Market Update: The impact of marketing strategies applied to logistics companies’ business

success has already been approved and well documented. Global container trade growth was
weak in 2019, as expected. Growth softened to around 0% in Q4 2019, and full-year growth
ended at 1.4% (3.8%), considerably weaker than in 2018. The slowdown reflected broad based
weakening across all the main economies. Negative effects from escalating trade restrictions also
weighed on trade growth.

Effective supply growth was contained during the year because of the moderate number of new
vessels entering the market and the increase in the number of idled vessels. Therefore, despite
the soft market demand, market fundamentals were more supportive of freight rates than in
recent years, and freight rates increased slightly compared to 2018.

Market developments: Container trade growth on the East-West trades grew 2.0% in 2019
Solid trade flows in the first part of 2019 were counterbalanced by negative demand growth in
the last quarter. European import growth from Asia was very strong in H1 2019 (5.1%) but
moderated sharply to 0.6% in H2, bringing it closer in line with Europe’s underlying economic
fundamentals. North American container imports were under pressure during most of 2019 due
to the US-China trade restrictions and slowing US capital expenditures, and consequently
declined compared to 2018. Meanwhile, Asian imports from the US and Europe (East-West
backhaul) showed solid growth in 2019, as the negative impact of trade restrictions on the US-
China trade was more than offset by strong exports from Europe.
North-South container trade stagnated in 2019. Latin American imports decreased slightly by
0.3%, reflecting weak macroeconomics, mainly in Brazil and Argentina and partly in Mexico.
Import growth in the Middle East and Indian subcontinent declined marginally by 0.4% in 2019,
while African imports grew by 4.0%. Finally, intra-regional trades posted modest growth in
2019, mainly supported by strong Intra-European flows. Modest container demand growth in
2019 reflects the slowdown in global manufacturing and global export orders. For 2020, global
container demand is projected to grow by 1-3%. The continued weak global sentiment above all
in the manufacturing sector reduces the likelihood of a material growth pick-up in 2020,
although sentiment brightened a bit at the end of 2019, and some improvement can be expected
on the back of stabilizing inventory dynamics. Aside from the cyclical slowing of the global
economy, substantial risk to global container demand comes from the effectiveness of fiscal and
monetary policy in major economies, such as the US and China. The global economy is
vulnerable to a spike in oil prices caused by geopolitical tensions, and the outcome of the Brexit
negotiations poses a risk to UK and European container trade. Moreover, the recent escalation of
the coronavirus adds to short-term downside risks, while the longer-term impact will likely be
limited. Finally, US-China trade negotiations remain a significant uncertainty. Trade restrictions,
mainly between the US and China and partly between the US and the EU, intensified in 2019,
and the trade restrictive measures introduced since 2018 impact around USD 640bn worth of
traded goods, corresponding to nearly 4% of the global value of traded goods. The trade
restrictions have reduced bilateral trade between the US and China and led to shifts in trade
structure. So far, US importers have shifted imports away from China to other countries such as
Vietnam, Korea, Thailand, India, Mexico, and Europe. Globally, the implemented trade
restrictions have reduced container trade by 0.5-1.0% in 2019 via direct and indirect channels,
such as deteriorating sentiment and business investments. Despite some relief of the US-China
trade restrictions towards the end of 2019, uncertainty about the outcome of subsequent trade
negotiations and the impact on trade remains large. Meanwhile, the US continues to threaten to
introduce higher tariffs on EU imports, for example on the automotive industry. Overall, the
negative impact on container volumes from the trade war is expected to be within 0.5-1.0% again
in 2020. The outcome of the 2020 US Presidential elections is not expected to significantly
change the US stance on its foreign trade policy. The global container fleet stood at 23.2m TEU
at the end of 2019, 4.1% higher than at the end of 2018. Deliveries amounted to 1,059k TEU
(148 vessels) in 2019 and were evenly distributed during the year. Deliveries were dominated by
vessels larger than 10k TEU. Around 208k TEU were scrapped in 2019, likely reflecting scarce
market availability of some vessel segments as ships were removed temporarily from service to
install fuel scrubbers, primarily in the +10k TEU segment in preparation for IMO 2020
regulations in January 2020. The reverse impact, when these vessels are redeployed back in
service, will add to effective supply and increase the risk of oversupply, mainly in H2 2020.
Idling totaled 6.1% (1,417 TEU) of the fleet at the end of 2019. The idle fleet bottomed out in Q2
and began to increase in the following two quarters, mainly because vessels were taken out of
service for scrubber retrofitting. Consequently, effective capacity increased less than 1% in 2019
784k TEU were ordered in 2019, corresponding to orderbook-to-fleet ratio of 10% at the end of
the year. According to Alphaliner, the nominal global container fleet will grow by 3.5% in 2020.
Effective supply is projected to increase by 1-3% (internal estimate), in line with global headhaul
demand. Freight rates, as measured by the China Composite Freight Index (CCFI), were on
average 0.7% higher than in 2018, supported by headhaul demand slightly outgrowing average
effective capacity (Chart 3). Freight rates held up firmly in the first part of the year but began to
decline in H2 as demand weakened and bunker prices fell. Freight rates fell on the Asia to North
Europe route by 4.5% but strengthened by 4.8% from Asia to Mediterranean Europe. Asia to US
West Coast freight rates were stable by negative 0.1%, while Asia to US East Coast fell by 1.3%.
Uncertainties relating to the strength of container demand and the dynamics of instalments of
fuel scrubbers continue to pose a risk to the developments of freight rates in 2020. The shipping
industry successfully prepared for the IMO 2020 fuel specification switch to 0.5% sulphur fuels
in Q4 2019. Demand for high-sulphur fuel oils fell substantially and Singapore and Rotterdam
high-sulphur fuel oil prices declined by 20% and 22% from Q3 to Q4, respectively, averaging
USD 350/tonne (t) and USD 273/t in Q4. Demand for low-sulphur 0.5% fuel oil increased as
carriers prepared ahead of the 1 January transition date. Low-sulphur fuel oil prices rose by 4.4%
in Singapore and dropped by 1.5% in Rotterdam moving into Q4 from Q3, averaging USD 576/t
and USD 518/t in Q4, respectively. Low-sulphur 0.5% marine gasoil (LSMGO) prices also
gained, rising by 1.4% q/q to USD 599/t in Singapore and 0.7% q/q to USD 568/t in Rotterdam
in Q4 over Q3. Singapore is the largest bunker port in the world accounting for an estimated
quarter of global bunker sales and has experienced an active and volatile pricing period in the
last months ahead of the specification switch. Singapore’s low-sulphur 0.5% fuel oil posted
prices above that of LSMGO for a period of 19 trading days at the end of December 2019 till
early January 2020 high lighting the tight demand of low-sulphur fuel oil in the Asian region.
We expect further volatility in the fuel prices in the major trading regions through mid-2020
before some stability returns. The other transport and logistics markets were in broad terms
impacted by the dynamics and market drivers that steered the ocean industry According to
Drewry, port throughput volumes grew by 2.3% in 2019. Ports on the US East Coast recorded
solid volume growth, while US West Coast saw declining volumes, and activity in the Far East
ports stagnated. In line with projections for ocean trade, global port throughput growth is
expected to be slightly higher in 2020. The container port industry continues to combat structural
challenges stemming from the cascading of large container vessels, reinforced carrier alliances
and capacity increases in many ports. The increased load on terminals is triggering requirements
for upgrades of the terminal infrastructure, equipment, manning and planning capabilities,
leading to more capital expenditure and operational cost, but lower utilization.
Weak growth in global trade volumes in 2019 weighed on the broader logistics segment. Gross
margins in the freight forwarding market remain under structural pressure from digital offerings.
Freight forwarders are attempting to mitigate these pressures by selling value-added services on
top of basic freight forwarding products and by developing their own digital offerings to be
competitive against new entrants. Additionally, the air forwarding market is under pressure as a
result of the trade restrictions between the USA and China.

Business Strategies of “Maersk logistics”

Maersk is on a transformation journey to become the global integrator of container logistics,
connecting, and simplifying our customers’ supply chains. Global trade is a key contributor to
economic development, enabling exporters to sell their products in all relevant markets and
importers to source goods and parts from the most competitive suppliers around the world.
Container logistics play a significant role in global trade by reducing trade barriers through
reducing the cost of transportation. Maersk has played a vital role in container logistics for more
than 40 years and takes pride in this contribution to global growth and wealth. Maersk’s strategy
is to accelerate that contribution by reducing complexity and waste along the global
containerized supply chains. Maersk has designed the strategy around its customers’ needs and
pain points, hereby creating a market opportunity that will deliver value to customers as well as
profitable growth and improved performance for Maersk

Becoming the global integrator of container logistics, the vision of becoming the global
integrator of container logistics rests on three pillars: • Creating a portfolio of end-to-end
products/ services. • Seamless customer engagement. • Superior delivery network end-to-end.
The first phase of strategy execution focused on improving the customer experience and the
financial performance of the Ocean business to create a strong foundation for the next phases of
the strategy. The tools have been better reliability, better service to customers, defining and
selling unique products, as well as continuing to reap benefits from scale and other cost benefits.
Maersk has seen significant progress in these areas since the strategy was launched in the fall of
2016.

Creating a portfolio of end-to-end products/services, the next phase in the strategy is about
growing the business by innovating existing products combined with selling landside logistics
products to our existing customers – as well as growth in our Terminals & Towage business.
Product innovation is critical to providing new and increased value to Maersk customers, while
at the same time addressing the inefficiencies of the industry. Maersk has made good progress on
adding new products in 2019, which is essential for creating a portfolio of end-to-end
products/services. On the oceanside, Maersk Spot has been launched – a new Ocean product with
equipment and load guarantee. This product has been very positively received by the customers
and by yearend 2019, Maersk Spot makes up approximately.

Digitizing the global supply chain, 24% of Maersk’s total spot volumes. On the landside,
Maersk acquired the US-based customs broker age firm Vandegrift in Q1 2019, which is a strong
addition to the Logistics & Services portfolio. In the coming years, Maersk plans to add more
new products and capabilities through value- creating acquisitions within areas where Maersk
can add value and solve pain points for its customers, such as customs house brokerage,
warehousing and distribution and supply chain management. The current M&A pipeline consists
of acquisition targets each of them with a value well below USD 1bn. The value creation logic in
the M&A strategy is based on creating additional value to our existing customers, hence the
majority of synergies from M&A will come from commercial synergies and less from cost
synergies – although the latter will also be pursued to the extent possible.

Seamless customer engagement Adding more products is fundamental towards becoming the
global integrator of container logistics. However, in the future, Maersk’s aspiration is not just to
have more products available but to be able to configure these into differentiated value
propositions to suit individual customer needs (as illustrated). This requires enhanced capabilities
to integrate data and to integrate operational processes, something which Maersk is currently
working on and investing in. Digitization is a critical element of improving Maersk’s operational
performance, creating new products, and not least creating a seamless customer engagement.
Maersk’s primary customer engagement platform, Maersk.com, is one of the world’s largest
B2B platforms. Maersk is bringing more of its inland products onto Maersk.com, and in 2019
went live with customs house brokerage in 22 new countries, where customers with a click of a
button can select customs clearance as an integrated part of the service. Data integration, where
Maersk provides customers with live data insights to optimize their supply chain is becoming
increasingly important. Here Maersk has made significant progress with TradeLens, which now
has Ocean partners signed up representing around 66% of global container capacity as well as 98
terminals live, and 22 customs authorities engaged in pilots or exchanging data. Another key
element of seamless customer engagement is how Maersk aspires to meet the customers as per
their individual preferences, and to enable that Maersk merged the frontline organizations of
Ocean and Logistics & Services in 2019. This integration effort, which involved a new
organizational model in more than 130 countries and a new operating model for 22,000
colleagues, was executed throughout H1 2019, and the new model is now operational and
delivering a much improved interface between Maersk and its customers.

Superior delivery network end-to-end, the foundation of Maersk’s strategy is a superior

delivery network end-to-end, which delivers on fundamental needs for getting goods to the right
place, at the right time, at the right price, with minimum environmental impact. Late 2017,
Maersk acquired Hamburg Süd to strengthen the Ocean network, and throughout 2019 the
networks of Hamburg Süd and Maersk became fully integrated delivering annual cost synergies
above expectation. In 2019, Maersk has improved reliability in Ocean by 10 percentage points,
placing Maersk (both the Maersk and Hamburg Sud brands) consistently in the top quartile of
global carriers in the industry. Cost leadership remains essential and in 2019 Maersk reduced its
unit cost by 1.7% at fixed bunker. Going forward, Maersk remains committed on lowering the
total operating costs, excluding bunker fuel cost and to deliver 1-2% unit cost at fixed bunker
reductions per year. In parallel, Maersk continues reducing the CO₂ emissions and by 2019 had
reduced relative consumption by 41.8% compared to 2008 baseline. Maersk’s ambition of 60%
reduction by 2030, and net-zero emission by 2050, will require significant innovation in new fuel
types, which Maersk is spearheading together with industry stakeholders. The Maersk
organization is changing from a conglomerate of independent businesses to one integrated
container logistics company. The integration is delivering significant synergies, and by end 2019
Maersk realized USD 1.2bn in combined synergies between the transport and logistics
businesses exceeding the USD 1.0bn target as well as from completing the integration of
Hamburg Süd. More synergies remain, and Maersk is constantly looking for innovative ways to
identify synergies and take out cost. In addition, Maersk is fundamentally re- architecting its
process and applications landscape, re-engineering core processes end-to-end, and replacing a set
of ageing legacy applications with modern, cost-efficient applications that can properly support
an integrated container logistics company. Many fundamental building blocks in this effort have
been selected and are being implemented with first major releases in 2020.

Growth with focus on Logistics & Services and Terminals & Towage In 2019, Maersk had
73% of the revenue in Ocean, 15% in Logistics & Services, and 10% in Terminals & Towage.
Maersk will grow the two latter segments disproportionate to the former, including acquisitions
in landside logistics, as previously described, to create a more diversified business model and
rebalanced operating profit (EBIT). In APM Terminals, growth will come from further
improvement of existing operations and completing ongoing terminal projects. In the future,
Maersk does not expect to venture into new greenfield projects but will consider brownfield and
M&A as means to deliver profitable growth in the Terminals & Towage segment. Over the past
three years, Maersk has deleveraged with more than USD 10bn via strict CAPEX discipline in
Ocean and not starting new greenfield terminal projects. This has contributed to a strong balance
sheet and by that the needed investment capacity to deliver on the growth plans described above
and at the same time be able to distribute cash to shareholders.

Keeping track of the transformation to measure the transformation, Maersk is tracking four
transformation metrics in addition to the overall ROIC target of creating an ROIC above 7.5%.
Non-Ocean revenue increased by 0.1% in 2019, adjusted for the closure of production facilities
in Maersk Container Industry, which accounted for USD 345m of revenue in 2018. Logistics &
Services improved gross profit by 8.7% to USD 1.2bn, reflecting a gross profit margin of 20%.
Cash return on invested capital (CROIC) increased to 9.3% in 2019 due to strong free cash flow.
Finally, combined synergies from the Hamburg Süd acquisition and from the integration of the
transport and logistics activities increased until end 2019 and came to USD 1.2bn, thereby
exceeding the original target. As the bulk of the synergies are now delivered, we will stop
reporting this metric going forward.

Less uncertainty, more transparency Efficiency, reliability, and competitive pricing are the
three anchors of the Maersk Spot booking experience. For short-term customers, they can count
on this product to deliver transparency, assurance, strong price competitiveness, awareness, and
an optimized ordering flow. “Once we started using Maersk Spot, we no longer had the
uncertainty of not knowing if we could actually provide our customers with their shipments,
“said Ramakrishnan. Moving away from 13 independent offline steps in the buying process to
five simple integrated online steps, Maersk Spot is providing a radically simplified buying
experience. “Not only is the flow and ordering process simplified and optimised, the attractive
rates and reliability of securing equipment and space guarantee have enabled us to improve
operations and provide more proactive customer service, “Ramakrishnan shared.

Higher predictability and reliability As Maersk races ahead to become the global integrator of
container logistics, building and delivering products and services that facilitate end-to-end
solutions for customers is imperative for growth. “Maersk Spot is giving us more operational
predictability and strong customer commitment, and our customers get a digital, affordable and
reliable service. All in all, this is driving an efficient and reliable customer experience, while
enabling both Maersk’s growth and that of our customers, “said Johan Sigsgaard, Head of Ocean
Products, Europe and Middle East trade. In Q4 2019, Spot customers booked 25,000 forty-foot
containers weekly, accounting for one quarter of Maersk’s total shortterm volume.
\

References

1. https://www.maersk.com/
2. https://investor.maersk.com/news-releases/news-release-details/annual-report-2019
3. https://moverfocus.com/maersk/#:~:text=Maersk%20Line%20is%20the
%20world's,products%20all%20over%20the%20world.
4. https://ml-eu.globenewswire.com/Resource/Download/35da68a1-f018-4dc3-85f9-
95994bc5dc6b