Restructuring ocean shipping and supply chains for the 21st Century.
Maritime shipping lies at the heart of a global ecological transition. Martin Stopford discusses how maritime supply chains are addressing trends such as decarbonisation, digitalisation and de-globalisation, and presents tactics for building a new world economy. Banner image: Shutterstock/fotohunter
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Tactics to survive “traumatic change”
In spring 2020 politicians in charge of the emerging Covid pandemic learnt an important tactical lesson. Stopping the pandemic needed decisive pre-emptive intervention, but by the time they could be sure it really was a pandemic, it was too late. Fortunately nightmare decisions like this are rare. In the maritime industry the last time was in the 1960s, when the nightmare of deciding how to change from general cargo to containerisation defeated a generation of “rock solid” liner companies. But suddenly, for the maritime industry, it’s all happening. Like London busses, three “nightmare decisions” are all arriving at once – decarbonisation, digitalisation and de-globalisation.
Maritime decarbonisation – difficult to be decisive.
About 62,000 cargo ships move 12 billion tonnes of cargo a year. All have internal combustion engines (ICEs) producing 3 tonnes of carbon PER tonne of Heavy Fuel Oil (HFO) burned. There is massive pressure for decisive action, but for decision makers the options are disturbingly unclear:
i. Retrofitting opportunities are limited and zero-carbon propulsion technologies will take years to commercialise.
ii. Supplies of green fuel will be limited and expensive. Deep sea ships need portable energy made from zero carbon electricity – but many other industries will be competing for green electricity too.
iii. Green fuel will be eye-wateringly expensive. For example 400 tonnes of green methanol is needed to replace the daily oil consumption of a $180 million containership1. An offshore windfarm producing enough electricity to synthesize this amount of methanol currently costs about $1 billion, with a daily operating cost around $100,0002. With limited supply, the market price could be much higher.
iv. Even when the technology and fuels are available, rebuilding the 100,000 ships will take about 20 years, unless the world adopts an emergency shipbuilding programme.
No wonder maritime executives are finding decarbonisation decisions difficult!
Digitalisation - creeping up on industry
Meanwhile the I4 revolution is reaching out to shipping, opening a Pandora’s box of satellite communications; the cloud; and data streaming etc. There is no doubt that when shipping companies apply this technology in the way car manufacturers, cab companies, and logistics services are already doing, sea transport will take a giant step forward, especially in the short sea trades.
But for most maritime leaders, including shipyards, it’s a struggle. Their companies were not designed for digitalisation. Information is jealously guarded, so systems integration is difficult. Essential professional and technical staff are thin on the ground and market driven earnings leave little margin for investment in Silicon Valley type organisational development.
So although this is a powerful way of improving the business, maritime companies, like many companies on land, are finding digitalisation (I4) painfully slow, as their development projects get stuck in what McKinsey call “pilot purgatory”.3
Read more on the Forum Network: The New (Ab)Normal: Reshaping Business and Supply Chain Strategy Beyond Covid-19, by Yossi Sheffi, Professor & Director, MIT Civil and Environmental Engineering & Center for Transportation & Logistics
The ebbing tide of globalisation
A third tactical challenge is that the tide of globalisation is on the ebb. Climate change, geopolitics, I4 technology and regional evolution will see to that. My guess is that over the next 50 years, globalisation will increasingly focus on regional trading blocks, described by the great historian Ferdinand Braudel as Weltwirtschaft.4 Reasons why this might happen are:
i. The integrated global trade of the last 50 years was run by multi-nationals, who are in retreat5.
ii. Future long haul transport will be squeezed by much higher transport costs, and I4 technology will narrow the inter-regional production costs differential. Consumer tastes will change too.
iii. Regionally, China is maturing, and the Pacific will develop differently from the Atlantic.
iv. Resource pressures and decarbonisation will move security of supply up the agenda.
v. Sea transport logistics will change. Today's system was designed in the 1960s when bunker oil cost $12 a tonne, so distance and transport mode did not matter. Integrated logistics systems will be more sensitive to the cost and emissions differences due to distance.
vi. Finally the global fossil fuels trade, which today accounts for 40% of seaborne trade will shrink and may eventually disappear. Will it be replaced by new global trades in green fuel?
Maritime tactics in a changing world
In each of the last two centuries shipping has been at the heart of a global transformation. In the 19th century, steamships created the network of general cargo, passenger and mail transport linking the Atlantic and Pacific economies. Then in the 20th century bulk transport and containers provided cheap and easy access to global sources of high quality raw materials and to markets for mass produced products.
With so much changing today, the maritime industry needs a compelling vision of its role in the 21st century. With the tide of globalization on the ebb, a vision of regional transport systems, designed to bind regions and communities together into “organic units” would fit comfortably into this vision.
The building blocks are all there. Electric ships, I4 technology, the cloud, data streaming, intelligent algorithms and business-to-business logistics can be used to build something much better than we have today. Persistence will be needed to develop organisations to manage this change. So will a new generation of entrepreneurs, professionals, technicians and enthusiasts - all dedicated to making the new maritime vision a reality. Unfortunately for maritime executives, the bad news is that, like the politicians managing the pandemic, nightmare decisions are on the agenda. How cay you be sure? But shipping investors are well known optimists – they will recognise the deal of a lifetime!
Learn more about the OECD's work on ocean shipping and shipbuilding
1 Based on 23,000 TEU containership costing around $184 million, operating at 22 kn.
2 Wind farm cost data from BVG Associates, cross checked against other sources. Green electricity supply to produce 400 tonnes/day of methanol requires offshore wind farm with 36 turbines of 10 MW capacity. Solar electricity would be cheaper.
3 McKinsey (2019) Industry 4: Capturing Value at Scale In Discrete Manufacturing. Page 6.
4 Ferdinand Braudel developed the concept of "a world economy" as being different from "the world economy". He defined a world economy as “a fragment of the world, an economically autonomous section of the planet able to provide for most of its own needs, a section to which its internal links and exchanges give a certain organic unity”. Braudel F (1984) Civilisation and Capitalism 15th – 18th Century, Volume III, The Perspective of the World, Fontana Press, p22
5 The Economist 28th Jan 2017 “the Retreat of the Global Company”.
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