With all the talk of breaking up the alliances, this decision by Maersk and MSC is smart. Each line now has a ready answer for regulators, both in the EU and the US.
The decision is reminiscent of what happened with IBM and ATT. In those cases, the US regulators sued these two giant companies on antitrust grounds. At the time, IBM was dominant in computers, and ATT was dominant in telephones, and there were concerns of price fixing with both companies. In each of these cases, the government had to take legal action against the firms. But the lawsuits dragged on and on; giant companies can easily afford large legal entourages that can string out a proceeding forever.
One of my good friends and former bosses led the IBM antitrust management team.
Somewhere in the proceedings, while imagining life after the breakup, each of these firms came to the conclusion they would be better off broken up. So each of them proposed a split-up. The proposal itself was enough to defuse the lawsuit’s consequences, and reduce concerns the regulators had.
For a short while, I worked for Lucent, which was one of the spinoffs of ATT; it was the Western Electric manufacturing division, and included Bell Labs and other electronics manufacturers. Other ATT spinoffs were the ‘baby Bells’, the regional telephone companies. Now, 40 years later, they are all gone too. So is local phone service, replaced by cell phones, so a monopoly in local landline service is not a concern. Lucent is also gone, merged into Alcatel, a large European concern with partial Chinese ownership, and is called Alcatel-Lucent. It’s a private concern.
IBM spun off its printer and PC division into Lenovo, also a Chinese company, and while they still support mainframe computing today, are now more of a software company.
I think it’s a smart move to defuse regulatory concern about alliances. The political atmosphere right now would definitely support breaking them up. Huge profits in times just past, and terrible service for customers in the past and right now make the alliances an easy political target. But saying it’s going to end anyway should buy Maersk and MSC some negotiating room with the regulators. The only issues then will be how they preserve service; these are easily dealt with by making some kind of plans that man or may not ever be implemented.
I think the big question for Maersk and MSC will be the effect on their capital expenses and on their service guarantees. The rationale for alliances was that more regular service could be offered on an alliance route because the carriers covering it would share the job of providing regular ship sailings. That would reduce the need of each firm for more ships. That’s much lower capital expense.
Alliances are a great example of business collaboration to reduce costs, here capital costs (since the voyage operating costs are ‘covered’ by the cargo). Capital is expensive; no one can buy enough ships without borrowing, or using up cash on hand, or asking for more investment.
But in recent times, carriers are blanking sailings when they don’t have full ships. Service, even on alliance routes, has deteriorated to an awful level for container shipping.
It’s hard to see how Maersk, for instance, can cover a 2M alliance route adequately for a large customer, who may require weekly shipments. Some of the business will have to go to another carrier. And then the scheduling will not be straightforward. Throw blanked sailings into the mix, and customers will suffer.
But the regulators will be appeased; they can’t regulate as much when the alliance is gone.
I think the big problem of long-term success for ocean container carriers is customer service. They have to figure out how to set delivery expectations for customers and then deliver to them reliably. Hopefully at a profit.
Another take from Drewry is posted below.\, via Nick Savvides and Loadstar.
Update 1/27/2023: another thoughtful article from Greg Miller·Wednesday, January 25, 2023 in American Shipper.
Building on the idea that maritime and rail generate less carbon than trucks, the blueprint for decarbonization suggests shifting transport to those means.
That’s easier said than done. The EU has been working hard for some years on a modal shift to river and rail transport for cargo inside Europe. They have actually had some success— a few percent improvement.
But the geography of the EU is a lot more conducive to waterborne transport of cargoes. There there are quite a few navigable rivers going inland from the coast where the ports are. Many EU ports have set up ‘inland ports’, large distribution areas inland that often can be reached by barge, to offload container cargoes and get them ready for distribution. This foresighted policy offers many advantages, both from an ESG standpoint, and for reducing congestion at the ocean ports. But the US has only one large river, the Mississippi, navigable for a long distance into the heartland, in a land mass much larger. Smaller rivers on the East Coast don’t go as far.
However, particularly on the Mississippi, there is a lot of potential for more barge traffic. I also suspect that maritime transport could be used along the coasts for some kinds of moves, particularly movements of products like refinery outputs, that might travel by truck otherwise.
So there is rail. The EU has a problem with rail; most rail is state-owned, and is oriented around passenger travel, not freight. And rail lines in Europe are not all compatible; not only are their practices disparate, but the physical equipment isn’t even compatible at some borders. That adds transfer delays as well as simple handling delays to transport. The EU will have a much harder and more costly time increasing rail cargo percentages.
In the US, we have seven Class I rail firms, all private, that crisscross the country and offer cargo service. Rail can provide the backbone of distribution from ports to the hinterland. But will it? Rail firms are all private, not public; they are currently focused on their most profitable segments, and have engaged in rampant cost-cutting. Sometimes, it’s referred to as PSR (precision scheduled railroading), but quite often it is more closely allied with old-fashioned cuts driven by short-term accounting. The recent reductions in staffing are claimed to result from PSR, but in fact, simply serve to reduce operating costs and improve operating ratios. They may result in reduced safety, as some of the claims in front of the STB put forward. And the popular step of running really long trains to save labor costs reduces flexibility and adjustability of rail traffic to support less predictable loads. These moves by private firms greatly increase the complexity of carrying out the proposed modal shift in the US.
But certainly a modal shift will reduce carbon output. And there is actually a lot that a government push could accomplish. Some of these things are:
Infrastructure improvements for inland maritime operations;
Streamlining projects for on-dock rail at ports large and small;
Inducing rail lines to improve their rail yards and lines to support a more flexible cargo mix and customer set;
Driving rail common carrier rules that will induce or force rail lines to accommodate cargoes from a broader set of customers, even though the traffic will not be as profitable as long steady coal or grain trains.
Keeping pressure on the rail lines to serve a broad base of customers, particularly intermodal (container on flat car or trailer on flat car). A move to transport this type of cargo long distances to inland container terminals would help with emissions and get trucks off the major interstates.
Supporting inland terminals and distribution points that are rail connected.
There are probably more, and Pete Buttigieg and the President’s commission on supply chain probably are thinking of them.
The biggest problem is how to get private industry and investors on board to finance and support the projects.
Why did Maersk and IBM cancel the TradeLens program?
Recall, when it was introduced 4 years ago many folks saw it as a step in the right direction for logistics, especially global ocean shipping. A single source of information in the cloud where you could go to verify all kinds of shipping information about your cargo. That’s if it worked.
And all of this built on the newly famous blockchain design, which burns tremendous amounts of energy and creates multiple copies of the data just so big brother cannot be controlling everything.
But who is controlling TradeLens? None other than IBM, the devil brought to life in the legendary 1968 science fiction movie 2001, in which a computer named HAL, who could converse with you, set out to destroy the astronauts on their voyage to Mars and take over the spaceship from them. HAL was just one step away from IBM.
Recall that the raison d’etre for blockchain was to eliminate any central control point, so that your money and transactions were free of any control or attempt to change them. That was fiction anyway; it turns out that in every implementation there is a set of controllers. For Bitcoin, it’s the miners, who have the computing power to make changes even in the code; three or four big miners handle most of the blocks of transactions, and that is who’s consulted when code changes are in the offing; they have the votes. Ethereum has a different structure, and is now moving to a new method of determining whether a block is valid, called Proof of Stake. It’s supposedly a lot faster and less energy-intensive; we will see; but it’s an oligarchy all the same, with miners needing to put up a stake they forfeit if they make a mistake and post an invalid transaction. Again the ones who put up the largest stakes are the ones consulted when a code change is desired.
The IBM/Maersk platform for TradeLens didn’t hide who was controlling it; it was those two. From the start there was a lot of suspicion that Maersk was trying to use it to lock in business from shippers who would normally use a freight broker or 3PL. Was Maersk really trying to lure smaller shippers by providing a platform for them to look at the progress of their shipments safely from end to end?
The reason given by Maersk and IBM for halting TradeLens is that there isn’t enough business after four years to continue supporting it. In the four years, according to the site (second article below) there have been 70 million containers and 35 million documents processed. That’s a lot of traffic. Over 20 port terminals are also participants, including in Singapore, Hong Kong, and Rotterdam.
Another major question is who owns the transactions processed through TradeLens? Should the firms need to pay to get their transactions suppressed from view? If IBM and Maersk own them, that could be seen as anticompetitive.
Perhaps the real reason is that Maersk and the other participating liner companies, Hapag-Lloyd, ONE, CMA CGM, and MSC, all majors, are growing afraid that they will lose their blanket exemption from antitrust to operate the container shipping alliances. Both the US and the EU are looking hard at whether the alliances should have their powers revoked, due to anticompetitive activity. If new regulations come about, the alliances will go down, and the liner companies will no longer be able to share their ships on the alliance routes.
Instead if they want to offer weekly service they will need to each provide enough ships. This would represent a tremendous amount of extra capital requirement. Rich as they have become from the recent high prices during COVID, none of them can afford that much capital.
I think any regulations that come about will tinker with the alliance structure but won’t do away with sharing capacity. Regular service is what shippers want. The target is excessive blanked sailings by these companies.
Blanked sailings are like ‘bait-and-switch’ selling. You offer a sailing on the 15th, and people sign up their cargo. But then closer to the 15th, you realize there isn’t a full load, and you can’t pay for the voyage. So you blank, or cancel the sailing, and move all the cargo shipments to later voyages. The customer is not getting the time frame for delivery of the cargo that he wanted, though technically he is still getting his trip. But the time element in modern business is what is important.
Many shippers are saying that signing up a cargo for a voyage is like Russian Roulette. You don’t know if you’ll get it.
I’m not sure what a regulation would look like that would reduce the frequency of blanked sailings but still allow the carriers to share capacity on the routes. Perhaps specified service levels on the routes would be enough; designating a route for sharing in an alliance would require also specifying guaranteed sailings at least every n days, a specification of a service level for the route.
Suppose the route cycle time is N days, the average time required to complete an entire trip around the closed circuit, including delays at stops, and return to the origin port ready to load. Clearly if N=n, only one ship is needed, but n could be pretty large, say 30 or 40 days, not soon enough for big shippers. For a service level of n = N/2, two ships would be needed, and so on. The number of ships is given by algebra as N/n. Since fractional ships are not allowed, the proper expression is CEILING(N/n) ships required, to steal from an Excel function; effectively rounding up to the next larger integer.
So a commitment to a given guaranteed service level, no blanking allowed, could force the carriers to be more aggressive in filling up the ships. Knowing they had to sail every so often they would work harder to fill the ships.
So consider a route from Tianjin to Rotterdam, including Shanghai, with stops in between. The latest Hapag-Lloyd route sheet shows that this trip called FE2 takes from 16 Nov to 7 Jan, a time of 52 days, on the ONE Triumph ship. The route sheet is difficult to interpret, so I’ve extracted the stops and timings in a table.
That does not allow for the return trip. But we can assume they have another ship ready when they want to go again.
To gurantee service every other week (14 days) on this route they need CEILING(52/14) or 4 ships available. That leaves an excess capacity of about 28% (four days out of 14) for issues that may occur.
Now factor in schedule reliability. According to their Global Performance Webpage, Hapag-Lloyd’s schedule reliability is 39% on 12/4/2022. This places them 8th among container shipping companies in the Sea Intelligence GLP rankings. We’ll give them 40% to make the calculations easier
If they are only on time 40% of the time, that means that on 2 of every 5 runs on this route there is no ship available to replenish the stock of ships to serve this route. This measure does not show us how late they are– it might be just a day, or it could be several or many days. Weather at sea and delays loading and unloading at ports are some of the major factors in being late. These are mostly outside control of the line, though in some cases, such as errors in advance notice of arrival, could trigger the delays. So this measure is not really sufficient to help us figure how many ships they need to service the route biweekly. We need the distribution of lateness times to be totally accurate.
So we’ll guess. We’ll assume half of these are over 4 days. Remember that 4 days out of 14 is the excess capacity on the route. So half of the time the delay is too long to be absorbed by the excess capacity. So based on these figures they would need to blank a sailing 1 out of every 5 times, for lack of capacity.
Based on this distribution of lateness, a big fat assumption, a possible rule of thumb might then be to punish blankings in excess of 1 out of every 5 scheduled trips. Thus if there were two blankings in any five-trip period, the carrier would be penalized for excess blankings.
It’s not known how the reliability measure would perform if such a rule were instituted, except that it would probably improve. In general, carriers need to improve their schedule reliability a lot to become more consistent with customer goals for reliability of receiving shipments. They can’t plan inventory well if there is so much lead time uncertainty.
Some enterprising scholar of maritime affairs could conjure up a simulation that would act as a ‘digital twin’ of this route. That’s the new term of art. With the simulation we could observe how the schedule reliability and the blankings and performance on the route in terms of number of ships required would work. We could throw at the model odd states of affairs, like China closing ports for extended periods, or major storms taking out ports or affecting the route for several days, or congestion like earlier this year at the US ports in Los Angeles and Long Beach, where waiting lines grew to over 100 ships.
Would the penalties need to be more frequent?
Would they need to be larger?
Would the blankings go up or down?
How would the schedule reliability be affected?
One thing we could not model, though, would be the amount of screaming from the liner carriers. And we also can’t model the politics, or the legality in the different jurisdictions, of such a scheme as a way of increasing competition. the penalties might actually reduce competition; alliances might have a harder time forming, preventing sharing of ships and raising the cost of running regular service. Those in favor of reshoring commerce would think that’s good. But most of the world has benefited greatly by global trade, and it has raised the economies of many countries, though labor dislocations have been created, making special noise in some developed countries.
I leave it to the international trade experts to design rules that would improve customer service for international container cargo and smooth out the lead time variations which cause inventory shocks, while maintaining the flow of international goods.
These below are thoughtfuil articles and make us think hard about competition in international trade.
Supply Chain and Logistics 