As major container shipping lines begin the descent into a new freight rate war, particularly on the volatile Asia-Europe trade, some are beginning to rethink their corporate exposure to the liner trades.
Japan’s largest maritime transport company, in terms of market capitalisation, last week released its annual report which featured an interesting segment about the carrier’s strategy of reducing its reliance on liner shipper and increasing its focus on freight forwarding and providing other logistics services directly to shippers.
“We are leveraging our logistics business to capture cargo movements likely to pick up as markets grow. While increasing overall lifting volume, our aim is to reduce our exposure to freight rate fluctuation risk,” the report said.
It continued: “Therefore, although we will continue capturing cargo movement directly as a shipping company, we intend to reduce owned and long-term chartered vessels as a percentage of our overall operating fleet. At the same time, we will strengthen forwarding in the logistics business.
“Containership operations are prone to service commoditization and price competition. With this in mind, we intend to differentiate these operations from those of competitors by providing an extensive menu of additional services, including customs clearance, ocean and air forwarding, warehousing, and distribution.”
Its recent plays in the containership charter market bear this out – it renewed the sublet of the 3,500teu NYK Lyttelton from CSAV in August for $7,500 per day for just six months as it sought to drive additional flexibility into its fleet cost structure. The vessel is deployed on the line’s New Zealand-Singapore service.
According to Tadaaki Naito, NYK’s chief executive of global logistics services, the aim is to reduce the fleet size from 84 vessels with a total capacity of 370,000teu currently to 63 vessels with a capacity of 330,000teu by 2016.
In contrast, its logistics subsidiary is on the receiving end of corporate investment, with two new facilities due to open in Bangladesh – at Dhaka and Chittagong – in the middle of next month as it seeks to build its presence in the country’s burgeoning apparel industry.
Its NYK Logistics arm has of course been bidding for logistics contracts for a number of years, but the strategy was given a considerable push by the merger with Yusen Air & Sea in 2012, one of Japan’s largest air freight forwarders. The integration process is now nearing completion – renamed Yusen Logistics, a unified holding company for Europe and two in the US were formed last year, and similar processes have been completed in most Asian markets. What remains is the merger at an operational level, which is expected to be completed by the end of the year.
A look at its accounts over the past five years demonstrates the drivers behind the refocus – liner shipping has traditionally been the largest earner for the company in terms of revenues, but in terms of pre-tax profits it is little short of being a basket case.
S&P Capital IQ data for the last five financial years show the sclerotic nature of liner shipping – it turned a pre-tax profit of $429 million in 2005; which declined to $136 million the following year, followed by an $84 million loss in2007, a $116 million profit in 2008, a $246 million loss in 2009, a $554 million loss in 2010 and a $365m profit in 2011.
Compare that with its logistics, which consistently delivered a profit, notwithstanding the distractions of the merger: $78 million in 2005, $109 million the following year, $137 million the next, $161 million in 2008, dropping to $49m million and $13 million in 2009 and 2010 and growing to $93 million in 2011.
It is, of course, not the only shipping company to be attracted by the relative stability of the returns in logistics. Maersk-owned Damco is in the midst of a similar process, although it is going about it in a different way – distancing itself from its parent in terms of branding and, as of last week, physical location with the shift of its HQ to The Hague from Copenhagen.
The art of successfully launching – or in both of these cases re-launching – a logistics company that is going to compete with existing customers is to convince shippers that it is a) independent of the parent and b) has a decent service at competitive rates. And that second requirement does have the potential to further destabilise the rate environment.
But Yusen is in a different position, as further demonstrated by the Capital IQ data. In the initial phase of its expansion into logistics, it is likely to build on the parent company’s presence in its domestic market. NYK is an overwhelmingly Japanese company – in its 2011 accounts Japan accounted for $17.7 billion of its total revenues of $23.3 billion. Its core offering is to Japan’s industrial giants – the carmakers and electronics producers – and deepening Yusen’s relationship with these customers will provide it with a base from which it will look to penetrate other sectors, geographically and vertically.
Ironically, the other industry that it finds so attractive, due to its stability, is the finished automobile supply chain, in which it now finds itself – along with other car carriers – the subject of a series of anti-cartel investigations.
