A few months ago, my colleague Ben Blaney talked about the collapse of the ocean container shipper, Hanjin. Ben dug deep into how shippers are actively engaged in a price war while the industry as a whole continues to lose money.
Of course, this isn’t new, as BBC recently published a fascinating look into the shipping industry and mentioned:
“Running these giants is costly… There’s significant pressure on the industry for ships to be more efficient, despite already tight margins. Shipping remains essential for world trade but the container market is in a slump… the Financial Times published a report about plummeting profits in the sector. Maersk Line’s own net operating profit for the first quarter of 2016 was down 95% on the same quarter of the previous year. The downward trend continued into 2016’s second and third quarter.“
Why is this happening and is there anything that container shippers can do to plug the revenue leaks?
The answer may be found in a very interesting and completely different arena which the BBC story briefly touches on when it reports “Within minutes of tying fast, another set of cranes have lowered over the Ebba and her own entourage of driverless trucks will soon be bringing new containers and ferrying other ones away.
Technology. Specifically, are container shippers keeping up with the rate and degree of technological change? Continuing a price war when the industry is already losing money suggests maybe not.
The maritime business is conservative by nature, but it cannot consider itself immune to technological changes and although demand for its services continue to grow, the industry hasn’t kept pace with global changes. This has resulted in excess capacity, poor pricing and overall deteriorating profits. By not innovating and embracing new ways to operate and profitably sell services, the industry risks losing its competitive advantage to newcomers or even going down the “Hanjin route” at an even faster pace.
An explanation for what’s happening may be found in The Law of Accelerating Returns. This concept from Ray Kurzweil, explains “the history of technology shows that technological change is exponential, contrary to the common-sense “intuitive linear” view. So we won’t experience 100 years of progress in the 21st century — it will be more like 20,000 years of progress (at today’s rate).” Basically, technological change happens fast and it happens at such a degree that humans can’t always keep up.
Apply this concept to the business world and we can quickly see how the speed of change and disruptive technology is effecting a variety of industries including medicine, manufacturing and even transportation. For example, in a few short years the taxi business has been significantly disrupted by the technology of Uber, which continues to drive disruptive innovation through driverless cars. Only a few years ago delivery and shipping companies were exploring next-day delivery and on-line tracking of orders and are now having to quickly think outside of the box with the advent of drones and new delivery concepts like Amazon Flex.
So what is a forward thinking maritime container business to do? They can start by using technology to make better pricing decisions. Sound too simplistic? Research suggests it’s the right thing to do as pricing is the most powerful profitability lever companies have in their control. Even more so than cost cutting. Modern pricing technology is also more than just getting the price right. It’s the key to transforming into a digital business.
Masersk Line’s 11% increase in volume and 16% decline in freight rates in 3Q indicates shippers are not yet embracing the pricing technology opportunity currently available to them. And with the degree of change described by the law of accelerating returns, shippers like Maersk are at real risk of not moving fast enough or to a sufficient degree. By embracing the capabilities of data science-driven pricing, carriers can start pricing faster and smarter to better capture the value of their services. Taking this first step towards using currently available pricing technology currently will allow them to start responding to customers in real-time and realize profitable growth. But they need to move fast or risk becoming quickly left in the wake of technological advancement.