Well, after posting last article I realized that I must have mentioned the objectives of such kind of interpretation of our industry. Let us not mistake it for some scholarly and researched studies on the subject.
Out of curiosity, I happen to research for articles/postings/blogs etc., on internet for anything that could faintly explain the market model for container shipping industry. Interestingly net is flooded with statistics, market shares and various other studies (and lot of images) about container shipping industry, but for analysis or even slight mention of our market model. I found one of the more detailed and technical chapter on something close to this topic, but it was more academic than something that could be commonly understood.
And that precisely prompted me to write something that should be easy to comprehend, understand and most importantly open to debate and further exploration.
After receiving interesting feedback from the readers on ‘Market Model’ topic, I decided to further dwell into it adding more to the earlier perspectives. Application of ‘Competitive Theory’ to the industry, which I had decided earlier, will now be postponed for some other time.
Link for the earlier article published here on 23rd May; http://www.dailyshippingtimes.com/news-upload/upload/fullnews.php?fn_id=13990.
By and large we recognized that container shipping industry shares the attributes of Monopolistic Competition and Oligopoly market models. Further section of the article will dwell upon drawing parallels on the characteristics of the firms operating in the container shipping industry and the observed market models.
As is the trend in Monopolistic Competition, operators in the container shipping industry, buoyed by the economic profits, adds to the services/or create almost undifferentiated products thereby increasing a number of close-substitute products. One need not go further than the domestic market, where India -Europe/ME/FE/SEA tradelanes attracted players/services and capacity in equal terms, thus absolutely rendering it economically unprofitable in the short run. Situation as is prevailing today whereby demand in response to the various factors fails to keep up with the increase in supply, eventually ends up financially damaging the players.
To certain extent, this leaves no further incentive for additional firms to enter and also causes the weak players to exit in the long run. In the present context, continued global economic downturn and no immediate recovery in sight with issues like BREXIT looming large (hopefully this will have its result by the time this article is published), there is a little hope of shipping volumes turning north for any Country/region, at least in the immediate short term. Many of the small players (read NVOCCs), who competed with the main liners on certain short haul routes had to exit the industry finding it difficult to contain their slow responding costs.
On the hindsight observations suggest that such period is expected to last long for ‘derived industry’ like ours, which is highly dependent on the international trend and global economic factors.
However, theoretically, this is expected to turn positive in the long run leaving the industry with fewer substitute offerings and an expanded share of total demand. It is left to be seen then amongst the current players who will be able to sustain this rough tide.
Exception in limited form applies to the firms, who build up certain aspects of product differentiation such that other firms find it difficult to duplicate over time. One of the citations can be the popularly acclaimed user interface of mega carrier Maersk, who apparently has technologically far more advance system bundled with impeccable services schedules, appealing to the trade. Having said that such differentiation though build up the brand and ensure its positioning, it really cannot insulate the firm from competitive market nature.
At the most it gives such firm a slight but long advantage over the followers/imitators. In our industry, it provides position at the top of the customers’ choice of carriers.
That’s it, ironically.
As in Oligopoly market, the most prominent barrier to entry for the new firms in container shipping industry is ‘Economies of scale’. Large shipping lines have sufficient sales and market share to achieve the economies of scale, whereas new firms have such a small market share that they find it difficult to compete, ending up being with high operational and financial costs challenging their survival.
Fixed assets and Capital cost being the most important factor of expenditures followed by investments in personnel.
Oligopolistic firms tend to grow through mergers. This feature has exactly been manifested in our Industry in the recent period.
Widely known mergers of recent times such as CMA-APL, COSCO-CSCL and speculations about impending HL-UASC are few of the examples of this strategy. One must understand that the merging or combining of these competing firms is not only to increase the market share, but in turn allowing the new firm to achieve greater economies of scale by rationalization and services optimization.
Such prominent Oligopoly behavior of merger and combining is not new to the container shipping industry. In the recent past – almost a decade back – spate of such activities has helped carriers to consolidate their positions and offerings, matching the capacity with the demand. After a comfortable period of such absolute fit, increasing volume and the economic profit attracted many new players to the industry, as naturally the trend goes. But that set the vicious cycle of over-crowding, leading to unavoidable and unpleasant price-war with introduction of close-substituted services and small-size operators offering excessive capacity on the certain short haul routes, the phenomena which has been dominating the trade for some time. Interestingly the unpleasant professional ferociousness’ starts with the short haul routes gradually moving to the long haul and eventually rendering the hitherto attractive economic profit into unattractive proposition. Thus, starts the exit of small-size operators, rationalization of services, mergers and acquisitions.
It is thus a little surprise that this cycle has a tendency to periodically repeat itself, unless demand keeps progressing positively and linearly with the supply. However, like the very nature of ocean, industry has rarely experienced calmness for a prolonged period and being extremely susceptible to international factors, expectation of this kind would be highly optimistic. In my limited observations rarely there is any better example than container shipping industry, which has built monopolistic competition characteristics in a perfectly oligopolistic persona of the market model.