Transportation & Logistics Analysis

States come to the rescue of ''their'' shipping companies

June 02 2020

Once again, a certain number of states have decided to provide regular line container shipping companies with financial aid. Some protest that this is an intolerable breach of free market rules. But it is also a matter of defending key assets.

The government of South Korea granted emergency aid totalling $378 million to Korean shipping company Hyundai Merchant Marine. Taiwan did the same by providing $1 billion to ease the difficulties of Yang Ming Marine Transport Corporation and Evergreen Marine Corporation (EMC). And then there is CMA CGM which was given a €1.05 billion loan 70% guaranteed by the French state. Governments are mobilizing to rescue shipping companies which have taken the full brunt of the virtual paralysis of world trade which occurred when the coronavirus crisis was at its height.

A structurally cyclical business

The problem is not a new one. Like air transport, which operates according to a quite similar cyclical dynamic, regular line shipping is confronted with endemic difficulties which result in states intervening in its affairs directly or otherwise.

What is the explanation? We could point to the "democratization" of modern transport with its deflationist effect on transport costs, along with strong growth in cargo volumes. Older industry hands with tell you with a touch of nostalgia that the era of "real profitability" disappeared with the "good old days" of conventional general cargo shipping and the rise to domination of containerization. Others will talk about markets on which de facto monopolies were maintained for a time after decolonization.

A key instrument of state power

We could also point to the territorial ambitions of certain states and the egos of certain captains of industry. The shipping economy has always been fundamentally a hybrid creation, a mix between the prerogatives of the state and business dynasties, a world of privateers and pirates. This presentation is deliberately exaggerated, but it is true. Business and the higher interests of states have always gone together in line with changing economic and geostrategic situations. The only certainty is that, on the international stage, whatever the period of history, a state's control over a merchant fleet (let us forget about flags, which today have little significance except as a means of tax optimisation) has always represented more of an advantage than a handicap.

This equation, which mixes an industry with heavy capital investment needs and little flexibility, low long-term profitability and a high level of exposure to political and climatic risk, results in a management system which is sometimes 100% private and sometimes involves the company being used by a state as an instrument of its expansion, "whatever it costs" to borrow a phrase from French president Emmanuel Macron.

For all modern companies, competition is undeniably a motor for continuing improvement of processes and quality. No Top Ten shipping company can be considered a pure public service operator in the way it operates. All use largely the same yield management tools and manage their businesses in real time on the basis of their operating results.

Although market economy rules apply, the political dimension has never completely disappeared and has even grown as a result of globalisation. China first decided to merge its biggest national shipping groups, Cosco and China Shipping, and then, three years later, Cosco acquired OOCL. The new giant, which is looking to occupy the number one position in the shipping top ten, is clearly acting as the arm of the Chinese state, which is looking to consolidate its maritime empire on all the seas of the world. As part of the same alliance, CMA CGM is clearly involved in this drive even if it maintains its own DNA and its French nationality. The exercise is a hazardous one, however, in the current period when public opinions are mistrustful of China.

Maersk chief executive Soren Skou has not tried to hide his anger over these public sector financial interventions which he sees as a serious distortion of competition. But he is doubtless forgetting a little quickly that, if Maersk itself is the giant it is today, it is partly thanks to the absorption of American group SeaLand by AP Moller-Maersk some 20 years ago with friendly assistance from the administration of George Bush Senior…

Behind the shipping companies' "shop windows", the states are clearly present, directly or indirectly, in their long-term strategies, investment decisions and now their cashflow difficulties. The coronavirus epidemic has made this necessary.

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Expert in Ocean shipping for 25 years, Jerome puts all his knowledge of the industry to contribution for Upply. Ship captain at heart, he has written the English-French Lexicon of Containerized Shipping (Paris: CELSE, 2001).
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