The Rise and Fall of the Hidden Giants
Lets talk about the five giants that control our lives, the ones that make the miracle of our connected and globalized world a reality, the ones that make every special holiday…. well special… The five that make miracles like this or this a reality. No Im not talking about an almighty being or a jolly fat man on a sled. Let talk about container shipping lines.
Not many people pay attention to the backbone of our global economies. With industries like finance and manufacturing making headlines every day somehow the shipping industry has fallen to the wayside (exception made for Amazon), becoming something that everyone now takes for granted, a commodity. A commodity that transports 87% of the worlds goods (1). Thats right, 87% of everything around you, your couch, TV, even the screen you are reading this on and just about every other product in the room you are in right now was transported overseas in one of the massive container vessels that have become the shadow backbone of the global economy. And 50% of that is controlled by just five companies (2).
I’m not blaming anyone for not knowing, lets be honest Occupy Wall Street was much more interesting than the ICC’s meetings to regulate international letters of credit. Hating on Wal-Mart is now an all time favorite past time of my family and I. Honestly why would we even pay attention to an industry who’s biggest innovation was over 40 years ago with the ISO standardizing the intermodal container (more on this later)? Well, its because these gentle giants are bleeding out…. quickly.
The Beginning
Before we get started lets talk about how we got here. Globalization started much before Facebook set out on its mission to connect the world, it has been inevitable ever since merchant ships left their ports in search for new riches hundreds of years ago. With things like the Silk Road, the discovery of the New World and the rise of the Mongol Empire under Genghis Khan we have set ourselves on an inevitable path to a connected world. Globalization is a good thing, it has allowed the flow of new ideas and innovations from one corner of the world to another, allowed us to change as a whole much quickly than we have throughout our history and brought down oppressive institutions with the introduction of new ideas. Unfortunately physical goods aren’t as easy to transport as ideas and customs. Until fairly recently people kind of just threw stuff on merchant ships, hoped they wouldn’t fall overboard or get taken by pirates and saw them set sail across the seas. This caused international goods to be reserved only for the highest circles of society. Things like sugar were specifically for royalty and the upper classes, silk and spices were not accessible to everyone either. But there was nothing we could really do about it (even under these circumstances merchant companies like the East India Company had more control over some parts of the world than the local governments did)
Then came the industrial revolution and with it the cost of production came down exponentially. Machines were able to produce things at a better quality and lower cost than ever before. The steam engine allowed for a revolution in transportation and with it the world started seeing more goods from across the globe. Yet still importers threw stuff on steam merchant ships, hoped for the best and saw them set sail across the seas. High international transportation costs led to a society where some countries like the UK, US and other industrial societies saw wealth created exponentially while others lived in abject poverty.
Then began the revolution, starting in 1830’s people were already beginning to explore how to transport goods across different modes of transportation. Having one consistent unit of transport across railways, ships and trucks would mean people wouldn’t have to unload a pellet from a ship, pack it into another giant box onto a truck, unpack it, pack it again onto a train, so on and so forth until it got to its destination. This would be as the big man likes to say “Yuugeee”. Unfortunately the world didn’t see an end to this problem until 1968–1970 when the ISO (International Standards Organization) started publishing the standards for containers, creating a set of standards for an Intermodal Twenty Foot Container (Twenty-Foot Equivalent Unit or TEU for short) (3). Then the fun began.
The Birth of Seven
With the issue of size out of the way and without having to worry about the possible intricacies of specific shipments, companies were able to focus on creating the most efficient methods of transport for a common unit of transportation. Shipping lines quickly realized that they could build bigger more efficient ships, and the bigger the ships the cheaper the cost to transport a TEU would be (also known as economies of scale). This came to a point where now it is cheaper to produce something in China/Japan, transport it overseas and sell it in the US than it is to produce it in the US directly. So shipping lines started building bigger and bigger ships. The big got players got bigger and the smaller ones started struggling to compete. Now with marvels of engineering we have ships that are 400m in length and can carry over 20,000 containers on board across the ocean (here is a list of the largest container ships). So a race began, the giants were born and they were unstoppable.
Companies like A.P. Moller-Maersk, the Mediterranean Shipping Company (MSC), CMA-CGM, China COSCO Shipping, Hapag-Lloyd and Hamburg-Süd started building the biggest ships in town and competing on availability, cost and reliability. They fought for capacity until the world could take no more and over capacity happened (now a container ship on some major routes will sometimes depart with 30% capacity filled, and there is enough capacity in the ocean shipping world to last the next decade or so of global economic growth)(4). With so much capacity they started competing in price, so much so that the cost to transport a container overseas from Shenzhen, China to Manzanillo, Mexico fell down to $0 USD….. thats right, companies were so desperate to fill their ships that if you booked with them you would pay $150 and some would then give you a $150 rebate when you boarded. With price unable to go any lower they started competing on reliability, but lets be honest for the past 50 years unless something terrible like a pirate attack or act of god happen 99% of container ships would make it to their destination +/- 1 day. Together these seven companies moved over 40% of the worlds goods (2)….. and they started to die
The Day the Earth Stood Still
2016 will be remembered as a year of hardship and sadness in the logistics industry. The collapse of worldwide shipping prices left some people wondering what will happen next. Maersk Line employs almost 90,000 people worldwide and with over 600 ships deployed, it recorded a loss of $1.8 Billion last year (5)…. yet it survived the crash, it was strong. Others weren’t so lucky. August 31st 2016 should have been a day of mourning (6)(7), something happened that ran a shiver down to the economic core of the world. Our dear friend Hanjin Shipping filed for insolvency and passed away that same day after the banks pulled the plug on its credit and it couldn’t afford to move on. Its customers were now stuck in a cross fire between banks and the shipping line, without the money required to unload a ship the company instructed its vessels to anchor at sea and leave the cargo onboard. And for a minute part of the economy stood still.
With only 60 ships around the world it wasn’t the biggest one around but it died of neglect, the disease that is quickly spreading throughout the industry. This marked the beginning of a slow process that I have no doubt will be remembered in future text books on the same page as the collapse of Lehman Brothers in 2007. It proved that these companies that had long been forgotten, carrying the global economy on their shoulders and were quickly loosing their strength….. Yet it was business as usual for the rest of the world.
And Then There Were Five
Queue 2017, a year that was supposed to hold the promise of a new beginning, but has quickly turned into what feels like the most eventful year in our history in terms of societal, technological and economic change. I won’t get into the politics that are in the news every day or the technology that is quickly changing the world economy. Instead something happened that went completely unnoticed by most people. Hamburg-Süd threw in the towel, the eighth largest shipping line with 3% of the global market decided to call it quits. Seeing what had happened with Hanjin and realizing they might soon come to a similar fate if they didn’t find strength in numbers they sold its business to Maersk Line (8) (then 16.4% market share) hoping that together they could find a new path forward.
Where are we now?
It’s incredible that the ICC historically hasn’t included shipping lines when talking about international trade regulation. Governments, Banks and even small businesses participate in these discussions yet somehow the people that do all the hard work of moving our precious iPhone halfway across the world get no credit. Before they didn’t have any power, they were too busy competing with each other and while prices to transport containers were high, life was good for everyone so they were friendly players in a transformation that has lasted hundreds of years simply looking to bring us the best quality service.
Now they have been pushed into a corner, and these people won’t go out without a fight. Right now Maersk has taken some amazing steps towards creating an ecosystem of different players within the industry and change in order to bring technology into this age old business and empower everyone from freight forwarders (imagine travel agents for cargo) to small businesses and of course the shipping lines (9) (10) (11). They want competition, they understand its healthy but they will soon be left in a position where they have no other choice than to push back to the people that have completely forgotten them and with 87% of the global flow of goods in their hands it scares me to think what might happen.
A Path Forward
If this continues we might very well look back to 2016 and mark it as the beginning of the end for our global economy. However this seems extremely unlikely. There are some amazing projects that are looking to work with Shipping Lines, empower them to take back control of their business and create healthy competition so they can go back to doing what they do best.
While some startups will just keep propagating this issue, others (like Gurucargo and Creditair) are working with shipping lines to experiment and solve some of their biggest pain points using technology. It is a race against time and while the clock is ticking they will continue to play into the rules we as a society have come to expect from them, but let the clock strike midnight and well see what happens when the tables turn.
What will happen, no one knows but in the mean time all I want to say is that we shouldn’t forget these giants, they have given us so much over the years and like any good friend we should at least pay attention to what they have to say.