Bertrand Chan, CEO at Global Shipping Business Network.
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What was once underappreciated and invisible, the shipping sector has become the zeitgeist of our post-Covid era. With a faltering journey for the shipping industry in 2021, there have been countless articles and predictions by pundits on when and how this sector will go back to normal. Consumers have also learned about the shipping sector the hard way, with the congestions in the ports of Long Beach and LA standing in the way of Christmas. The Ever Given container ship was a popular costume for last year’s Halloween.
Containerization has significantly reduced the cost of moving goods, which has arguably contributed to the growth of the world economy by supporting global trade. Yet, an unintended consequence of this focus on cost has made the sector fragile and unable to cope with the historic shock in demand and the congestions in the supply chain. Another force impacting the resilience of the sector is its low level of digitization. It’s a wonder how the shipping sector can handle the current disruptions while reliant on paper, emails and EDIs.
As we tick off the Greek alphabet of Covid variants, terminal operations are disrupted by virus flare-ups, which exacerbate the uncertainty in the system. As a result, shippers are currently facing the twin challenges of higher costs and less reliable services.
The modern iteration of the shipping sector was born following the introduction of the shipping container in 1956. Today the sector is merely an adolescent, and now it faces new challenges as it enters adulthood.
Resiliency is the new silver bullet, but how should one implement it?
A common topic on most investor calls today is the challenge of supply chain risk. In response, some retailers in the U.S. have taken the initiative to charter their own ships or to repurpose dry bulk ships to give them guaranteed capacity. In theory, this should provide them with a more resilient supply chain.
As any MBA student in MIT’s Sloan School of Management’s famous “Beer Game” can attest, managing supply chains in any environment is very challenging. Compound the bullwhip effect with managing ships, and some organizations might find themselves biting off more than they can chew. Rather than insourcing supply chain management, strengthening their commercial relationships with their logistics partners might be a better long-term strategy.
The interesting and potentially most impactful development from this crisis is the willingness for shippers and shipping lines to enter into enforceable agreements. Prior to Covid-19, shippers would often break contracts and go with the cheapest shipping line of the moment. As a result, shipping lines would rely on overbooking their ships to ensure a certain level of utilization. Shippers would find out after the ship had left that their containers were not loaded on the ship, which further incentivized shippers to break contracts. This vicious cycle would self-perpetuate. However, we are seeing shipping lines and shippers enter long-term, enforceable contracts, where both sides are incentivized to invest, make the supply chain more resilient and break the cycle.
Perhaps a sign of times, the actions — which may have the most impact in solving the bottlenecks at the ports of Long Beach and LA — came from a Twitter thread and not an executive order. The CEO of a digital freight forwarder took to Twitter to propose a simple solution to reduce the bottleneck in Long Beach: stack containers four high instead of the prevalent two-high stacks. Within 24 hours, the mayor of Long Beach implemented the change.
With an already stretched shipping sector, perhaps this is the kind of bold thinking that is needed to get it back on the front foot. Shipping lines already recognize the role that digital transformation can play; the question is how it can be harnessed to move beyond cost-based models and toward greater resilience.
Three Steps To Adulthood
In my view, three steps are needed for the shipping sector to enter into adulthood: regulation, ecosystem and technology infrastructure.
For the shipping sector to meaningfully change, policymakers must provide legal frameworks allowing for digitized shipping. Electronic-based records rules have now been adopted in Singapore and Bahrain, which will promote the adoption of electronic bills of lading, allowing for a paperless, efficient system.
China’s 14th five-year plan is promoting the use of technology to enable digital transformation for industries. Its Ministry of Transport is pushing for the trade ecosystem in China to adopt blockchain technology to improve the customer experience of shippers, especially when it comes to making cross-border e-commerce paperless. Such government-led initiatives are critical to driving adoption in a sector that historically has been reluctant to change.
Additionally, change cannot be accomplished without involving the expansive ecosystem of shipping lines, terminal operators, freight forwarders, customs and banks. They are all ultimately responsible for the services that enable global trade. Right now, there is a lot of confusion and angst about the impact of digitization on the business model of those organizations. However, as more participants realize the importance of value creation and resilience, they will find a better way of collaborating.
Finally, venture capital has seen a record number of liquidity events lately. In 2021, the value created by U.S.-based venture-backed companies for its shareholders has surpassed half a trillion dollars for the first time ever (paywall). Storied venture capitalists such as Andreesen Horowitz are now talking about the digital transformation of the supply chain.
The current crisis has highlighted the importance of the shipping sector and the potential impact of digital transformation. Logistics technology, or logtech, is becoming an attractive investment area, but what’s missing is an industry-wide digital infrastructure to allow startups to build on top to solve the problems of the shipping sector. Logtech companies need their version of AWS or Azure to facilitate and accelerate this transformation.
The good news is, things are evolving rapidly, and blockchain-enabled digital infrastructure platforms are coming to support a thriving ecosystem in the shipping sector. With this, we hope to see the coming of age for the shipping sector.
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