New global supply chain principles



Professor Jean-Paul Rodrigue, Department of Global Studies & Geography, Hofstra University, New York, USA


Grandma’s shipping market

Maritime shipping and port operations are both facing economic and commercial changes in the post-recession era. From strategic changes in trade flows to the operational fickleness of supply chains, maritime shipping has shown a propensity to adapt by capturing new commercial opportunities. In the previous environment in which international trade was continuously growing in terms of volumes and distances travelled, and where additional capacity was constantly required, the principles followed by the industry (grandma’s shipping market) were relatively straightforward: ships and terminals needed to be built to increase capacity and expand economies of scale. Embracing this trend, shipping companies, terminal operators and even the financial sector (such as sovereign wealth funds) expanded their existing portfolios through investments, mergers, acquisitions, joint ventures and alliances. Maritime shipping networks were organised to maximise the usage of ship and port assets in view of the global distribution of demand. There was also ample capital provided by financial institutions to fund the expansion of an industry content in capturing the low hanging fruits of ongoing globalisation.

Questioning grandma’s sanity

Since the financial crisis of 2008-09, the port and shipping environment has substantially changed, often to the dismay of the industry. Overall positive long term growth prospects have been replaced by uncertainty and even rationalisation in some markets. Conditions that propelled the growth of the industry are shifting and the foundations of its development may not be the same. Adding further capacity and promoting economies of scale were logical strategies in a growing market, but this has led to limited options for pricing power. For instance, for the last 10 years container shipping rates have declined by about 1.2% annually. There is something of a vicious cycle at play here. The decline of shipping rates further induces the application of economies of scale, which adds capacity that tends to depress rates. Pushing for economies of scale has also led to unintended consequences that can be labelled as ‘disadvantages of scale’. While larger ships help maritime shipping companies improve their operational costs, the externalities of such ships are mostly assumed by ports and inland distribution as well as the performance of the supply chains they service. Thus, there is a dichotomy between the actors who benefit from economies of scale and those that assume some of the negative impacts. Furthermore, the financialisation of the industry is shifting strategies and priorities since shipping and port assets are viewed as elements of investment portfolios. Long term strategic investments can be skewed by short or medium term time horizons of financial returns. All of the above collate to raise the question: to what extent are the core principles of global maritime shipping being challenged, and to what extent are new principles emerging?

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