Maritime Economics - Assignment Example

Maritime Economics () (Assignment) Student: Student ID: Lecturer: Subject: Course: Due Date Word Count 2584 Contents 1.0Explain how the market structure for dry bulk shipping affects companies’ competition strategies. 4 2.0 Explain how the concept of marginal cost can be applied to shipping management 7 3.0 National fleets in global shipping 9 3.1 Need for national fleet 9 3.2 Protecting national fleets 10 4.0 Investment strategy for shipping lines: adequately responding to trends. 10 References 16 Introduction In today’s global economy, shipping, port and logistics are indispensable and are essentially the constructs of globalization. They are vital for of economic resources, which have become global, creation of added value, creation of employment and for facilitating global trade. The maritime industry has experienced major shifts over time, along the lines of international economic conditions. Recently, in the economic crisis of 2008-9, it was one of the most hit sectors suffering major structural changes. Rising globalization presents immense opportunities, similar to challenges and risks. This requires that maritime managers must make strategic moves to adequately respond to the global environment. This paper explores the global maritime industry and attempts to draw insights for managers in line with globalization. 1.0 Explain how the market structure for dry bulk shipping affects companies’ competition strategies. Over the past few decades, national economies and the international economy have grown manifold. The 21st century and post World War II profile indicates increasing proliferation of both the developed and developing economies. The shipping industry is cited as being at the centre of this globalization-related growth (Frémonta, 2009). More specifically, the dry bulk shipping market is one of the most essential components of this growth and globalization of trade. According to Song (2012), it accounts for 25% and 30% of tons and tone-miles of international maritime trade respectively. It has become so important that it is now being used as a predictor if world economy state, especially wth reference to the Baltic Dry Index. Over time, the market for dry bulk shipping has experienced immense changes aligned with the growth characterizing globalization except for the global recession period. These changes are related to supply-demand interactions, global economic times, market structure, shipping firms number, their operations sizes and services homogenity. Market structure can be analysed by an assessment of key variables such as product differentiaton, entry barriers, number of shipping companies and other related carriers, and cost structure. Lun, et al. (2010) cites market structure characteristics of bulk shipping such as homogenity of services offered by large firms, increased information and ease of access to new entrants, and increased supply of capital for the latter from financiers. In addition, there are other factors such as ease of regulatory and economic obstacles in market entry and exit. Finally, this literature cites that the market plays a big role in determining the fleet size and freight rates so that it is deemed unnecessary to have product development and promotion initiatives. Additionally, it has been cited as being intensly competitive and fragmented with no clearly dominant player with a majority market share (Koncept Analytics 2012). Harlaftis & Theotokas (2000) describes this as a market structure with perfect competition and that is highly subject to economic conditions as indicated by the demand/supply balance figure 2. The structure has effects on the competition strategy which determines performance in the market. Literature that shipping firms have resulted to specialization and enhancement of technology (Stopford 2009; Talley 2012). With specialization, it is in response to the indication that maritime management has cognitive limits and is at greater risks exposure given the vulnerability in global international trade and economics, than previous times. This industry is cyclical with demand-suppy imbalances that have express effects on revenues, freight rates, pricing and asset values as illustrated in figures 1 & 2. This is also as a response of the firms to specialization of equity providers as the contemporary investor has shown preference for more focused capital ventures. Specialization has allowed increases in fleet sizes. The firms also respond by implementing strategic technological advancements both in organizational management and the shipping hard ware. Figure 1: Bulk carriers shipping cycles (Stopford 2009) Figure 2: Dry bulk shipping market balance (Bornozis 2006) 2.0 Explain how the concept of marginal cost can be applied to shipping management The marginal cost refers to the additional cost incurred in producing an extra unit of output or due to the addition of a unit of output (Jain & Trehan 2011). The production of an additional unit causes variations on the total cost or variable cost. With an increase in production, there is a commensurate increase in both the variable total costs but at a diminishing rate. This is related to economies enjoyed by a firm as a result of increasing returns in the initial production stages of a factor. As such, there is decreasing cost of additional units as compared to the earlier output resulting in marginal cost curve falls (as shown in figure 3). Following a given quantity produced the rate of increase of the total and variation cost is the minimum implying minimal marginal cost. However, due to the operations of the law of diminishing returns, the total and variable costs increase at an increasing rate leading to diseconomies for the firm. Figure 3: Marginal cost curve In analysis of product-pricing, it is vital that maritime management is critical of the interaction of marginal cost and the average cost. This is very vital for the shipping competitive strategy. According to Pozdnakova (2007) a competitive pricing policy should be focused on a low tarrif rate. This tarrif rate should be designed as a competitor elimination method by market dominant forces and for safety of long-term returns in the event that supra-competitive prices are no longer economic. Essentially, low-pricing in liner shipping for market dominance purposes and in competitive markets tend to shift towards the marginal cost of production. This is unlike in uncompetitive markets where the lowest prices are considerably above the marginal costs. Having prices that are below the marginal costs reflects inconsistency with respect to normal competitive conduct as well as dominant company with explotative and eliminative pricing strategy. I there was lowering of tarrifs past the short-run marginal cost of supply in a competitive market, this would still be uncompetitive. Stopford (2009) relates its benefits to the pricing flexibility. The shipping industry shows high volatility responding to international economic conditions. This implies that there are changes relative to recession or booms. A shipping company makes total commitment to voyage costs. When there is recession and reduced shipment, a ship may fill extra spaces and earn extra revenue and enjoy economies. During boom, there is scarce capacity requiring proritization of cargo and discouragement of cargo with low freight rates using high pricing. With marginal cost pricing, it is possible to offer price discrimination so that low-value carge are rated cheaper than the premium high-value cargo. As such, there is competitive yield management. With increasing automation of the trade, there has been reduction in costs of shipping. These include carrier charges, freight time and damage. The costs are reduced for the client, shipping liner and the provider of the automation. Marginal cost concept can also be used to estimate the benefits as regarding the surplus related to automation (Konings, et al. 2006). 3.0 National fleets in global shipping 3.1 Need for national fleet Fleet ownership and operation are among the major issues that surround commercial shipping and globalization. Additionally, globalized trade and maritime economics have presented the industry with change trends and intensified competition. Literature highlights another key phenomenon of globalized trade: liberalization (Eekhoff 2003). Liberalism in the trade and the rise of multinational companies controlling the trade has significantly contributed to development and proliferation of liner conferences. This has had a compromising effect on national fleets. Stopford (2007) underlines the change from the imperialism characterizing global trade and shipping industry in the latter years of the past century, to a global free trade policy. In the past times, commercial maritime competition was dominated by national merchant fleets until the 1973 shipping depression. They were replaced by the flag of convinience flag or open registry merchant ships, now increasingly successiful under liberalization. This shipping continues to grow competitively as aided by free market economies (Jamieson 2003). Whereas national fleets have been overtaken by the flag of convinience in international trade, they have relevance in some areas of international economy. These include regional trade in which some national markets have warded penetration and take-over by flag of convinience shipping lines by improving on competitiveness, aligning their merchant lines to liberalization trends. As such, the national fleets can have a growing significance in international trade complementing and competing with the open registry lines. However, it is imperative that they be managed in a way that is responsive to liberalization and globalization trends. 3.2 Protecting national fleets The ability of governments to protect national fleets in the liberalization of trade characterizing globalization is, in the view of this paper, not commensurate to the influence of free market forces. Essentially, any action in that direction may imply imposing restrictions to free trade and may have substantial impact on maritime economy. Governments may initiate cargo sharing pacts focusing on protecting national shipping lines and interests (Parameswaran 2004). This implies that individual governments may not adequately protect their fleets. In addition, the attempt to practice illiberal practices in liberal frame-work presents the national economies with a conflict between liberalism and their pragmatic operations. As such, national fleets only to be bettered for the competition. This way, the governments are more likely to make more earnings apart from improving global positioning in global trade. 4.0 Investment strategy for shipping lines: adequately responding to trends. Stopford (2007) presents trends in maritime trade since 1957 to 2007 after which the literature suggests predictions for until the year 2055. It is demonstrated how maritime operations have changed along international trade and economics. As trade and resources have become global, there has been an increase in the importance of maritime trade (see figure 4). It is expected that there will be gradual increase in the trade requiring focused maritime management and investments strategies. In the report, key drivers of change in the industry are indicated: long cycles, increased volatility, globalization and technological advancements (Ostergaard 2007). The challenges include intensifying competition amidst highly volatile economic times, environmental pollution, freight safety, need for cheaper transport, and routes specialization and diversification. Recently, this industry was significantly hit by the economic slump, being at the core of world trade (Sato 2002). Whereas, the shipping are prone to impact by international economic conditions, it is important that the firms invest with intelligence eying enhanced risk management. Figure 4 : Increasing ship demand (Stopford, 2007)- there is increasing significance of maritime trade This industry has highly globalised ownership and operations. Currently, it is dominated by increasing trends of trade diversification associated with strategic alliances, mergers and acquisitions. This is to enable the shipping diversify revenue sources, increase the economies enjoyed, as well as score on cost savings. Essentially, the mergers have been related to route diversification, terminal operations and hinterland logistics (Cullinane 2010). For investment strategy, I would advice a shipping line to explore the area of integration. This not only enables adequate response to the trends, but is also a competitive strategy. For a majority of organizations and industries, the focus is on cost savings, efficiency enhancement, market accessibility and quality of market output. As such, these are being pursued by companies through strategies to maximize the global buying power, economies of scale leveraging, and globally reconfiguring and sourcing the value chain manufacturing-based part (Lorange 2009). There have been vertical and integration as companies seek to rationalize. According to Pozdnakova (2007) the most common aspect in international maritime economy is development of coalitions of shipping lines for cooperation, in pursuit of profit growth and/or maintenance through rationalization. Such cooperation relations include market sharing, liner consortia, capacity regulation and revenue pooling. With reference to this, the focus is on becoming a global maritime, port and logistics operator. Global operators have been categorized into three: stevedores that venture and replicate into new markets, maritime shipping companies with investments in port facilities and hinterland logistics such as Maersk®, and financial holdings where shipping diversify financial portfolios (Rodrigue 2010). For instance, expansion into logistics provisions presents lines with a totally new and wider range of diversification opportunities. Apart from shipping services, there are diversification areas such as goods tracking, bulk breaking, warehousing and hinterland distribution becoming more involved in logistics. In this way, there is not only costs savings, but also the shipper optimizes logistics and competititively meets all the needs of the clients. Fremont (2009) conceptualizes this as shown below recommending that shipping lines need to shift from just the control of boxes to provision of logistics services. Figure 5: Rationalization- the way forward (Fremont 2009) These are set on the tenets of rationalization to enable joint lines to have effective route coverage, participation and earnings. Investing in rationalization may aslo tone up for the shipping lines as a way to undertake a structural shift. Following the recent economic downturn, there were significant drops in global trade and shipping volumes. In addition there was a credit crunch for the lines, a global economic problem that may persistent until there is total recovery of the global economy and stability is restored. As a result, this paper suggest the need for shipping lines to invest in restructuring. According to literature, this structural shift entails a focus on either of the following: service networks redesigning, competition strategies, capacity deployment and shipping lines’ business models (Hall et al 2010). In the report by Stopford (2007), it is cited that a key issue in shipping liner trends is the expected growth of oil prices, a cost-intensive indicator. One way to avert crises is redesigning in which a shipping line would be focusing on services rationalization, vessel size limits and shifting large vessels to secondary routes. Secondly, it is vital to strategically deploy organizational capacity. This entails developing strategies on areas such as containerization and specialization in view of growing market dominance. Such strategy was used by MSK® during the recession when it increased containerization and grew in market share closing in on Mearsk®. Capacity deployment assessment may also entail totally leaving some market segments and routes and replacing with others. The aforementioned redesigning and structural strategies depend on the value of business intelligence. It is projected that the leadiing shipping lines in increasingly globalized economy will display, amongst other characteritics, advanced business intelligence (Hingorani et al. 2005). This is the helm of a strategic focus suggested by the IBM Institute for Business Value (see figure 6). Business intelligence refers to the ability of a shipping line to maintain market leadership through the optimization of organizational capacities. Figure 6: strategic designing and structural shift (Hingorani et al 2005) Lastly, this paper recommends a focused investment in customer relationship management. This is highly related to the need for the firms to invest in optimizing on business intelligence. There are increasingly intensifying demands from clients. Given the limitations in terms of growth prospects and avenues, the stiff competition related to it, and the financial constraints characterizing the global market, there is a significant need to advance customer satisfaction strategies. The diversification aforementioned in (Fremont 2009) is one of the ways to meet these needs competitively. According to Hingorani (2005), there is a need for a targeted customer relationship management. This has also been refered to as sales coverage and entails refines segmentation, and a clear demonstration that the line understands clients’ needs. Whereas there are emerging markets such as China and Africa for shipping lines to venture into, any line pursuing must demonstrate optimalization of this intelligence. This may also call for enhanced investment in technology and communications as well as pricing, standardization branding, and agility (Gelareh et al. 2010; Liu et al.2009). References Bornozis, N., 2006. Dry bulk shipping: The engine of global trade. A review of the dry bulk sector. Barron's , 30 Octobed, pp. 1-13. Cullinane, K., 2010. International handbook of maritime business. Cheltenham: Edward Elgar. Eekhoff, J., 2003. Competition policy in Europe. New york : Springer. Fremont, A., 2009. Emprical evidence for integration and disintegration of maritime shipping, port and logistics activities. International Transport Forum, January , pp. 1-33. Frémonta, A., 2009. Shipping Lines and logistics. Transport Reviews: A Transnational Transdisciplinary Journal, 29 (4). Gelareh, S., Nickel, S. & Pisinger, D., 2010. Liner shipping hub network design in a competitive environment , s.l.: DTU Management Engineering . Hall, P., Comtois, C., McCalla, R. & Slack, B., 2010. Integrating Seaports and Trade Corridors. Farnham: Ashgate . Harlaftis, G. & Theotokas, J., 2002. Maritime business during the 20th Century: continuity and changes. In: The handbook of maritime economics and business. London: Lloyds. Hingorani, N., Moore, D. & Tornqvist, K., 2005. Setting a new course in the container shipping industry , New York: IBM Global Services. Jain, T. & Trehan, M., 2011. Microeconomics and Indian Economy. Delhi: Vimra Kumari Jain. Jamieson, A., 2003. Ebb tide in the British maritime industries : change and adaptation, 1918 - 1990. Exeter: University of Exerter Press. Koncept Analytics, 2012. Global Dry Bulk Shipping Industry Report: 2011 Edition. [Online] Available at: http://www.marketresearch.com/Koncept-Analytics-v3494/Global-Dry-Bulk-Shipping-Edition-6418262/ Konings, R., Premius, H. & Nijkamp, P., 2006. The future of automated freight transport : concepts, design, and implementation. Cheltenham: Edward Elgar. Liu, W., Xu, H. & Zhao, X., 2009. Agile service oriented shipping companies in the container terminal. Transport, 24 (2), pp. 143-153. Lorange, P., 2009. Shipping strategy : innovating for success. Cambridge: Cambridge University Press. Lun, Y., Lai, K. & Cheng, T., 2010. Shipping and logistics management. London: Springer Verlag. Ostergaard, T., 2007. Quarterly financial overview. Containerization International, pp. 9-10. Parameswaran, B., 2004. he liberalization of maritime transport services : with special reference to the WTO/GATS framework. Berlin: Springer. Pozdnakova, A., 2007. Liner shipping and EU competition law. Austin: Wolters Kluwer Law & Business. Rodrigue, J., 2010. Maritime Transportation: Drivers for the shipping and port industries. s.l., OECD, pp. 1-23. Sato, H., 2002. Management Strategy of container liner shipping in the age of globalization. Gwangyang, Shipping research. Song, D., 2012. Maritime logistics : a complete guide to effective shipping and port management. London: Kogan Page . Stopford, M., 2007. "Will the next 50 years be as Chaotic in Shipping as the Last". Hong Kong, Hong Kong Shipowners Association. Stopford, M., 2009. Maritime Economics. 3rd ed. Oxon: Routledge. Talley, W., 2012. The Blackwell companion to maritime economics. \ ed. Chichester: Wiley-Blackwell. Read More