How to stop the commoditisation of container shipping

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Don’t feel bad if MSC, the Mediterranean Shipping Company, is the biggest ocean-going carrier you have never heard of. It is meant to be that way. Its founder, Gianluigi Aponte, is a publicity-shy Italian billionaire, based in Switzerland, a country with no maritime borders and a culture of secrecy as deep as the ocean. His firm has taken the seafaring world by stealth. Born in 1970 with a single vessel trading between Somalia and southern Italy, msc last year overtook A.P. Moller-Maersk to become the world’s biggest container-shipping company. Yet its culture of silence remains. When its CEO, Soren Toft, spoke at a shipping jamboree in Long Beach this month, he revealed next to nothing. “We’re not going to make [talking in public] a habit,” he said gruffly.

Do not be put off. Actions speak louder than words. MSC hasn’t simply edged past Maersk. It has left it in its wake. When it takes delivery of the ships it has on order, its total tonnage could be a whopping 40% greater than its Danish rival’s, according to Alexia Dogani of Barclays, a bank. Meanwhile Maersk, the industry blue-blood with a pedigree dating back to 1904, is abandoning the quest for dominance on the high seas. Instead of a big order book, it hopes to focus investment on higher-return services along the supply chain, from ports to rail, road and air networks, becoming, in the jargon, an integrator rather than a mere box-carrier.

In effect, then, the number one and number two companies in an industry at the centre of world trade are placing radically different bets on the future. They are doing this against the backdrop of a post-pandemic slowdown in container shipping, as well as longer-term questions about the future of globalisation. Whether either succeeds or not, they provide an intriguing natural experiment on different approaches to industrial commoditisation.

It is an extraordinary parting of the ways. For eight years the two companies have been in an alliance, called 2M, in which, like airlines swapping passengers in code-sharing agreements, they provide container space on each other’s vessels. They have always made an odd couple. Imagine a budget airline like Ryanair teaming up with a plush carrier like Singapore Airlines and you get the picture. MSC was infamously unreliable (its initials, an old joke went, stood for “maybe ship comes”). Its staffing levels, as one ex-Maersk employee puts it, were “lean to the point of starvation”. Maersk was the opposite. It was the industry’s most punctual, best-staffed and most service-oriented carrier. But in the mid-2010s it had over-ordered mega-sized vessels, and needed help filling them. MSC, whose main selling point is cost, was delighted to oblige, partly to emulate Maersk’s standards of service. It worked so well that alliances began to be considered the cornerstone of improved financial discipline in the industry. In a sign of MSC’s “Maerskisation”, in 2020 Mr Toft jumped ship from the Danish firm, where he had been chief operating officer.

There were drawbacks, though. As Alan Murphy of Sea Intelligence, a research firm, notes, alliances are a “fast track to commoditisation”. Once you entrust your cargo to someone else’s ships, it is hard to differentiate yourself. Moreover, as the strategies of both companies diverged, the alliance made less sense. MSC used boom times during the covid-19 pandemic to order enough ships to go it alone. As Maersk focused on logistics, it needed complete control of its cargoes, which was easier if they were on its own ships. In late January the two firms said that they would end the alliance in 2025 and sail their separate ways.

Their divergent strategies are bold—almost to the point of recklessness. MSC’s buying spree will contribute to serious overcapacity in the market this year, driving down shipping rates. The assumption is that it hopes that its overwhelming size will enable it to achieve economies of scale, reduce unit costs and further expand market share, which is about 17% by volume. This is the classic approach of the market leader in a cyclical, investment-heavy industry, which feels it can outgun its competitors. The trouble is that smaller shipping lines are also spending their pandemic windfall on new ships. Size may also mean that MSC’s standards slip, says Simon Heaney of Drewry, a shipping consultancy. He notes that last month the Australian Maritime Safety Authority, a regulator, said it had detained five MSC ships already this year, many because of substandard maintenance practices.

Maersk has a different problem. However sensible it is to maintain a disciplined order book, the risk is that its smaller fleet relative to MSC’s puts off customers who want a greater choice of sailings and destinations. Maersk argues that many of its customers will benefit more from reliability, data-driven insights and the flexibility to divert cargoes at short notice than they will from size. Sceptics wonder whether customers will cough up more for integrated services, especially in a lacklustre economy. Moreover, Maersk’s logistics business will compete with freight-forwarders, such as DHL and Kuehne+Nagel, which perform similar functions using a variety of carriers. If Maersk’s strategy puts their noses out of joint, they may stop directing cargoes to its ships.

Long slogistics

Maersk has tried and failed to pivot in this way in the past. But this is a new era. It has more data than ever to work with. Companies wondering whether to reduce their exposure to China, to create additional capacity in Asia, or to “nearshore” production to North America may welcome new supply-chain options. And Maersk may be able to make a virtue of offering climate-friendlier freight routes for customers willing to pay for greenery.

From an economic point of view, the success of both long-term strategies would be a good thing. If MSC drives down shipping costs, this would help reduce goods prices. If Maersk becomes a smooth integrator, supply chains could go back to being as boringly reliable—and unnewsworthy—as they once were. Even MSC would welcome that. ■

Read more from Schumpeter, our columnist on global business:
Lessons from Novo Nordisk on the stampede for obesity drugs (Mar 2nd)
It’s time for Alphabet to spin off YouTube (Feb 23rd)
AI-wielding tech firms are giving a new shape to modern warfare (Feb 16th)

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