LONG BEACH, California — Expecting more carrier consolidation, AP Moller-Maersk is becoming more customer-centric amid sweeping digitization and has no plans to expand its fleet capacity in the short term, says Soren Skou, group CEO and head of ocean carrier subsidiary Maersk Line.
In a wide-ranging interview, Skou outlined Maersk’s strategy as it continues a restructuring of its business model that began in 2016, separating the tanker and drilling units and focusing almost exclusively on the transport of containers around the world. The carrier is looking to reduce its vulnerability to volatile ocean transport revenue and cost with a goal of becoming less dependent on freight rates and having more control over the entire container supply chain. Maersk and forwarding subsidiary Damco have said previously they aim to offer integrated transport solutions that make shipping a container as easy as ordering a pair of shoes online.
“When we speak to customers, we see that we haven’t spent a lot of time on how to make it easier and simpler to ship containers,” he told the TPM 2019 conference. “There is complexity, unreliability, and lack of transparency of shipping containers around the world, and that is what we are trying to address.”
A similar approach
By moving into end-to-end logistics, Maersk is following a familiar path, but one that has not seen much success. Maersk Logistics, for example, struggled to separate itself from its container carrier parent and was subsequently spun off as Damco, only to have part of its business eventually integrated back into Maersk Line; APL Logistics was eventually sold to Kintetsu World Express; and Yusen Logistics is operated separately from NYK Line.
So what’s different this time? “What is different is that we now have 17-18 percent global market share, so we have the size where we can be relevant for customers shipping with us,” said Skou. “That will also mean more and more customers can rely on us to offer integrated solutions.”
Skou said another difference was digitization, which has provided greater supply chain visibility, thus enabling logistics providers to take a more integrated approach. “All the relevant participants in transportation can track containers, and that wasn’t possible 10-15 years ago,” he said.
This more customer-centric, end-to-end logistics focus moves Maersk into an area long controlled by forwarders, giving rise to suggestions that the carrier was planning to bypass third-party providers and contract directly with shippers. But Skou moved to allay those fears, noting that forwarders still make up 40-45 percent of Maersk’s business. What’s more, he said forwarders doing business with a more integrated Maersk would actually spend less time booking freight.
“If there is one thing that matters to a forwarder, it is the ability to transact a lot of business at the lowest possible cost and that is where we can help them make a difference,” he said. “If our customers want to book directly with us, that is fine; or if they want to use a forwarder, that is equally fine. It is as simple as that.”
Skou warned, however, that forwarders that have ignored the wave of automation sweeping through the industry face. “If the only thing they provide is a booking service with a carrier, then it is going to be a hard place to be.”
The Maersk Group CEO also spoke about the impending International Maritime Organization’s low-sulfur fuel mandate that will be enforced from Jan. 1, 2020. Considered the single largest threat to the container shipping industry, the additional costs associated with the rule — which requires a global reduction in the sulfur content of marine bunker fuel from 3.5 percent to 0.5 percent — have become a source of friction in early trans-Pacific contract negotiations.
Carriers forecast the cleaner fuel will cost the container shipping industry $13-15.7 billion in additional annual fuel spend. Maersk has pegged the extra costs at $2 billion, as has Mediterranean Shipping Co., Hapag-Lloyd at $1 billion, and CMA CGM at $160 per TEU ($3 billion). One thing the carriers agree on, however, is that these costs must be passed on to shippers for carriers to continue to operate.
Skou was frank about the impact on container shipping companies unable to recover the costs of the more expensive bunker fuel from customers. “If the projections in fuel costs were to come true and lines are unable to pass that on to customers, some will go bankrupt.” he said. “If you suddenly have a billion dollar fuel bill there will be more consolidation.
“In Maersk, we use about 0.9 ton of fuel per container we ship, and if the price goes up by $300 per ton, we have a price increase of $270 per container. That can often be 10-15 percent of the freight. It can cause enormous fluctuation in an industry that doesn’t make any money.”
But even without the low-sulfur fuel issue, consolidation in the container shipping industry was not yet over, Skou said, and it would center around the sustained struggle for profitability. Persistent overcapacity has put downward pressure on ocean freight rates for the better part of the last decade, squeezing margins and eventually spurring an unprecedented wave of mergers and acquisitions, as well as the largest carrier bankruptcy ever.
“We are in an industry that has been unsustainable for the last eight years. As long as the industry is not financially viable for quite a number of participants, we will continue to see consolidation,” he said.
Carriers have at times been their own worst enemies, ordering new, larger vessels at the expense of supply and demand fundamentals, but Skou was adamant that Maersk Line had no plans to increase the size of its fleet and would maintain its capacity of about 4 million TEU for the next two years.