Discussion document

September 28, 2015

WORKING DRAFT

Last Modified 9/27/2015 8:34 AM India Standard Time

Printed 8/22/2014 10:55 AM Central Standard Time

Industry Evolution

Implications to Singapore & The Role of MPA

Ronald D. Widdows,

Principal

Ronald D. Widdows & Associates PTE Ltd

August 5, 2015

Why Alliances Must Move to Landside Collaboration

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company is strictly prohibited 15 October 2015

TPM Asia

McKinsey & Company | 1

Key Drivers Impacting Ocean Shipping Industry

▪ Macro-Environment remains

challenging

▪ Prospect of continued slow growth

globally but higher growth in parts of

Asia & Middle East

▪ Structural Over-Supply continues, will

be the case for many years

▪ Longer Term pressure on rates &

profitability

▪ Fuel cost relief temporary

▪ Focus remains on reducing operating

cost

▪ Drive to reduce fuel consumption

continues

▪ Industry structure coalescing around

large/expanded Alliances

▪ Complexity increases dramatically as

a consequence

▪ Barriers to consolidation remain

▪ Factors that will result in the Liner shipping sector struggling with profitability

pressures for many years to come…

▪ Near term fuel cost reductions will positively impact results…but beyond the short

term carriers have to find new means maximizing asset utilization and reducing

cost

These dynamics are structural not just the effects of a cycle !

McKinsey & Company | 2

-8

-6

-4

-2

0

2

4

6

8

10

0 0.5 1.0 1.5 2.0 2.5 3.0

OOCL

MOL

COSCO

Hanjin

APL Hapag-Lloyd

MSC* estimated

MAERSK

K Line

Zim

Wan Hai

CSAV

Yang Ming Evergreen

HMM

CSCL

NYK

Total capacity Million TEUs, February 2015

Operating profit margin Percent, FY 2014 1

Scale has become a key differentiator

SOURCE: Alphaliner; Company annual reports

Economies of scale are becoming increasingly visible in driving

liner profitability

Alliances have had impact but not

on scale (other than on the

ocean)

1 Operating profit margin of 1H 2014 for COSCO and operating profit margin of 9M 2014 for Zim and CSAV

CMA CGM

High Intra-

Asia share

Real returns

to scale MSC*

▪ Allow smaller players to offer

wider service scope

▪ Helps reduce ocean-side costs

(e.g., allowing smaller players to

acquire and employ larger

vessels)

▪ But, alliances do not help

overall scale (e.g., overhead,

landside)

▪ And, the alliance structure

perpetuates the fragmented

nature of the industry: to a

degree minimizes consolidation,

and allows smaller players to

remain in the game, not exit

▪ However, with the evolution of

the Mega Carriers and

dramatically larger alliances,

the game has changed and the

industry will have to seek new

methods of attaining a

competitive position and

improving profitability

McKinsey & Company | 3

Profit pressure has translated into an intense drive to reduce cost –

which has negatively impacted customers

Many of the steps that the carriers have taken in the chase to reduce cost have

had a negative impact on service levels and consequently a direct impact on

their customers supply chains

▪ Slow steaming

▪ Constant changes in network; service suspensions and adjustments in the process

of seeking lower network operating cost

▪ Reductions in organization; sales and customer facing resources

▪ Expanded alliances that have made for a much more complex operating

environment particularly on the U.S. West Coast; multi terminal operations is much

more challenging than most anticipated

▪ Exiting the provision of chassis concurrent with creating a more complex operating

environment

▪ There remain opportunities for the carriers to focus on initiatives that would target

improved flow/velocity through their terminals (particularly on the U.S. West Coast)

Continue to focus on driving down costs, but attack barriers to improving

flow through the terminals, result; lower costs and better service….

McKinsey & Company | 4

Delivery Schedules through 2019…..Scale game is over for many

Subscription copy for Harper Petersen Hamburg. Sent to containers@harperpetersen.com Unauthorised re-distribution prohibited

 

Page 14 © Copyright Alphaliner 1999-2015 Unauthorised re-distribution prohibited

ALPHALINER   Monthly Monitor   September 2015 

 

2017/18/19 Scheduled Deliveries 

36

7 

17

0 

11

8 

25

4 

32 

30

0 

10

8 

15 

0 

12

7 

12

1 

0 

70 

84 

0 

69 

86 

0 

0 

0 

0

100

200

300

400

 TEU

 Th

ou

san

ds 

Top 20 Carriers Newbuilding Delivery Schedule   As at 1 September 2015 

2015  Scheduled Deliveries 

Operated Fleet  As at  1 Sept 2015 

Operated Fleet and Scheduled Deliveries include owned and chartered ships. Delivery schedules may be subject to revision. 

© Alphaliner 

2016 Scheduled Deliveries 

Already delivered 

3,0

35 

2,6

67 

1,7

97 

95

5 

94

5 

86

4 

704

 

62

5 

617 

59

0 

58

2 

54

6 

533 

50

8 

47

0 

399 

38

5 

38

0 

36

4 

20

9 

0

500

1,000

1,500

2,000

2,500

3,000

 TEU

 Th

ou

san

ds 

59 

17

0 

11

2 

0 

0 

9 

0 

29  2

7 

9  0  0 

28 

0  70 

14 

12 

0  0 

0 

0

100

200

300

400

 TEU

 Th

ou

san

ds 

39 

35

9 

11

1 

14

0 

21 

38 

0 

0 

9 

0 

20 

0 

70 

56 

11

5 

0 

0 

60 

0 

0 

0

100

200

300

400

 TEU

 Th

ou

san

ds 

McKinsey & Company | 5

20

22

14

16

18

0

24

2018-

01

2013-

01

17-

01

2019-

01

14-

01

2014-

11

2016-

01

2019-

12

Global container shipping volume, TEU mn standing slots

In aggregate, oversupply is expected continue for many years

McKinsey’s forecast an

over-supply condition

existing through 2019

But it’s really about

supply/demand gaps in

specific trades; East/West

trades will take the brunt of

the orderbook so utilization

there will be a challenge

Bottom line is the

industry has to construct

a basis of becoming

profitable without

supply/demand coming

into balance for many

years

Layup

pool

Forecast

Supply

78%

82%

Actuals

Eff.

utilization

Demand

Active fleet - Historical Total fleet - Historical Demand - Historical

SOURCE: Global Insight for macroeconomic indicator outlook; McKinsey Container Model (Jan 2015); Drewry

McKinsey & Company | 6

Complexity Varies by Geography

Network complexity increases, however it is the impact on the landside

that is the challenge for most of the expanded alliances

Japan &

Korea

Alliances add

complexity; Japanese &

Korean carrier

owned/operated

terminals a challenge

U.S. W/Coast

Largest complexity challenge; many

carrier owned/operated

terminals/multi-terminal

environment and sub-optimal big

ship capabilities

India &

Subcon

Challenges are

congestion and poor

infrastructure not

Alliance impacts

China &

SE Asia

China and most of SE Asia

adequate capacity and capability to

adjust to Alliance structures…some

challenges in Hongkong (HIT/MTL)

Europe

Europe has some

added complexity

due to new

Alliance structures

Latam

(Panama

New connectivity

opportunities/changes in

networks driven by larger

ships

Middle

East

ME generally has

capacity and capability

for larger ships and

adjusting to new Alliance

structures

U.S. E/Coast

Few carrier

owned/operated terminals,

challenges handling

largest ships at some

ports

McKinsey & Company | 7

Growing complexity due to alliance expansion made even more

challenging do to carrier decisions

The environment that has been created has produced an operating

challenge that is beyond any one carrier resolving

▪ The only means of getting significant improvement is a level of

collaboration that does not currently exist

▪ Cooperation between carriers in an alliance – especially the terminals they

operate – is essential to improving the flow of cargo through their terminals

to onward conveyance; whether truck of rail

▪ Situation is less complicated for some than others:

– The market leader in terms of profitability, Maersk has one partner, and

in LA/LB only two terminals to flow cargo through…relatively simple by

comparison

– Even so there are growing pains in the new structures (particularly in

LA/LB)

– Situation is far more complex, and challenging for the 11 carriers

engaged in the G6 and CKYHE alliance groups than others

McKinsey & Company | 8

FE - N. America weekly capacity Landside volumes at US ports 1

22 21 17

140 30

G6

7

34 21

O3

128 17 20 31

17 39

52

CKYHE

24 21

2M 66 28 38

0.9

1.0

1.1

1.1

1.2

1.3

1.3

1.4

1.8

1.8

1.9

2.0

2.1

3.0

3.3

APL

MSC

Maersk

CMA CGM

Hapag-Lloyd

Evergreen

Hyundai

Cosco

Hanjin

-23%

MOL

"K" Line

NYK Line

Yang Ming

OOCL

China Shipping

But, CKYHE members lag MSC and

Maersk in landside scale working

alone

CKYHE is the leader

in Oceanside scale

Million TEUs, 2013

1 Include both import and export volumes in U.S.

WC EC

Maersk MSC

CMA CGM CSCL UASC

COSCO K Line Yang Ming Hanjin Evergreen

NYK OOCL Hapag-Lloyd MOL Hyundai APL

WC EC

WC EC

WC EC

Thousand TEUs, 1 January 2015

Example: Asia/U.S. trade lane, alliances (aggregated volumes) create

ocean scale but members only have their own landside scale once “off the

ship”….cost competitiveness remains challenging

McKinsey & Company | 9

Aggregating volumes on the landside

The alliances, or a sub set of any of the alliances would collectively

have very large volumes, and the potential for scale economics that

individually they cannot achieve

▪ The regulatory environment prohibits joint negotiation of rail or truck rates,

but the creation of single entities to manage the operational flow of more

than a single carriers volumes can produce lower costs

▪ The challenges of getting the entire membership of an alliance to

cooperate are many, however a sub set of like-minded members could

realistically put together a cooperation to create more scale and improve

flow

▪ There will be technology required to improve visibility to enable better

planning and execution for multiple carriers cooperating….the good news

is the technology exists….the will to do is the issue

McKinsey & Company | 10

Terminals are a major complexity driver, especially where alliance

members operate their own facilities

SOURCE: Drewry research; McKinsey & Co

1 Includes berths J243 – 247, J266 – 270, A88 – 96, C60 – 62

… driving substantial complexity Five of the G6 have their own terminal assets in L.A. …

Ownership

CSCL 1

Yang Ming 2

MOL 3

Port of LA 4

N Y K Line 5

Evergreen 6

Maersk 8

Hyundai 9

Hanjin 10

K Line 11

OOCL 12

Carrix 13

Berths

100

121 - 131

135 - 139

206 - 209

212 - 225

226 - 236

401 - 404

405 - 406

T130 - 140

G226 - 236

F6 - 10

Piers J,A,C1

302 - 305

Operator

China Shipping (CS)

Yang Ming (YM)

TraPac (TP)

Port of LA (POLA)

Yusen (YTI)

Seaside (STS)

APM Terminals (APM)

California United (CUT)

Total Terminals (TT)

International Terminal (ITS)

Long Beach (LBCT)

SSA Terminals (SSAT)

Eagle Marine Services APL 7

1

2

3

4

5

6

8 9

10

11 12

13

13 13

7

▪ Each carrier has a strong incentive for

their vessels on a service to call at

their terminal

– Terminal costs are not shared

– Some carriers run terminals as profit

center, some as cost centers (some

now with JV partners/financial

investors).

– Sets up difficult negotiations within

alliance on rates to be charged to

alliance partners

▪ This leads to less efficiency compared

to if each alliance was using one

terminal

– Higher” peakiness”

– Customer service issues/confusion

– Chassis location complexity

– Trucking to-from rail head complexity

– Sub-optimized utilization of assets;

ships, terminals, trucking, rail

– Higher costs

– Negative impact on service

McKinsey & Company | 11

SOURCE: Lloyd’s List

Alliance Evolution

From 3 Major Alliances and Numerous Independent Operators in 2011 …to 4

Large Alliances in 2015….the future will bring further changes

2m

G6

CKYH

O3 +

2M

McKinsey & Company | 12

A New Approach to Alliance Cooperation…

SOURCE: McKinsey & Co, RDW & Assoc, Team

▪ Alliances have overall brought a number of benefits to small and

mid-size carriers through:

– Combining their ocean assets to gain significant increases in

scope, aimed at minimizing the capital investment in creating a

more competitive service structure as compared to the largest

carriers

– Achieving economies of scale by enabling usage of larger vessels

utilizing the combined volumes of the group

– As a result, smaller carriers are beginning to close the gap in

terms of slot costs compared to the largest carriers (Maersk and

MSC), on the trades covered by alliance agreements (e.g. E/W)

McKinsey & Company | 13

A New Approach to Alliance Cooperation…

SOURCE: McKinsey & Co, RDW & Assoc, Team

▪ However, there remains a number of challenges for smaller and mid-size players

– Carriers remain sub-scale on the landside, where carriers’ cost is largely a function of

only their volumes

– Expanded alliance structures have created a dramatically more complex operational

environment, particularly on the U.S. West Coast, e.g. larger vessels hence higher

move counts, increased “peaking”, terminals operating close to full capacity, carriers

decision to exit the provision of chassis, ILWU labor unrest tied to an unresolved

contract negotiation and an alliance service structure calling at 7 different terminals in

the LA/LB basin

– The combination of these events resulted in a calamity, vessels stacking up unable to

berth, lack of trucks to service the flow in/out of terminals due to longer cycle times,

delays in customers accessing their cargo, a breakdown in intermodal flows, a loss of

terminal velocity and significantly increased costs

McKinsey & Company | 14

Alliances can and must work closer together on the landside to reduce

costs and improve flow/fix operational issues

▪ Pool operations – especially on U.S. WC – allowing multiple terminals to operate as close as

possible to being one large terminal

▪ Key savings on terminal management costs, utilization of assets and potentially labor (optimizing

gang deployment) and revenue sharing/lease cost to Port Authorities

Terminals

Rail

Trucking

Overhead

Approach described initially for U.S. operations, but principles can be more

broadly applied across the network

▪ Need to get a competitive cost base across combined operations – as close as possible to

acting as a single entity, without a merger

▪ Need to resolve the operational complexity (e.g. US WC today) which is putting the alliances at

a major disadvantage

▪ Have got to address distruction of service and damage to customers supply chains

Overall

Other

▪ Form a combined trucking and truck dispatch entity to plan movement of all carrier controlled

drayage, thereby increasing roundtrip utilization. This involves boxes inter-terminal, to/from rail

ramps, common co-ordination of chassis logistics/flow.

▪ Better use of the scarce trucking resource in the U.S. (LA/LB in particular)

▪ Establish single intermodal entity as the operational interface with rail companies; with a single

focus to managing the planning and execution of flow improving velocity through terminals. This will

have positive impact on costs for the carriers, railroads and positively impact shippers supply chains.

▪ Improvements in co-ordination will show as trucking/repositioning savings (e.g., better empty co-

ordination), but improvement in rail carrier asset utilization will translate into savings on rail spend.

▪ Combine operational teams into one single team (potentially in a new operating company) to

reduce overlap and enable the above levers

▪ Pool container fleet/procurement as well as pool management as the overall fleet required is

probably smaller than total from each player

▪ Combine alliance level chassis requirements (within the broader “Pool” to better manage chassis

logistics

McKinsey & Company | 15

Dramatic growth by some coupled with the deployment of larger tonnage

will have a significant impact on the market

Transpacific trade has yet to see the impact of cascading from Asia/

Europe and the influx of larger tonnage on the West Coast

▪ Large number of 4–6,000 teu ships currently serving the WC will begin

to be replaced by 9-10,000’s and in some cases 14,000’s

▪ 2016 through 2018 will see a major transformation in the ship sizes

serving the U.S. market

▪ The challenges that the carriers and terminals have today will be made

more difficult if the operating methodologies/processes the carriers

employ don’t begin to change

▪ Greater “peaking” will require improvements in velocity through the

terminals or service levels will be more significantly impacted

McKinsey & Company | 16

So, where from here? There is a service dimension that will be

impacted by the changes that focus on costs

but improve flow and velocity through the

terminals

▪ Have to get away from the mind-lock of “I

don’t get paid for it” …if you can improve your

costs, and as a consequence flow improves

regardless of whether the customer pays a nickel

more, are you not better off?

▪ Railroads will engage in the process given

positive implications to the railroad’s cost and

service delivery

▪ Shippers can help the process but not enough

yet willing to engage differently….WIP

▪ Peaking effect will increase as larger ships

begin to show up in the

Transpacific…..they’re coming

▪ Efficiency levels are going to have to improve

or the terminals will be adversely affected

McKinsey & Company | 17

Implications for intermodal transportation

One of the more significant drivers of improvement – the coordination

of the flow; to/from the railroad, use of on-dock rail – would require

the following:

▪ Single operating entity to coordinate information and physical flow of

intermodal volumes for an entire alliance’s intermodal activity

▪ Provide the railroad with the data, one time, the same time, in the same

format for all 4-5-6 members of an alliance

▪ Pre-planning of all intermodal flows; on-dock rail as well as dray to ramps

▪ Collaborate to maximize the use of the collective on-dock rail assets

▪ Coordination of all trucking related to intermodal flow (inclusive of

chassis logistics planning and execution)

▪ There is new technology emerging that could provide new visibility tools

that would enable improved upstream visibility and more efficient

preplanning from both a terminal and a rail planning perspective

McKinsey & Company | 18

Implications for intermodal transportation

There are significant opportunities from a change in methodology. Some

examples of what might be achievable:

▪ Improved velocity through the terminals; improved flow reduces extra handling,

enables ship productivity improvements

▪ Reduce the demand on the scarce trucking resource

▪ Enable the reduction in “empty legs” for trucking to ramps, improve chassis logistics

and related costs….reduce delays/congestion related to not having sufficient chassis

at the right place at the right time

▪ Building of more, longer trains to maximize road power utilization

▪ Minimize rail switching to make/break trains

▪ Create more “run through” trains to reduce X-town drayage and steel wheel

interchange at interior points (Chicago….others)

▪ Improved use of rail carrier assets in LA/LB basin

▪ Aggregating volumes and coordinating flow to increase density in certain lanes

There are 20 carriers today flowing intermodal volumes to 2 railroads (2 ramps) in

the LA/LB basin…there’s a way to be smarter about managing the complexity

McKinsey & Company | 19

Feedback for Shippers

▪ “Service has not met the defined transit standards, but is improving. Some carriers are

more engaged in delivery to the final destination and some are disconnected from

managing the final leg.”

▪ “There is a lack of leadership in the container shipping sector”

▪ “Communication gaps and inefficient coordination among shippers, terminals, ocean

carriers, and land transport companies in the scheduling and movement of containers in

and out of the ports”

▪ “There’s nobody to talk to….local management doesn’t make the decisions”

▪ “The chassis debacle continues; forces me to recover my added cost from the carriers,

but service impacts remain”

▪ “We leased chassis directly to ensure that we had a reliable supply….I get the cost back

from the carriers we utilize”

▪ “I understand the need for the alliances, but the difficult operating environment that has

developed really needs to improve”

▪ “The NVO’s/Forwarders are filling the service void left by carriers who only want to serve

port-to-port”

Just some of the feedback as shippers watch the carriers continue to struggle

with both profitability and a challenging operating environment