Readers of this blog may note that like other supply chain industry analysts and consultants, there are some supply chain trends that tend to trigger our ire. One specific area has been the ocean container carrier industry, whose arrogance toward customers and management missteps just keep on coming. Ocean container carriers still do not seem to have a clue on how to balance internal profitability objectives with delivering required customer service. Instead, decisions motivated by internal objectives are eroding customer and overall service levels.
In previous Supply Chain Matters commentaries we called attention to the dynamics of consolidation and industry restructuring and noted that just when we presumed that international ocean container carriers were finally paying more attention to customer cost and service needs they again disappointed. Our latest commentary observed the industry again turning to price increases and targeting U.S. bound shipments for carrier profitability targets.
In mid-February, after fighting a market-share battle with its competitors, industry leader Maersk Line announced that it would cut Asia to Europe vessel capacity by 9 percent. In a Financial Times article, Maersk’s finance director indicated that the carrier will use all of its tools to return to profitability, including further pricing charges and capacity cuts beyond those already announced. Maersk raised rates on the Asia – North Europe route by $100 per 20 foot container on February 1, and another $50 on March 1.
In late-February, AP Moeller Maersk, the parent company, announced that its profits had dropped 33 percent to $3.38 billion. Profits for Maersk Line, the ocean container group, came in at a net loss of $537 million. Ocean container losses were fortunately offset by a 24 percent increase in oil and gas activities. The carrier’s CEO, Soren Skou, who assumed leadership in mid-January, arrogantly declared that Maersk Line had captured enough market share to fill excess capacity. In a separate FT article, Mr. Skou declared that industry margins have come in at 2 per cent over the last seven years while 12 percent was a more acceptable range. Later he declared that unless industry returns do not reach 8 or 9 percent, the industry is destroying shareholder value. During this same period, container lines collectively decided to order way too much excess new capacity with over 250 vessels currently being idled. While the industry might have viewed bigger and more efficient ships as the answer to increased profitability, too many of these ships have exceeded any conceivable notion of container shipment growth.
As a contrast for our readers, UPS currently has a pre-tax operating margin of 10.86 percent, and a net margin of 7.15 percent. FedEx has a pre-tax margin of 5.7 percent, and a net margin of 3.7 percent. Both FedEx and UPS have proactively idled excess capacity since the global recession of 2008 without incurring significant service level erosion for customers, while continuing to exceed profitability expectations. Each has balanced investment in new, more efficient capacity with corresponding investments in process control and productivity tools directed at servicing shippers.
Today, ocean container carriers continue to run at the slowest speeds, Maersk is quoting transit times from Shanghai to Northern Europe at 34 days, up from the mid-twenty days in prior months. That has an impact on customer needs for faster transit times and less safety stock. Last week Maersk had to declare that it was suspending bookings on the North Europe to Asia reverse route because a current backlog of shipment containers has caused European ports to be at full physical capacity. European shippers have obviously stepped-up some export volumes while empty containers needing to be sent back to origins compound the problem. The carrier indicates that it may take until May to clear port backlogs.
A failure to view an operating problem from both the internal profit and external customer service lens compounds even further. Ocean container carriers have withdrawn capacity, and continue to slow transit speeds in order to raise profitability. Slower transit times are causing ports to become ever more congested as empty containers cannot be cycled to other ports. Shippers continue to plan for far more excess inventory to compensate for slower transit times from the key manufacturing regions in Asia. Now, as choke points continue to compound themselves, carriers decide to suspend services rather than recall an idled ship and operating crew.
I’m sure we need not continue this commentary since the bulk of our readers get the picture. While the industry may boast that it serves as the lifeblood of global commerce, management missteps and a general arrogance to shipper and customer needs have resulted in a mess. Where is the balance?
In the view of Supply Chain Matters, what this industry really needs is either a healthy dose of oversight, or a general thinning of the carrier herd with the survivors being those who demonstrate a clear focus on investing in customer and shipper needs.