On August 31, 2016, the world’s seventh largest shipper and once successful South Korean company HANJIN filed for bankruptcy. This temporarily marooned 66 ships and $14 billion worth of goods as they were denied entry into ports around the world for the fear of not getting paid.
After the financial crisis of 2008, the industry was hard hit – but with damage control measures such as quantitative easing by the U.S. and other governments, the recovery was underway. With unrealistic estimates, the industry prepared for a bounce back of the trade which never quite materialized. The freight rates, as well as the shipper’s revenues, continued to drop. To give an example of how far the freight dropped, we can look at the experience of iCracked – a San Francisco -based gadget repairs and accessories company. AJ Forsythe, CEO of iCracked, told the LA Times that he was recently paying $800 to ship a 40-foot container from one continent to another. This is half the price one would pay for shipping a 40-foot container across the U.S.
Per The Economist, Hanjin isn’t alone. Eleven out of the top 12 shipping companies are facing huge losses, and many are precariously close to bankruptcy. Even industry leader A.P. Moller-Maersk (Maersk), a Danish conglomerate, is set to suffer significant loses. In 2015, Maersk – along with Mediterranean Shipping Company (MSC), a Swiss shipping giant and the world’s second largest shipping line, announced ‘2M,’ a partnership to share space on their vessels. This was followed by two other alliances: Ocean Alliance and The Alliance. All of these alliances are still evolving. They now account for more than three quarters of all container cargo being moved. However, the problem of overcapacity cannot be solved through these alliances.
Many of these companies had hedged their bets by investing in oil tankers, and some – like Maersk – also made significant investments in oil drilling. With the oil prices hitting record lows, the profitability of these lines was also severely impacted. The downfall in oil prices also worked to the disadvantage of companies like Maersk, which set out to build huge container ships with higher capacity to reduce fuel costs. In 2015, fuel made up for less than 13 percent of the cost.
As the shipping industry grapples with these problems, all eyes are on the industry leaders and how they will contain costs. In June, Moody’s – a credit ratings firm – reported that the world’s container fleet is set to outpace their demand by two percent in 2016. The economic slowdown of China and the trend of manufacturing in local markets – led by giants like General Electric – are only set to compound the shipping industry’s problems.
Soren Toft, COO of Maersk Line, told The Economist that the company will focus on embracing the “age of digitization” better.
Shipping lags far behind other sectors – such as aerospace – in this area. A modern jetliner creates several terabytes of data in a day, while it takes 50 days for an average cargo ship to produce a single one. Maersk is retrofitting its ships to collect more data, which it will use it to enhance its ship-to-shore operations, as well as improve the utilization of its containers.
While these initiatives might be able to help the industry cut costs, the shipping industry will not ignore one of its biggest: seafarers. After the oil crisis in the 1970s placed financial pressure on the industry, a shift in maritime laws allowed ships to hire workers from countries with lower wages – so the companies set out to reduce their labor costs. By the 1980s, Filipinos had taken the industry by a storm and still dominate the market for ship’s crews. In the 1990s the shipping industry witnessed a big reduction in manpower, with ranks such as purser and radio officer almost completely eliminated. In the 2000ss, the big shipping companies – mostly European – started to shut out European officers in favor of Indian, Filipino and other Asian officers in order to benefit from the lower cost of living – and thus, lower salaries – in these countries. A company would pay two to three times more to retain a senior British or Danish officer compared to an Indian or a Filipino officer. The ship operators have also experimented with running ships with a crew as small as 10-13 people. Crew numbers have dwindled to nearly half of what were in the past 25 years. All of this was achieved without huge leaps in technology – mostly by reassigning tasks to onboard staff or onshore contractors or employees.
Today, most ships are well connected to their onshore offices via satellite internet. With the advent of autonomous vehicles and Internet of Things (IOT), the shipping industry is ripe for a technological reform in the near future. Modern airliners have already come to depend heavily on the autopilot function, especially after take-off and during landing. While ships have autopilot functionality, they can hardly be called adaptive and can rarely be trusted when a ship makes its port call. The category of Unmanned Aerial Vehicles (UAV) has been exploding, boosted by practicality of commercial drones and the impressive military capabilities of unmanned aircrafts. In the short term, shipping will certainly continue to reduce manpower – if not eliminate it completely – and catch up with aviation. A technological reform will see shipping lose jobs, and those that remain will be less specialized. This brings us to a question about the fate of the seafarer, a job now predominantly filled by workers from developing countries.
Today’s seafarers predominantly come from the Philippines, India, Indonesia, China, Russia and Ukraine. There are about 1.65 million seafarers worldwide. Approximately 45 percent are officers, while 55 percent are ratings. The current demand-supply scenario is quite acceptable. There is about a 100,000 supply surplus, with close to 69,000 ships in service. The alarming fact, however, is that while the increase in demand for officers has tapered down since the 2005-10 period, the demand for ratings has barely increased. This reflects the shipping companies’ strategy of lowering manpower and maintenance jobs at sea. When technology catches up in the industry, there is a high likelihood of severe cutbacks on employment opportunities for merchant marine officers.
India provides an interesting case. The country now provides a sizeable chunk of seafarers to shipping companies – however, their quality of education and training has been a problem. The ancillary industry of training seafarers grew rapidly – and rather haphazardly – without due considerations about quality and supply-demand scenarios. This relegated vast numbers of seafarers to unemployment after they received expensive training at many private institutes. The situation for these freshly-minted professionals went from campus recruitment to paying off agents to get the required work experience to become certified. For those who did get jobs, the severe cost cutting done by many companies onboard their ships left them disillusioned. The situation looked rather bleak for ratings attracted to the industry in hopes of earning a higher salary. Many aspirants had invested all of their money into this education and gained almost no transferrable skills to help them get another competitive job on shore.
When we put the current scenario in context, the ground situation for merchant marine aspirants does not look good. At the same time, there is a huge opportunity for technology companies to move into a market ripe for transformation. Shipping companies are faced with an existential crisis of sorts: evolve or be prepared to perish. In the coming decade, business will not be as usual. The shipping industry is an example of why every industry needs to plan for an imminent shake-up in the age of technology.
By Ravi Maniar (MBA ’16)
This post has been republished with permission from the author. View the original post here.