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THINKING ALOUD (Business&Law) SUPPLY CHAIN & the Exporter

Updated on February 1, 2017

Doing the commodity business with China is like drinking coffee. We enjoyed three spoons of sugar per cup for a long time. Suddenly, when that’s cut to one and a half spoons, we feel bitter — because it used to be so sweet.

— Sukanto Tanoto: founder and chairman, Indonesian conglomerate Royal Golden Eagle
EMMA MAERSK
EMMA MAERSK | Source
RICKMERS JAKARTA  Superflex heavy multi-purpose ship The eastbound Round-the-World Pearl String Service was launched ten years ago, connecting Europe, Asia and North America.
RICKMERS JAKARTA Superflex heavy multi-purpose ship The eastbound Round-the-World Pearl String Service was launched ten years ago, connecting Europe, Asia and North America. | Source

CONTAINER SHIPPING ALLIANCES work like the airline alliances, allowing members to share space on services operated by other members and making the best possible use of capacity.


The Merriam-Webster defines an alliance as a relationship in which people agree to work together. Transpacific Stabilization Agreement (TSA) comes within the definition. Nevertheless, it calls itself a research and discussion forum. That is official.

But in May 2014 TSA members agreed to raise Asia-US freight rates by US$400 per 40-foot container.

TSA is certainly an alliance with an impact on the shipping market; and it is not just an ordinary forum for mere oratories and routines. So it seems.

ALLIANCES by name
MEMBERS by name
TRADE ROUTES
 
P3 Network
Maersk Line, Mediterranean Shipping Co and CMA
Asia-Europe; trans-Pacific and trans-Atlantic (service abandoned)
 
CKYHE
COSCO group, China,Japan’s K Line, Taiwan’s Yangming, Evergreen and Korea’s Hanjin
six service loops between Asia and Northern Europe and four loops on Asia-Mediterranean trade.
 
G6
American President Lines Hapag Lloyd Hyundai Merchant Marine Mitsui Nippon OOCL
Trans-pacific and trans-atlantic; Asia-Europe
 
 
 
 
 
Grand Alliance
Orient Overseas Container Line, NYK and Hapag-Lloyd
Asia-Europe trades
 
New World Alliance
Hyundai Merchant Marine, MOL and APL
Grand Allinance & New World joined to form G6
 
Transpacific Stabilization Agreement (TSA)
A group of 15 of the world's biggest container shipping lines including Maersk Line, MSC, Cosco and Hanjin Shipping
Asia-US routes
 
The Far East Freight Conference
ANL Container; APL; CMA; CGM SA; CSAV Norasia; Egyptian International; Hapag-Lloyd; AG Hyundai Merchant; Kawasaki Kisen Kaisha Ltd. Maersk Line MISC Bhd; Mitsui O.S.K.; MSC - Mediterranean Shipping Co. SA; Nippon Yusen Kaisha; Orient Overseas Container Line; Safmarine;Yangming Marine;Zim Integrated Shipping.
Asia-Europe routes
 
CONTAINER SHIPPING ALLIANCES Alliances are cooperative agreements entered into by shipping lines with their competitors. The shared use of their various container ships enables them to increase the variety of their shipping lines, and also

Chén Róng’s

Little English-Chinese Dictionary

  • liner trades = bān lún yùn shū
  • market share = shì chǎng zhàn yǒu lǜ
  • O.P.E.C. shí yóu shū chū guó zǔ zhī
  • Running into a bind = zǒu tóu wú lù

SUPPLY CHAIN:

Goods take longer to arrive!

Writer: Chén Róng



Container shippers take note. Your goods are spending longer periods at sea before reaching their intended destinations. Do you know the reasons for the extended transit time?

Shipping companies that operate the main liner container services are losing billions yearly since 2009. Container rates have tumbled.

One cost savings option for some liner companies is using the longer and cheaper route round the Cape of Good Hope which avoids the hefty fees at the Suez Canal. The other more common approach is slow steaming. Lower vessel speed reduces fuel consumption, and the cost savings can be tremendous if the price of bunker fuel is high. Many ships continue to slow steam at around 18 to 19 knots. Even when bunker price came down steeply in 2009, slow steaming option remained popular because the extended round trip time helps to absorb surplus capacity -- more vessels can be added to the loop and few ships get laid-up unemployed. On a liner route between Europe and Asia, the cost savings for slow steaming compensate for the cost increased linked to the deployment of an additional vessel to guarantee a weekly call in each port including in the liner service.

Well, it may not necessarily be a loss to shippers. Slow vessel speed reduces carbon emissions and their carbon footprint. Shippers get a good green image! A more direct benefit for some shipping line customers is the use of these ships as floating warehouses. They can hold less buffer stocks. There is assurance that new stocks are arriving on schedule. A sailing schedule at ports-of-call published by a shipping company is not an absolute obligation for being well-timed. They are close approximate arrivals and departures of ships at ports. When ships proceed at full speed of 20 plus knots, it has no allowance for delays by bad weather or congestion at ports. With slow-steaming, a ship can increase its speed to make up for lost time.

Customers of shipping companies can use slow steaming to their advantage because of its great benefit that it engenders -- reliability that passes on to its supply chain. Timely delivery may be a contractual term. But it is certainly an important practice of most successful businesses to win over customers for the long haul. Timely delivery certainly comes before getting a cheaper freight rate or a shorter transit time in these instances.

What is said does not necessarily hold true for every shipper or his consignee. At times, longer transit does increase costs for shippers as they may have to put up with more inventories to feed this longer supply chain. Inventories, including raw materials and component parts, and how much of these to keep on hand is an important decision for a business whether it is in manufacturing, retail or some other industries. For inventory decisions involve cash flow -- ordering costs and holding costs such as storage and insurance. In the majority of cases, finished goods are mainly the consistent inventory for small businesses. Longer transit time at sea means an extended period between production and sale. Small firms generally need expeditious cash flow processes to continue in business. Shippers, therefore, should not just pick liner services that offer cheaper freight charges; they have to take into consideration transit time as well. Time is money when it affects cash flow.



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SHIPPING ABROAD:

Changing dynamics affect container ships

Now Smartphones made in China are travelling in Boeing 747s.

Smartphones bound for the American market and other parts of the world would leave Chinese customs by trucks. These goods are then freighted overland to Zhengzhou airport which has recently been much expanded in tandem with an increase in smartphone production. Zhengzhou is the provincial capital of Henan Province in east-central China.

In earlier years, container vessels shipping personal computers made in China to U.S.A.,with a trip lasting about a month. Now, it is no longer the case when air freight charges get cheaper and arriving at destinations much faster. Similarly, smartphones are small enough for shipment by Boeing 747s in huge quantities. It is more cost-effective as volume has helped airlines to lower freight costs. A single wide-body plane can easily carry nearly two hundred thousand smartphones packed inside aluminum canisters.

From Zhengzhou, freight carriers such as UPS and FedEx flying United States-bound carried these shipments to Anchorage. These smaller planes refueled at Anchorage before going on to Louisville and other logistics hub in U.S.A.

Things do not seem to augur well for the container liners.

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Chén Róng’s
Little English-Chinese Dictionary

Shipping Abroad = yùn wǎng guó wài

cost effective = pō wéi jīng jì

wide-body Boeing = jià kuān tǐ bō yīn

aluminum canisters = lǚ guàn

Apple's iPhone 6
Apple's iPhone 6 | Source

Global Supply Chain


Apple's iPhone 6 is the best example of an international supply chain.

Strip apart an Apple iPhone 6s and one sees components made by companies from several economies. The following information came from Business Insider:

* Its storage, camera and display come from Japanese companies Toshiba, Sony and Asahi
* Its random access memory (RAM) from South Korean company Samsung
* Its A9 processor is from Samsung and Taiwan's TSMC
* Its LTE modem and radio frequency receiver are by San Diego-based Qualcomm
* Its Wifi module, battery and chassis are made by Chinese firms
* Its rare earth minerals came from China and the USA.

Many products are exported from China to USA with the Apple iPhone as the finest example of products assembled in China with components made in other countries - a perfect global supply chain.

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SUPPLY CHAIN & the Exporter

- Liner Shipping –

Writer: Chén Róng



Mr John Lu, Chairman of Asian Shippers' Council: "We have all heard about the estimated losses for the liner industry, which we all know are self-inflicted, and we are being forced to pay for their misplaced judgement in ordering more ships than the world needs,"

Mr Lu has a point.

Perhaps exporters (and, to a lesser extent, importers) of goods should know why these misplaced judgement were made and under what circumstances these self-inflicted injuries caused ship-owners to pay heavily in nursing their wounds.

Different ships can be found in liner trades; some vessels come with cranes that can be twinned to give a lift of nearly 1000 tons in capacity. Others have tween decks, but highly sophisticated adjustable ones for optimum space utilisation. The success of the smaller liner shipping firms has to depend on such flexibility; using multi-purpose vessels to serve niche markets. However, this article will talk about container-ships of the major firms because these are the crafts that the majority of importers and exporters employ for transportation of their goods across oceans.

Liner shipping services provide an important supply chain - the journey of a product or raw material from its source to the consumer from one part of the world to another.


CEO: Man-on-the spot

The executives running major liner-shipping companies are not ordinary folks; they are smart and often experienced people in the business world. The Chief Executive Officer (CEO) who heads the Board of Directors is usually a highly qualified person; qualified either in terms of professional attributes or years of experience in a certain industry. Unlike the writer who marks time at the desk pondering over his investment portfolio, top shipping executives generally do not share the same luxury in their approach. If they see their competitors buying new ships, they do not sit back hesitating their next move. Most of them would join in the buying spree as following herd-instinct is a better strategy. If a bet turns out wrong, he has the company of all other top-notched in the industry making the same mistake buying new ships when they know their collective action will eventually lead to a shipping slump. Nobody can be singled out for poor business judgement.

Hence, circumstances may not permit these CEOs to be different. Certainly, some people will argue that non-family CEOs take risks at shareholders expense. If their bets are right, they get paid off with handsome bonuses. CEOs will still get a reward for wrong business judgment - a built-in multi-million dollar termination pay-out under terms of their contract. It is a case of winning with the flipped coin falling either way -- heads or tails. The writer prefers not to take this view as it is unfair to some executives who may be dedicated people out to do a good job.

People running real estate companies are similarly wrong with business cycles. We cannot blame their CEOs because the nature of their tenure requires the taking of short-term views on business strategies. It is the writer's opinion that a liner-shipping company may be better managed as a family business. Traditionally, the Greek ship-owning families bought ships in good times. They got bargains when the sale and purchase market was at the bottom of a trough. These Greek owners were able to spot some astute re-sales of new-building contracts for substantial profits. This is probably the basic success formula for managing a profitable liner shipping company in the long run. It is difficult to consistently make money out of its daily operations.

Managing the daily liner shipping operations is not a walk in the park. International liner shipping is an interwoven network of scheduled services. Container ships regularly transport goods at a price from one port to another globally. The container liner shipping industry depends on global main trade flows: Transpacific and Europe-Far East. As U.S.A. takes in the bulk of all imports from Asia (particularly China), the transpacific route has become the busiest of route to west coast ports of America. As international trade grew in the 1990s, shipping companies have gone on a renewal process. They started building bigger, bigger ships to gain greater economies of scale. This has been a main reason for buying of new ships by all liner shipping companies.

But shipping has become increasing cyclical over time. It requires management to take a long-term perspective. In so doing, the job of a CEO of a shipping company gets more demanding as he has to iron out the constant abrupt swings between the ups and downs of a more volatile shipping cycle. We will come to that a little while later.


Liner Conference – the end of an era

Liner shipping, per se, can be profitable on a long-term basis if there are conferences to manage capacity and freight rates; even though shipping companies may continue spending on new tonnage racing against one another to increase market share. During those good old days, these conferences achieved its objective in ensuring that liner companies were able to make acceptable profits year after year as container ships then begun displacing the conventional cargo ships.

Few people outside liner shipping are able to explain what a conference is. It is probably a euphemism for a cartel. A cartel is bad when it is an effective one. But some cartels are misnomers. For instance, Opec does not have the power in controlling prices because its members regularly breached oil production quotas that were intended to regulate the market. But liner conferences have built considerable clout. These liner conferences are effectively clubs of the rich and mighty that dominate the major transpacific shipping routes between Asia and USA West Coast; and between Asia and Europe. These firms have large financial resources and government support which were barriers to entry for all other smaller players.

This price-fixing regime was what export and import firms argue that allowing ship owners to join forces to set freight rates and capacity usage goes against prevailing world trends toward open competition.

However, these conferences which can do both of these things -- managing capacity and freight rates - disappeared since the start of this century. Banning of liner conferences by nations is irrelevant. These former cartel members are struggling with the sea-change without a core partnership. They can be seen openly competing against one another. The bigger liner companies built mega container-ships with a view to cut costs but this is probably a hidden agenda to bankrupt their competition. Generally, everyone is busy forming their own alliances; with some alliances coming together to form mega alliances to gain bigger market share, effectively reducing costs through economies of scale. Shippers should be happy to note that liner shipping is now a matter for the survival of the fittest liner operators.

Without the cartels as the unifying force, liner shipping is now not only highly competitive; it is all politics that stays beneath the surface that makes the atmosphere seemingly peaceful and cooperative between industry players. In truth, it reflects deeper realities rooted in balance-of-power politics where powerful players impose their will on the weaker competitors. The strong and powerful artfully prevent weak players they consider a part of the legitimate sphere of influence from forging links with its adversaries. It is the unpalatable truth -- a subject which most industry editors prefer not to talk about.

But exporters and importers are still not happy claiming that these alliances are hiding behind their liner shipping agreements to fix prices! Shippers should not over kill because liner shipping does offer great economic benefits -- offering regular sailings even to ports that outsider-lines will never provide services. Liner shipping brings about co-ordinated, regular and predictable services. These carrier alliances are responding to overcapacity by laying up surplus ships, restructuring routes or suspending services as part of what they agreed upon in the Liner shipping agreements. These agreements are non-binding and signatories are free to determine individual freight rates.

In fact, the structured groupings of alliances and building of mega container-ships have prolonged the cyclical downturn; the freight market has remained depressed for the past six years and liner companies suffered cumulative losses in billions. Alliances help in consolidating capacity by taking out excess capacity. It is similar to the practice of commercial airlines, where different companies may fly passengers on the same plane on a code-sharing basis. In both scenarios, airplanes and container ships will travel close to full capacity. An alliance structure, therefore, allows for asset utilisation between two or more companies to achieve economy of scale -- much in the same way as NOL and Maersk Line buying gigantic container ships.

This concept of economies of scale has taken liner shipping to engaging in huge investments in ships, containers, and port equipment and information technology as the only way to stay in the game as global container carriers. For the same reason, liner shipping has been consolidating through mergers and acquisitions. Neptune Orient Line of Singapore bought over American President Lines. Maersk, a Danish conglomerate, acquired Sea-Land - an industry pioneer.

Exporters and importers do not see all these changes going behind the scene; or they are simply too busy with their international trades.


Corporate structure of liner companies

Conflict of interests is one reason the writer opines that container liner shipping should preferably be operated and controlled as a family-run business. If managed as a public-listed entity, management has constantly to look at ways to placate and reward shareholders holding shares with voting rights that can oust an entire management team at times.

Some years ago, public listed Neptune Orient Line returned a highly controversial US$1 billion in cash to its shareholders, because the company has no immediate use of the fund. It financed the pay-out by borrowing the required cash through an issue of medium term notes -- a corporate debt repayable to lenders in ten or less years. Instead of a cash-back, a private business would probably use the strong balance sheet to fund related activities, and not having to listen to accountants and financial analysts theorising on what would be best for a liner shipping company. Regret to say, qualified professionals in specific fields are not in the same league as PIL’s S.S. Teo and former P&O chairman Lord Sterling insofar as the shipping industry is concerned. These gentlemen have remarkable hands-on industry experience having spent years at the deep end; the fortitude that reinforcing their foresight and immaculate judgement in timely execution of business strategies. Paper qualifications mean little to successful running of a shipping business - in particular, one with a strong liner shipping division. For the entire year 2012 NOL reported a loss of $400 million and last year nearly $80 saved by a cost savings and corporate building sale of some $500 million. These losses were much higher than many financial analysts estimated during the years of economic slowdown in Europe and USA that put a damper on international trade. These same people were the first to up their thumbs when NOL distributed over $1 billion in back to public shareholders.

Some countries like Russia, for political reasons, they have their top military men run public listed companies in diverse businesses. Perhaps it is good for the Russians. But such placements may not augur well for true democracies with open economies. In the shipping business, placements of ex-politicians and army personnel would exacerbate the cyclical challenges faced by the industry and the liner company. Coming from a totally different background, what can be expected of these non-marine men to patch the hole that is about to sink the corporate ship? They probably spend their good hours inside war-rooms planning at cost-cutting strategies. Follow the lead players! That is probably their only option - improving cost structures whether it is terminal agreements, charter agreements, laying up tonnages, vessel sharing and slot swops in an effort to deploy their assets most optimally and secure low cost.

Cost-cutting is vital for riding out cycles but in itself it will not help stop a company from further financial bleeding.

Today, when competition is rife, a regimental approach to managing a liner shipping company will face insurmountable challenges.


Shipping Finance

One big hurdle that liner shipping companies face is in getting the necessary finance for working capital and the acquisition of new ships.

Shipping loans are among the riskiest assets on a bank's balance sheets. It is doubtful if banks fully report on their risky loans. Their books might not have adequate provisions for bad shipping debts. In lean times, ships under mortgage may not be valuable enough as collaterals when ship-owners are experiencing overcapacity and economic slump that push down cargo prices to unsustainable levels. Many of them just do not have the money to pay back their loans after covering operational costs and interest payments from their meagre income. Fortunate are the few ship-owners whose financing banks take a long-term view instead of appraising their ships at market value -- otherwise many containership-companies would be categorised as insolvent. But their shareholders and accountants who advise them insist on purely accounting doctrines with assets still showing inflated values. In a financial crisis some ships may have just scrap values if marked to market.

It is really difficult for shipping companies to stay on as going-concerns during bad years. Even when times are good, banks may not provide 100% of the working capital. As a general rule, a financing bank usually provides about 40% of the total capital requirement. European lenders do have stricter capital requirements under regulatory rules. Therefore, they are more cautious on making new loans during an economic downturn. Hence, they generally use money paid back on existing loans to finance new credit. The drying up of credit results in more companies seeking to raise cash from the public -- the main reason why liner companies are mostly listed entities on major stock exchanges.

These are challenges faced by liner services providers, but exporter-shippers would not care to know. It is unfortunate. But if they would just take some time to understand the difficulties that liner ship-operator face, shippers might actually relent instead of pushing their shipping associations hard on getting freight down to depressing levels. What should be asked instead are fair freight rates. With no one willing to provide scheduled and reliable sailings between major trading regions, because such a business is unprofitable, exporter-shippers are not going to fare any better either. So, stop asking for bottom rates!


Commercial Shipping Skills

The skills required for successful management of different sectors of the maritime industry are not the same with expertise almost inter-changeable. Historically, the liner trades have always been ones based on stability and, through the conference system; container shipping companies had been able to control capacity and kept a tight rein on freight rates. These days are no more, gone forever. Now, the commercial skills required for operating a liner company is moving closer to those required to manage bulk trades. The people managing liner trades -- particularly the CEO -- need abilities to judge a cyclical market and make shrewdly timed acquisitions and disposals; and to fix vessels on the most favourable time charter terms. In the case of bulk trades, managers must have a sharp eye for spot market fixtures. The Greek ship-owners were probably the most savvy of shipping people, -understanding the trip wires -- pulling back by selling their vessels profitably and chartering in to fill the shipping gap instead of holding on to their hardware.

Savvy owners not only have a good mix of ship-types on liner routes; they also invest time and money in other shipping and maritime-related sectors which are less cyclical than the liner trades. In the writer's opinion, the shipping business -- one incorporating liner trades -- is best run and controlled under a private holding company with family members having acquired decades of hands-on and risk-taking experiences. All subsidiaries may be public listed entities. Shipping business is one where multiple classes of common stocks should be encouraged.

Multiple share classes allow founders to retain control of the company. For example, a company could designate its Class A shares to have 10 times the voting rights of its Class B shares. The founders would then be able to control the company without having to own the majority of the shares. If further working capital is required, the company raises capital by issuing additional class B shares accordingly.


A bird's-eye-view observation

The major liner shipping companies appear to be running into a bind but there is no turning back. They just have to keep growing in corporate size through acquisitions and the building of newer and bigger container ships. A.P Moller Maersk built a supermart business to even out the business cycles. The company realised a gain of US$2 billion when the supermart was sold. It was perfectly timed.

Non-family executives have trouble growing and nurturing long-term projects. They do not have the luxury of time. Their relatively short term in office will not be sufficient to see such projects bear fruits. They are to strike and hit their targets, so their views and approach are also short termly. Organic growth seems their safer option; growing through merger and acquisition opportunities in their core activities, perhaps the port terminals as vital parts of their supply chain that can offer to their customers.Organic growth is staying too close to the core business and not a good enough complement to the liner trades. A commodities logistics and marketing business as a diversified solution to the volatility of liner shipping may be a better strategy, but it needs lots more effort to grow it than a port terminal.

These non-family executives are smart people, no doubt. Unfortunately skills in liner trades are not so readily transferable. One simply cannot learn them from books. The CEOs of family businesses are a different breed of commercial men. They are like Red Indians who could tell enemies coming by listening to the ground. They could hear things for miles in any direction. Liner shipping is best left to these men.

What really makes the world's biggest liner shipping company so different?

A.P. Moller-Maersk is probably the biggest European family business. Mr Moller (son of the founder) who is now 96 years of age is still keeping an eye on cash flow; and he continues to provide advice to the CEO. Hard earned experiences have been handed down the generation to generation. Such a long legacy has been the big advantage for this family business in difficult times. It has lots of experience to fall back on, teaching the family members to be prepared for downturns. Maersk has survived two world wars. Shipping cycles no longer bring them the sleepless nights. The family business is constantly wary of debt but seldom panic because of its lower leverage and long-term approach as the way forward to a more stable kind of shipping capitalism.

Are there suggestions for Neptune Orient Lines? The writer has two – sell it to a family holding. Alternatively, have Port of Singapore buy over the business and run both ports and liner trades under the same roof. PSA can still remain a private entity and NOL a listed one.

Consolidation in the form of mergers and acquisition will eventually help the industry to regain the level of freight rates that would put liner shipping on a sustainable footing.

Hence, the selling of NOL to a family holding of ship owners is not a bad thing. But it is politically unthinkable. It is a national icon. It is a strategic industry which a nation must protect at all costs.


Are Shippers faring well?

Shippers were not doing too badly for themselves during the heydays of the liner conferences. The old cartel system was not totally immune to competition. Outsiders such as Taiwan's Evergreen Marine did exist to provide a high level of service to importers and exporters. If these shippers thought liner conference rates were too high, they could start to forgo their loyalty discounts and circumvent the conference. Many did.

The present system of alliances is no threat to the shippers who are now having much lower freight rates. The building of bigger, bigger container ships and the merging of shipping lines, the alliances -- simply put, the economies of scale, can only do so much to reducing costs. The current depressed freight rates is due to overcapacity; there are more ships than goods available for shipment. More ships should be scrapped; more should be laid up. With that, freight rates can be stabilized. But this is obviously not happening. The existing world fleet of container ships is too young to be sent to the scrap yards.

With more mega container ships offering even lower freight charges, shippers can continue to enjoy their highly subsidized lunch for years to come. The rich and mighty lines and their mega fleet will see off weaker shipping lines. Only the fittest will survive at cut-throat freight levels. Who says people in Maersk Line do not understand economics? A family-controlled firm can deploy such business strategies without getting the ire of public shareholders.

Nevertheless, watch it! In a monopoly setting, freight rates will soon rise!


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