Shifts In Maritime Transportation Industry - Case Study Example

Shifts In Maritime Transportation Industry Table of Contents Introduction 1 Cyclic Nature of Maritime Transportation Industry 1-2 Shifts in Maritime Transportation Industry 2 Present Dangers 3 Future Status 3 Conclusion 4 “Notwithstanding all the familiar and unfamiliar dangers of the sea, both travel and traffic by water have always been easier and cheaper than by land” - Mahan A.T. 1890.1 Introduction Ever since man learnt to sail the seven seas, maritime commerce has played an important role in human commercial activities. The words of Alfred Thayer Mahan in the quotation above bring forth a truism, which is relevant even today, i.e commerce by the sea is still the cheapest form of transportation. Thus an industry connected with maritime transportation remains a global economic pivot. Economics, like other social life, does not conform to a simple and coherent pattern(Galbraith 1958)2. However, a striking pattern of the maritime transportation industry has been its cyclical nature of highs and lows which during times of lows appear to many as a industry in recession or some would call a ‘sunset’ industry. The present slow down of the industry in the developed world gives rise to this pessimism however, the forecast for the developing world produces a completely contrasting picture. Cyclic Nature of the Maritime Transportation Industry Maritime transportation is intricately linked by the means of transportation i.e by the shipping industry. Thus the health of the shipping industry gives a fair picture of the state of the transportation industry. After the end of the Second World War, The United States was the leading country in maritime transportation. The remarkable Marshall Plan saw the rebuilding of a shattered Europe in which seaborne commerce played an important role. Transportation of oil as also other goods increased manifolds. Closure of the Suez Canal in 1956 caused a short term downswing, but also helped add impetus to the shipping industry as the oil now had to come around the Cape of Good Hope thus increasing the capacity and capability of the maritime transportation sector. Between 1957 and 1973, the West’s domination of the maritime transportation industry was challenged by Japan who became the industry leader. In that period the transportation industry was very much a ‘sunset industry’ as far as the Europeans and the Americans were concerned but a ‘sunshine industry’ for Japan. The OPEC oil embargo of 1973, caused a sudden glut of oil tankers which had no cargo to carry. Consequently, the maritime transportation industry suffered badly. The Japanese shipbuilding industries suffered heavily and in the intervening vacuum, the South Koreans stepped in to claim their stake in the global maritime transportation pie. China and Singapore too joined the race. Shifts in Maritime Transportation Industry The maritime transportation industry today is characterized by some important factors shaping the world. Globalisation and the rise of the developing world has been one such important factor. According to Goldman Sachs BRIC report, by 2050 AD, the ten largest economies in the world would be China, US, India, Japan, Brazil, Russia, UK, Germany, France and Italy in the descending order3. This rise of the developing world is causing a shift of seaborne trade from West to the East. IBM Global Business Services report “Setting a New Course in the Container Shipping Industry” states that “ trade flows are becoming more imbalanced. For example the East – West imbalance in the trans-pacific trade almost doubled between 1995 and 20044. Aggressive low price expansion strategy pursued by South Korea and China have further skewed this balance in favour of the East rather than the West. Present Dangers The health of the global maritime transportation industry is linked to many diverse factors. Global Geopolitical situation, rising oil prices, inflation, lack of trained manpower, national social policies and foreign policy decisions by the great powers play an important role in deciding the status of the industry as a sunshine or a sunset industry. Maritime terrorism, Piracy, and other nefarious activities have a deleterious effect on the transportation industry. To cite an example, in the aftermath of the Iran Iraq war, insurance premium went up drastically for shipping plying through the Persian Gulf making sea borne trade expensive. The current rise in oil prices has a cumulative effect on every aspect of economic activity including maritime activities. Freight charges have increased and the dangers of certain parts of the world facing a recession would impinge in many ways on the seaborne trade. Safety of sea lanes especially through narrow passages called ‘choke points’ is yet another issue. For example “In terms of value, the total tonnage carried by the Malacca Straits amount to 525 million metric tonnes worth a total of US$ 390 billion”5. A terrorist strike or increase in Piracy in the Malacca strait would put this huge amount of trade in danger. Social security policies of the developed world too have a downward pull on industries of all sorts. The generous benefits that many western nations give their citizens needs to be sustained by a balanced fiscal policy. Should the fiscal balancing not take place, the social security schemes are no longer sustainable. Various subsidies become harder to justify as does limits on working hours as the famous French 35 hour per week. Higher salaries in the Western world in the maritime transportation industry forced by national social policies cause problems of competing with the low end cheap labour pools of the developing countries. So to compete with the work-obsessed Koreans or the Japanese or the dirt cheap labour pools of China, is an upward task for most Western shipping companies. As a result, western countries are resorting to outsourcing to cut cost. According to Ronald D White of LA Times “ Another factor that could slow shipping growth is that many U.S. and European manufacturers already have moved their manufacturing overseas, bringing a moderating in new outsourcing.6” A lack of trained manpower is also impacting on the industry. According to Prof. John Tzoannos “ By 2010, the shortfall will rise to 46,000 officers.7” What may further exacerbate the downward trend is” overcapacity, softening demand and continuing cost escalation will likely usher in a much more austere period, especially for the smaller yards8”. Future Status Despite the grim economic outlook for the West in the current financial year, the overall impact on the maritime transportation industry is set to improve. As per UNCTAD report, seaborne trade in 2006 increased to 7.4 billion tons9.This overall improvement is being lead by the galloping economies of the developing world led by China, India and the powerhouses of South Korea and Japan. Since three quarters of the world is covered by water, the influence of maritime trade is here to stay. The current US Navy Joint Maritime Strategy quite aptly describes their prognosis as “ over the past four decades, total sea borne trade has more than quadrupled: 90% of world trade and two thirds of its petroleum are transported by sea”10. As the world sea borne trade increases, it causes a demand for building new ships. This demand for building new ships gets translated in greater jobs in the ship building industry, more income and thus a greater growth in the maritime sector. According to Nazery Khalid, a research fellow at the Maritime institute of Malaysia “Demand for new building (of ships) between 2000 to 2010 is estimated to be around US $ 4.5 billion.11There of course is a word of caution in this tale of optimism. In the near term, the effects of the US recession will cause a downward pressure on the transportation industry where the bigger players will be able to weather the storm by sustaining on slimmer margins. This will also force a consolidation of the industry wherein the smaller players may get subsumed into conglomerates to survive. In the longer term going by the economic predictions of Goldman Sachs quoted previously, the economies of scale imposed by China, India and the South East Asian countries will sustain the growth. Conclusion The dynamics of Maritime Transportation Industry are here to stay. The cyclical nature of the industry will ensure phases of profit followed by losses. The dynamics would continue to be affected by the global geopolitical environment. With the developing world gaining prominence in the future, the focus of the industry would shift from the West to the East. The East would become the drivers for the future prosperity of the industry. In the near term, the perception of a ‘sunset’ industry holds true for the developed world but the same industry is poised to become a ‘sunshine’ industry in the long term. Notes Read More