The recent loss of Hanjin Shipping, the seventh largest shipping line in the world, is sending shockwaves through the logistics world. The transportation industry is dealing with this crisis as a multitude of theorists try to understand what happened and what the repercussions may be. The economy will bear the largest brunt of the disruption that is bound to arise out of this saga.
Perhaps the most relevant question of the moment is “What will happen now?” Here are some effects that have started taking place in the ocean shipping industry.
The Hanjin shipping collapse will have more carriers considering mergers. Some problems (such as operational inconsistencies, cost variations and bottlenecks) are unforeseen and only become apparent when the entire industry is in danger as was the case in the Hanjin bankruptcy. The financial crisis only served to make an existing problem worse. The instant case showed that the inability to develop systems, structures and resources that can cope with rapid change could be at the heart of the issues.
To avoid going under, smaller to medium sized carriers will look to merge with larger operators to become more stable. In fact, CMA CGM, a French carrier, has already announced that they are looking for consolidation opportunities with smaller operators. This is after they released their Q2 results which showed a loss of $800 million when compared to Q2 2015.
Hanjin filed for bankruptcy protection after losing support from its South Korean banks. Korea Development Bank rejected a liquidity plan from Hanjin and shortly afterward Hanjin suspended trading of its stock on the Korean Exchange.
In 2016, the volume for global shipping containers was at a growth rate of 0% which is the lowest in the sector since the economic crisis of 2009. This number could be an indicator for further acquisitions and bankruptcies to take place across the industry.
Distinguishing Opportunities from Threats
There are rare events that we have limited control over and are therefore hard to predict. A case in point is the global financial crisis or the Zika virus outbreak; both of which profoundly affected the global shipping industry. The firm itself may survive the worst aspects of the crises but the same cannot be same for its supply chain factors.
The industry needs to use better algorithms in order to predict behavior based on previous patterns. Until the players within the shipping sector are able to do this; they will remain hostage to the vagaries of changing industry patterns as well as global events. It is not enough to account for risk but there must also be a monitoring process which keeps tabs on what is happening. The assessments must be timely, objective and logical in order to make sense to the people that are responsible for making decisions. Hanjin Shipping clearly failed to do this and they paid the price.
This major industry downturn has also caused one of the largest transportation and energy companies in the world to split. Danish oil-and-shipping behemoth A.P. Moller – Maersk announced that it would split its oil and shipping operations into two different divisions. Company Chairman Michael Pram Rasmussen stated that the shipping and oil industries are radically different and dividing the businesses will enable the company to focus on their respective markets. CEO told the Wall Street Journal that he expects to see more consolidation in the shipping industry because many carriers haven’t been profitable for years and this is unsustainable in the long run. Maersk will look to acquire other companies moving forward.
The shipping industry is very diversified and competitive. That means that organizations within it are generally free to develop an operational strategy that suits their needs. This may relate to the competitive environment or even the government regulation that they have. The $350 fee that is charged by the South Carolina Ports Authority may seem like peanuts for a large corporation but the reality is that they mount up on every trip and they represent a leakage that is simply unacceptable in the face of modern business practice.
Speaking of prices and charges, it would appear that Hanjin Shipping was not prepared for the impact and reality of price spikes. The journey from South Korea to the USA has risen by up to 50% in the past few months but Hanjin was not responding. This meant that they were absorbing situational costs that other competitors had effectively passed on to their consumers. This weakened the position of the company within the industry and also ensured that they were always under pressure to meet the bottom line; let alone making any profits. That is the beginning of bankruptcy for any company. The diligent companies will go as far as including an explicit clause to the effect that the incident costs will other be shared or fully passed on to the customer.
Now, the fall of Hanjin will cause freight rates to rise even further. According to retailers, shippers, and federal agencies, U.S. businesses will face higher costs on a vast range of imported goods. There is much more demand for capacity than supply. People are scrambling to find a carrier that can accommodate their freight, especially with the holiday season quickly approaching. Logistics giant UPS is working with Asian customers to move goods from Hanjin containers to other operators. $14 billion worth of cargo was stranded when Hanjin went under.
A Glimpse into the Future
It is no longer desirable or feasible to build large carriers without actively seeking new customers to fill them up. Access to credit facilities within the shipping industry is likely to be subjected to even more stringent conditions based on the experiences of Hanjin Shipping. The final observation is that America needs to start exporting manufactured goods in a much wider arena so as to diversify its export base. The economy in general and the shipping sector in particular is not yet in full balance.
Photo source: logistixau.com