- Despite the current low rates driven by consolidation and formation of shipping line alliances, shippers are still plagued by lack of transparency and perceived poor service. Lack of communication and poor scheduling methods between terminals, ocean carriers and land-transport companies make it difficult to differentiate based on quality of service, McKinsey and Company stated earlier this month.
- Shippers want transparency and its resulting reliability, while alliances are struggling with what McKinsey partner Steve Saxon refers to as a type of "prisoner's dilemma," where competitors will follow each others' leads, such as purchasing more ships, when in fact this decision is a failure of rational decision-making.
- The forming of alliances has reduced M&A activity, but consolidation within shipping lines will likely continue because it is one of the one areas where the struggling industry can regain better profit margins.
Alliances aren't the only aspect of the shipping industry struggling with the prisoner's dilemma and other challenges, as service commoditization is marginalizing ways to create alternative competitive advantages, which further diminishes profitability returns.
Shipping ports are also faced with the need to modernize, whether through dredging or upgrading, in order to keep pace with the direction of the industry, which emphasizes larger but fewer ships and the corresponding capacity that they carry.
Alliance forming, while beneficial to shippers looking to save costs, is ultimately creating an industrial spiral toward irrationality. Justified by cost-saving, it puts downward pressure on companies to differentiate based on other measures such as speed or customer service. Without this differentiation, the product becomes commoditized, and shippers lose the benefits of competitive choices. In the near-term, this is an attractive step for an industry that is struggling. But what happens when prices stabilize, all of the differentiation of product has been removed, and a majority of shipping lines have consolidated? The history of OPEC might be a clue.