A common refrain about the container shipping industry is that it has become highly commoditised. Analysts describing the prospects and nature of the industry, while discussing the challenges faced by the container shipping industry and its customers and stakeholders, often decry the trend of commoditisation as being one of the factors responsible for the deteriorating schedule reliability and customer service levels.
Simply put, the concept of commoditisation of any product refers to a situation where all competitors in the market start offering a standardised product with similar characteristics and uses, leading to a situation where every competitor’s product is identical.
This lack of differentiation leads to customers having no way or reason to select one manufacturer’s product over the others, making price the sole (or primary) parameter in the buying decision.
Under these circumstances, manufacturers will have to resort to lowering the prices of their products in order to entice customers to buy them.
Once a particular manufacturer has reduced its price, other manufacturers will be compelled to follow suit, failing which they will lose market share. Their product sales will start falling rapidly (since customers get a similar product at a lower price, they have absolutely no incentive to buy competitors’ products and thus pay more for a similar alternative).
In the case of services, however, given the inherent difference from tangible products, it is the process and mode of delivery of the service that will create the holistic customer experience and play an important role in the customers’ perception of the quality received in lieu of the price paid.
Given the intangible aspects and the element of subjectivity, it is relatively difficult for competitors to replicate a service that is available in the market, wherefore commoditisation of services is less common.
Commoditisation of the Container Shipping industry
Container shipping is unique in the sense that carriers essentially offer transportation services, execution of which is done by offering space on their vessels, as well as the use of their shipping containers (unless the cargo owner/ exporter has opted to use a shipper-owned container – which is not very common). Thus, what carriers offer their customer is a mix of intangible elements delivered by using physical assets.
Over the past several years, in response to market conditions and the competitive environment, container shipping has gradually been commoditised. The trend has gathered momentum since the late 2000s, when the massive influx of incoming capacity, coupled with recessionary pressures, compelled carriers to embark upon price wars and undercut competitors in their bid to retain market share and ensure reasonable utilisation levels for the incremental capacity that had entered the market.
Over the years since then, as carriers continued their quest for capacity and economies of scale and maintained the vessel upsizing and newbuild ordering spree, supply has generally outstripped demand.
Besides, shippers have shown reluctance to pay a premium for superior quality and service, as a consequence whereof carriers have reconfigured their product portfolio to offer standardised services at prices which are on par with what competitors are offering and aligned with what customers value and are willing to pay for.
Also, in response to wafer-thin margins, carriers started rigorously focussing on their cost base, with the objective of paring to the bone expenses that were not related to their core business or generated revenue. As a result, all the features and service elements which failed to materialise commensurate revenue were often discarded to provide a basic service which was sufficient to meet the customers’ primary requirements.
Attempts were also made to standardise the process and minimise exceptions as much as possible so that it could be managed smoothly with minimal effort, and also reducing complexity, resources utilised, and effort expended.
This industry-wide endeavour to rationalise costs, standardise the broad process, and increase efficiency led to all carriers offering similar products at comparable service levels – which further contributed to the spread of commoditisation.
Another interesting aspect is that certain trade lanes have been more susceptible to commoditisation than others. Trade lanes which have a profile matching the most common elements of the container industry are likely to be commoditised earlier and faster, i.e., where the assets and services needed to cater to the trade are typical ones, the probability and pace of commoditisation is far greater.
For example, dry containers are much more common than reefer containers (because the proportion of dry cargo is much higher, besides which they are cheaper to procure; hence, more container carriers can afford to invest in them rather than in the more expensive reefer containers). Therefore, on trades with a higher proportion of dry cargo, such as the Asia-Europe trade, more carriers will have more equipment, enabling them to mirror products offered by the competition, leading to the commoditisation of services.
On the other hand, in trades involving South America, which exports large quantities of fruits and agricultural products, the proportion of reefer cargo is higher than in most other trades. Therefore, to serve this trade, Carriers will first need to invest in the more expensive reefer containers, which could act as a barrier to entry for competition and hence moderate the pace of commoditisation (it must be emphasised that this factor will only slow the pace of commoditisation, and not halt it completely, because an increasing number of carriers are now investing in reefer containers.
So, a decade or so back, shipping companies like Maersk had a much higher inventory of reefer containers vis-a-vis competitors, providing them with a distinct competitive edge on such trades; competitors have in the last few years also purchase reefer containers, thereby enabling them to serve this trade effectively. The increased competition and consequent provision of similar services will, therefore, slowly lead to the commoditisation of container services in these trades as well).
This logic also holds for special equipment, such as flat racks, open tops, and tank containers, which only the bigger carriers would hold in sufficient quantities in their equipment pools. Therefore, in verticals like project cargo, where such equipment is more likely to be utilised, the bigger carriers can offer services that are, to some extent, differentiated.
A variant of this is geographically niche services, where companies look to start services connecting hitherto underserved regions.
This would include developing countries with high growth rates and ample scope for industrialisation. Examples are countries in East and West Africa, where operational challenges have thus far deterred carriers from running services.
Companies like Maersk and MSC, with the scale and wherewithal to tackle the operational and ground-level challenges, were better placed to design products connecting these countries with the rest of the world, something their competitors could not readily replicate.
This barrier to entry thus helped stem the tide of commoditisation initially. As in most other instances, though, the other bigger carriers (such as Hapag-Lloyd, CMA CGM, and COSCO), in their pursuit of new high-growth markets, have realised the potential of such niche trades and started offering services thereto, which once again inevitability led to commoditisation.
To summarise, the level of commoditisation depends on the commonality of the type of cargo to be transported and the equipment required, as well as the ease of serving the region/ country, the difficulties posed by which will delay the trend of containerisation until the competition is in a position to offer similar services.
Reasons for commoditisation of container services
Having understood the concept, the background and the prevalence thereof, let us now delve into the reasons for the commoditisation of container services.
1. Upsizing of vessels and excess capacity creating a demand-supply imbalance
Perhaps the biggest reason for the commoditisation of container shipping was the influx of capacity due to the ambitious fleet augmentation and upgradation initiatives programmes undertaken by almost all Carriers, which steadily eroded the very idea of product differentiation.
While Carriers until 2000s had their own strengths and niches that they operated in (such as Maersk and Evergreen being global carriers which offered multiple connections across all major trading routes or the likes of the now defunct Hanjin Shipping, which had a smaller fleet but controlled a lot of South Korean exports or regional carriers like RCL, whose focus of operations was a limited geographical area, often the intra-regional trades), the boom in global trade and the accompanying rapid growth of containerised transport meant that all Carriers started investing heavily in new tonnage to capture a larger share of the growing container transport segment.
Consequently, the growth in supply started exceeding demand for shipping services, and the supply-demand imbalance widened further with the recession in 2008-09 and in the subdued economic environment thereafter.
Left saddled with behemoths and strained by the pressure of ensuring adequate cargo to maximise utilisation of their expanded fleets, Carriers were left with little option other than to cut prices in order to get more cargo.
Since most global carriers now had ample amount of capacity and equipment, their competitive position was strengthened, and they embarked upon debilitating price wars to capture market share.
The result was that carriers gave up all attempts at differentiation and started offering standardised services and competing on price, contributing greatly to the rapid commoditisation of the container shipping market.
2. Low barriers to entry
Attracted by the growth and potential of the container shipping segment and aided by the relatively easy availability of ship finance in the 2000s, competition in the industry intensified.
The barriers to entry were low since carriers could start their own container shipping business with relatively fewer investments (even though vessels are extremely high-value assets and building an appropriate pool of containers can be expensive, which, combined with establishment and manpower costs, would necessitate massive CAPEX, Carriers could reduce the upfront investment using strategies such as chartering vessels instead of owning them, sell and lease-back options for vessels, leasing containers, appointing agents at destination countries rather than setting up own offices, serving only limited geographies where they had inherent advantages etc.) wherefore more carriers could offer container shipping services, of a level and quality comparable to that of existing players.
This created a situation where the number of product offerings increased, with a corresponding decrease in product variety/ diversity). Since carriers then had to compete on prices, container shipping was further commoditised.
3. Space-sharing agreements and Container alliances make differentiation difficult
Since the beginning of the 2000s, Carriers have been collaborating extensively through container alliances and slot-sharing agreements. This is done with the intent of offering wider geographical coverage than any single carrier could offer on its own, as well as increasing vessel utilisation levels, in a bid to optimise the asset turnover ratio and ROI of these expensive vessels. What this essentially entails is multiple carriers carrying their customers’ cargo on the same vessel.
So, while each carrier will market their services separately and try to sell them to customers as a unique product, in reality, since all carriers use the same vessel, they are, in essence, offering the same product.
Thus, carrier cooperation agreements lead to commoditisation.
4. Focus on short-term returns and survival rather than long-term strategy
Given the cut-throat nature of competition in the container shipping industry, shipping carriers are not in a position to take the long-term view or make decisions that will lead to sustainable growth in the future.
The intense struggle to retain volumes and grow at the expense of competitors has led to carriers focusing on short-term survival tactics, where the intent is to stay afloat until the industry cycle reverses and the uptick pushes freight rates into profit-making territory again.
This mindset impedes attempts to design differentiated products and instead makes carriers take a myopic approach and offer customers only the most elemental of services.
5. The quest for efficiency led to standardisation and, thus, loss of differentiation
The international shipping process is beset with complexities, with a multitude of variations to the process depending on the jurisdictions and commodities involved. Carriers are now attempting to standardise the transport process by reducing the number of exceptions allowed and mandating that their customers follow the same broad process (of course, with reasonable allowances made for logical reasons).
This standardisation has furthered the similarities in the services offered by various carriers, increasing the extent of commoditisation.
6. Flexibility: Carriers unwilling to be flexible regarding standard processes
In a bid to capture more business and differentiate themselves from the competition, Carriers would previously offer a certain degree of flexibility to customers in terms of late cut-offs, extended free time, dedicated customer service focal, etc.
Permitting this flexibility involved incurring additional expenses, which pushed the carriers’ cost base upwards and often could not be recovered from customers.
With the enhanced focus on rationalising costs, Carriers started adhering to their standard processes more stringently, thereby reducing the flexibility offered to individual customers. With processes becoming highly standardised across the industry, the level of commoditisation increased.
7. Lower slot costs enable carriers to compete on price
The rationale underlying the commissioning of bigger vessels was to reduce the slot costs per container, enabling the carrier to reduce operating costs and thus increase their operating margins or capture more business by passing on the savings to customers through lower rates.
This approach shifted the focus from service levels to freight rates, where carriers opted to leverage the reduced cost base to undercut competition, paving the way for commoditisation.
8. Slim margins and cost pressures
The pressure to compete on rates, in conjunction with the historically low margins, led carriers on a downward spiral, where wafer-thin margins were further depressed by price wars.
In response, carriers started eliminating non-revenue generating activities (costs for which could not be recovered from customers). Instead, they focused on offering basic standardised services, which lacked any differentiating features whatsoever.
An example is how carriers have invested in well-designed websites and apps and are slowly guiding smaller shippers and cargo owners towards using self-service or telesales channels instead of allocating a full-time sales or customer service representative.
The idea is to reduce manpower and instead create digital platforms which empower the customer to manage and track the booking himself.
9. Cargo owners (BCOs) are reluctant to pay premiums for superior quality of service or faster transit times
With the globalisation of manufacturing activity and dispersed supply chains becoming the norm, manufacturers and cargo owners are exporting and importing far more volumes than before. This translates into a massive surge in transport and procurement expenses, representing a significant cost element.
Due to subdued macroeconomic fundamentals, even manufacturers across industries are pressured to reduce costs. With shipping procurement spending representing a big proportion of their transport costs, BCOs give greater weightage to price while evaluating transport vendors. They are, therefore, open to contracting basic-level services at low rates.
This reluctance to pay a premium for a superior quality of service has lessened the imperative for carriers to offer differentiated services at higher prices, which in turn adds to the degree of commoditization.
10. Bigger vessels reduce the number of ports that they can call at, limiting options and, thus, differentiation
Apart from the surplus capacity and the pressure on freight rates that bigger vessels exert, there is another operational aspect of mega vessels that hinders product differentiation. By virtue of their bigger size and heavier weight, ULCCs require deeper draught to be able to call at a port.
Because draught is essentially a natural characteristic and dredging is effective only to a certain extent, there are a limited number of ports in each region which possess the draught necessary to accommodate mega vessels, which constricts the number of ports that a mega vessel can call, and in turn curtailing the number of direct port calls, effectively reducing the port-pair combinations / direct routing options that the carrier can offer to customers, thus leading to a commoditised service (where all carriers serve the same mega ports).
11. The “Hub and Spoke” model decreases the number of port-pair combinations/ direct services offered, lessening the differentiation between competing services
The limitations imposed by deep draught requirements that curtail the number of ports which mega vessels can serve have also led to the prevalence of the: hub and spoke” model, involving transhipment at mother ports, whereunder carriers deploy mega vessels to serve major ports in all regions and reduce the number of services to/from smaller ports (effectively consolidating in fewer big vessels the volumes that were hitherto carried by a greater number of smaller vessels).
Containers destined for smaller ports in the vicinity are then discharged at the transhipment port and then loaded onto feeder vessels, which can call the feeder ports in the vicinity.
Given that there is only a limited number of ports/terminals that can handle mega vessels, all carriers must, of necessity, confine their basic services (connecting the mother ports in the origin and destination regions) to the same ports, resulting in commoditisation.
12. Growing consolidation in the container shipping industry
The container shipping industry has witnessed numerous mergers and acquisitions over the past two decades, leaving the industry more consolidated than it was at the beginning of the century.
Bigger carriers have tried to build operational scale and geographical presence by growing both organically and inorganically, with smaller carriers who were unable to withstand competition being acquired by bigger carriers.
Post the rounds of consolidation and exits witnessed since 2000, there now exists a smaller number of bigger players (as opposed to a handful of bigger players, a few medium-sized players and a number of smaller players), each with the financial resources (especially in the post-covid environment) to operate at the global level even in an unprofitable environment.
With similar objectives and enough resources available to achieve those objectives, these dominant carriers offer a uniform level of services across most trades.
13. Products can be easily replicated by competitors, thereby eliminating the element of novelty and product differentiation
With little to prevent competitors from replicating any new service designed or innovation introduced by a particular carrier, the advantages of differentiation are short-lived.
Any innovation will instantly be mirrored by other industry players, thus negating the differentiating factor and commoditising the service.
14. Carriers have been focussing on basic ocean shipping services and moving away from landside/ other value-added services
While most Carriers have traditionally also had a freight forwarding or logistics arm, as well as investments in port assets (with some Carriers even investing in oil, airlines, supermarkets and rail companies), as the shipping markets receded from their highs in 2008, Carriers increasingly started focussing on their core container shipping business and divested non-core activities, including logistics and port assets.
Since product differentiation was primarily based on land-side activities, and Carriers were now confined to only offering basic shipping transport, they had little scope to offer services that were distinct from those offered by other market players, leading to the commoditisation of their primary business activity.
15. The democratisation of information and proliferation of digital forwarders and freight management platforms
Carriers have traditionally relied on manual rate sheets and emails to quote rates and share other pertinent information regarding sailing frequency and transit times. Cargo owners and freight forwarders, therefore, had to approach numerous Carriers to obtain quotes, which often took a few days, and could compare information only for carriers who reverted on time. Therefore, exporters often did not have complete visibility of the prevailing market rates, and decisions were generally made basis incomplete information.
Nowadays, with the extensive use of digital freight management tools and logistics technology, customers can retrieve in a few minutes rates offered by all carriers for any port pair combination and, therefore, immediately compare rates and service levels and make an informed decision.
This democratisation of information has meant that exporters have access to all the data required to objectively evaluate alternatives and select the one that best meets their requirements and at the optimal price.
Due to this, Carriers are forced to offer sharp rates in line with what is offered in the market to avoid losing the customer. Ultimately, this does degenerate into competing on prices, with other carrier/ service evaluation criteria being rendered secondary.
Future trends
While the container industry has become highly commoditised, the windfall profits earned in the post-COVID years have afforded Carriers a substantial financial cushion to create new sources of corporate and product differentiation. With the healthy cash flows, Carriers have deleveraged and strengthened their balance sheets and thereafter utilised the surplus funds to carve a niche for themselves, in line with their long-term strategic vision.
These attempts at rebranding themselves and building a new business model include:
Maersk’s strategy to position itself as an integrated logistics service provider by investing heavily to scale up its logistics capabilities across the globe and in different verticals, by acquiring strong regional players and also investing in assets, with the intent of becoming an end-to-end logistics services provider, rather primarily focussing on its traditional container shipping business.
Maersk has prioritised its growth in the logistics segment at the expense of its container shipping business, resulting in it losing its long-held position as the world’s largest container carrier to MSC (and an analysis of current order book suggesting that even CMA-CGM could overtake when their newbuilds are delivered).
MSC has taken the diametrically opposite approach, focussing extensively on building its fleet through acquiring vessels and also placing orders for new tonnage. MSC aggressively acquired tonnage during the peak of the supply chain disruptions in 2020 and has shown little signs that its appetite has whetted since then.
The magnitude of its fleet expansion has been such that it has left Maersk far behind in terms of operated capacity. MSC has also invested in logistics assets and acquisitions but on a smaller scale than Maersk. Looking at its strategy and the size of its fleet, it is quite conceivable that MSC will have to undercut prices to fill its vessels and offer an extensive network of services with similar service quality.
CMA CGM has taken the middle path and tried to strike a balance between the two contrasting approaches adopted by Maersk and MSC by investing in vessels and logistics capabilities alike. CMA CGM has both purchased and chartered vessels in recent years, as well as placed orders for new vessels. Its order book is of a scale that enables it to surpass Maersk and take the number 2 spot amongst container carriers.
In terms of logistics assets, it has targeted inorganic growth through the acquisition of global freight forwarders and local players as well. At the global level, it has acquired prominent freight forwarding companies like Ceva Logistics and Bollore. In contrast, on the local level or in niche segments, it has invested in companies such as Gefco, Ingram Micro, and Stellar Value Chain Solutions. Looking at its pattern of acquisitions, it is likely that the company will try to differentiate its services by offering end-to-end transport solutions.
Hapag Lloyd was one of the most highly leveraged companies prior to COVID-19. After the exceptional bull run in the post-COVID market, the company used its profits to retire existing debt, as well as invest in new tonnage, besides some investments in logistics and port assets. Hapag Lloyd has seen a turnaround of sorts, with the largely successful implementation of its multi-year global strategy.
The company’s stated approach to differentiate its products is to identify unmet customer needs (through customer surveys and face-to-face interviews) and then design premium solutions around those needs. Hapag Lloyd is focussing on high-value cargo (reefer commodities and special equipment such as flat racks and open-top containers) in its attempt to counter market commoditisation.
Overall, carriers are cognisant that the market has devolved into a highly commoditised one and are aware of the long-term consequences of this trend. They are, therefore, trying to counter this by devising appropriate corporate strategies and altering their business models to meet changed ground realities.
While the attempts at offering differentiated services and trying to position themselves apart from competition may or may not be successful, it is nonetheless evident that carriers are making concerted attempts to counter the trend of commoditisation.
Source: Marine Insight