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A Sucker for a Slow Boat

By Kevin Meyer

Marco_polo_containership

You're looking at the Marco Polo, owned by CMA CGM, which can hold more than 16,000 containers and reach a speed of 24 knots.  Regular readers know Bill and I have often derided the idiocy of such vessels, idols to the false gods of cheap overseas labor and the fallacious financial fabrication known as economy of scale.

In reality these ships might as well be floating banks, as they are effectively holding cash - at an average of $100,000 per container, presumably more if they hold MacBooks instead of smokey-smelling garments from a factory in Bangladesh.  Non-performing cash in fact, doing nothing but float for a few weeks while quality issues go unrecognized, clothing styles change, and whatnot.  Most of us would be smart enough to rule it out as a bank, let alone a component of a value creation process.

Fortunately some manufacturers are beginning to wake up to the reality that doesn't appear on traditional P&Ls and are recognizing the value of speed, agility, and brains.  Apparently container ship companies are not part of this intelligent awakening, because they are doubling down on crazy.

How so?  Well that ship you see above can cruise at 24 knots, but they are intentionally slogging about at 14 knots.

The Marco Polo's size and pace on the Europe-to-Asia route show an
interesting dynamic at play in the container-shipping industry:
Grappling with excess container capacity and declining shipping fares,
companies such as CMA CGM of France, owner of the Marco Polo, are racing to operate the biggest-possible ships so they can
benefit from economies of scale, and run them at moderate speeds to
save on fuel costs.

Slowing down ships, known as slow steaming, doesn't only offer
environmental benefits. By making fewer trips, ships can adjust to the
lower demand for cargo space. Analysts say the practice has helped avoid
a complete collapse in shipping fares.

"Surely, if we did not have
slow-steaming at all implemented on the Far East-to-Europe trading lane,
I'm not sure rates would be higher than a few dollars per container,"
said analyst Peter Sand, with Denmark-based shipping association Bimco.

You read that right.  Surely.  To operate more efficiently there should be more, larger ships, running slower.

Sort of like auto companies building more, and larger, factories filled with expensive equipment (perhaps larger as well?), then intentionally slowing them down to a single shift to match to a much lower demand.  Oh wait, they did try that.  And learned.  Well some of them did.

Let's slow down the movement of value, increase the risk of a quality issued buried in larger inventories, increase the potential for obsolescence, and reduce the utilization of a capital asset - although admittedly focusing on that utilization often creates inventory issues in the first place.

"a few dollars per container" is saved in fuel costs by slowing down, and by the supposed other operating efficiencies of the mega ships.  And what is the interest on, or depreciating value of, the cash tied up in inventory for a few weeks?

Rates for shipping a 20-foot container from Asia to Europe stood at
$1,237 in late December, compared with about $2,000 in the spring,
according to data compiled by the Shanghai Shipping Exchange. Still, the French company said it
decided to go ahead with the Marco Polo order, betting that the vessel's
extra-large size and lower operating cost per container would help CMA
CGM elbow out smaller competitors.

"Those who have small ships will
gradually have to withdraw and those who have large ones will keep on
developing," CMA CGM's deputy chief executive, Rodolphe Saadé, said in
an interview.

Ya, stick with that strategy.  It's apparently served you well.

For 2011, CMA CGM posted a net loss of $30 million on revenue of $14.9 billion, while debt was at $5 billion.

Meanwhile, in the real world...

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2 Responses to "A Sucker for a Slow Boat"

  • Joe
    9 January 2013 - 6:16 am

    “Those who have small ships will gradually have to withdraw and those who have large ones will keep on developing,” CMA CGM’s deputy chief executive, Rodolphe Saadé, said in an interview.

    It would be interesting to hear under what dramatic global circumastances it would happen!

  • Robert Drescher
    9 January 2013 - 11:18 am

    Hi Kevin

    A prime example of bigger is better thinking. Despite the fact that in most industries we have seen that bigger is in fact rarely better.

    Big steel mills are being beaten out by the newer and smaller mini-mills using modern equipment that simply out performs them.

    The North American auto industry paid a huge price for their focus on bigger vehicles. Even most builders are finding that larger houses are no longer selling as well. Large console TV and stereos have been replaced by much smaller component systems despite the fact that the screens and watt output have gotten much larger.

    Computers have stayed relatively the same size for the last decade, yet their capability has increased at staggering rate.

    Even some retailers are starting to realize a store can be too big. I know of two chains that found that out the hard way, they built monster sized stores which did well for a few weeks, but died shortly after. No one wants to walk several miles just to get a few items. I have started avoiding Wal-Mart more than ever simply because going to most of their stores has become a major expedition, and if I am going to have to cover that much ground I can think of several hundred places I would rather go.

    Bigger just isn’t better anymore today’s credo should be “the right product, at the right price, at the right time.”