Chinese cruise ships? Thanks but no thanks

Shipbuilding is an economic activity that has in substance left Europe long ago. With one exception: Cruise ships. There is a reason for this. Cruise tourism, and carriers, are inextricably linked with the concept of quality; and quality is a ‘way of life’, a philosophy, difficult to copy. 

In spite of the global economic crisis of 2009, cruise tourism has been growing steadily. Carriers are working to near capacity and so do European yards in Germany, France and Finland. Orderbooks are full, without counting newbuilding options. Shipbuilding berths will be the bottleneck in the further growth of the sector going forward.

Aspiring volunteers, such as China, do of course exist, and European builders, such as Fincantieri of Italy, are already considering joint ventures. To my view, this would be the wrong thing to do. A JV entails transfer of technology and as such it is the surest way of offering the knife that will eventually stab you in the back. We have seen this happening in every other European industry and we should be learning from our mistakes.   

It will therefore be quite some time before China enters seriously into the cruise shipbuilding market. No doubt this will eventually happen. But in the meantime, a carrier should think twice before assigning an order to a yard which does not have the experience, suppliers and logistics to carry out the work as expected, and he would be fast to stealthily advertise, negatively, competitors’ decisions to do so. At a consumer level, personally I would think twice before boarding a cruise ship made in China…  

The result of all this will undoubtedly be an increase in the price of cruise tourism products which, we must admit, has dropped to ridiculously low levels due to competition among carriers. Time will tell. HH 

Container shipping: In short, you have a ghastly mess

Containerization has gradually led to the commoditization of the ocean liner service and thus to higher competition among carriers. In an effort to differentiate their service, as well as better control the supply chain, in the 1990s carriers started to invest in the other components of the supply chain, such as container terminals, distribution centers, road, rail and air transport, and in a miscellany of other logistics services, such as bar-coding, assembly, documentation, etc.  Investment in logistics services and related infrastructure, rather than in ships, -which, incidentally, could be chartered-in from private equity investors (e.g. KG funds in Germany)- allowed the carrier to become more asset light, thus more agile in coping with the vagaries of the business cycle.  In addition to service differentiation, vertical integration also serves in increasing both the complexity of operations and the sunk costs of aspiring new competitors (carriers) , particularly if shippers are convinced, through effective marketing, that an integrated service is the only way to better serve their requirements.

This situation has started to change. Carriers appear to be returning back to core business, shedding the idea of vertical integration in favor of better horizontal integration (alliances) and dominance in the sector (shipping) where they have the comparative advantage. Partly, this return to roots has been the result of the weakening or banning of liner conferences, and the low freight rates and service unreliability that have ensued. Presently, you can bring a container from Hong Kong to Rotterdam with $300; far below break-even point. Laid up container tonnage is 5% of the total fleet (over one million slots) and, interestingly, it is often the largest and newest ships, such as MSC Oscar, which are laid up. To no avail, consignees are desperately looking for someone to talk to on the phone. In complex ports like Los Angeles, the terminal of arrival is often unknown until the last minute. At the other end, in Asia, to be filled, a mega ship would call at far more ports than what its size would warrant; something creating a stowage nightmare at the receiving ports. In short, you have a ghastly mess,[1]  brought about by the shippers themselves. HH 

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[1] Lyrics from “The life I Lead” (Mary Poppins) […] A British bank is run with precision. A British home requires nothing less. Tradition, discipline and rules must be the tools; without them: disorder, catastrophe, anarchy, in short you have a ghastly mess. 

Export logistics: the culprit of sluggish trade growth

Years back, a friend of mine at Stanford was making headlines for months by claiming that trade agreements were a bad thing for international trade. 

At the same time, I was claiming that it was the abysmal state of logistics in large countries such as India and China that was holding back container penetration and thus international trade growth. 

The World Bank seems to agree to this. In addition to the usual culprits of trade destruction, such as product standards in importing countries and other non-tariff barriers to trade, the WB now finds that, since the 2009 economic meltdown, the size of exporting firms in developing countries has gone down. 

Apparently, as I had been claiming, the smaller the size of producers, and the larger the size of the country, the more difficult it is to organize export logistics in a system based on containerization and hub-and-spoke consolidation and distribution.  HH 

A business model for Amazon’s Containerships

Just a few posts below, we had predicted that, after entering aviation, it would be a matter of time before Jeff Bezos enters also into ocean transportation. And this time has been quite short.

Amazon has announced its intention to invest in containerships. Its business model is still being thought out, but here is how I foresee a possible scenario:

The company will not be running liner services, being itself both the carrier and the shipper. She will load in Asia with all sorts of container cargo, from all sorts of possible ports, until the ship is full. Assuming a sufficient number of ships is engaged to serve this model, time should not be of essence, for there wouldn’t be a specific consignee requiring the goods at the other end. Amazon would be just warehousing at sea. In this sense, economic slow-steaming would be the preferred option, rather than express services, as Bezos seems to be considering too.

Once the ship arrives, she could be conveniently anchored offshore, sufficiently close to dense consumption centers, such as Los Angeles or Hamburg (close shoring). Goods would be delivered directly to the consumer by drones, thus bypassing ports, tracking, and land-warehousing. A truly green supply chain! The same, hopefully, on the way back to Asia.

The choice of ship would be Amazon’s biggest challenge, and here your guess is as good as mine. Constraints in this regard are: stowage planning; required onboard gear; sufficient deck space for container stripping operations; and sufficient and suitable below-deck space for safe and weatherproof storage of unpackaged goods. With these in mind, and at such a preliminary state of affairs, a “box-shaped” multipurpose vessel (Figure) of about 2000 TEU jumps immediately to mind, and this might not be such a bad idea after all.

Futuristic? Yes. Could it be done? I believe so. When there is a will there is a way. Jeff Bezos is known not only for his innovations but also for his determination to see them through. Time will tell. HH