The Tranformation Imperative in Container Shipping (PDF) - 150312

The Transformation Imperative
In Container Shipping
Mastering The Next Big Wave
18 March 2015
Introduction
Ulrik Sanders Lars Kloppsteck

(Senior Partner, (Principal, BCG is a leading thought partner of
BCG Copenhagen) BCG Hamburg) the container shipping industry
Copyright © 2013 by The Boston Consulting Group, Inc. All rights reserved.
Global leader of BCG's Co-leads BCG's Combining proprietary research with
Transportation & Shipping Practice extensive transformation experience
Logistics sector working with leading container lines
Significant container
Started his career in liner transformation BCG's new container shipping report
Maersk Line experience released today: "The Transformation
Imperative in Container Shipping"
>20 yrs experience in Leads the Shipping
shipping and consulting Benchmarking Initiative
2014 12 Quarterly Shipping Call - December 2014 -draft - 12dez2014.pptx Draft—for discussion only 1
Agenda
Continued Overcapacity—No Market Recovery In Sight
The Transformation Imperative For Container Lines
Extracting More Value From Alliances
Ten Imperatives For Restoring Profitability
Container shipping is trapped in a vicious circle
Reluctance to adjust capacity

Demand misperception • Idling costs
• New building programs do • Low charter rates
not reflect actual demand Over-
for vessel capacity
Incentive capacity High barriers to exit
• Large book losses
More competitive fleet to build Low • Nonfinancial interests
• Greater scale new industry
• Higher fuel efficiency vessels
• Lower costs returns Low pricing discipline
• Each carrier is price taker
Available financing
• New sources of capital Downward Commoditization
pressure on • Price—the main differentiator
Low new-building prices freight rates • Low switching costs
• Available yard capacity
• Chinese capabilities Inelastic demand
improving • Total demand does not
adjust to price changes
Source: BCG analysis.

The "GDP Multiplier" is shrinking—flattening global container
demand growth is the new reality
Flattening global TEU demand1 Fundamentals

Global TEU volume growth flattens—
"GDP multiplier" GDP multiplier expected to be ~1.3 vs.
(relationship of global TEU trade to GDP growth) historic values of 2-3x
3
Key drivers
1. Global shift of production slowing down
2 (off-shoring is a one-time effect)
2. Flattening degree of containerization
1 2.2x Downside risk of increased "re-shoring", i.e.

1.4x 1.3x manufacturing moving back to the Americas
as cost advantage erodes
0
2003-2007 2010-2014 2015-2019
(Pre-crisis) (Post crisis) Forecast
1. 2008/2009 have been excluded as outliers 2. Average across selected publicly listed container liners
Source: IMF, Financial statements of selected carriers, BCG analysis
Higher relative growth in backhaul and intra-regional trades,
requiring less incremental vessel capacity
Backhaul volume growth outpaces ... while shorter intra-regional trades

head haul on key trades ... grow faster than deep-sea trades
TEU demand CAGR (2014-2019), headhaul vs. backhaul Headhaul TEU demand CAGR (2014-19)
Trades Headhaul1 Backhaul1
Global average: 5,4%
Asia - Europe
Africa 6,9%
6,8% Oceania 6,2%
4,0%
M. East / India 6,2%
Transpacific Intra-Asia 6,1%
Latin America 5,6%
6,2% Shorter
4,4% Intra-Europe 5,0% distances
requires less
Trans-Atlantic 4,4% incremental
Transatlantic vessel
Trans-Pacific 4,4%
capacity
Asia-Europe 4,0%
4,4% 3,6%
2% 4% 6% 8%
1. Headhaul direction is respectively FE Asia to Europe, FE Asia to N. America and Europe to N. America. Backhaul is the opposite.
Source: BCG Container Flow Model
BCG Box Club Presentation 18March2015 - The Tranformation Imperative In Container Shipping - vFINAL.pptx Draft—for discussion only 5
As a result, oversupply likely to continue until 2019 (base case)
Supply-demand forecast, 2015–2019 (Base Case)
Annual growth (%) Fleet capacity (millions of TEUs)

20% Alphaliner historic development BCG 25
forecast Oversupply
20 • Driven by trade
10%
growth dynamics
15 (higher relative
backhaul and
intraregional trade
10
0% growth)
• Oversupply persists
5 even when global
TEU throughput
-10% 0 growth exceeds fleet
2000 2005 2010 2014 2019 growth (2018/19)
% Fleet growth Fleet capacity

% Global TEU throughput growth Fleet capacity forecast
% Fleet capacity demand growth
Sources: Alphaliner; BCG container-market model.

The optimistic and pessimistic scenario:
Significant downside if slow-steaming is widely reversed
Three scenarios Resulting demand/supply growth gap
• Projected new orders at Demand/Supply gap (in %-pts)

Much less 50% of base case
new orders • All other as base case 6% A demand/supply gap of +0.2% means
(optimistic) vessel capacity demand growth is
4% outpacing supply growth by 0.2%-pts
• GDP CAGR: 4.1% (IMF)
• TEU CAGR: 5.4% (BCG) 2%
Base Case 0.2 Optimistic
• Considers vessel -0.6
cascading 0%
-1.9
• Speed increase by -2% Base case
increments of 1 knot in
Speed case 2015/16 respectively -4% -5.1
(pessimistic) (2 knots overall) Pessimistic
• Projected new orders at -6%
50% of base case 2014 2015 2016 2017 2018 2019
To re-establish supply-demand equilibrium, ~300 vessels

must not be ordered of which 70 could be ULCVs
Source: MSI, BCG analysis
We expect freight rates to continue long-term downward
trend with annual decline between -1.6 to -2.6%
Freight rate forecast Approach
CCFI1 Commercial
(Jan 1998=1,000) Forecasted utilization levels
suggests a ~1.8% p.a. decline
1,200 Actual BCG forecast2
(BAF adjusted) (net of BAF) • Based on historical
relationship between
utilization levels and rates
1,000 -2.0%
Cost-out
Efficiency gains of –1.6 to -2.6%
-1.6 to
800 -2.6% are expected to be 'passed on'
CCFI index to customers
• In line with slot cost reductions
Expected and BCG experience curve
600
corridor
400
’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19
1. China Containerized Freight Index 2. BCG model adjust for fuel in line with historical patterns, hence it is not normalizing for abnormal fluctuation in fuel prices
Note: CAGR is based on yearly averages to lower effect from seasonality
Source: Alphaliner, CCFI data, BCG Model
Vicious circle is most evident in liners earnings:
Only 2 sustainable patterns emerge
Cumulative EBIT margin, 2012–Q2 2014 (%)

"Market profitability"
10% Scale leaders for global liners
Niche focus
SITC
CMA CGM
5% Wan Hai Maersk Line
OOCL
K Line
0% Evergreen NYK
Hanjin Hapag-Lloyd
ZIM MOL
HMM
-5% CSCL APL COSCO
Yang Ming "Stuck in
CSAV the middle"?
-10%
0 10,000 20,000 30,000
Revenues ($millions)
How can mid-sized carriers escape scale trap?

Sources: Alphaliner; company fillings; Capital IQ; BCG analysis.
Note: CSAV = Compañía Sud Americana de Vapores; CSCL = China Shipping Container Lines; OOCL = Orient Overseas Container Line.
Global carriers must transform themselves in 2 steps
Strong and sustainable value creation
1
Funding the journey Winning in the medium term
Transform Score short-term wins to close Establish a unique competitive position
your company performance gaps and fund and drive medium-term growth in
to restore new growth engines revenues and earnings
profitability
(5-7 p.p.)
Establishing the right organization, team, and culture
Execute and sustain the transformation
2
Pursue external Unlock alliance synergies and accelerate M&A
synergies Build the required scale and capture the full potential of the alliance
(2-3 p.p. + to remain competitive in the long run
M&A on top)

As a result, mid-sized global carriers move up the scale curve
Cumulative EBIT margin, 2012–Q2 2014 (%)

Step 2
10% Pursue scale by unlocking
alliance synergies and M&A
(2 to 3 p.p. and more through M&A)
5%
Step 1
"Market profitability"
Transform for global liners
to restore
0%
profitability
(5 to 7 p.p.)
-5%
-10%
0 10,000 20,000 30,000
Sources: Alphaliner; company fillings; Capital IQ; BCG analysis.

Revenues ($millions)
Note: CSAV = Compañía Sud Americana de Vapores; CSCL = China Shipping Container Lines; OOCL = Orient Overseas Container Line.
Agenda
Funding the journey: Most carriers have launched
comprehensive improvement programs (now "table stakes")
Costs Revenues
Impact (%) Impact (%)
Bunker end-to-end optimization1 2–4

Utilization of utilization
Speed equalization
Detention and demurrage 1–2
Steaming execution of revenues
pricing and recovery
Trim and ballast optimization 6–11 1–3
of bunker Yield management of revenues
Network rationalization
Reduction of port stay time 3–5
Contract and tender management of base-cargo
Technical efficiency contribution
Terminal cost optimization 3–5

of terminal
5–10
Intermodal optimization
of intermodal
10–20
Shared-service centers of SG&A
Source: BCG experience.
Note: Impact refers to the related cost-to-revenue category. Typical impact is for an average-performance carrier and varies depending on individual carrier performance. Impact is identified through
BCG's case experience. SG&A = selling, general, and administrative costs. Some levers overlap (for example, utilization and yield management) and hence may influence total impact.
1Extra slow steaming is in addition to suggested potential.
Yet significant performance differences remain: Cost
competitiveness per category varies as much as 42 p.p.
Carrier cost delta to industry average (%)

40
22% 3% 22% 17% 42% 33% 41%
30
20
10
-10
-20
Most cost categories show
-30 significant differences among
companies
-40
Bunker Bunker Terminal Rail Truck Feeding Vessel
consumption procurement and barges OPEX
Cost delta as a percentage of the industry average Cost spread (p.p.)
Source: BCG Container Benchmarking Initiative 2014.

Note: Vessel opex and bunker consumption benchmarks include ship owners and ship managers. All cost categories are benchmarked within comparable vessel classes, trades, terminal cluster, and
intermodal stretches and are then aggregated to a weighted performance versus the average.
Realizing full value from "table stakes" requires mind-set shift
Dimension Mindset Rationale

from ... ... to
• Shift focus from commercially-driven
Strategic Commercially led with Balanced but
decision-making towards optimizing
1 capacity growth focus cost driven
focus for cost and profitability
• Optimize the entire network across

Network Stand-alone optimization Optimize across with trade and service silos , including
2 in trade silos variable cost in mind rethinking the terminal and
design
intermodal strategy
Box-level cost Marginal pricing • Enforce strict profitability focus to
3 Net profitability
transparency based on contribution avoid excessive rate erosion
• Develop functional procurement

Procurement Decentralized procurement Functional expertise to improve 3rd party
4 within operations expertise terminal-, intermodal-, depots-, and
excellence
other cost categories -charges
• Deploy "activist" program office to

Project Soft project Empowered centrally drive execution across
5 reporting execution regions—senior leadership to
execution
assume full accountability for results
Source: BCG Experience

Winning in the medium-term: Carriers can gain competitive
advantage by pulling “next frontier” cost and revenue levers
Costs Revenues
Impact (%) Impact (%)
Owned terminal productivity +20–30
Sales force effectiveness
Implement lean in owned terminals to of productivity +2–3
Improve the sales force capabilities and
significantly improve asset productivity of EBIT
10–15 efficiency to acquire good customers
(moves/hour) and lower operating cost
of OPEX
Equipment & Repositioning Pricing including carrier haulage
Drive new efficiency along the value 5–10 Apply more sophisticated pricing +1–3
chain: Purchasing/leasing, operations/ of equipment practices across e.g. spot, contracts, of revenues
repositioning, M&R, and disposal and repositioning intermodal and D&D
Big-data opportunities
Lean Operations Develop big-data capabilities
Streamline all operational processes to 1–20 Enabler
of SG&A to improve business performance
reduce waste and shorten cycles (e.g. utilization forecasting)
Shared Services 2.0 Channel and service innovation

Drive off-shoring to mature operational, Enabler Embrace technology to build modern Differentiator
financial and commercial functions booking and customer interfaces
Source: BCG experience.

Note: SG&A = selling, general, and administrative costs.
In addition, carriers need build the capabilities required for
their chosen business models
Business
model Required capabilities Brand examples
• Top 3 scale in selected key deep-sea trades

Deep Sea • Product and process standardization and simplification
Scale • Cost leadership throughout
• Competitive fleet (size, age) and financial muscle
Addressable market
• In-depth market understanding and strong regional

Regional customer relations
Scale • Efficient processes for high volume and low transit time
• Regional value-add (network, land- and infrastructure)
• High flexibility in network, schedule and deployment

Short Sea (smaller, more flexible tonnage)
Specialist • Ability to tailor end2end services to short sea market
• Sufficient cargo volume to utilize asset base
• Deep product and customer expertise

•Product • Specialized vessels/equipment (e.g. US flag, D&G, reefer)
Plus liner departments:
Specialist • Technology (e.g. reefer monitoring)
Reefer , OOG, DG
• Adequate front-end knowledge (e.g. legislation on D&G)
Some carriers are too fragmented, making them subscale
Trade concentration1
High
Company names sanitized
Medium
Carriers too
fragmented for
their scale?
Low
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.6 2.5 3.0
Operated fleet in M TEU2

(not taking slot charters in account)
Time for some global carriers to start focusing more?

1. Measure as Herfindahl-Hirschman Index based on share per trade.. The lower the value, the more fragmented the trade focus is e.g. a max value (10,000) represents a player only operating one trade (e.g. Intra-Asia),
while a player with lower than index 3,000 are present in numerous trades at the same time 2. Includes current owned and chartered fleet, but excludes orderbook
Source: Alphaliner; BCG Analysis
Establishing the right organization, team, and culture:
Many carriers with room to optimize organizational structures
Span of control ranges
Micro- Target Target Target span for

teams span for span for operational3
expert1 decision (routine) roles
roles support2
Managers (%)
"Optimal"
15 distribution Implications
Long reporting chains and
micro-management, resulting in
slow decision-making and high
10 cost/complexity
Carrier
distribution
5
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Span of Control
1. Experts defined as functions requiring highly specialized knowledge providing value-added services to enterprise. 2. Decision support defined as functions requiring deep knowledge of BU,
product, and/or region in which firm operates 3. Operations defined as functions that provide high-quality transactional services at a low cost to enterprise.
Source: BCG Organizational Efficiency benchmarking database
Agenda
Unlock alliance synergies and accelerate M&A:
3 obstacles discourage consolidation in container shipping
Value misperception Ownership structure Integration risks

Capacity market share, by owner type
RONA (%)1 Price-to-book ratio1 (% of total including the order book)1 Complexity and
 cost of integration
20 3 40
 Cultural differences
2 Order book
32 High customer churn
10 WACC Current  (loss of market share)
1
Price-to-book ratio
Limited financial
 resources
0 0
16
-1
RONA 9
-10
-2
3 100 ?
-20 -3
2007 2008 2009 2010 2011 2012 2013 Family Government Government Value of Value of Cost and Value
(private) (listed) (private) the merger risks after
Family Listed company
Sources: Capital IQ; Alphaliner; BCG analysis.
(listed)
Note: Family (private) includes CMA CGM, Hamburg Süd and CCNI, Hapag-Lloyd and Compañía Sud Americana de Vapores, MSC, PIL, and ZIM. Family (listed) includes Evergreen Marine, Hanjin
Heavy Industry, Hyundai Merchant Marine, Maersk Line, Orient Overseas Container Line, and Wan Hai Lines. Government (listed) includes APL, China Cosco Holdings, China Shipping Container
Lines, and Yang Ming. Listed includes K Line, MOL, and Nippon Yusen Kabushiki Kaisha Mitsui OSK Lines. Government (private) includes UASC.
RONA = return on net assets; WACC = weighted average cost of capital. 1. Weighted 3-year rolling average
Particularly mid-sized carriers can capture new synergies
through more sophisticated alliance models
Synergy Integrated
value alliances
Value-added
alliances • Back-office
Conventional alliances consolidation and
and vessel sharing shared services
agreements (VSAs) • Joint procurement • Joint IT development
- Terminals
- Intermodal
- Equipment
• Slot cost
optimization • Joint operations
• Network reach • Equipment pools
Established ? Some alliances

with initial steps
Degree of sophistication

Example:
Joint procurement can deliver significant savings
Example: Truck-procurement scale curve for North America

Unit costs as a
percentage of the
average Stand-alone Joint Example: Truck expenditures in North America
30% spending spending With the doubling of truck expenditures, costs
decrease by 7%, owing to scale benefits (for example,
improved procurement, and more triangulation)
20%
Increased
spending ...
10%
... decreases unit
cost by 7%
0%
-10%
Source:
-20% Fundamental analysis of $30Bn annual spend in
benchmarking database across cost categories
-30%
0 10 20 30 40 50 60 70 80 90 100
Total expenditure per hub location
(Index: largest = 100)
Source: BCG's Shipping Benchmarking Initiative, BCG analysis.
Current regulatory filings are far reaching—much is already
prepared, but not yet implemented
G6 CKYHE1 Ocean Three M2

Planned In place Planned In place Planned In place Planned In place
• Ad hoc coordination ✓ ✓ ✓ ✓ ✓ ✓
• Operating committee ✓ ✓ ✓ − ✓
✓
Operations
• Operation centers − − −
• ✓3 ✓ − −
✓ (✓) ✓ ✓
Bunker
−
Procurement •
✓ ✓ ✓
Terminal
• −
✓ ✓ ✓
Feeder
• −
✓
Rail/truck
• Joint depots − − −
Data • Confidential data exch. ✓ ✓ ✓ ✓ −
Potential
Synergies
1. Discussion Agreement that permits evaluating many options, but does not establish concrete actions so far
Source: Original alliance agreements documents; Federal Maritime Commission (FMC) website; BCG analysis
Size-of-the-Price: A midsized alliance could save more than
$1 billion by adopting the integrated alliance model
Cost reduction potential for a midsize alliance
Estimated savings potential ($billions)

2.0
Conventional Value-added alliance Integrated alliance
alliances
Up to Up to Up to Up to Up to
and VSAs Savings share1:
3% 2% 13% 25% 3%
1.5
$0.1 $1.2
$0.2 (9%) (100%)
(14%) IT
$0.3
1.0 (22%) SG&A
Liner 4 - X
$0.7 Terminal
(56%) Intermodal
Liner 3
0.5 Terminal
Additional upside Bunker Liner 2
depending on
Intermodal
fleet and Liner 1
Already realized network structure Equipment
0.0
Slot Joint Joint Equipment Back-office Joint IT Total
cost optimization operations procurement pooling integration development potential
Source: BCG alliance value calculator.

Note: VSA = vessel-sharing agreement. Synergy potential depends on the specific alliance configuration.
1Total savings share of cost categories with savings.
Realizing these synergies requires a closer-knit alliance
operating model
Potential transition
Project organization
Coordination process Joint entity
(some liner alliances today)
Co A Co B Co C Co A Co B Co C Co A Co B Co C
FU 1 - n FU 1 - n FU 1 - n FU 1 - n FU 1 - n FU 41- n FU ´1- n FU 1 - n FU 1 - n
Coordination Committee
Project Joint Board
Project team office company
FU 1 FU 2 FU 3 FU 1 FU 2 FU 3
A+B+C B+C A+B A+B+C A+B+C A+B+C
Close collaboration with regulatory authorities required

Note: FU = function; SSC = shared-service center..
Agenda
10 imperatives to navigate the rough seas ahead
1 Define a clear path toward creating more value for shareholders and meeting (or exceeding) the
cost of capital
2 Decide on a winning business model and build the capabilities needed to implement it
3 Incorporate the new, low-growth normal and declining freight rates into your strategy and
business planning
4 Be selective when ordering new vessels, as every additional ship will further distort an already
oversupplied market
5 Reap the full cost reduction potential by giving operations more leverage when designing and
running the global network
6 Enforce pricing discipline through advanced tools and processes that mitigate freight rate erosion
7 Flatten the organization and simplify reporting structures and accountabilities
8 Steer your company through the transformation with an “activist” program office
9 Exploit technology and business model innovation to break out of the vicious cycle
10 Reinvent your alliance and consider M&A to build the scale required for deep-sea trades
Thank you
bcg.com | bcgperspectives.com

The Tranformation Imperative in Container Shipping (PDF) - 150312

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

The Tranformation Imperative in Container Shipping (PDF) - 150312

Uploaded by

Copyright:

Available Formats

The Transformation Imperative

Ulrik Sanders Lars Kloppsteck

Continued Overcapacity—No Market Recovery In Sight

The Transformation Imperative For Container Lines

Ten Imperatives For Restoring Profitability

Reluctance to adjust capacity

Source: BCG analysis.

Flattening global TEU demand1 Fundamentals

1 2.2x Downside risk of increased "re-shoring", i.e.

Backhaul volume growth outpaces ... while shorter intra-regional trades

Supply-demand forecast, 2015–2019 (Base Case)

Annual growth (%) Fleet capacity (millions of TEUs)

% Fleet growth Fleet capacity

Sources: Alphaliner; BCG container-market model.

Three scenarios Resulting demand/supply growth gap

• Projected new orders at Demand/Supply gap (in %-pts)

To re-establish supply-demand equilibrium, ~300 vessels

Freight rate forecast Approach

Cumulative EBIT margin, 2012–Q2 2014 (%)

How can mid-sized carriers escape scale trap?

Strong and sustainable value creation

Source: BCG analysis.

Cumulative EBIT margin, 2012–Q2 2014 (%)

Sources: Alphaliner; company fillings; Capital IQ; BCG analysis.

Continued Overcapacity—No Market Recovery In Sight

The Transformation Imperative For Container Lines

Ten Imperatives For Restoring Profitability

Bunker end-to-end optimization1 2–4

Terminal cost optimization 3–5

Carrier cost delta to industry average (%)

Cost delta as a percentage of the industry average Cost spread (p.p.)

Source: BCG Container Benchmarking Initiative 2014.

Dimension Mindset Rationale

• Optimize the entire network across

• Develop functional procurement

• Deploy "activist" program office to

Source: BCG Experience

Shared Services 2.0 Channel and service innovation

Source: BCG experience.

• Top 3 scale in selected key deep-sea trades

• In-depth market understanding and strong regional

• High flexibility in network, schedule and deployment

• Deep product and customer expertise

Company names sanitized

Operated fleet in M TEU2

Time for some global carriers to start focusing more?

Span of control ranges

Micro- Target Target Target span for

Continued Overcapacity—No Market Recovery In Sight

The Transformation Imperative For Container Lines

Ten Imperatives For Restoring Profitability

Value misperception Ownership structure Integration risks

• Network reach • Equipment pools

Established ? Some alliances

Source: BCG analysis.

Example: Truck-procurement scale curve for North America

G6 CKYHE1 Ocean Three M2

Cost reduction potential for a midsize alliance

Estimated savings potential ($billions)

Source: BCG alliance value calculator.

Close collaboration with regulatory authorities required

Continued Overcapacity—No Market Recovery In Sight

The Transformation Imperative For Container Lines