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How Can We Fix the Shipping Industry? Let’s Think outside the BOX!

Editor's Note: Take a look at our featured best practice, Organization Design Toolkit (103-slide PowerPoint presentation). Recent McKinsey research surveyed a large set of global executives and suggests that many companies, these days, are in a nearly permanent state of organizational flux. A rise in efforts in Organizational Design is attributed to the accelerating pace of structural change generated by market [read more]

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shippingThe current status quo is that the shipping industry’s cycle is not synchronized with global economy’s one. As a consequence, the ratio between demand and offer for sea transportation of containerized cargo is bringing shipping line’s revenues even below operational expenses on the majority of the trades. Shall we start panicking? No, maybe we should simply start to change our perspective.

Arguably, when years ago massive investments for mega cellular ships have been decided, there was not only hope but also certainty about a healthy recovery of the world economy. This, in turn, would have brought to an increased derived demand for maritime transportation, stronger freight rates and huge profits for those shipping companies able to have their super-efficient, mega vessels at sea by 2013-2014.

However, as we know, something went wrong, and unfortunately it is still going wrong. Something unpredictable happened, something able to inhibit the expected synchronism between the shipping cycle and the world economy’s one. More specifically, a chain of events bogged down the world economy. First of all the stall of the Chinese growth, secondly the implosion of the Southern European and North African economies, then the stagnation of other BRICS economies, just to mention a few.

So what is going to happen within the container industry? The current scenario appears to be very gloomy, with (almost desperate) IPOs (Hapag-Lloyd) and not very convincing M&As (CMA – NOL), shares’ value plunging, balance sheets turning to red, and massive layoffs (Maersk).

Furthermore, just to hit the last nail on the coffin, technical and geopolitical factors (related to resources accessibility) might bring the oil barrel up to $ 60-80 by the end of 2017, despite recent OPEC’s skirmishes. This will not only push more to the right global economy’s recovery but also increase shipping line’s operational costs.

Common sense would suggest that this is the perfect set-up for one of the worst bloodshed in the history of the container industry, where competitors, due to the increasing imbalance between tonnage and cargo, will fight for cargo volume, no matter how much shrinking freights will jeopardize their profitability and – in the end – shipping lines’ own existence.

My personal point of view is slightly different: this is going to be the best bloodshed ever for the container sector. You can bet on the fact that less cash-solid and efficient company either will be acquired or liquidated after going out of business, but this will be the survival of the fittest. The day after tomorrow will see less shipping lines in the market, probably fewer alliances but for sure a healthier and more balanced industry. In turn, the world economy will benefit from a rejuvenated and leaner container sector.

The issue is now to guess which players we’ll continue to be in business after this shipping catharsis: beside political and geopolitical interests, the key factor will be the ability of shipping company’s leaders to make a difference in terms of knowledge, timely decision making, courage and stamina. As the Latin saying quotes “mala tempora currunt, sed peiora paratur,” we are going through tough times, but the worst is yet to come: a solid hand at the helm is paramount to the get out of the storm. Only those companies, which have been able to nurture and retain consistent mid, senior and top management ranks will survive in the middle term and prevail in the long one.

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About Michele Sancricca

Michele Sancricca is a seasoned executive and Maritime expert, having worked several decades over differentiated roles in both the Defense sector (where he was a Lieutenant Commander in the Italian Navy) and Maritime industry. Project experience includes multi-billion dollar shipbuilding projects, maritime security operations, and ocean and intermodal international trades. Michele's functional experience includes Process Optimization, Leadership Training, Strategic Planning, Shipping Finance, and Maritime Security. Michele also has published a series of Leadership training courses based on both Corporate Leadership and Military Leadership tools on Flevy here.

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