TUNG WARNS AGAINST “CONSOLIDATION AND COMMODITIZATION”

TUNG WARNS AGAINST “CONSOLIDATION AND COMMODITIZATION”

TUNG WARNS AGAINST “CONSOLIDATION AND COMMODITIZATION”

   Consolidation among ocean carriers and the trend towards commoditization of service may eventually have a negative impact on shippers, C.C. Tung, chief executive officer of Orient Overseas Container Line, warned.
   Speaking at the JOC Transpacific Maritime Conference in Long Beach, Calif., Tung said the commoditization of containerized transportation will only serve to encourage further competition often at the expense of value added services. He predicted that, in a competitive environment where carriers compete on price alone, high levels of service will suffer.
   “As a capital intensive, cyclical, complex and unique industry, we should not and cannot allow the takeover by such commoditization which would inevitably lead to destructive competition followed by lower margins, lower returns and therefore lower investment,” he said. Tung urged shippers not to condone this process within the industry, since “any wholesale commoditization of the industry will undoubtedly lead to a lowering of service levels.”
   He said that carriers themselves may make the problem worse by engaging in mergers and takeovers.
   When driven by intense competition and the quest for scale, “carriers often look to one-off rapid growth opportunities,” Tung commented. Mergers and acquisitions offer the quickest means of achieving this jump in scale, and consolidation has become common within the ocean carrier industry over the past few years, he added.
   But Tung warned that the trend towards consolidation has created a spiral and further intensified competition and the need to achieve cost efficiencies.
   “In other words, carriers today are not only under pressure to achieve further cost reductions but also need to match the cost efficiency of the largest existing carrier group, whichever one it may be at the time,” he said. “The end result has been the inevitable decision, or perhaps irresistible temptation, to build, buy, and grow.”
   “In fact, if consolidation is coupled with commoditization, the outcome will in fact be less beneficial for all resulting as it does in lower returns, declining liquidity, lower investment    and less choice for the shipper,” Tung stressed. Commoditization singles out pricing as “the lone differentiation” between service providers. The process drives down prices and “removes all incentives for providers to improve service levels,” according to Tung.
   He said that carriers themselves can address the risk of commoditization, by cooperating within alliances to better manage capacity growth, by maintaining “financial discipline” on investment and pricing, and by developing and offering value-added products. Tung said that OOCL follows such principles, but inferred that certain other carriers don’t.
   Commenting on the current problem of ship oversupply, Tung said that the immediate outlook for world container trade is “rather grim,” and supply side figures present “an even more dismal picture.”
   Carriers that order ships to expand and reach economies of scale exacerbate the cyclical troughs of the industy , Tung said. He said that the global vessel order book has now grown to a total of over 500 vessels, representing 1.59 million TEUs of capacity, or more than 30 percent of the existing worldwide containership fleet.
   “We must also remember that the over tonnaging of the tanker sector in the 1970s took over two decades to be redressed,” Tung observed. “All around the world, there are examples of industry workouts resulting from overcapacity lasting for longer than five years.”
   Yet, Tung said that he hopes that OOCL will still make some profits during downturns in the market, and “huge profits” in good times.
   As the industry competes through cost rationalization and economies of scale, Tung predicted that the cost to shippers will decline. In addition, information technology is making carriers more efficiencies and eliminating unnecessary steps within the logistic process.
   “The recent emergence of e-bidding initiatives is further serving to commoditize the transportation industry, which in turn, encourages further price alone based competition,” Tung commented.
   As a consumer, the OOCL executive said that he supports greater efficiency and therefore lower prices. “I do believe however that there are circumstances in which over-commoditization becomes undesirable,” he said.