A couple of weeks ago I posted a short article on how companies can prepare for and respond to supply chain disruptions (Hanjin Revisited). This was a follow-up to an earlier article on the Hanjin bankruptcy and its impact on businesses globally (Hanjin and Turmoil in the Shipping Industry … Should we have seen it coming?). Two further points worth noting are the systemic problems faced by the maritime shipping industry and what appears to be poor bankruptcy planning on Hanjin’s part.
We should not focus too much on the issues specific to Hanjin lest we lose sight of the problems impacting the industry at large. Was the Hanjin bankruptcy an exception or a harbinger of bigger issues to come? My concern is that it may be the latter. Weak global trade and overcapacity contribute to the problem. Nerijus Poskus, pricing and procurement director for San Francisco-based Flexport, has pointed out that not long ago prices hit historic lows worldwide, with shipping rates from Shanghai to Los Angeles as low as $600 per container.
Source: Shanghai Shipping Exchange
Simply put, supply currently outstrips demand, resulting in an untenable environment whereby many carriers are transporting goods at prices below operating costs. And the Boston Consulting Group has predicted a further 30% increase in container shipping capacity by 2019.
This problem is exacerbated by the fact that operating materials costs are increasing (irrespective of the decline in fuel costs). Additionally, increased emissions regulations, and the technology required for compliance, coupled with the cost of mitigating security risks, are further driving profits down.
Additional debt, in an already highly-leveraged industry, is not the answer, as Hanjin can now attest to. The industry response will likely be diversification into higher-margin business segments, strategic alliances to enhance profitability and industry consolidation to leverage economies of scale. And, hopefully, a staving off of further bankruptcies.
The bottom line for companies employing ocean freight is that they should not take solace in these historically low shipping costs. While this may represent a short-term windfall, the risks associated with an industry in turmoil represent a greater threat, as Hanjin customers have seen.
Which leads us to the second issue, Hanjin’s bankruptcy planning. A recent article in the New York Times addressed this issue.[1] As noted in the article, when an airline files for bankruptcy, sufficient insolvency planning and engagement of bankruptcy professionals early in the process ensure that aircraft are not stranded on the ground in unfavorable situations and, in the case of cargo, that transported goods are not quarantined or otherwise made unavailable to the owners. While ocean transport carries with it certain challenges not shared with air cargo, better front-end liquidity planning on Hanjin’s part could have prevented or significantly mitigated the situation of companies not having access to their goods for weeks or longer.
