Diminishing Returns

Just when you thought the news couldn’t get worse for global container carriers that lost an estimated $650 million collectively in the first half of the year, it did.

Beyond the deepening financial losses — the exception being Maersk Line’s exceptional $554 million third quarter profit driven by deep cost-cutting — the news included the ouster of two industry leaders and the retirement of a third.

When Xu Minjie stepped down this month as executive director of China Cosco Holdings and executive vice president of China Ocean Shipping, it came amid widespread reports that China was expanding  an  anti-corruption campaign launched by President Xi Jinping to shipping. The plot only thickened with reports — denied by Cosco — that former Chairman Wei Jiafu, the architect of the carrier’s rise to global powerhouse, had been placed under some form of house arrest.

The second casualty came just days later, when Hanjin Shipping CEO Y.M. Kim stepped down, in the process taking responsibility for 11 consecutive quarters of losses that through the first nine months of this year reached $388 million.

The third pillar to fall was China Shipping Chairman Li Shaode, who retired just weeks after the company reported a $66 million third quarter loss that brought the company’s year-to-date deficit to nearly $280 million.

All of this underscores the weakness that has plagued global shipping markets for three of the last four years, and stands in stark contrast to the financial fortunes among North American surface operators. The seven Class I railroads, the beneficiaries of 30 years of consolidation, have been swimming in billions of dollars of profits for years, and some of the most unstable trucking operators have engineered a turnaround that threatened their existence during the 2008-09 recession and its aftermath.

Notwithstanding the speed bump YRC Worldwide, the most troubled major motor carrier, suffered in the third quarter on its road to recovery, there’s little debate that once-beleaguered trucking companies, unlike their ocean brethren, are on firmer footing, perhaps the firmest of any point during the last decade.

Not so long ago, motor carriers faced many of the same problems as shipping lines: severe overcapacity and the chasing of market share that decimated pricing and bottom lines, and threatened the existence of some of the largest players in the game.

So what changed? Carriers in both modes aggressively reined in capacity and costs, but did so in dramatically different ways: shipping lines by implementing slow-steaming, ordering ever-larger ships providing economies of scale and teaming up in massive vessel-sharing alliances, and truckers by curtailing investment in new equipment and, importantly, passing up unprofitable freight that could move by intermodal rail, and consolidating.

In the process, those once-endangered motor carriers, and the industry as a whole, have managed to bring supply and demand into balance, which is, after all, the only recipe for sustained profitability.

Is it a model ocean carriers can follow? Well, no. The capacity already ordered or delivered has no outlet, regardless of whether consolidation — through acquisition or failure — occurs. It’s here to stay, and so is the cost-cutting that so many carriers have employed to stay afloat.

For them, the only cure is a sustained economic recovery that leads to greater consumer spending than exists today — a scenario that is beyond their control.

Until then, let the cost-cutting continue, but consider this: Only so many costs can be taken out of a business before there are no more costs to cut. What happens then?   

Contact Chris Brooks at cbrooks@joc.com and follow him at twitter.com/cbrooks_joc.

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