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Container Shipping & Trade

Container Shipping & Trade

Hapag-Lloyd: why the box ship industry is at a turning point

Thu 01 Nov 2018 by Rebecca Moore

Hapag-Lloyd: why the box ship industry is at a turning point
The LNG-ready vessels Hapag-Lloyd acquired when it took over UASC (pictured) will be converted to LNG dual-fuel

Hapag-Lloyd has moved from growing larger to cut costs, to a long-term strategy focusing on quality service – and one of its top executives explains why this heralds a change within the box ship industry

The container shipping industry has reached an ‘inflection’ point – it is now about how to win commercially rather than how to get bigger faster, Hapag-Lloyd senior director of corporate development Pyers Tucker told Container Shipping & Trade. And to do this, Hapag-Lloyd is focusing on quality service, concentrating on a strategy spanning market research, controlling schedules and greater interaction with terminals.

Speaking about the industry downturn and consolidation, Mr Tucker said “The absolute headline point is that the container shipping industry has not covered the cost of capital since 2000, and one of the consequences is, instead of shipping being a fairly favoured investment area, banks are backing right off because it is just not bringing the returns.”

He added “It is supposedly a cyclical business, but we are in the longest down cycle ever and there is no clear view of when it will end.”

Ruminating on the general container carrier industry strategies for the past 10 years, he said “the strategy has been to consolidate as fast as possible and the reason for that is that consolidation massively reduces costs. That is the only thing carriers have focused on over the last 10 years.”

He singled out an example: Hapag-Lloyd in 2000 had a cost per unit of US$2,000. Today that has been slashed to US$1,000 per unit. Hapag-Lloyd of course acquired several companies, the most recent being USAC, and before that, CSAV.

But things have changed, as going forward Mr Tucker believes there is little further benefit to be gained from getting bigger. “We believe the game is now about how to win commercially. To win commercially in a service industry you have to provide good service.”

Quality service

Hapag-Lloyd is focusing on a major strategy to provide quality service. Mr Tucker said the company spent 11 months researching and working on this. “We have done cost saving exercises and an IPO, we have completed the UASC deal and there is no other big M&A deal on the horizon. Now is the time for us to take stock strategically, this is what led us to the [current] analysis.

“Our main conclusion is that the industry is at an inflection point. Previously it was all about getting bigger faster to bring down unit costs. Service was given lip service.”

Hapag-Lloyd’s analysis included a major piece of market research which came up with three categories of customers:

  • Price seekers: the only thing they are interested in is price. These shippers make up 45-50% of TEU volume but 35% of the value of the container shipping market.
  • Value seekers: if two carriers provide similar service, and one demonstrates proven quality, they will award that shipping line business. They make up 30-35% of the volume and about 40-45% of the value of the container shipping market.
  • Service seekers: these shippers value quality and reliability, whether total reliability or very fast transit. This makes up 15% of the volume and 20-25% of the value of the container shipping market.

Mr Tucker said “It is about the mix, and not focusing on one or the other. But we believe there are customers for whom quality matters, that as a total this makes up 45-50% of market and we believe it is possible to target those customers.”

However he emphasised “The key point is it has to be proven quality, not just marketing quality and making claims in the press, that does not cut it because that is what the industry is doing. Many are selling a high-level promise and do not live up to it, and shippers expect that.

“The game is changing and the carrier that moves earlier and most effectively can have a significant competitive advantage in the mid to long term”

Hapag-Lloyd focused on identifying what it is that shippers want most when it comes to quality service in its market research.

Mr Tucker explained “Which carrier is even capable of measuring on-time delivery at shipment level? None of them do it, not one of them is capable. That is why we think there is an inflection point and where we think the opportunity is [measuring on-time performance].

But to achieve this, “you have to do an awful lot of things”.

Delivering reliability

To deliver quality service, it is necessary to go through an entire operation from beginning to end. Therefore Hapag-Lloyd is designing what it calls its ship system to ensure a reliable, visible schedule. “It’s our strategy for ship systems and we are sticking to this and building the schedule based on our base customers. The whole thinking behind this is about how to design a ship system, construct a schedule, update it and distribute it to customers.”

To adhere to schedule, the company is establishing a control tower to design and operate schedules. Currently, and this is generally the case for all container shipping carriers, there is nobody responsible overall to decide if captains should sail faster or slower, skip a port etc. The instructions come from the nearest area or region to the ship. “They are making decisions without the visibility of a round trip, which will impact on these decisions.”

The company has piloted the control tower concept for six months and is now setting up its first control tower at Hapag-Lloyd’s headquarters in Hamburg.  

An important way of making sure ships sail to schedule is though building a more productive relationship with terminals. “Terminals are a big part of it and we believe the way carriers work with terminals is counter-productive. It is all about reducing the charge per move (the terminal pick rate for moving a container). We get billed through the number of moves by the pick rate we agreed. In the past it was all about negotiating down the pick rate. Terminals responded by grudgingly accepting ever-lower pick rates and by increasing extra charges.

“We believe we have to collaborate as partners as we cannot turn around credibly to our customers and claim to deliver quality if we do not make sure we get quality from our own suppliers.”

Therefore, Hapag-Lloyd has carried out pilot information exchanges with terminals. Mr Tucker said “There are things they want from the carrier, like earlier and more accurate information, and things we want, so to work that out we need a team in place to work with the terminal. The terminal has to have people who work with the carrier to work out better, more efficient ways of working and improve quality for both.”

The pilot Hapag-Lloyd carried out in a Middle East terminal will be rolled out across the rest of the 29 terminals the carrier works with.

Mr Tucker summed up “The whole notion is, instead of treating major suppliers as opponents, we turn them into stakeholders in the provision of quality to the end customer.” This extends to other suppliers as well, including railways, trucking and barging companies. “It is about maturing our entire procurement set up. Supplier management is at the heart of our ability to deliver quality. We need to turn our suppliers into partners and stakeholders.”

“In order to deliver quality, the only thing to pay attention to is proven quality, we have to do things differently and it is a significant transformation in the mindset and the way we operate – this is not done in six months. This takes a lot of management effort and focus for it to be real shift of mindset for the entire organisation. This is a long-term programme and that is why it is our strategy.

“Where we want to get to are customers understanding what they get for their money and when we say this is what we deliver, that is what they will get and move away from promises hardly ever delivered.”

Highlighting how he felt Hapag-Lloyd stood out from its competitors in executing such a strategy, he said “Where we think we are different is that we believe it is about execution, not about promising – it is only through adjusting our whole backbone that we will make a difference. We believe that one of the core differences Hapag-Lloyd has is the ability to execute plans – once we have decided to do something, we do that and do it very well and reliably. It is the culture of company.”

LSF the way forward

Moving to the 2020 low sulphur cap, he said “There is no choice – the only thing the industry can do is to go the low sulphur route. To convert the entire fleet to scrubbers and LNG by 2020 is just impossible. If we did everything we possibly could, we could covert 3-5% to LNG or scrubbers by 2020 – if we worked flat out by the end of 2023 20-30% of our fuel needs could be converted to LNG or scrubbers. That means that our entire global fleet is only going to become fitted with scrubbers and LNG by 2045. Until then it is low sulphur oil. 80-90% [of carriers] have no choice but to use low sulphur oil. There is this interest in technology but there are limits to the numbers of scrubbers available and the number of ships that can convert to LNG.”

Out of 250 ships, Hapag-Lloyd only has 17 worth converting to LNG. These are the LNG-ready ships the carrier obtained through its acquisition of UASC. It is currently converting one of the ships, which should be ready to sail on dual-fuel LNG in either Q4 2019 or Q1 2020. If all goes as expected, the other 16 ships will be converted to LNG.

However, Mr Tucker is only talking about the current fleet. He makes it clear that the situation is different when it comes newbuilds. “These will either be powered by LNG or fitted with scrubbers in our view.”

Mr Tucker expressed concerns about the fact that low sulphur fuel is more costly. “We are highly concerned as the industry has a poor track record in passing on rising fuel costs to customers. The issue there is if you assume a 200-250% increase per tonne of low sulphur versus 3.5% fuel, this is an extra US$90-100 per TEU. The industry has a bad track record and one reason is over the years there have been completely untransparent bunker charges introduced and some are just a legacy from 20-30 years ago.”

To mitigate these issues, Hapag-Lloyd is starting from a blank sheet of paper and “sweeping all old bunker mechanisms off the table”.

The company is launching a marine fuel recovery mechanism due to the implementation of the IMO low sulphur fuel directive in 2020, which it says will be gradually implemented from 1 January 2019 and replace all existing fuel-related charges.

Mr Tucker said “We will have a transparent fuel charge calculated and set so it covers the cost of the fuel without making an initial profit for the carrier and without causing a loss. I believe the whole industry needs to work towards this.”

Parameters of Hapag Lloyd’s recovery mechanism include vessel consumption per day, fuel type and price, sea and port days, and carried TEU.

Asked about whether it would order any more vessels, Mr Tucker said UASC brought many newbuilds when it was acquired so Hapag-Llloyd does not need to build new vessels for a while. “We will come back to it but not in the immediate future. As a result of acquiring UASC’s fleet we have the youngest average fleet in the industry and largest average ship size. We do not need to place orders now.”

 

Pyers Tucker (Hapag-Lloyd)

Pyers Tucker has been senior director of corporate development at Hapag-Lloyd since October 2014. Before this, he was global head of strategy at Damco for five years. Previous positions include GCS global head of programme office at DHL and head of performance management at Exel. He graduated from Cranfield University with a first class bachelor of sciences degree in mechanical engineering.

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