Shipping Industry and Its Profitability.

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Table of Contents

Introduction
Macro-environmental Factors Analysis
Five Forces Analysis
Industry Life Cycle Analysis
Conclusion
References

Introduction

The primary means of international transportation is shipping. About 80% of cargo and 100% of hydrocarbons are transported through water (Halystead, 2009). This indicates the importance of the shipping industry. To investors, these statistics show the great potential that the industry has for growth and profitability. The industry serves the global market. The growth in the industry relies on the performance of other sectors of the economy such as production, retail and distribution (Halystead, 2009). These are the sectors that require a lot of transportation. This paper will analyze the shipping industry in terms of its growth and profitability. The aim of the analysis is to provide the necessary information that would help a potential investor to decide on whether to invest in the industry or not.

Macro-environmental Factors Analysis

The macro-environmental factors that affect the shipping industry include political, economic, environmental, social, technological and legal factors. These factors affect the shipping industry in the following ways. Political factors are associated with the relationships between countries. The political relationship is important since it determines the terms trade between countries. It is particularly important in the shipping industry since shipping involves international transportation. Currently, there is political stability in Western countries as well as parts of Asia. Thus the shipping companies are able to transport various consignments across the waters of politically stable countries with ease. This is due to availability of security (Halystead, 2009). However, political instability in East Africa has led to high cases of insecurity in the Indian Ocean. Shipping companies have had to pay ransoms as high as $30,000,000 to pirates in order to use the East African sea route. This has led to increased costs in the industry since the shipping companies have only two options (Halystead, 2009). They either pay the ransoms or use longer routes to connect to Asia. Efforts to reduce piracy in the region have been unsuccessful due to the lack of resources and commitment of the local governments to fight piracy.

Economic factors are the most important in the shipping industry. This is because the demand for shipping products depends on the performance of other industries in the world economy (Cheng & Chay, 2007). When the world economy is growing, the overall output will be high. This will lead to an increase in raw materials as well as finished products that are to be transported from one region to the other. In 2009, there was underperformance in the world economy. The growth rate was only 2.3% and this negatively affected the demand for shipping services (Cheng & Chay, 2007). Due to the dismal performance in the economy the demand for products such as crude oil and coal reduced by approximately 35% globally. This led to a great reduction in the demand for shipping services. The economic stimulus packages that have been used in response to the slow growth in the economy have changed the scenario in 2010. The rate of economic growth in 2010 is projected at 4.2% and a steady improvement is expected in the medium and long term (Cheng & Chay, 2007). This means that the global output is set to rise. Thus the demand for shipping services will rise as the economy improves. Currently, the major players in the industry such as Mearsk and United Parcel Services of America are recording over a 63% increase in revenue. This growth is mainly attributed to the steady improvement in the economy (Cheng & Chay, 2007).

The increased investments in port facilities especially in emerging economies will lead to high revenue in the long term (Kessides, Noll, & Benjamin, 2010). Most economies are investing in larger ports that are equipped with efficient cargo handling machines (Kessides, Noll, & Benjamin, 2010). This will help in improving efficiency and reducing costs in the industry (Managi, 2007). The lack of large oil storage capacities in developing countries presents a greater opportunities for oil transportation in the industry. This is because such countries will need a frequent supply of oil in order to satisfy their needs for the commodity.

Advancement in technology is likely to have positive impacts in the industry. The introduction of advanced communication technology such as the use of the internet will continue to improve efficiency in the industry. Currently, shipping firms have the opportunity to benefit from e-marketing through the use of the internet (Managi, 2007). E-marketing is effective in facilitating communication between shipping firms and their clients at low costs. The introduction of GPRS technology enables the firms in the industry to track their consignments during the transportation process. Thus they are able to ensure security for the goods being transported (Managi, 2007). They are also able to keep their clients updated on their progress with the transportation of the goods. The use of these technologies has helped to simplify operations in the industry and this translates to higher revenue (Cheng & Chay, 2007). However, the companies that manufacture the vessels are yet to develop better methods of production that can reduce the time required to build vessels. The vessel manufacturers cannot respond to increases in demand in the short term. Consequently, there is a backlog of orders for vessels that dates back to mid-2010. This means that the industry is characterized by low supply of vessels.

Social factors relate to the world’s demographic patterns. An increase in the world’s population means that there will be a higher demand for raw materials and finished goods. Thus there will be high demand for shipping services. This has made the highly populated regions such as India to be the most profitable routes in the shipping industry (Halystead, 2009). Africa has a high population growth rate of 3% and this will make it a profitable destination for shipping companies. The legal factors that affect the industry relate to the regulations on the condition of the vessels (Managi, 2007). Currently, the vessels are scraped at the age of 19 years. This period is relatively long and therefore limits the supply of new vessels.

Five Forces Analysis

Power of the Supplier

The industry is characterized by a large number of shipping companies against a small number of reputable vessel manufacturers. Consequently, the demand for the vessels is higher than their supply in the market. This can lead to an increase in the price of the vessels especially in the short term. The vessels used to transport goods do not have substitutes. This is because substituting them will mean engaging in a totally different line of transportation business such as air transportation. This means that the switching costs of the buyer are very high in the industry (Cheng & Chay, 2007). The manufacturers of the vessels also differentiate their products. This is because the vessels are usually made according to the specific needs of the shipping companies (Managi, 2007). These conditions give the suppliers a high bargaining power in the industry. The suppliers can use such powers to exploit the shipping companies through high costs of the vessels.

Power of the Buyer

The shipping industry mainly serves the global market (Cheng & Chay, 2007). This means that there is a high concentration of buyers in the industry. The cost of obtaining substitutes in the industry is high. This is because alternative transportation systems such as air transportation are more expensive. Besides, they might not be able to facilitate intercontinental transportation of goods. Due to the competition in the industry, there is a high level of product differentiation (Managi, 2007). Most of the goods transported are either finished goods or raw materials. Thus the costs of transporting them can be transferred to the end users. This means that the buyers’ profit margins are high. This analysis shows that the buyers in the industry have low bargaining power.

Threat of Substitute Products

The threat associated with substitute products in the industry is very little. This is because it is only air transportation that can substitute water transportation in transporting goods from one continent to the other. However, air transportation is more expensive and cannot handle heavy goods such as coal. Thus water transportation is the dominant means of international transportation and this reduces the threat of substitute products in the industry (Managi, 2007).

Threat of New Entrants

There is a low threat of new entrants in the industry due to the following reasons. First, investing in shipping business requires a lot of financial capital that is not easily available. Second, the incumbent firms enjoy high economies of scale. At least 60% of all the firms in the industry have overseas offices and this helps them to simplify their operations as they save costs (Managi, 2007). There is a high level of product differentiation thus even if new firms join the industry the competition for the market share will not be high.

The Intensity of Competitive Rivalry

There is intense competition in the industry due to the following reasons. First, there are a large number of competitors. The main players include Maersk, COSCO, Hapag-Lloyd, United Parcel Services of America and FedEx. There is no firm that has monopolistic powers in the market (Halystead, 2009). Thus the industry is not highly concentrated. Second, the industry is experiencing a slow growth rate. Thus the firms are competing for the market share.

Industry Life Cycle Analysis

Generic Strategies

Most companies in the industry are focusing on three main strategies in order to maintain their competitiveness. First, they are focusing on product differentiation. Each company is aiming at developing products that satisfy the specific needs of the clients in order to expand their market share. Second, the companies are focusing on cost reduction by simplifying their operations and improving efficiency (Cheng & Chay, 2007). Companies are mainly pursuing the cost leadership strategy in order to remain competitive.

Market Growth

The market is experiencing a moderate growth. In 2007 it had the highest growth rate of 8.4%. The world’s shipbuilding rate for the period was as high as 20%. The high growth is attributed to the drought in Australia that increased the importation of grains from South America (Halystead, 2009). It is also attributed to the increase in steel production in China. In 2008, the market’s growth rate fell to 7% due to the effects of the global financial crisis. In 2009 the growth rate fell further to 6%. However, as the world economy began to improve at the end of 2009, the growth rate has improved (Managi, 2007). Currently, the growth rate stands at 9%.

Number of Segments

The market has five main segments. The dry bulk category is the first segment of the market and it involves the transportation of solid raw materials such as coal, iron ore, steel and sand. Wet bulk is the second segment and it involves the transportation of crude oil, liquid gas and liquid chemicals. Containers form the third segment. It deals with the transportation of finished goods. The fourth segment involves warehousing of the goods being transported. The last segment involves investment in shipbuilding business.

The competition in the industry is intense. Most companies are able to record an increase in revenue. However, the growth in revenue is not attributed to the growth of the market. The increase in revenue is attributed to cost reduction measures and investments in other sectors such as the real estate industry (Cheng & Chay, 2007). Due to the competition in the market, firms are spending more on research and development in order to develop products that satisfy the needs of their customers. Most companies’ emphasis on process design relates to simplification of operations and improving efficiency. This analysis indicates that the shipping industry is at its maturity stage.

Conclusion

The macro-environmental factors such as advancement in communication technology, stable growth of world economy and increase in world population provide growth opportunities to the industry. The main threat in the industry includes piracy in the Indian Ocean. The five forces analysis indicates that the buyers have low bargaining power and the threat of new entrants and substitute products is low. However, the suppliers have high bargaining power. The industry life cycle analysis indicates that the shipping industry is at its maturity stage. These findings reveal that the future of the shipping industry is bright since there is room for growth. A company that is interested in succeeding in the industry can consider the following recommendations. First, they should focus on efficiency and cost reduction in order to improve their profitability (Cheng & Chay, 2007). This can be achieved through redesigning their operations. Second, the firms should focus on the needs of the customers (Cheng & Chay, 2007). This will help in developing relevant products that will lead to high revenue. Finally, the firms should explore new markets especially in emerging economies. This will help them in increase their market share and revenue (Cheng & Chay, 2007).

References

Cheng, E., & Chay, P. (2007). Measures of success factors of the quality management in the shipping industry. Martime Economics and Logistoics, vol. 9 (3) , 234-253.

Halystead, L. (2009). Shipping industry prepare for economic turnaround. Tampa Bay Business Journal, vol. 10 (3), 10-92.

Kessides, L., Noll, R., & Benjamin, N. (2010). Regionalising infrastructure reforms in developing countries. Economic Analysis and Policy, vol. 2(1) , 79-108.

Managi, S. (2007). Maritime shipping industry and productivity in Japan. Maritime Economics and logistics, vol. 9 (3) , 291-301.

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