Rough waters for container shipping. Why Hanjin, the world’s seventh largest container line, went under

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End of the line

Olaf Merk, Ports and Shipping expert at the International Transport Forum (ITF), OECD. We are co-publishing this post with the ITF’s Transport Policy Matters blog

Sad news. After months – even years – of pain and suffering, the South Korean container shipping company Hanjin finally sank and passed away. Not just any casualty, but the largest shipping bankruptcy in history: Hanjin was the world’s seventh biggest container line with a fleet of 90 ships. Was this an accident, an isolated case of bad luck, or is something more structural going on?

Like with any bereavement, there are the immediate arrangements to make. Terminal operators and maritime service providers were not paid for their services and need their money, so they have seized Hanjin ships in ports to have some sort of guarantee. Hanjin’s clients are eager to know that their goods will be delivered and not be stuck on ships. Competitors are circling around the deceased to pick up some of the ships that Hanjin leaves behind.

At the same time, people are starting to wonder how all this could have happened. Forensic analysts talk about the sluggish demand for container transport, hit by declining trade from China, the overcapacity in container shipping and the resulting low ocean freight rates that have made it very difficult to make profits in container shipping. All this sounds very logical, but also pretty abstract, and – more fundamentally – it obscures an uncomfortable truth: this was not an accident, but market forces at play – and it will happen again.

The story starts – in a way – in a corporate boardroom in Copenhagen in 2010. Then, the world’s largest container shipping company, Maersk Line, decided to order a set of new container ships that were larger than the world had ever seen, able to carry 18,000 standard containers. Putting more containers on a more fuel-efficient ship would save costs and thus give it a better position in a very competitive market.

For a weekly container service between Asia and Europe – the route on which the largest ships are deployed – ten to eleven ships are needed; a lot of capital that smaller companies would not be able to collect. As the order for the new mega-ships was placed while the global economic crisis was still unfolding, banks were unwilling to lend much to a risky business like shipping, especially the smaller ones with high risk profiles. Timing was excellent, with ship prices low due to overcapacity in shipbuilding yards. The new mega-ships were smartly marketed as “Triple E” ships, providing economies of scale, energy efficiency and environmental performance. They also provided a once in a lifetime opportunity “for the market consolidation that big players hoped for“.

Yet things worked out differently: other firms reacted by ordering similar mega-ships and by organising themselves in alliances. They agreed to share slots on each other’s vessels, which means they can offer networks and connections that they would not be able to offer if they would go it alone. Alliances had existed before, but the Triple E-strategy involuntarily resulted in stronger alliances in which more carriers were involved. These consortia were also used to share newly acquired mega-ships, so individual carriers would only need to buy a few of these, instead of having to shoulder a whole set of ten ships. Consequently, many carriers were able to rapidly catch up and also order mega-ships, many more than expected. The alliances became such powerful mechanisms that even the largest companies found themselves forced to find alliance partners.

This gave a different twist to the play, but with a similar outcome. The combined mega-ship orders in a period of sluggish demand created a sensational amount of overcapacity: way more ships than were needed. This overcapacity resulted in lower freight rates, lower revenues and several years of losses, which we have not started to see the end of yet. Whoever has the longest breath and biggest pockets will survive; the others won’t and will suffer death by overcapacity, like Hanjin.

There will very likely be more Hanjins. Hardly any container shipping line is making profit nowadays and the perspectives are bleak. Sputtering trade growth and gigantic ship overcapacity will continue to depress ocean freight rates. Banks, creditors and governments might well get impatient with some of the liners and cut life lines again.

Economic theory champions the notion of “creative destruction”, in which inefficient firms are replaced by more efficient ones. So, even if it is hardly any comfort for employees that lose their jobs in the process, one could consider it a natural thing that weaker shipping firms disappear.

There is just one problem. If this process continues, it will soon lead to a very small group of powerful carriers dominating an already concentrated market, enabling them to put a lot of pressure on clients and ports. We are starting to see what the results of this are: less choice, less service and fewer connections for shippers, the clients of shipping lines. The ports that accepted the offer they could not refuse and invested in becoming mega ship-ready may find out that they placed their fate in the hands of a few big players who frequently change loyalties at fast as the wind.

Hanjin is gone; the problem is still very much there.

Useful links

The impact of mega-ships Olaf Merk on OECD Insights

The Hanjin case is a practical illustration of the complexity of sectors such as international shipping. The OECD is organising a Workshop on Complexity and Policy, 29-30 September, OECD HQ, Paris, along with the European Commission and INET. Watch the webcast: 29/09 morning29/09 afternoon30/09 morning

Women in transport

and truck drivers, and CEOs, and...
and truck drivers, and CEOs, and…

Magdalena Olczak-Rancitelli, International Transport Forum

The role of women in the transport sector is something that needs to be addressed. Women account for only 17.5% of the workforce in EU urban public transport for example, and hold less than 10% of technical and operational jobs. In the United States, women comprise only 15% of transport and related occupations and only 4.6% of commercial truck drivers are women.

Changing these numbers to achieve inclusivity and gender balance in the transport sector is a very ambitious agenda. What is transport-specific about the gender issues? What are the catalysts for change? How can different stakeholders support this aim?

These questions were at the heart of a debate during the recent International Transport Forum’s 2015 Annual Summit in Leipzig, Germany. Under the theme of “Women Shaping Mobility for a Connected World, transport ministers, business leaders, entrepreneurs, civil society and academics shared their experiences and good practices, and emphasised the message that a strong transport system depends on a vibrant and diverse workforce which includes women and men.

Closing the gender gap in the transport sector is a priority for many governments. “People should succeed because of their training, ability and commitment. Transportation will always be a major factor for all nations around the world. We will need all skilled individuals to operate and manage our networks”, highlighted the Canadian Minister of Transport, Lisa Raitt, for whom promoting women’s leadership is of paramount importance. Half of the senior executives in the Canadian Ministry of Transport are women, and similarly, gender parity has been achieved across the boards under the Minister’s responsibility.

For Susan Kurland, U.S. Assistant Secretary of Aviation and International Affairs, “Women bring a unique perspective to the issues facing a modernising global transportation system. When women are given an equal opportunity to succeed in transportation careers they unlock new pathways for growth and profitability.” This reflects the strong engagement of the U.S. Department of Transportation (USDOT), at the highest level, to attract, retain, and advance the careers of women in the sector. The Department aims to build an economically compelling case by leveraging a growing body of research that outlines bottom-line benefits to transport systems that have greater numbers of women.

The USDOT is fully engaged in these endeavours at national level, and also international level, where it leads APEC’s Women in Transportation (WiT) initiative to increase women’s economic engagement in the transport sector throughout the region. A four-pillar approach is taken to achieve this: ensuring access to education, creating access to jobs, increasing retention, and providing a path to leadership. A data framework is being developed in the context of this initiative to enhance opportunities for women’s employment in the sector, as well as to improve the sector’s infrastructure and services to women as consumers. The results of the survey will be presented at the APEC WiT Forum and Transportation Ministerial in October 2015, in Cebu, Philippines.

But not only women are supporting stronger presence of women in the transport sector. New Zealand’s Minister of Transport Simon Bridges indicated that his government promotes parity on boards: 30 % of board members of key transport agencies in New Zealand are women. Similarly, Tunisia’s Minister of Transport, Mahmoud Ben Romdhane saw value in having more women as part of the workforce at all levels in transport, including at board level, and indicated he was proud to announce that he has appointed women as CEOs of two major transport companies – Tunisair and the national rail company SNCFT.

Also in the corporate world, leadership and role models are needed. Women in senior management positions can impact board dynamics and broaden a company’s knowledge as well as raising its profile. The effect of more women on boards can also trickle down to management and other levels in the hierarchy.

Jessica Jung, Director of Corporate Social Responsibility of Bombardier Transportation,
pointed out that in order to increase the number of women in the male-dominated transport industry, it is crucial to set specific targets, develop road maps to reach these, and implement regular monitoring. Setting targets in the recruitment process is also important. To avoid cognitive biases, Bombardier decided to ensure that a balanced gender mix of candidates is invited to the final interview round.

More women means bringing more talent to transport and a broader view conducive to innovation. For Robin Chase – founder of Zipcar, Veniam, and the author of the recently published book “Peers Inc” – diversity is vital for creativity. Robin provided the example of Lyft, a car sharing company, intended to be a more woman-friendly option than taking taxis. For Lyft, where 60% of passengers and 30% of drivers are female, gender diversity in decision making is critical to the company’s experience-based growth strategy. Fourteen of Lyft’s 30 executives at director level and above are women, and these include leaders in engineering and operations.

Women’s skills and perceptions are central to addressing different gender requirements in access to transport and mobility, as well as to safety and security. Silvia Maffii, Professor of Transport Planning at Milan Polytechnic, and co-author of the CIVITAS policy paper “Gender equality and mobility: mind the gap!” showed how women and men use transport modes differently. Often, these differences have not been taken into consideration in transport planning, neglecting problems of accessibility and safety and thus limiting women’s social participation.

Moreover, neglecting women’s preferences of transport and mobility may also limit women’s economic participation. A recent analysis carried out by US researchers shows a negative correlation between commuting time and women’s participation in the labour force. An increase of 1 minute in commuting time in metropolitan areas is associated with an approximately 0.3 percentage point decline in the women’s labour force participation – reflecting women’s mobility patterns: they do not simply commute but do a lot of additional travel.

Gender sensitive mobility planning should be also seen as an opportunity to promote urban sustainability. A study from Malmö shows that women choose sustainable alternatives to a greater extent than men. Men use cars for 48% of their transport needs, while for women the figure is 34 %. If men started travelling like women, CO2 emissions would go down by 31%, particle emissions would decrease by 21%, nitrogen emissions by 25%, and the noise level would go down by 1 decibel. Reduced negative effects on the environment, accidents and noise imply annual savings of 300 million kronor (32 million euros).

This debate proved how rich the issue of women in transport is and that the enhanced participation of women, with their unique skills and perceptions, is an opportunity that the sector cannot ignore. Next year’s Annual Summit, “Green and Inclusive Transport”, will certainly be an occasion to continue this multi-stakeholder dialogue. So, mark your agenda: 18-20 May 2016, Leipzig, Germany!

Useful links

Help shape APEC’s WiT data framework by contributing your views as private sector stakeholders: responses via survey.

Networking Breakfast “Women Shaping Mobility for a Connected World”, International Transport Forum’s 2015 Annual Summit in Leipzig

OECD work on gender

Key data on gender equality

Transport, trade and tourism

ITF SummitTo mark the opening of the International Transport Forum’s Annual Summit, today’s post is by the Summit’s keynote speaker Pravin Krishna, Chung Ju Yung Distinguished Professor of International Economics and Business at Johns Hopkins University

We live in exciting times. Globalization is deepening at a very rapid rate. In the last decade and a half, international trade in goods has nearly tripled and international tourism has nearly doubled in magnitude. Increased connectivity has led to globally fragmented production processes.

We are now more internationally connected in our economic interactions. We have a better appreciation of the peoples of different countries and their cultures through our travels. We have greater economic prosperity and a greater civilization through these interactions. A large part of this is due to the availability of transportation systems and the increased efficiency of their operation over time.

I will address three broad issues of the complex and multidimensional triangular relationship between transport, trade and tourism.

First, the crucial importance of transportation in generating economic gains, and the concerns about the effects of globalization on poverty and inequality.

Transport networks have obviously provided the backbone for the process of globalization. And, study after study has shown that improved access to transportation infrastructure can be beneficial at the local, national and the international levels. Research from the World Bank has shown that reducing delays at borders in an exporting country by 1 day, through improved trade facilitation, increases exports by 1 percent and that a 10 percent improvement in the quality of transport infrastructure would result in a 10 percent increase in trade, which suggests a very significant impact of improved transportation logistics on trade.

Going beyond the straightforward consequence of lower transport costs for trade flows; there seem to be other productivity benefits as well. For instance, following the Golden Quadrilateral project, which upgraded a central highway network in India, we observe an increase in size of the most productive firms and reduction in the size of the least efficient firms, signaling improvements in allocative efficiency in the economy.

In my own research, I have investigated a rather different set of issues concerning trade, poverty reduction and the availability of transport networks. The claim is often made that exposure to globalization may lead to greater levels of poverty and inequality. However, by looking across various regions within India, comparing regions which are proximate to ports and transportation networks with those that are not, we actually found the opposite. Without trade openness, poverty reduction is actually lower in geographically remote areas due to their lack of exposure to international markets (Krishna, Mitra and Sundaram, 2010). This is important for countries where persistent poverty is a major policy issue. Access to transport networks should clearly be an important part of equitable progress and poverty alleviation strategies.

Second, despite the obvious infrastructure gaps in transportation in large parts of the world, the question of whether to invest more in transport and in what forms, can only be answered in its specific context.

While we generally believe that there is a positive effect of infrastructure on output and productivity, it is not always the case that the benefits of additional infrastructure outweigh the costs. It is, of course, only with productive spending that value is created. Indeed, after surpassing certain thresholds in infrastructure levels, the marginal productivity of infrastructure declines. And, there is some evidence that the productivity of public capital has been declining in advanced economies. As transport networks have become more complete, the average impact of additional segments has been lowered.

Furthermore, the link between infrastructure and growth is much weaker when we measure infrastructure supply using pecuniary measures such as public investment flows. And there is a good reason for this: namely the lack of a close correspondence between public capital expenditure and the provision of infrastructure services, owing to inefficiencies in public procurement and outright corruption (Pritchett, 2000).

Evidence of waste of public resources can cost governments dearly in terms of lost credibility and trust on the part of citizens, even for well-designed projects. In rapidly growing India, the intense struggles of the current government, which is attempting to push through legislation on land acquisition to advance its infrastructure agenda, against a backdrop of long-standing cynicism about public capital expenditure, bear testimony to this fact.

Third the nature of change is complex, and while trade and tourism have grown steadily, this has not taken place in a uniform manner.

Over the last few decades, the center of global production activity has begun to shift back from the West to Asia, and in recent years especially towards China, which has become an important venue for offshore production. But many variations and uncertainties remain. Businesses looking for low-cost export platforms in Asia are increasingly considering countries such as Thailand, Indonesia and Vietnam. Indeed, even Mexico is possibly returning back to favor for many US based manufacturers.

These shifts raise important questions.

For instance, how is freight demand expected to evolve over time? On the one hand, demand could increase dramatically due to rising wealth and rising trade. On the other hand, changes in energy prices, in trade patterns and in economic geography, could affect the origin, destination and mode of traffic, possibly decreasing demand in particular segments and modes. Are our transport networks capable of flexibly adapting to these changes in demand and usage? Are there alternative infrastructure strategies that allow both efficiency and flexibility of response to changing demand?

The demographics of the planet are rapidly changing. A decade or two from now, populations in the United States, Japan, Europe and even China are likely to be significantly older than today. This may, in turn, alter demands for tourism and transportation. However, enhancements in information and communication technologies and other trends such as the movement of aging citizens to urban, pedestrian-friendly areas may mitigate the need for changes to be made in supply. It is unclear which way this will go and by how much.

Interestingly, other parts of the world will be getting younger. For instance, it is estimated that over 30 percent of India’s population, roughly 400 million people, are under 15 years of age and that, going forward, about 1 million young Indians will join the labor force each month, many in urban areas.

These are big trends and they are relatively easy to forecast. But how well do we understand the impact they will have on transportation? And how prepared are we for those challenges?

In addressing these issues, institutional gaps may be as large a problem as infrastructure gaps. Lack of co-ordination between transportation and tourism ministries, for instance, may yield mismatches in mutual expectations of both supply and demand. Similarly, with international trade, infrastructural improvements need to go hand in hand with other behind-the-border reforms, as bottlenecks may lie as much, for instance, in poor customs facilitation, as in poor transport infrastructure.

Long range planning has an outlook of 20-30 years, but is often largely a linear projection based on current relationships between economic and demographic patterns – much like the Times of London forecast in 1894, that given the growth rate of horse carriages, every street in the city of London would be buried under nine feet of horse manure by 1950! These linear projections may be the single greatest weakness of policy making for transport today. A wide range of technological, demographic, social and economic changes will likely affect demand and supply patterns in the future.

These changes and their impacts are not as well understood as we would like. But I am sure that the collective talent of the ITF Summit audience is very well equipped to address them, today and in future research.

Useful links

Pravin Krishna, Devashish Mitra and Asha Sundaram, 2010, “Trade, Poverty and Lagging Regions in South Asia,” in The Poor Half Billion in South Asia, Ejaz Ghani, ed., Oxford University Press

Lant Pritchett, 2010, “The Tyranny of Concepts: CUIDE (Cumulated, Depreciated,Investment Effort) is Not Capital”, Journal of Economic Growth, 5 (4): 361–84

Free ebooks from ITF

Africa on the move: the Bamboo Bike Project

 

Bamboo has higher tensile strength than steel. Click on the logo for the project prospectus.

Africa imports an estimated 30 million bikes per year, yet there are no bike manufacturers on the continent. In today’s post, John Mutter of Columbia University describes a project to build bikes locally, using bamboo for the frames.

People in wealthy countries full of young, genuinely well motivated and committed people with honest and very good intentions can always do something to help those in poorer countries – something small, that is.  These small things no doubt can be very good things. You can build a sanitary facility in a village and the health of the villagers will improve. You can introduce better farming practices and yields will improve on the few hectares of a poor farmer’s field.

It is also not very difficult to establish a small business in Africa. There must be millions of roadside vendors selling everything from food to furniture to appliances. In many cases the goods are produced right there on the side of the road. They operate out of stalls as small as the average toilet stall in the US. These businesses support the income needs of perhaps one or two people at a very modest level.

When we first started the Bamboo Bike Project many people suggested that we should emulate that model. We should create new village-level or roadside businesses because “that’s what works in Africa”. People who encouraged that approach said that if we just got a few started then things would “go viral” and next thing you know they would be everywhere, like Starbucks maybe.

The problem is that just about nothing goes viral in Africa except biological viruses like HIV. The singular exception is cell phones. It’s hard to think of anything else that just took off. The roadside vendor selling fruit isn’t on the first step of a path that will lead to opening a Shop Rite supermarket, there isn’t a Pret a Manger chain in the future for the woman cooking food over a wood-fueled fire, the guy walking around with a display of 50 cheap sunglasses isn’t about to challenge Sunglass Hut any time soon.

For us the issue is that we want to make a serious difference to transportation needs and those needs are vast. Our guess is that there is something between 5 and 50 million bikes in sub-Saharan Africa (it is impossible to get a good number), almost every one made in China and every one of inappropriate design and very poor quality. A bike is something that is assumed to break and need constant repair. We want to make good quality bikes designed for the needs of the rural poor and don’t need repair as often.

Most important is that we want to make them at a scale comparable to the needs – millions. That can’t be done on the side of the road or in village settings. Bike building won’t go viral. It needs a factory and now there is one in Kumasi, Ghana.

The whole story is too long to tell here, but thanks to a partnership between the Millennium Cities Initiative at Columbia University, The Bamboo Bike Studio in Brooklyn, New York and a Ghanaian investor, a factory is taking shape that has the potential to produce perhaps 10,000 bikes a year all made locally. That’s not millions but it is a lot closer than what can be done on the side of a road and it has a chance of meeting some significant part of the transportation needs in West Africa.  

We haven’t found the Rosetta stone for scale-up. You can’t scale-up latrines this way. But we have kept a clear focus on the size of the problem from the very start and not been tempted into the much easier path of making a few bikes in a few places, taking pictures of ourselves in Africa, and achieving little more than making ourselves feel virtuous.

Useful links

African Economic Outlook

China in Africa: Debunking myths and debating truths

Linda Richter of South Africa’s Human Sciences Research Council and the Global Fund to Fight AIDS, Tuberculosis and Malaria speaks out against AIDS orphan tourism in this post