After an unprecedented 2016, the shipping industry has given us a lot to think about. Trade growth was stagnant in 2016, stuck at 2015 levels of 2.8%. Hanjin left $14B worth of goods at sea. Flexport raised USD $65MM in venture capital to forever change freight forwarding. Uber acquired Otto, ushering in a new era of autonomous trucking. The four major alliances controlled roughly 70% of market share last year and that’s slated to rise to 90% by mid-2017.
No one can predict the future, but as a technology company and stakeholder of the shipping industry, it’s in our interest to begin plotting a course.
Here are our five predictions for the year ahead:
1. Terminals will get Squeezed
The shipping crisis is far from over.
We’re hopeful we will begin digging ourselves out in 2017. Shipping lines were not the only ones affected. Every member of the chain is affected, but the next member who we believe has the balance sheet to bore the brunt of change is the terminal operating companies (TOC).
Terminals now find themselves between a rock and a hard place. If shipping lines are set on consolidation and increasing volumes, As World Cargo News explains, 2017 will see rising costs already tacked onto due to:
- Higher capital and operating expenditure to build up the infrastructure, teams, and resources to keep pace with and work large vessels.
- Greater business risks from larger liner alliances due to dependence on the large streams of revenue they represent.
- Softening global demand growth. Terminals are already facing weak earnings and an increasing debt load.
- Pressure on terminal handling prices from cash-strapped carriers. Every time a shipping line aims to reduce cost, the revenue shortfall has to come from somewhere else.
“Idle fleets” (ships not being used commercially) have doubled in the last year as well, from 238 vessels to 435 ships. Overconfidence in the periods prior to 2016 and easy capital led many lines to invest in new state of the art ships which have resulted in severe overcapacity. There are still many unfulfilled ship orders that have yet to hit the water as indicated in the graph below.
It will take some time, and a lot of scrapping of young vessels, to restore balance to the industry.
Alpha Liner has also predicted more rate volatility for 2017 citing intense competition for market share and government intervention. He believes that unless something drastically changes in the mindset of the liner executives, the market will be operating in similar volatile cycles as last year. We hope that these executives look beyond standard industry practice and focus more on technological innovation.
“By the time we enter 2017, the cut throat competition that characterised the first half of 2016 will return to the market. In the absence of the change of a mindset of carriers, we will continue to see the market move in circles.” -Tan Hua Joo, Principal at Liner Research Services
We’re seeing capitalism at its best with shipping liners assuming the apex predator position.
2. Another Major Liner will be Acquired or File for Bankruptcy
We’re not going to name any names, but earnings are not looking good.
Last year we participated in the 46th Annual Meeting of the Caribbean Shipping Association in Port-of-Spain, Trinidad. Our friend Michael Kristiansen delivered a compelling presentation that spelled out how bleak the current market is looking:
Red is bad. And there are many liners in the red this past year other than Hanjin. Hyundai Merchant Marine (HMM) for example, was losing $1.22 for every $1 they receive in revenue. It seems that they’re taking steps to reform their balance sheet, but the 2M Alliance rejection did not help. Instead, HMM had to seek out other partnerships with local, smaller rivals.
It has fueled many rumors that HMM might also go bankrupt. We’re not trying to start any rumors ourselves, but there’s strong speculation that ZIM may sell its container network. There’s also talks of a CMA-CGM IPO after the Neptune Orient Line (NOL) deal.
Other notable acquisitions and mergers:
The crisis is far from over and if the volatility continues to play out as expected, we anticipate the demise or acquisition of at least one more liner this year.
3. The First Autonomous Vessel Load will be Delivered
The Finnish government wants a robust, autonomous marine ecosystem by 2025. It has invested in researching and producing the first autonomous vessel. Dubbed ‘shipping 4.0’, autonomous vessels are already a thing. Companies have also begun small pilots to test out the viability of autonomous vessels.
Rolls-Royce is already working on their smart ships that would function similarly to drones. They would be capable of being controlled remotely from a central command building.
Rolls also partnered with the VTT Technical Research Centre of Finland Ltd. Though no load was carried, we believe this year we’ll see a small load carried via autonomous vessel.
We love seeing this innovation. And it makes us wonder with excitement: Why hasn’t Uber entered this realm yet? Will they? Uber is working on self-driving cars and have already delivered cargo by truck, so how far off are autonomous ships? Will Amazon augment drone delivery and try its hand with ships?
In another post, we wrote about how shipping technology growth is exponential and we expect autonomous ships to become the norm well before 2025.
4. Large Exit of Freight Forwarders as Software Eats their Business
Our logistics peer, Flexport recently raised $65 million USD from some top venture capitalists in the US, including Founders Fund, Bloomberg Beta,and First Round Capital. The organization is currently valued at over USD $300MM but we expect that to increase very quickly. FreightOS, another promising tech company in the logistics has raised $23MM to date.
The relationship between startup and corporation is typically a mutual one where mutual value is traded between both parties. This is characteristic of innovation. Corporations need to innovate to remain relevant, and it is often the startups that specialize in certain functions that are able to help corporations do so feasibly.
Sometimes, companies break the mold of how the business is actually conducted and this is the term coined “disruption”. Disruptors change the way we think, behave, learn, and complete tasks. Flexport is disrupting the freight forwarding industry by offering its customers something that typically hasn’t existed - all the benefits of a freight forwarder with a simple to use interface and transparency.
Logistics and shippings seem to typically be “by the book” with vast opportunities for innovation and disruption throughout the ecosystem. It won’t be that way for long however. Our friends at CB Insights put together a nice infographic of Startups that are unbundling Fedex & UPS:
We believe that the next 100 years of human progress will be largely driven by technology -- not solely consolidation, cost cutting, and the same internal measures that have been taken for the last few decades.
5. The Cloud is Coming
The Cloud Computing movement started back in the late 1960’s not too long after the invention of Malcolm McLean’s intermodal container. Fast forward to today, the cloud now accounts for 71.3% of the total services used by your average organization.
It’s long overdue for this technological revolution to hit the shipping industry. We’re confident that 2017 is the year of the cloud for the shipping industry - so much so that we staked our livelihood on it.
We exist to help port leadership think about and optimize for the future. The ever-changing demands from all stakeholders cannot be met by legacy systems. The cloud is the adaptable, modern solution that lends itself to long-term, operational success.
At Octopi, we intend to modernize terminal operations with beautiful, cloud-based Terminal Operating Systems.
What do you think will change in the shipping industry in 2017? Share with us in the comments.
About Author: Miles J. Varghese
A relationship-oriented, #innovation-driving, People-loving, Enterprise Sales Executive at @Octopi_TOS. #miamitech #SaaS