The shipping industry recently experienced a considerable shakeup.
France’s CMA CGM acquired Singapore’s Neptune Orient Lines Ltd. for $2.4 billion in cash. The Wall Street Journal reported on December 7 the acquisition would not only give the French carrier a larger presence in the Pacific, but the deal was also a move on both NOL and CMA CGM’s parts to consolidate in the floundering container-shipping industry.
For an industry which normally relies on alliances to improve business, such a big-time acquisition may feel like a sign of the end times, especially if more carriers follow suit. However, several factors are making larger acquisitions and mergers a necessity in this business. And as for the industry’s end times? Well, we’ve got a few reasons why the future isn’t as grim as it may seem.
Why Mergers and Acquisitions Must Happen
Before proclaiming doomsday for shipping based on NOL’s acquisition, take a moment to think about the current state of the industry.
Things aren’t going so well for shipping businesses. Slowing global trade and commodity demand have caused a significant downturn in the industry as a whole. Many emerging economies, which used to be high consumers of shipped products, are now affected by a devaluation in currency and weaker prices of commodities they typically export. And this is even true now during the holidays, when retailers are normally ordering more goods to cover consumer demand.
This slowing trade means shipping routes are now overcapacity. Carriers are fighting to keep what little freight is available, and charging nearly impossible-to-work-with rates, which have steadily fallen over the last year. Many carriers can’t even cover the cost of fuel anymore. For example, The Wall Street Journal noted Europe-to-Asia routes are wavering around $1000 per container, when most carriers need an average of at least $1300 per container to cover expenses.
In this environment, it only makes sense some carriers will want to merge or acquire other companies to help cut costs and stay in business. Shipping lines can usually reduce overhead by up to 30% after a merger or acquisition. This also means carriers can create economies of scale (i.e. more goods moved on a larger scale but with less costs incurred) with ports, equipment, and service providers.
Really, with all those benefits, who can blame companies like NOL and CMA CGM for wanting to consolidate?
How Mergers and Acquisitions Will Affect the Future
The main concern presented by shipping professionals is that if more and more companies end up merging and getting acquired, the industry will be left with nothing but behemoth carrier lines. While that’s a valid concern, there’s a reason combining lines isn’t such a bad idea for the shipping industry in the short-term.
In the long run, mergers and acquisitions will eventually open up new opportunities in the market, as is the case in any sort of capitalist-style economy. As mega-mergers and corporations create gaps, smaller and even brand-new carriers will rise to fill them over time. These changes, while they may temporarily be volatile, will ultimately re-stabilize the shipping industry and make it a strong, proud enterprise once again. It’s a cycle that tends to happen in any industry, and has happened before in shipping.
Mergers and acquisitions also help stable economic countries come out on top of the downturn. The U.S., for example, has a high chance of being the dominant player in the shipping industry as it recovers from its economic slump. America’s potential success comes from our country’s strong dollar and low unemployment rates (currently sitting around just 5%). After fixing our banking system during the housing crisis, we’ve managed to stabilize our currency and economy, unlike some other countries. For these reasons and more, we could very well see America come out as a strong player in the shipping industry’s future.
What Carriers Can Do to Keep Business Going in 2016
So what are shipping companies supposed to do to ensure business success in such a volatile, changing industry?
Mainly, it’s vital all carriers and logistics brands (especially larger and mega-brands) focus on reducing their costs. If a merger or acquisition is the right move for a particular company to cut back on its expenses, that’s a route which should be explored. Carriers can also consider wiser investments; for example, many shippers could severely increase their automation and processes by investing in better technology.
In terms of smaller carriers, their primary focus should be on making their customer service the best it can possibly be. Oftentimes, when there’s an industry shakeup, larger shipping companies will lay off employees (as Maersk chose to do in early November), which causes low employee morale and can result in decreased customer service quality. The void from this lack of quality is what smaller carriers should look to fill. By maintaining and improving their customer service, small shippers can ensure their customers keep coming back time and time again despite the rough times.
While the shipping industry is transitioning into a period of consolidation, mergers, and acquisitions, the cycle is just temporary and shouldn’t be feared. Change is difficult, but many times it can result in a better, stronger economy for us all.
Has the global shipping industry shakedown affected your business? Tell us what you’re doing about it in the comments below!