On the last day of August, Hanjin Shipping, the world’s seventh largest container carrier, representing almost 8% of all of the United States trans-Pacific trade volume and 3% of global shipping capacity, filed for protection in South Korea’s bankruptcy courts and was granted court receivership two days later.
Needless to say, the shipping industry has been thrown into a state of turmoil, with countless container ships either stranded offshore, unable to dock and likely inaccessible for weeks or months. In the worst scenario, several have been seized by private charters, creditors or government authorities, including several reportedly seized in China and Singapore.
The total cargo already loaded onto Hanjin vessels and at risk of being tied up indefinitely has been estimated to be as much as 540,000 twenty-foot equivalent units (TEUs). So let’s take a moment and put this in perspective. Panamex vessels (those that could pass through the Panama Canal’s old locks), of which there are still many, can hold between 3,000 and 5,000 TEUs. Post-Panamex and New Panamex vessels between 5,000 and 14,500 TEUs. The bottom line is that we’re talking about a lot of stranded container ships.
Shipping customers, from the likes of LG Electronics and Samsung to major retailers such as Wal-Mart and Target, were caught flat-footed, unable to retrieve their goods and not knowing when, if ever, they will be able to do so. LG Electronics, for example, has begun making contingency plans for its cargo currently quarantined on Hanjin vessels, in the event they are seized.
But the ripple effect extends far beyond Hanjin’s direct customers. Third party providers, from tugboat operators and trucking companies to stevedores and freight forwarders, all of whom depend on shipping activity for their livelihood, are at risk. Some will not survive. Others will struggle for months or years to recover.
The other short-term impact, already being felt throughout the world, is rapidly rising shipping rates, regardless of whether these increased rates are sustainable. A day after the bankruptcy filing, according to Nerijus Poskus, director of pricing and procurement for the freight forwarder Flexport, rates from China to west coast ports increased from $1,100 to upwards of $1,700 per container, literally overnight. Similarly, rates from China to east coast ports increased from $1,700 to $2,400. Competing carriers are rushing to fill the vacuum created by Hanjin’s bankruptcy, and to capitalize on a windfall opportunity. Ultimately, at least in the short term, the consumer will pay.
So this leads me to a question. To what extent was the Hanjin bankruptcy expected, or should it have been based on the facts at hand? I heard someone last week refer to this as a “Black Swan event”. Back in February I wrote about a thunderstorm in Albuquerque, New Mexico that virtually shut down Nokia’s and Ericsson’s supply chains, an unexpected occurrence from which the latter company never fully recovered (How a Lightning Strike Almost Destroyed a Company). That was a Black Swan event. The Hanjin bankruptcy clearly is not.
Investopedia defines a Black Swan event as one that “deviates beyond what is normally expected of a situation and is extremely difficult to predict.”
In the case of Hanjin, the writing could not have been more clearly “posted all over the wall” in bright red ink. On a company-specific level, Hanjin has been hemorrhaging money for years. In the first half of 2016, the company lost 473 billion South Korean won ($430 million). It had accumulated a debt of 6.1 trillion won ($5½ billion), almost a fifth of which was due before the end of 2017. Hanjin’s losses and this debt, at the end of the day, pushed the company’s creditors to their limit and they decided to pull the plug. To compound Hankin’s woes, it owns less than half of its fleet, leasing the rest at fairly high lease rates. While experts disagree regarding Hanjin’s fate, there is a likelihood that the company will not recover.
On a macro scale, the industry has been struggling for the past several years. Notwithstanding the uptick last week, shipping rates have been depressed and probably will remain so. Trans-Pacific shipping demand has been sluggish for some time, as global deals are replaced by regional ones, China shifts its focus to domestic consumption, and the dynamics of the global economy change. In light of depressed demand, the industry has struggled with excess capacity. These factors are highly unlikely to change in the near term, and other carriers may risk the same fate as Hanjin.
So how can companies anticipate, prepare for and respond effectively to supply chain disruptions such as this going forward? What lessons can be learned from the Hanjin experience? In the February article I laid out four principles, Awareness, Agility, Resilience and Redundancy to help businesses deal with unexpected (albeit, I would argue in this instance, predictable) events such as this.
In the next article we will revisit these principles and how they apply to supply chain disruptions such as the Hanjin insolvency.
For over thirty years, Mike has been actively involved, as a coach, entrepreneur, scientist, business executive and management consultant, in the areas of executive leadership, organizational development and change management, strategic planning and execution, and financial analysis. He has provided strategic, operational and financial leadership to small and medium-sized firms, as well as Fortune 500 companies and large government organizations, in a broad range of industries. Mike holds BS and PhD degrees from the Georgia Institute of Technology and has had additional training in finance and accounting, strategic planning and management, leadership development, and succession planning, from various top-tier institutions.