Effect of Expansion into Logistics by Liners on Competition in the Shipping Industry - Assignment Example

Maritime Economics () (Assignment) Student: Student ID: Lecturer: Subject: Course: Due Date Word Count Abstract The shipping liner is experiencing a lot of transformations as business nature changes with globalization trends. Key among the changes is the increase in competition. Competitive trend now takes a turn to diversification in which major companies have diversified into logistics. Given the high volatility of the industry, it is vital that companies grow in the trend. The industry is also faced with imminent reduction of capital flow. This is a precipitate of the economic recession, 2008. As such, the companies have to change growth strategies to face off growth challenges. Table of contents 1.0 Question 1 3 1.1. Effect of expansion into logistics by liners on competition in the shipping industry 3 1.2. Need for a company to grow 5 2.0. Question 2 10 2.1. Reasons for tighter loans supply 10 2.2. Reasons why lenders are stricter on shipping companies and effects 11 2.3. Implications 13 Conclusions 14 3.0. Bibliography 15 The effects of globalization and the recent economic recession are being felt in all economic sectors in international economy as well as individual national economies. This paper explores the effects of increased competition on the shipping industry. It also explores an indication by Lloyds List Report that these companies will experience imminent credit crunch in 2012. There are several reasons for this. From literature review and through an assessment of international economy, the effects of the recent global recession, 2008, have far reaching ramifications. As demonstrated below, the major implications of the effects of the aforementioned factors revolve around growth strategies. 1.0 Question 1 1.1. Effect of expansion into logistics by liners on competition in the shipping industry The liner shipping sector is changing with changing trends in globalization trade. The core factor in this change is the increasing acceptance of globalized trade as a primary contributor of growth and development at various levels: in national, regional and international economies. As such, liners are now experiencing what literature refers to as rationalization. In rationalization, liners seek control of the international market via various expansion techniques. This is inclusive of both diversification and reorientation. As such, companies have been seen to increase their fleet sizes and deploy larger capacity vessels. Additionally, they have been seen to bank on greater understanding and cooperation (Cullinane 2005) in which there have been mergers, acquisitions or even partnerships. The shift into integrated logistics provision has been seen to spur a different kind of competition: rationalization. The global focus adopted for containerization draws a focus on expansion. This is marked by a shift from rivalry to increasing cooperation which has characterized structural changes. These changes have demonstrated an increase in mergers and acquisitions (Kammlott & Schiereck 2011). The cooperation involves both pure liners and other industry players such as International Terminal Operators. According to Soppe et al (2008), merging with a handful of such strategic partners is competitive edge marker. The majority players, especially major companies such as Maersk and NYK have diversified from pure liners into integrated logistics services providers (Kanafani & Kuroda 2005) and are now going hinterlands. This trend has ramifications on competition in the industry. Firstly, this trend has changed the view and structure of growth strategies taken up by players. From the industry’s point-of-view, there is paradigmatic shift from the focus on size of vessels to ‘verticalization’ and ‘horizontalization’, in which companies strive for control in supply chains. As such, this could mean that the market will see new strategies with a reduced focus on sea-leadership to diversification into into integrated logistics provision (Kanafani & Kuroda 2005). Such strategies include transhipment strategies. In these strategies, liners select strategic ports within a region and use it as distribution hub.The hubs are fed by trans-continental vessels and emptied by intra-regional vessels which have linkages in hinterlands (Kanafani & Kuroda 2005). In this sense, the diversifying companies pose a competitive advantage with respect to vulnerability to sector-specific economic cycles. Diversification-based competition entails a focus on networks as companies strive for maximum control over various networks. As such, there are moves to establish and restructure networks to ensure wider geographical coverage. Wide geographical presence is vital for liners to control competitive positions (Song & Panayides 2012). In the stated strategies, there is a potential for cost savings in which liners focus on using standardized containers and reducing duplication of facilities purchased or facilitated, enhanced efficiency with respect to reduced queuing and intermodal effectiveness. This trend also effects competition in the line of technological advancements. Such organization of maritime services under rationalization will require commensurate technological advancements with reference to handling. This demands continued automation given the market factors such as labor cost, availability and skillfulness as well as changing client needs (Macário et al. 2007). 1.2. Need for a company to grow It is important that any shipping company grows its operations to include logistics. This is a trend that is slowly taking over in liners. Literature refers to this as bundling. In bundling, a liner has four options for operations. Either one operates as a pure liner, an integrated liner, have affiliations with a third-party or a pure third-party logistics service provider. Operating as a pure liner is a dying trend in which a company’s major focus is ocean transportation. The shift is towards integrated operations in which companies have vertical extensions providing logistics to clients. The alternative is a third-party logistics provider to which a liner is connected. This may be a subsidiary. In these expansions, a company will be positioning itself to accrue full benefits of bettering globalized trade which is highly dependent on shipping and logistics. It is a way of enhancing not only the visibility in international markets, but also the value thereof. With the globalization trend, there has been continued growth in world trade volume further enhanced by continued removal of trade barriers. The IMF and Institute of Shipping Economics and Statistics forecast continued growth not only in size, but also in the value as shown below with respect to controlled tonnage. As per the ISL, the increase in tonnage in foreign flags, relative to Germany, is a major concern for liners with respect to fleet development (ISL 2010). Table: increased controlled tonnage in selected countries source: (ISL 2010) Additionally, with the improvements in international economy after the economic slump, there are prospects of continued growth (see below the global financial stability map) (IMF 2012). According to the World Trade Organization (WTO), there is more potential in developing economies. They were less hit and affected by the economic crisis and have posted a growing share in world trade (WTO 2011). These economies have been, in addition, cited as having more investor friendly policies and growing export-import trade which an expanding liner may take advantage of. global financial stability map: source (IMF 2012) Developing economies share in world trade: evidence of potential. Source (WTO 2011) Such a move would also enable a liner company to adequately provide multimodal operations in which one can provide thorough container service. This is to meet clients’ needs for reliability, service frequency and capacity. The clients have also been cited as seeking to reduce inventories in their supply chains. As such, it is vital that liners have integrated service provision. This integration is not only a competitive advantage. It is also a move for risk spreading over various portfolios. International trading and shipping have immense risks consummate with potential for gains (Branch 2007). In contemporary globalized trades, the risk factor is even greater presenting interconnectivity of global issues. This was demonstrated by the global economic crisis, whose effects had international ramifications. The shipping industry was adversely affected. As such, diversification is vital to enhance survival in such times (Kanafani & Kuroda 2005). 2.0. Question 2 2.1. Reasons for tighter loans supply According to Lloyds List Report, it is expected that there will be a crunch on syndicated loans in 2012. In the new stage of capitalism, it is a requirement that the role of financial institutions and investor institutions be considered by all sectors of an economy especially with regard to ‘financialization’. This refers to the growing role of financial actors, motives, markets, and institutions in defining national and international markets and economies (Rodrigue et al. 2011). Since the global economic crisis of 2008, from which some economies have not yet recovered, financialization is a central concept especially with respect to contemporary capitalism that is finance-driven. There are ramifications of this concept in maritime industry with regard to expected reduced supply of syndicate loans whose value has increased with time Australian economy (Domestic Markets Department 2005). There are several reasons for this expectation. Firstly, there remain shreds of economic crisis effects in the international lending market. Specifically, this is with reference to the European loan markets where the banks are having a credit crunch. Industries in the size of maritime can only operate in syndicates due to the amount required and risks involved. A focus on Asian lenders reflects wary over European lenders citing a snug for debt syndication soon. As further reported by Wong (2010), insurance sought on debts of some major European banks has shot to highest historic rates, even beyond the 2008 mark. These banks have been major actors in marine financialization. However, in recent times, they are seen to reduce their portfolios for shipping loans due to shortage of capital and increasing cost of funding. In addition, there is reduction in the supply side since some of the actors are exiting lending markets reducing the number of active maritime lenders. Economies and lenders are putting up risk management tools that are tighter. Economies have established tighter capital regulations for lenders (Wong 2012). These regulations have ripple crunch effects on heavy finance industries such as maritime and infrastructure. For instance, there is a new regulation requiring European banks to raise capital to USD 260 billion with respect to a focus on Basle III banking reforms (Brook masters 2011). To raise this amount, the alternatives include either cut down balance sheets by reducing lending or raising capital in other means. The response of cut lending precipitates into reduced supply of finance. These regulatory capital reforms are intended for risk management and enhancing banks to be more resilient. The reforms are derivatives of the economic crisis, 2008 (Basle Committee on Banking Supervision 2010). In scope, the banks and financiers must cut down ‘significant investments’ above materiality thresholds in entities. Significant investments are said to have a risk of 100% (Latham & Watkins 2011). 2.2. Reasons why lenders are stricter on shipping companies and effects As indicated above it is expected that shipping companies will experience finance crunch in 2012. This is directly because of reduced funding by various sources of funds for the companies. Much as these companies have a variety of sources, credit finance remains a major support especially with regard the capital intensiveness of maritime operations. Lender’s strictness is related to the crunch. There are several reasons leading to the increased strictness. They are related to the recent economic crisis, economic policies and regulations developed in response to the crisis as well as market forces. For instance, a focus on European finance market given above indicates that there are stricter capital requirement as per the Basle III reforms. The effect of the current European crisis has ramifications across the globe as shown below. This is due to the role this market has been with respect to syndicating. To raise the capital base, lenders result to stricter lending practices such as higher rates. These reforms drag along long-term funding constraints. Such constraints have a potential of limiting lenders’ capacity to service needs in markets such shipping, infrastructure development and aviation (IMF 2012). Figure: Stability risks of the European Financial Stability Facility (IMF 2012). Insurance and risk management costs related to maritime lending are increasing. With reference to risk assessment, literature indicates a stricter trend informed by institutional consolidation as well as macro-economic level shake-ups (Measures & Rosa 2004). With increased consolidations and diversifying of shipping companies, lending priorities have changed from growing conventional and small companies to those with a high ability breaking even. Consolidations imply sense of power and an ability to deal with market shocks. As such, conventional and pure liner shipping companies are faced with higher costs. The recent economic downturn demonstrated the risk exposed to these companies. Due to their size and diversity extent of operations they slid into heavy indebtedness with minimal ability to service debts. As such, securing loans for the conventional is faced with stricter conditions as lenders seek to insulate themselves from the imminent danger in contemporary international economy. With global efforts in all crisis-affected economies, the lending market is currently characterized with stiff competition for finance. The global credit crunch continues to dry up lending forcing ship financiers to seek new relationships and alternative strategies (Eric 2008). With effects on export and import trade across individual economies and recurring tectonic shifts in post-crisis there is stiff competition for finances especially in capital-intensive industries (Levchenko, et al., 2010). This competition is marched with stricter regulations that lenders have to comply with as posed by local economies aiming to cushion themselves. As such, the lenders have to extend finance on a priority basis that favors non capital-intensive sectors to capital-intensive and lower risk sectors to high risk. Additionally, the lenders will prefer companies which demonstrate more dependability with regard to loan servicing. This crunch has direct effect on reduced financing for shipping businesses. 2.3. Implications There are further implications of the reduced finance. Firstly, companies are threatened by liquidity issues. They face an imminent danger of running out of cash flows which are very vital in running. For the conventional companies whose income flows is not diversified and commensurate to sector demands, there is a potential for acute liquidity shortage. This has operational problems, in addition to spill-overs into strategic plans. Growth in this industry heavily relies on loans. As such, the crunch implies cancellation of building contracts and abortion of route diversification. Business portfolio development is also hampered which further causes increased and non-consummerate costs as well and poor financial reports. For instance, the recent economic crisis had far reaching implications on individual companies and groups. One of the largest companies, the Japanese NYK Line had a drop of close to 40% in operating profits and a further 25% cut on fleet expansion (Dimitrova & Blanpain 2010). With the tectonic shifts in today’s maritime financing, the impacts could be more especially on conventional shipping liners. There is a reduction on the number of lenders which pushes loan prices to premium levels due to demand-supply interaction (Measures & Rosa 2004). As such, finance markets post high debt prices for both the lenders and the companies. Thus, it is more expensive for lenders to syndicate loans and equally so for the companies to service them. In addition, given the reduced financing from the mainstream actors in the financialization process, shipping companies have also been seen to diversify source of finance and methods of growth. These are methods such as asset securitization, new banking markets, and hedging (Lorange 2009). There is increased verticalization and horizontalization of businesses. There is also a trend of companies seeking diversification and risk spreading over various portfolios overseas and in hinterlands. Conclusions This paper explores the changes facing shipping liner companies in the global economics. Conclusively, the paper demonstrates how companies are diversifying into logistics services as growth strategies, amidst challenging, highly competitive and volatile international business conditions. Secondly, Lloyds List Report indicates an imminent capital and credit crunch for the companies. The main reason for this is the effects of the recent economic recession, from which many economies are still yet to fully recover. As such, they have put in measures to ensure their economic stability. Of major influence is the role of the EU policies. The lenders are thus stricter. This has growth and expansion ramifications on individual companies which either find new sources of credit, or define alternative growth strategies. 3.0. Bibliography Basle Committee on Banking Supervision , 2010, BASE III: A global regulatory framework for more resilient banks and banking systems , Basle, Switzerland: Bank for International Settlements Communications . Branch, A, 2007, Elements of shipping (8th Ed), Oxon: Routledge . Brook masters , 2011, Banks face €350bn Basle III shortfall, Financial times, 15 December. Cullinane, K, 2005, The Container Shipping Industry and the Impact of China's Accession to the WTO, Research in Transportation Economics, Volume 12, pp. 221-245. 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Song, D & Panayides, P, 2012, Maritime logistics : contemporary issues. Bingley: Emerald. Soppe, M, Parola, F & Fremont, A, 2008, Emerging inter-industry partnerships between shipping lines and stevedores: from rivalry to competition. Journal of Transport Geography, pp. 1-11. Wong, R, 2010, Asian Bank Market: Appetite Update, s.l.: Marine Money Asia. Wong, R, 2012, Surviving the credit crunch- Bank debt deal of the year. Bulletin, February/March, pp. 48-51. WTO, 2011, World Trade in the 21st Century: The 1st decade developing economies' increasing participation. WTO StatTalk, 2011(6), pp. 1-2. Read More