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Implications of Maersk’s Restructuring for Shipping Market

Maersk_logo

Maersk announces a restructuring plan

In early November, Maersk, the global leader in shipping, announced an aggressive restructuring plan to reduce cost by making its organization slimmer and reducing investment in new vessels for next two years. Maersk’s plan charted three things to do: manpower reduction, vessel investment reduction, and service route reduction.

Maersk plans to cut 4,000 employees out of its land-side operation staff of 23,000 people through attrition and through an organizational reshuffle by the end of 2017, while it plans to improve work efficiency and customer service through work automation and digitization. The company further expects to reduce costs by 400 million dollars (150 million dollars in 2016 and 250 million dollars in 2017 as selling, general and administrative expenses).

Maersk aims to reduce vessel capacity by giving up the option for constructing new vessels and delaying ship delivery. Maersk canceled its options in its contracts with Daewoo Shipbuilding & Marine Engineering (DSME) for building six 19,640 TEU vessels and with COSCO Shipbuilding Industry Company for building two 3,600 TEU feeder vessels, and postponed exercising its option in the contract with Hyundai Heavy Industries for building eight 14,000 TEU vessels.

Furthermore, Maersk recently suspended its four services of ME5, AE9, AE3, and TA4, which the company had provided in partnership with MSC, and is going to stop 35 more voyages in the fourth quarter. Moreover, the company considers laying up one 18,000 TEU vessel for six weeks and is mulling over a plan to idle more ultralarge vessels.

The foreboding outlook for shipping market in the backdrop

Maersk realized a better-than-expected profit in the first half-year, but saw a sharp decline in its performance in the second half-year, which seems to have prompted the establishment of the extraordinary plan. Maersk came up with such a massive restructuring plan, because the container market is expected to get worse, leading to a decline in profitability.

As a cost leader for global shipping market, Maersk has shown its determination to respond to oversupply by reducing vessel capacity and diminishing and reorganizing services instead of implementing restructuring just to reduce costs.

Strategic shift toward mitigating oversupply

A correct reading of this should be that having triggered cost-based competition by deploying the world’s first 18,000 TEU vessel, Maersk has thereby revised its erstwhile strategy which was focused on preempting the shipping market and maintaining its status as the industry’s leader. As Maersk’s cost leadership strategy has started the craze among its competing carriers for ordering ultralarge vessels and thereby instigated an oversupply in the global container shipping market, thus increasing the likelihood that the company will end up a victim of the cost-based competition. While Maersk has performed a leading role in changing the mode of competition in the global container shipping market, the company’s strategy has practically failed, in that the extreme cost-based competition has caused a depression in the shipping market that is the severest ever in history.

Strategy should be created for balancing demand and supply

For last several years, the global container shipping market has been involved in an extreme cost-based competition, which should be noted in that it has dragged the market through a bottomless depression. It takes spontaneous restructuring to safeguard the carriers’ interests in the current market which is dominated by shippers.

Especially, a restructuring shouldn’t stop at workforce reduction but has to be implemented with a view to achieving a significant balance of demand and supply by focusing on reducing vessel capacity and services and idling vessels.

Author: Jeon Hyeong-jin, Shipping Market Analysis Center Director
Source: KMI Shipping Market Trend Focus, No. 280