On financing universities

It is not so much about “how much money we spend per student” but “on what” we spend money per student for. If we spend money on universities ‘closed’ to the outside world of business and society, this is money down the drain. If instead money is spent on incubators, innovators or, in general, universities aiming to create a better, more efficient, and technologically more advanced economy and society, this spending is then the best investment a country can opt for. Universities often complain about under-funding. Before they do so, however, they should convincingly explain to society what they are going to do with the money, and who are their peers who will eventually assess their toils. Otherwise, money given to universities is money put into a bottomless barrel, proliferating incompetence and backwardness. Contrarily to the university of the 1940s, today the value of research is measured by society's willingness to underwrite it. (OECD: spending on education). HH 

Would you buy a secondhand ship from him?

Never buy from a shop which doesn’t put its prices on the window. Never buy on the internet from a vendor who asks you to contact him for a quotation. Why is that? The answer is to be found in the theory of asymmetric information, for which George Akerlof, Michael Spence and Joseph Stiglitz won the 1971 Nobel Prize in economics. In simple words, the seller knows more than you do about the product he is trying to sell you, and he is counting on his good salesmanship skills to sell it to you at a price above the one you would be prepared to pay, were you to know the things that he does. The English have an expression for an untrustworthy person: “would you buy a secondhand car from him?”, they ask. The pioneering work on the theory of asymmetric information is Akerlof’s 1970 paper “The Market for Lemons: Quality Uncertainty and the Market Mechanism”, Quarterly Journal of Economics 84: 353–374. Although the example Akerlof used was also from the secondhand car market (“lemon” is American slang for a bad car), the theory has found important applications in finance; medical insurance; crime prevention; industrial concentration; and much more. In the latter field, Akerlof and his coauthor, Janet Yellen, have also carried out groundbreaking work on pricing in concentrated industries. Incidentally, Yellen, the current chairperson of the Federal Reserve System, is Akerlof’s wife. Apparently, George knew something others didn’t, for Janet proved not to be a lemon after all… HH

PS: Two related expressions, also English, are cases in point. The first comes from banking: “bad money drives good money out”. The second is often quoted in third party liability insurance markets in shipping (P&I Clubs): “I don’t want to be member in a club which wants me as a member”.

Should the Fed raise interest rates?

It is true that the American economy is again firing up: unemployment is down to 5%, 200 thousand jobs are being created each month, and wages are going up too. Many Fed economists believe, not without good reason, that this is the time to “step on the brake” and raise interest rates, probably next month. I believe this would be wrong. As a result of an unprecedented global corporate debt in excess of 3 trillion dollars, the global economy has not yet escaped the risk of another financial meltdown, and raising interest rates won’t make debt servicing easier without painful defaults all over the world. It is true that this debt was created by cheap money and lax monetary policies. It is also true that countries who have borrowed low and invested in local economies and in non-dollar-earning local assets, including real estate, have since earned a decent interest rate differential. Yet, raising US rates won’t solve the problem, no matter how the problem was created. Moreover, energy and commodities exporting countries, such as Russia and Brazil, are already feeling the pinch, in the face of a declining demand for commodities and low energy prices. If I had to put my money somewhere these days, I would definitely put it on India: A country growing at 7% with a relatively low dependence on the world economy (small exporter and massive importer of 'cheap' energy that helps its competitiveness). The precondition for doing so would be the speeding up of economic reforms, particularly of the financial sector, reducing bureaucracy, and privatizing state assets. As always in this world, there will again be winners and losers, depending on how successful is one in predicting the future and thus manage his risks. HH  

There is no business like terminal business

That Maersk (or Denmark Inc.) is an exceptional company should come as no surprise to anyone (if ever in the mood, I will recount here my one and only experience with the late Mærsk Mc-Kinney Møller, once he was visiting Rotterdam). The company (group) is packed with money: last year it turned an operating profit of 9.3 billion dollars, well above the group’s combined debt of 7.8 billion dollars. Usually, accountants like money in the till: this boosts the company’s credit ratings and thus reduces its cost of capital. But shareholders (and economists) think differently, and Maersk these days is under pressure to spend its money and invest its surpluses. And this is so for 3 reasons: a) dividends are taxed; capital gains usually not; b) profits attract competition; c) profits also attract the inquisitive eye of the regulator, particularly if you and your partner (MSC) control almost one third (28.1%) of the market. After all, in network industries such as container shipping, a company’s objective should be market share maximization (i.e. long-run profit), rather than short-term profitability. And Maersk’s investment vehicle these days is called APM Terminals: another exceptional company, controlling 70 terminals (and more than 100 inland facilities) in 60 countries. Last year, APMT showed a NOPAT (net operating profit after tax) of 20%! Year after year I advise my students to put their parents’ pension into Global Terminal Operators… Some have listened; others are yet to do so. One thing is for sure though: “there is no business like terminal business”. HH  

Carriers vs. 3PLs: Being stabbed in the back?

The, for years now, attempt of carriers to enter the lucrative global forwarding market, in competition with NVOCCs and third party logistics service providers (3PLs) is not succeeding. If one casts a cursory look at the financial results of both players, he will notice that 3PLs are more stable and robust, with consistently higher EBITs. The answer is simple: being asset light, 3PLs adjust easier to demand and thus wither the downturns of the economic cycle. In the opposite, carriers, in their strife for survival, build increasingly larger ships, which they are unable to fill, and then sell, wholesale, capacity to their competitors (3PLs). To me, this looks like giving someone the knife to stab you in the back. Is this a clever strategy? I wonder… HH

Mega containerships and inventory costs: who pays the pipe(r)?

Each export container is nowadays handled about four times at ports and inland terminals until it arrives to its final destination; and transshipment costs money. It is common knowledge that cargo owners dislike mega-containerships and transshipment, preferring instead a multi-porting system, with cargo unloaded closer to its final destination. Research on the optimum size of containerships has rarely taken into account diseconomies of scale at ports and in hinterland distribution, let alone road congestion and the environmental impacts of long distance overland transport. More importantly, the negative relationship between ship size and shippers’ inventory (holding) costs has never been seriously addressed. Recent research, soon to appear in Maritime Economics and Logistics, demonstrates that, were one to jointly optimize system costs of door-to-door transport, i.e. taking into account inland distribution and shippers’ inventory costs, the optimum ship size in the North Atlantic trades should not exceed that of 9000 TEUs. Obviously, the questionable, nowadays, economies of scale in shipping cause a NIMBY effect on system costs that needs to be earnestly addressed in the planning and financing of new infrastructure. HH 

Is infrastructure the solution to global peace?

It is often said that the development of vested interests and the economic interdependence among nations is the safest way towards regional and global peace. Cross-border investments in infrastructure (motorways; rail; pipelines; energy) are key in achieving this goal. The infrastructure financing needs of Central Asia alone amount to some 8 trillion USD. Cash-rich international donors, bilaterally or multilaterally, compete fiercely for a share in this market, but this engenders the risk of overlaps and of creating “cathedrals in desert”. After all, the success of any infrastructure project is in its ability to create growth and employment. On the side of recipient countries, the requirements are becoming increasingly stringent: co-financing through public-private-partnerships (PPP), budgeted state guarantees to attract private investors (something like the Juncker Plan in the EU) and, in general, sweeping economic reforms. HH 

China vs. USA: when titans thud their feet on the war path

The Chinese response to TPP is called the maritime silk road or the  one belt one road project. This formidable infrastructure idea transverses the resource-rich  countries of Central Asia (e.g. Kazakhstan), comes up to Rotterdam, down to Venice, and then through the Med and Suez back to Asia. Countries involved are more or less known but ports, railways and pipelines are not. China dangles the carrot in front of investment-hungry countries, looking for the best concession terms possible (e.g. the sale of the port of Piraeus in Greece). I have little doubt that the silk road would eventually expand eastwards from China to the West Coast of the Americas, to connect to the Nicaraguan Canal that the Chinese are also planning. With a slowly growing middle class, saturated infrastructure and declining exports, China still has 4 trillion US$ of foreign currency reserves to spend. And it will do so. After all, investments need security protection and this, in its turn, requires a geopolitical defense presence. The role of the global policeman, so far played, thankfully I must admit, by the US, won’t be enough in the future, although, one might argue, when money comes in from the door, fundamentalism goes out from the window… In my eyes, the US-China arm-wrestling doesn’t have an obvious winner yet; or does it? HH 

In Chinese, “logistics” means “Rotterdam"

On contract with DHL, the Chinese giant Huawei has established its European Distribution Center (EDC) for ICT products at the small Dutch city of Eindhoven, just 100 km down the road from the port of Rotterdam. In spite of the Chinese economic slowdown, container flows to Rotterdam continue to show a healthy growth throughout 2015. Due to its strategic location; stable business environment; extensive network of infrastructure; and a well-educated labor force, Rotterdam is Europe’s distribution center par excellence, matched only by that of Singapore. No wonder therefore that half of Europe’s Asian and North American distribution centers are located in the port’s wider industrial cluster. If one drives around on European motorways he couldn’t miss noticing that one in three trucks, from Spain to Poland and from Finland to Greece, are Dutch. Half of Rotterdam’s inhabitants are holders of a foreign passport, and the hundreds of multinationals like Huawei, setting up shop in Rotterdam, have transformed the city into a modern metropolis in less than 20 years. From open fields and cows in the 1990s, to the “Manhattan” of the Netherlands in 2015, this is not a bad score by any count. HH 

COSCO-China Shipping: Concentration in container shipping continues unabated

The proposed merger of COSCO and China Shipping will create a maritime giant which will dwarf by far Maersk line; the current market leader. In the face of a declining global demand, carriers try to reduce costs through such consolidations, as well as achieve market shares which, in the long run, should hopefully maximize shareholder value. However, such costs are created by the carriers themselves, by building ships of such sizes that they are unable to fill by themselves. Mergers and alliances are thus the obvious outcome. I am curious to see the reaction of the Chinese competition authority, when last year it gave the thumbs down to the P3 alliance (Maersk, MSC, CMA-CGM), assessing it not as an alliance but as a merger. Certainly, DG-COMP in Brussels are not going to be easy, after the tough stance they took against their own companies, when Maersk bought P&O Nedlloyd 10 years back. Assuming the merger will go through though, CKYHE –the COSCO Alliance- will not be allowed to continue under its current membership composition (COSCO; K-Line; Yang Ming; Hanjin; Evergreen). We see... HH