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Container Shipping & Trade

Container Shipping & Trade

Maersk North Asia boss: scrubbers, mega-ships and M&A

Mon 04 Dec 2017 by Rebecca Moore

Maersk North Asia boss: scrubbers, mega-ships and M&A
Tim Smith (Maersk): We have ruled out scrubbers

Maersk China chairman Tim Smith on why Maersk has chosen low sulphur fuel over scrubbers and LNG, the company's mega-ship strategy and his thoughts on the new alliances

Maersk Group is campaigning for strict enforcement of the 2020 global sulphur cap due to concerns that some “unscrupulous” ship operators will not comply, Maersk chairman of China and chief representative of Maersk Group North Asia Tim Smith told Container Shipping & Trade. In a wide-ranging interview, he also covered the company’s mega-ship strategy, acquisition of Hamburg Süd, digitisation and cyber-attacks.

A major area that is preoccupying him and other Maersk chiefs is the 2020 global sulphur cap. Maersk intends to meet this by burning low sulphur fuel but is concerned about how the regulation will be enforced.

Mr Smith told Container Shipping & Trade “While it is the right thing to do, we are very concerned to make sure that it is fairly enforced. Because the cost of low sulphur fuel is so high, there is a big potential advantage for an unscrupulous operator not to comply with this.”

He added that complying could cost billions of dollars, which is “one reason why we are concerned about enforcement. If we are going to pay that cost we want to make sure that others are not cheating the system.”

Responsibility for checking compliance rests with port state control, which is “a concern for us as we guess that while some parts of the world will actively enforce it, others will be less active,” he said.

Therefore, the company wants to make sure there are clear rules and is advocating a directive stating that operators should only have heavy fuel oil on board if they also have equipment such as a scrubber to burn fuel cleanly. “If a ship is in the middle of the ocean who is going to check that it is burning clean fuel?” Mr Smith said.

Maersk is speaking to IMO about the regulation’s enforcement, he said, and it wants to see “a strong reaction” about enforcement. “It is good to create this regulation, but effort now needs to go into regulating it,” he said.

Maersk chooses low sulphur fuel

Maersk’s decision to use low sulphur fuel contrasts with some other shipping lines, which have decided to use either scrubbers or LNG. “We have ruled out scrubbers,” he said. “They are expensive and sophisticated pieces of equipment that take a lot of work to install and they actually use quite a lot of energy themselves.” He added that Maersk’s experience of scrubbing showed that it did not look like a very cost-effective solution for the shipping line.

He said that LNG was an interesting option but Maersk had also decided against this because the bunkering infrastructure was not yet in place and LNG holds less energy-dense than fuel oil so takes up more space and requires more infrastructure on board a vessel.

As a result, the company has decided on low sulphur fuel. Mr Smith explained “We already know that we can deploy low sulphur fuel as most of our ships use it already as they have to comply with stricter environmental regulations in some parts of the world already.”

Cyber-attack impact

When CST interviewed Mr Smith in November, the group’s Q3 profits had just come out. While Maersk Line reported a net profit of US$220M compared with a loss of US$122M in Q3 16, this was offset by the huge costs of the cyber-attack suffered by Maersk Line in June, which is estimated to have cost the group US$250-US$300M. “The results were unsatisfactory, with the cyber-attack halving the profit that could have been achieved. While the markets are gradually improving, we did not get the ‘slam dunk’ results that we wanted,” he said.

Commenting on the cyber-attack, he said “We are one of the leading proponents for digitisation and we feel that this is something that we do well, so it is more than a bit ironic and disappointing that we seem to have been hit more than our competitors on this, possibly because we are further ahead in digitising our operating processes.”

Indeed, Maersk Group announced in March 2017 that it was working with IBM to implement technology designed to help protect companies against cyber-attacks. But Mr Smith explained that even this would not have saved the company from the hacking because it was a “new type of attack not seen before”.

The attack happened because software required to be used in Ukraine to file the company’s corporate tax returns had been targeted by hackers. “We are using all latest defences, from what we can see this is a new type of attack that came from state-sponsored activities and it was very difficult for us to protect ourselves from that as a commercial business.”

But despite the costs and upheaval for Maersk, Mr Smith said that the positive was how quickly the company managed to bounce back. “We suffered 11 days of very significant disruption before core systems came back and it took a long time to work through the backlog of data, but we are pleased about how our staff responded,” he commented. For example, despite having no access to email and corporate systems, staff took bookings manually until the issues were resolved.

Despite the impact of the hacking, Maersk’s results reflect the fact that the economic conditions of its business have been better in 2017. Mr Smith said that the demand had increased this year by around 5% compared to last year.

Orderbook strategy

Maersk is not following in the footsteps of CMA CGM and MSC with their orders for 22,000 TEU units and ordering more ultra large container ships.

“From our perspective we do not see the need for more large ships our orderbook,” Mr Smith commented. Maersk’s orderbook is 7.4% of its existing fleet and although he thinks this is “relatively modest” he said “it is what we need for our services. We do not build speculatively – if shipyard offers are low, we do not get tempted by that.” Rather, the company looks at the age of its fleet and looks the amount of cargo it expects to be able to carry.

Maersk has no plans to order more ships now and has not ordered new ships since 2015. “There is often a lot of publicity about the largest ships and competition for bragging rights about who has biggest ships out there, but you cannot run those ships other than on the Asia-Europe trade so, for us, it depends on how demand shapes up on the trade,” Mr Smith said. At some stage the company will need 12,000 TEU or 15,000 TEU vessels for other trades, he added, but “it is about having a balanced fleet at the end of the day, rather than just focusing on larger ships.”

Hamburg Süd takeover

The other issue is that, with Maersk’s takeover of Hamburg Süd, the company will be taking over 130 more ships. The deal is expected to be completed in Q4 this year.

Mr Smith said “They are a nice complement to Maersk. Hamburg Süd is very strong in Latin America and the coastal trades there.” In addition, the German carrier has a different customer service approach to Maersk. “We are quite standardised in the way we work and one of the aims is consistency of customer experience.” Hamburg Süd, on the other hand, is a much smaller organisation so has more flexibility, with a very strong customer focus.

This is the reason that Maersk has taken a different approach to the acquisition of Hamburg Süd from previous deals. Normally when it acquires a company it is put under the Maersk umbrella (as P&O Nedlloyd was), but Hamburg Süd will retain its own separate sales and customer service teams.

“We will aim for economies of scale and create efficiencies by using the same network of ships but they can keep their own distinctive customer value proposition,” said Mr Smith. “Personally, I Iike this logic and think it makes sense.”

As to whether Maersk would consider more acquisitions, Mr Smith said that the shipping line would do that at the “appropriate time”. He explained that “acquisitions are time consuming and require a big management effort and I think we have probably got our plates full in the short-term to consolidate Hamburg Süd.” Furthermore, the company aims to grow organically and, with the rising trend of digitisation, Mr Smith said that there was plenty of opportunity to grow services and create new business models. “Therefore, there is plenty for us to do – I would be surprised if we acquired short term,” he summed up.

Moving on to the subject of wider consolidation within the container ship industry, in terms of both merger and acquisition activity and the formation of the new mega-alliances that launched in April this year, he said “I have 32 years in the liner shipping industry and have never seen anything like the consolidation that [has happened] in the last two years. Coming with that change we have seen the alliances slim down from four to three.”

Mr Smith believes that both things are “helpful” for an industry that was “very fragmented for a long time”. Maersk is “cautiously optimistic that the increase in the scale of the alliances means that we can start to build high quality global networks and compete more on quality of service not just on price ,” he said, adding that the larger alliances would lead to a wider range of port calls and more stability of service.

Digitisation forefront

Apart from consolidation, the other big trend gripping the industry is digitisation, with Maersk leading the pack. Mr Smith singled out one of the areas in this sector that was having a huge impact: this year the company introduced a remote monitoring service for containers. The shipping line has fitted 270,000 refrigerated containers with sensor equipment that transmits real time data via satellite to ports, land stations, Maersk offices and shippers about what is going on in the container. The sensors check temperature and humidity and control the containers remotely. They can change the temperature remotely and, if a more significant problem is flagged up, the service enables Maersk to direct engineers on board or contractors to check the container if it is on land.

Benefits include preventing the loss of perishable goods in travel, decreasing cargo claims and saving costs.

As well as global trends within container shipping, Mr Smith is also very focused on China’s ‘Belt and Road’ initiative. He described this as the “biggest opportunity” for Maersk Line within North Asia. “Anything that has one of its goals as generating US$1.5Tn in the next 10 years is going to provide more cargo opportunities,” Mr Smith said, adding that the infrastructure needed for the project would allow Maersk opportunities spanning investment and development of ports and warehouses. For more on ‘Belt and Road’, see pages 8-9.

Despite the challenges faced by container shipping lines, there are still plenty of opportunities for Maersk to capitalise on.

Snapshot CV Tim Smith (Maersk)

Starting from July 1, 2015, Tim Smith is chief representative of Maersk Group in North Asia and Chairman of Maersk China Ltd. He is based in Beijing. He has worked in the container industry for 30 years, with much of that time in Asia. Initially with P&O Containers and then P&O Nedlloyd, Mr Smith has been with Maersk Line since their acquisition of P&O Nedlloyd in 2005. Mr Smith was appointed chief executive of Maersk Line in North Asia from 2008 until June 2015. He graduated from the University of Oxford with a BA Hons first class in geography. 

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