It's no secret that the world's shipping economy is slowing down and this, in turn, has a flow-on effect to terminals around the world. The difference between an obstacle, such as a market downturn, and an opportunity is one of perspective. When shipping volumes decrease, container terminal operators’ thinking needs to shift from quantity throughput to service quality in order to maintain a healthy bottom line.
The downturn is fueled in part by year-on-year decreases in China's economic growth, with 2015 growth at a meager 6.9% - expectations for 2016 is that their economy will show a comparable, or worse, growth level. It is also partially attributed to declines in the Russian container shipping industry fueled by sanctions and a decreasing oil price, and the oversupply of shipping capacity shouldn't be ignored either.
There are numerous articles on how the shipping industry can survive the current decrease in freight volumes (search consolidation) - but is surviving the only option? There are a few articles on how, in fact, the shipping industry can benefit from the downturn - strategy firm, McKinsey & Company wrote an excellent article on this very subject - but little is available on how terminals can benefit.
Causes aside, what can be learned from the downturn, and are there benefits that container terminals can realize?
Building more isn't always best
Shipping companies have over-invested in their shipping infrastructure. Shippers face a two-pronged problem. Firstly, economics tells us that oversupply will drive costs down, eroding their revenue base until demand recovers. Secondly, they have a sustained increase in costs from maintaining a large asset pool. In short, what was meant to be a solution to cater for an increasing demand for shipping services has become a significant hindrance to their ability to weather the current shipping downturn.
The lesson for terminals of all sizes is simple. Excess capacity comes at a cost; firstly, the cost to build infrastructure or acquire equipment, and secondly, the cost of maintaining these assets. Increasing terminal assets require significant capital expenditure (CAPEX). Moreover, new assets lead to a higher terminal break-even point to offset the ongoing operational costs (OPEX). Combined, these new CAPEX and OPEX costs decrease flexibility - an essential characteristic of businesses that do well during financial downturns.
Infrastructure and equipment investment do have a place in the growth strategies of terminals. However, a terminal’s decision to build infrastructure or acquire new equipment should be made strategically after considering all options for realizing gains in terminal handling capacity. Improving the quality of service - through increased efficiency, improved procedures, and better transparency - lead to gains in handling capacity and should be considered before new equipment is purchased.
Managing the bottom line
Effectively driving down costs, where possible, is useful for increasing profits during booms, but more crucially, strategically critical to ensuring ongoing operations during downturns. As shipping companies around the world have come to terms with the current state of the market, they've turned to cost cutting as a means to improve their financial outlook.
The lesson? Regularly reviewing terminal procedures helps to identify inefficient processes. Addressing inefficiency almost always leads to cost savings. Optimization specialists provide further expertise in identifying inefficiency and cost saving opportunities as well as solutions for realizing these savings throughout a terminal.
Trimming costs is a very useful tool during a market downturn, as well as when business is booming, as it can lead to an improved bottom line. When done correctly, cost reductions can also improve the quality of service.
It isn't all doom and gloom. Downturns can also have upsides; the trick is identifying and acting on them. Decreases in handling volume prompt terminals to act; simply doing nothing is rarely, if ever, an option. Downturns also allow terminals time - an essential factor in change.
For most terminals, during high volume periods, or market booms, the focus is on throughput and getting things done. In a simple world, high revenue means low incentives for reducing inefficiency. These two factors exist in an inverse relationship - and while they shouldn't, that is a different conversation. As revenue drops, the incentive to act increases until it is no longer an option, but rather a requirement.
Time is the crucial element to enact change; best of all, they come in spades when terminals experience a decrease in handling volume. As volumes decrease, available time increases. Time creates flexibility. Flexibility creates opportunity. Opportunity is the ultimate silver lining to any downturn. Looking at an unfavorable situation and seeing the opportunity is but a matter of perspective. The market is going to shift; that is inevitable. Having the foresight to shift one's thinking with it; that is good business.
These are the two lessons we see - what else can container terminals learn from the downturn?