ready to face any hindrances and issues including economic recession or financial crisis in the future.

The budding and developing companies that faced the heat and severe crisis effects / losses and also the new companies should study the strategies adopted by these global leaders and should learn how the management should match up with the crisis and the adverse industry situations. The thesis carried out gives the vital message of what the companies should prepare before any crisis occurs, what the companies should do exactly during the crisis and what are the measures ro be taken in the recovery period as explained by M.O.L., A.P.M. and A.P.L.

Adopting strategic measures is very important for any organisation in the crisis period. The company have to look at its strengths and take the opportunity to adopt those measures which gets the company out of the situation and at the same time improves its performance in the future. In the case of ship-ping industry it is seen in the studies carried out that when the industry witnessed boom in trade de -mand and revenue, many of the shipping companies were enjoying huge profits and these companies ordered for new vessels of more efficient and large volume types. But when the world faced severe financial crisis, the demand for seaborne cargo slummed and this in turn left the ships empty with low trade.

Now when the ships ordered previously got delivered from the shipyard during this period of crisis, it created a tough situation of severe over capacity of vessels and fleet volume. This was one of the ma-jor reasons as to why the ships were forced to lay off or scrapped during this period. Hence a proper vision and forecasting of the situation even in the boom period is the success formula for an experi -enced and world class shipping organisation.



Customers or clients have transformed or have become very choosy after the crisis. They have put in more focus on the selection of a particular vessel, particular shipping company and its supply chain. One of the major factor influencing them at this present world scenario is ‘which company have over-come the crisis in good condition?’ or in other words ‘who are the better survivors’ who have a com -petitive edge in the market and are believed they have an experienced professional management team which tackles any odd adverse situations. Customers value the safety of their cargo the most and are ready to spend more on the safe disposal and delivery of their cargo on time at the destination point.

Importance of finance budgeting and risk forecasting is of vital importance for any management to get prepared for the adverse situations and experienced companies have proved its importance. A well planned company always prepare for worse situation even in good times.

The study reveals that it was the emerging nations that were least affected and recovered well during the crisis period. The developing countries of China, India, Brazil, Indonesia etc with its stable eco-nomy and financial status took effective actions during crisis. In the present scenario after crisis it is visible that China is emerging as the world’s greatest power and the shipping industry in highly de-pended on the China’s projects and infrastructure activities going on. Coal and Iron ore exports in the countries of India and China is still going high. Major companies particularly developing maritime companies have to concentrate on the most happening field for getting their business to less risks and newer heights.

Supply chain for any organisation have physical, financial and information flows associated with it, in which the physical and financial flows get affected due to recession caused decline in trade demand and financial crisis. The risk incurred in the management sector due to this to be shared with the entire links or members of the supply chain. More stress on Lean management and Pull strategy has got to be adopted more strictly during crisis period.

Merging and Acquisitions have been an efficient strategy adopted by most of the carriers during this period that witnessed company sharing the fleet based on mutually agreed terms but certain cases in shipping industry reveals the fact that unless the parts are chosen after efficient studies carried about their background and policies, it can incur loses and risks to the company.

Lessons to be learned from the crisis for Shippers

Economic recession and its effects on the shipping industry have taught a lot of lessons to the marine shipping sector of knowing their strengths and getting prepared for risks and worse time ahead in good times.



Anticipate the bad situation and forecast the future in the industry. Shipping industry should focus on reducing waste and keep the ships and environment safe for the years ahead. Com-panies should try to cut and reduce their operating costs and utilise the latest technologies in-cluding the Business Process Outsourcing of non – essential services which can be more eco-nomical.

Acquisitions and Vessel sharing processes should be done well planned and strategically fore-casted for future fluctuations.

Job cuts and unemployment during crisis reveals the importance of companies looking for more loyal customers, employees and loyal clients who stand with the company during the bad phase and its effects are visible in the improved trade with these clients even after the re -covery.

All major shipping companies seek to understand the importance of procurement and supply chain and are more focussed on improving the logistics sector.

Financial management team of the shipping companies should identify the priorities during bad phase and budget their future expenses and revenue.

Companies should identify and take calculated risks and should understand the advantages of the power of change.

Globalisation and global co-ordination is very vital for smooth flow of supply chain and ship-ping cargo trade.

As it is known “Every cloud has a silver lining”.

Further Research

It is obvious that any research study carried out cannot cover the entire topic area that was planned at the beginning as it is evident that there are further areas in the research which can be again focussed critically and studied much deeply and further development of this research can be carried out.



Marine shipping industry and its supply chain is a very vast field with over 50000 ships moving across the globe in the international waters at present. With the increase in the shipment volume and the numbers, the importance of supply chain has been understood and the making of an efficient sup-ply chain network, which can handle the crisis situation, is an area in which further deep researches is possible to be carried out.

Analysing more deeply into the shipping industry unveils the nature of vast global trading industry and together with it comes the stringent rules and regulations particularly in terms of Environmental Protection. Going green is of major importance and is followed in every organisation at present for taking care of the Mother Nature. For example Mitsui O.S.K. Lines initiated safety campaign where the company focussed on achieving Four Zeros namely Zero marine incidents, Zero oil pollutions, Zero fatal accidents and Zero cargo damages. A lot more research can be conducted in the field of prevention of environmental pollution by marine ships. This includes control over disposal of waste water/ ballast water from ships, bilge and waste oil treatment and incineration of wastes, anti fouling paints, refrigerated outlets, toxic and hazardous sewage and garbage disposals etc. MARPOL annexes have been formulated and are strictly followed by the shippers.




CHAPTER 9

APPENDIX


Fig.22 Consolidated statement of Income of Mitsui O.S.K. Lines (Mitsui O.S.K. Lines Ltd 2011)

Fig 23 Consolidated financial information of A.P. Moller Maersk (A.P. Moller Maersk 2010)



Fig. 24 Consolidated Income statement of A.P.L. [Neptune Orient Lines]

(Neptune Orient Lines Ltd 2010)




CHAPTER 10

REFERENCES


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