Consolidation and the alliance shuffle: what could it mean for shippers STEVE SAXON TPM ASIA, OCTOBER 2016
The voice of the shipper Service does not meet the defined transit standards This is a mess to say the least (related to chassis). From shortages of chassis at ports to IPI points, it s certainly an issue we need transparency much more accurate and timely information on arrival, berthing, and container availability Yet, shippers benefit from $23B in lower rates Communication gaps and inefficient coordination throughout the port ecosystem There s nobody to talk to While slow steaming has added some days to the chain, the bigger problem has been congestion from VSAs, connection problems at the terminals. I think it is unfair that everyone blames us for the rates. I am never the one pushing rates. That always comes from them McKinsey & Company 2
So, what do shippers want? It s not rocket science Full transparency: where is my cargo and when will it arrive and be available Online systems for booking and transparency and someone to talk to when things go wrong Choice of products: fast and reliable for my high priority cargoes; cheaper and I accept less reliable for others What s the impact of alliances and consolidation on these wants? Multiple providers to allow me to split carriage: in case of the worst End-to-end service when I want it Competitive but stable pricing to help me meet my procurement KPIs and improve my supply chain cost McKinsey & Company 3
Alliance shuffles nothing new 1996 2017 Maersk Sea-Land MSC 2M 1 2M Norasia HMM CKYHE CMA COSCO K Line Yang Ming CKY CKYH O3 2 OA Hanjin Choyang DSR-Senator CSCL ZIM Evergreen Lloyd-Triestino G6 TA P&O Hapag-Lloyd NYK NOL APL MOL OOCL MISC Nedlloyd Grand Global New World 1 HMM not yet confirmed 2 APL to merge wtih CMA CGM and assume completion of UASC-Hapag SOURCE: Alphaliner, McKinsey McKinsey & Company
Hard to argue alliances have stabilised the industry CCFI Composite Freight Rate index 1,900 1,800 1,700 1,600 1,500 1,00 1,300 1,200 1,100 1,000 900 800 700 600 500 0 05 06 07 08 09 10 11 12 13 1 15 16 SOURCE: Clarksons McKinsey & Company 5
New alliance formation The Alliance 2M Ocean Alliance 2 1 Carriers without alliance commitment, but many rumours 1 Acquired by CMA CGM 2 Merging with Hapag-Lloyd SOURCE: Press releases McKinsey & Company 6
How do alliances help shippers? first views for discussion Impact of: Alliance Right choice of routes, ideally direct, for my cargoes Full transparency: where is my cargo and when will it arrive and be available Online systems for booking and transparency and someone to talk to when things go wrong Choice of products: fast and reliable for my high priority cargoes; cheaper and I accept less reliable for others Multiple providers to allow me to split carriage: in case of the worst End-to-end service when I want it Competitive but stable pricing to help me meet my procurement KPIs and improve my supply chain cost Greater breadth of services through VSAs More complex: box can be on one of many vessels, arrival at many terminals Alliances speed commoditisation Alliances keep smaller carriers in the game No impact: carriers organise inland separately Smaller carriers staying in the game keeps prices low McKinsey & Company 7
The industry has been concentrating for many years 100% = 5 12 20 million TEU Top 5 35% 6% 55% 2 Next 5 17% 18% 16% Rest 8% 36% 29% 2000 08 2016 1 1 As of Oct '16 2 Includes Hapag-Lloyd and UASC merged capacity SOURCE: Alphaliner McKinsey & Company 8
Massive value destruction Average ROIC 1 Average WACC 2 ROIC excl. goodwill % 18 16 1 12 10 8 6 2 USD 8 billion in value destroyed over the last years 3 0 1990 1995 2000 2005 2010 2015 1 Weighted average ROIC of Maersk, OOCL, MOL, Kawasaki Kisen, Evergreen Marine, RCL, Wan Hai, NYK, HMM, Hanjin and Misc Berhad. Leases are not capitalized 2 Average WACC of Maersk; Wan Hai; MISC Berhad; COSCO; RCL and CSCL. Cost of equity based on CAPM methodology using risk free rate of.5%, MRP of 5% and 0.9 asset beta. Cost of debt based on risk free rate plus credit spread based on respective credit rating 3 Estiamte for the whole industry, based on extrapolation from the players in the sample based on market share SOURCE: CPAT, Capital IQ and team analysis McKinsey & Company 9
A spate of recent mergers will not be the last Total fleet, 2013 000 TEU Market share Total fleet, 2016 Million TEU Market share M&A announced year 2.6 16 3.0 16 2.2 1 2.7 1 1. 9 2. 1 9 2015 0.7 5 1.6 5 2015 0.7 5 1.5 2 5 201, 2016 0.9 201 Bankrupt 2016 0.5 3 3 1 Proposed 2 HL merger with CSAV has completed, while UASC deal is still waiting for approval SOURCE: Alphaliner McKinsey & Company 10
Are clear returns to scale Operating profit margin %, 2015 10 8 6 2 0-2 - -6-8 0 Wan Hai OOCL K Line Niche focus on specific routes Hanjin MOL NYK APL HMM CSCL Hapag-Lloyd COSCO CMA CGM Global scale and reach Maersk 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Operators with large size of asset base and wide spread commercial network Operators with focus on niche/less competitive routes Niche routes are under pressure as the advantage is short term Total capacity, Million TEUs, Jan 2016 SOURCE: Alphaliner; Company annual reports and team analysis McKinsey & Company 11
Substantial synergies in container line mergers Synergies Combined cost base Synergies realized in previous mergers USD millions, as announced Share of combined cost base NOL/ APL (1997) 180 2,920 6.2% Maersk/ P&O (2005) 00-600 18,10 2.2-3.3% Hapag-Lloyd/ CP (2005) 230-300 7,971 2.9-3.8% Hapag-Lloyd/ CSAV (201) 00 11,955 3.3% SOURCE: Press announcements McKinsey & Company 12
Market concentration correlates with industry profitability Average profitability 1 EBIT margin 16 1 ROUGH ESTIMATES 12 Cruises 10 8 6 Contract Logistics Forwarding US Airlines EU Airlines Int l Express Dom. Express US Top 3 market share increased 2 Container Shipping from ~27% to ~36% during Bulk Shipping the past 10 years. 0 0 5 10 15 20 25 30 35 0 5 50 55 60 65 70 75 80 85 90 95 100 Market share top 3 players 2 1 2011 to 2015 2 Market share for 2015 except Int l express for 201 SOURCE: McKinsey analysis based on Transport Intelligence, Drewry, Alphaliner, Bloomberg, company reports McKinsey & Company 13
How does consolidation help shippers? for discussion Impact of: Alliance Consolidation Right choice of routes, ideally direct, for my cargoes Larger carriers serve more routes Full transparency: where is my cargo and when will it arrive and be available Online systems for booking and transparency and someone to talk to when things go wrong Larger carriers can and do invest more in systems and digital Choice of products: fast and reliable for my high priority cargoes; cheaper and I accept less reliable for others Larger carriers have enough scale to differentiate products Multiple providers to allow me to split carriage: in case of the worst Too big to fail? End-to-end service when I want it Larger carriers have enough scale to offer range of inland Competitive but stable pricing to help me meet my procurement KPIs and improve my supply chain cost? But does consolidation risk leading to market power? McKinsey & Company 1