Ocean carrier alliances have dominated the news in recent weeks, with new alliances emerging in reaction to recent merger activity. These are potentially important developments, but not for the obvious reasons.
The China Cosco-led Ocean Alliance and THE Alliance will enter service in 2017 after the existing CKYHE, G6 and Ocean Three partnerships were torn asunder by CMA CGM’s acquisition of APL, which will close shortly, and the state-directed merger of Cosco and China Shipping. The 60-year-old container shipping industry has never seen mergers and acquisitions and alliance restructuring activity at this pace. But its significance to the industry and to customers should not be overblown.
For customers, the new landscape will mean somewhat fewer carrier choices in the east-west trades and a new set of sailing schedules and port pairs to which supply chains will have to acclimate. There will be no shortage of available sailings, perhaps just different carriers and services calling at different ports on different days, but that’s not extremely significant.
Nor will it alter the hypercompetitive container pricing environment, where spot pricing exists in a free-flowing and volatile market based on supply and demand of capacity at any point in time, and where contract rates follow the spot market. From a customer perspective, that will be the short-term impact.
But container lines’ central, overriding focus on cost will be the interesting development following the alliance restructuring. There can be no doubt that cost is the carriers’ primary focus and will continue to be into the future. Despite periodic (and flimsy) red flags raised by shipper groups as to the market dangers of consolidation, revenue focus including finding opportunities for premium pricing isn’t a priority for most carriers.
For example, a hedge fund investor asked me recently why container lines wouldn’t just pursue the smaller shipper market where forwarders achieve premium pricing and profitability. My answer wasn’t just that carriers gave up on the small shipper market years ago — which they did — it’s also that pursuing the small shipper market would require intensive focus and investment on the revenue side of the house and that is not investment I see any of them making right now.
Given the risk that higher pricing wouldn’t result — a reasonable conclusion, considering carriers’ track record on pricing — such an idea is unlikely to be taken seriously within most carrier organizations. Finding opportunities for premium revenue, and a willingness to make the necessary investment to unlock that value, is simply not where most carriers’ focus is these days.
Their focus is on the cost side, and that’s where the alliance changes may produce impact. Alliances until now have been little more than glorified vessel-sharing agreements, often unhappy marriages of convenience that allow carriers to offer a competitive service network and to take advantage of cost savings by collectively utilizing the lowest-cost tonnage that the member lines have available.
But the cost savings could go a lot further if the alliance members were willing to integrate their operations further, particularly on the landside, for example, by combining container depots. This, of course, undermines their independence, a tough pill for proud shipping companies to swallow and makes it harder to undo the alliance at some later date. But as carriers dig deeper in search of cost savings, alliance integration on the land side — if they’re willing to do it — stands out as an untapped opportunity.
As McKinsey wrote in March in a white paper authored in part by former APL CEO Ron Widdows, “The operational alliances are in effect for assets at sea but come to an end once the boxes are unloaded. On land, the lines separate one from the other: Each has its own terminal agreements, trucking contracts and dispatching arrangements, railroad agreements and operations management.”
The benefits are there for shippers as well, as landside coordination, which must withstand antitrust scrutiny, could help unclog chronic bottlenecks such as at Los Angeles-Long Beach. But for such benefits to be tapped, the alliance members must be aligned, culturally and strategically. The China Cosco-led Ocean Alliance, which includes OOCL, CMA CGM and Evergreen, may have a shot at getting there. China Cosco anchors the alliance in China, which despite slowing growth remains by far the largest container shipping market. Cosco and Evergreen are long-standing partners, and OOCL is well-connected in Beijing through C.H. Tung, its former chairman and the first chief executive of Hong Kong after the handover by the British in 1997. The alliance was proactively put together.
With industry overcapacity seen as a chronic reality, the benefits from further alliance integration may become too tantalizing for carriers to ignore. As McKinsey stated, “On the financial side, the benefits of scale in ocean-side alliances have not significantly enabled better financial performance by the constituents. By extending their reach to landside operations, the alliances will be able to capture real savings.”
A new era in the industry is beginning, based on the activity of 2016. It’s a natural time for industry leaders to pause and take stock. It’s at a time like this when new thinking could emerge. My view is it won’t take shape on the revenue side. That’s too uncertain and unproven. But on the cost side, the alliances could make headway, and everyone would benefit.