Historically, shipping has been a highly unregulated industry. Many of its segments are very fragmented, both on the ownership and the charterers’ side, while political events tend to have an outsize effect on markets and trade routes. And because the industry operates vessels far at sea, often unseen by the people making the commercial or operational decisions, transparency and visibility are not always easy to achieve.
Complicating this scenario is the fact that tramp shipping is a niche of its own. Whereas industrial bulk shipping concerns bulk shipping that is embedded in industrial relations – either through the industrial shippers’ direct ownership of vessels or through purpose-built and tailored transportation – tramp shipping operates in the same way as a taxi or ride-sharing service: competing for customers and serving the fluctuating demands of the market.
Geographically, tramp shipping consists in principle of all accessible oceans and reachable ports but is further marked by two distinct characteristics.
First – in contrast to land-based transportation – vessels do not have a physical base from which they operate. The second distinguishing feature of tramp shipping is its costly assets, making entry barriers extremely high (a new medium-sized product tanker vessel can cost $30-40m while a large crude oil tanker now exceeds $100m.)
Demand calculations are also highly problematic: it often takes between 18-36 months to contract and build a new vessel, so increasing demand cannot be met by a rapid response of additional supply. And when demand for transportation falls for whatever reason, owners are left with excess supply in terms of tonnage on the water.
Tramp shipping strategy and its implementation hence require high degrees of resilience and agility. In an age of ever-increasing market upheaval and uncertainty (think of the disruption GenAI is wreaking in many sectors, including the broader transport and logistics industry) and the mounting challenges it presents for regulators, it has some key lessons for businesses facing similar threats.
Make sure that the organizational design allows the business to exploit the information and insights it generates.
The organizational structure of the company must reflect the characteristics of the underlying business. There will be trade-offs between the need for agility and speed of decision-making versus safety, for example.
Organizational design must also reflect the need for knowledge-sharing at different levels. In a trading platform-style company, information on volumes and levels and their trends in the market will be key information in determining when it’s a good time to sell into a rising market or to take advantage of market weakness to secure good assets at lower prices.
Companies also have to make decisions regarding the age of their physical assets (in the case of shipping, the age range of their fleets). It requires a different technical and operational skillset to operate a new or modern asset, compared to one that is five to 15 years old (and an entirely different approach again with even older assets, where the demolition value and scrap prices will be an important feature in disposal decisions). Much key information will concern opportunities to reduce marginal costs and secure better utilization of assets.
Make sure that the organizational design allows the business to exploit the information and insights it generates.
“Maersk Line embarked on radical change by breaking up the company’s conglomerate structure to ensure maximum agility and the ability to adjust rapidly to the expected changes in its competitive landscape.”
In a time of rapid technological change and with the ever-present threat of new competitors, it rests with senior management and the board of directors to identify the key strategic must-wins for the company.
Strategic challenges could range from being prepared for digitalization to meeting and staying on top of the increased regulation of the company’s environmental and societal impact (and how not just to meet the formal requirements but how to be regarded as an employer with the ability to attract top talent). Increasingly, you need to monitor potential threats from players outside the traditional industry, such as Ali Baba and Amazon.
Many businesses will think they simply do not have the size to attract the kind of talent required to meet the challenges posed by rapid technological change – but their competitors will have already invested significant resources in being leaders and have adopted many of the features of private equity and Silicon Valley to drive innovation. Maersk Line is a great example from the shipping industry. It embarked on radical change by breaking up the company’s conglomerate structure to ensure maximum agility and the ability to adjust rapidly to the expected changes in its competitive landscape.
Identify the key strategic challenges, assess the gaps in the company’s corporate structure and competencies, and consider how best to fill them.
In shipping, financialization (the process of making profits through financial channels instead of trade and commodity production) has led to more efficient markets, competitive freights, and, at times, bumper profits for the best-managed companies.
Another trend has been increased specialization, where even large companies outsource hitherto important parts of the value chain to service providers such as crew managers. (Today, approximately 20% of the world fleet is managed by third-party ship managers. The distance from the boardroom to the bridge has never been farther.)
But this comes with the loss of intimate knowledge of the actual operations onboard the ships; depriving owners and operators of the ability to engage and motivate crews when addressing operational challenges. (Increased fuel efficiency is one important challenge where increasingly reliable data can be combined with motivated crews to deliver superior results.)
In shipping, the specialization of the modern operator, where the company can choose which risks to take (and outsource pretty much everything else), has proven incredibly competitive. But newer technology and cheaper data connections can make it worthwhile to bring some outsourced functions in-house again: it could be advantageous to build a stronger in-house technical department and take over certain functions yourself.
It can be risky to start in a new segment, but an overly cautious approach all too often turns out to be a self-fulfilling prophecy.
A classic pitfall is to expand into a new segment and be too careful. In shipping, many operators have started and succeeded in handy size (a medium-sized bulk carrier with a deadweight tonnage (DWT) of 24,000-35,000 deadweight tonnes) or supramax (a bulk carrier with a DWT of 50,000-60,000), then wanted to go into panamax (ships that can carry 70,000-80,000 metric tonnes of bulk cargo) in a controlled and conservative manner. This typically means they pick a small team from their existing organization (instead of picking a few strong specialists from the outside), which often leads to an ultra-cautious approach to finding cargo and vessels. This results in too little activity, which in turn leads to a substandard chartering performance compared to the index. Too little activity also means that adverse outcomes due to weather or pure bad luck are much harder to absorb.
It can be risky to start in a new segment, but an overly cautious approach all too often turns out to be a self-fulfilling prophecy. It can require too much attention from senior management and become an unnecessary drain on the company’s resources both in terms of management attention and cash flow.
Another oft-repeated scenario seen in the tramp-shipping sector is how one or two years of success can lead to false confidence. Companies enjoy success for a multitude of reasons: hard work, smarts, insights, and the right positioning for market changes. Well-run companies occasionally enjoy windfall profits because of their positioning and hard work but tend to put too much emphasis on their ability to predict market movements – and end up taking too much risk through misplaced faith in their own abilities.
Don’t assume that what got you here will get you there – continuously monitor trends in the market and try to distinguish among the various reasons for your success, so you know what is down to good strategy and what you owe to pure serendipity.
This article is based on the e-book Strategy and Business Models in Tramp Shipping. From financialization to digitalization by Peter Borup and Martin Jes Iversen
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