Cargo ship.

A look at the logistics of making maritime shipping more profitable

Two ASU supply chain experts are starting a conversation about improving the competitive landscape of the maritime shipping industry.

By Jennifer Daack Woolson

The Arizona desert might seem like an unusual place to study maritime shipping. But for Assistant Professor of Supply Chain Management Mikaella Polyviou, who grew up on the island of Cyprus in the Mediterranean, and Assistant Professor of Supply Chain Management Robert Wiedmer, who grew up in Rostock, Germany, a port town on the Baltic Sea, it's the perfect fit.

They believe supply chain management discussions in academia overlook maritime shipping — a huge mistake given its prevalence. The sea carries roughly 80% of international trade in goods, Wiedmer explains, so it's essential to understand how the industry works to help shipping companies of all sizes see increased profits. Their paper, "Does Global Supply Chain Integration Payoff? The Case of Maritime Shipping Firms," was published recently in the Journal of Business Logistics.

In combination with integration, the pair and co-author John-Patrick Paraskevas, assistant professor of supply chain management at the University of Tennessee Knoxville's Haslam College of Business, were also interested in understanding how recent concentration in the industry affects profitability. The top 20 carriers dominate approximately 90% of the maritime shipping market — with the four largest carriers controlling more than half of the global container shipping capacity. That consolidation has shoved many of the industry's smaller players out of business.

That balance of power can affect pricing — not just of a shipping container from China to California, but also the price of food, technology, and other consumer goods you might buy every week. That was evident during 2021 at the COVID-19 pandemic's peak, Wiedmer says. Shipping companies charged around $20,000 for a 40-foot container from China to the United States, typically costing $2,000 to $5,000.

A look into integration

The paper asked several critical questions about how integration and assets affect profitability. Shipping carriers typically integrate vertically by offering more supply chain services such as port services and trucking or horizontally by acquiring another shipping company, offering more routes, or expanding to more countries.

In terms of assets, carriers can either lease assets or buy them. The latter can be risky because assets such as ships are costly and can take several years from order to delivery. During that lead time, a company might find that the economic environment has shifted from boom to bust. Now, they not only don't need the ship but can no longer afford it.

So, what's the ideal balance of integration and assets? Polyviou and Wiedmer found that it depends on how you manage your assets and whether horizontal or vertical integration suits a company.

"In straightforward terms," says Polyviou, "the larger you are, the better, and the more investments and renewals you make in your existing assets, the better." That finding made them wonder: Where does that break? At what point is big too big?

They found that the larger a company is, the more it should stick to what it does best. "The findings show that the more assets you have in your portfolio, the less you should integrate either vertically or horizontally," Polyviou says. Maritime shipping is such a capital-intensive sector that it can be difficult for large companies to manage their current portfolio of assets. As a result, straying from that focus can reduce a company's profitability.

Asset management can have a positive effect when companies invest in new or renewing their assets in times of high business confidence. Wiedmer equates this asset acquisition to renovating your existing house to ensure it has the latest technology or a new roof. Maritime shipping companies acquiring new business sectors must invest in the equipment or updates that will allow them to succeed.

Taking the long view

It's also important not to expect immediate results. Polyviou points to Maersk, the world's largest maritime shipping firm. The carrier wants to become "the global integrator" by providing global supply chain solutions — moving shipping containers from port to port and shipping that same product directly to your door.

She says her team was surprised that integrating segments like that hasn't improved the profitability of shipping carriers. "Specifically with logistics," she says, "we found that the larger you are if you start integrating into logistics activities, that can downgrade your profitability."

Shipping carriers know how to put cargo on a ship and ship it from A to B, Wiedmer adds. But that doesn't necessarily mean that if those companies integrate, they'll immediately be more profitable. "That sounds like a good move," he says. "But it might hurt profitability."

So why do it? Polyviou speculates that Maersk's and others’ moves are helping the carriers provide better service and possibly diminishing competition. Although they're not seeing positive results today, it might benefit once the companies learn how to manage the additional activities better in a few years.

Making waves in the industry

Wiedmer sums up the goal of their research as starting a conversation about the state of the maritime shipping industry. "Overall, we hope we create awareness among smaller shipping companies, policymakers, and in the industry, in general, to understand how competition is increased — or, as we've seen in recent years, diminished — and make sure we see a better competitive landscape in the industry."

He adds that he and his co-authors believe that the recommendations from this paper can help provide insights for smaller shipping companies so they can take the proper steps regarding their integration strategy and learn how to manage their assets effectively.

The hope is that this research in the desert could make some waves.

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