The perfect storm of digitalization and commoditization
Below is the full version of the keynote speech delivered by Frank Coles, Transas CEO at the Transas Global Conference in Malta today...
We are faced with the perfect storm in the next few years. Many will conclude it is all the fault of President Trump, but in fact it is actually nothing to do with him. If anything he is going to enable the industry to think smarter because he is also bringing change. The perfect storm is the one confronting the maritime industry. It is one which will disrupt all elements of the shipping industry – is technology-driven and in some cases is also self-inflicted.
If you follow the maritime press or listen to the various presentations on smart shipping you cannot have missed the calls for shipping to change its business model. There are also the grandiose claims made for the broadband revolution that will somehow pave the way for smart operations and the coming age of unmanned ships. Let me be clear I don’t doubt change is coming and I think broadly the various ideas have merit. I also think the maritime industry knows it needs to change. However, let’s inject some reality into the discussion and distinguish between the blue sky and the blue ocean. Have we ever paused to consider how these changes will play out within the context of the maritime and shipping industries and to reflect on the true implications? I anticipate several defining or Kodak/Blackberry moments on the horizon and the possibility of a totally new model of shipping, in the maritime industry. I distinguish between maritime and shipping deliberately, as I see them as representing different things.
The maritime industry is about ships and ship operations; shipping is about the carriage of and logistics related to cargo. Shipping is the business of end-to-end delivery of goods by whatever means whether by road, in the air, or at sea. This is an important distinction because the adoption of technology and the application of solutions is happening in quite different ways in these segments. I would venture to suggest because of financial values, the competition, the advantages resulting from technological change in shipping supply chain are far greater than in the maritime industry alone.
The retailers of the world including the likes of Alibaba, Amazon, Walmart are now starting to shake up the shipping world, especially in the parcel delivery industry. These major e-commerce players are starting to disrupt the shipping space, as they strive to take greater control over logistics and directly over transportation. Until recently they have focused on last mile logistics and delivery. Until now the e-commerce players relied on specialist delivery/shipper companies like FedEx and UPS. The ‘first mile’ of the ocean shipping was largely ignored.
In 2015 Christmas holiday season FedEx and UPS delivered only 95% and 91% of packages on time. The e-commerce retailer, not the shipper got the blame. The e-commerce retailers are seeking on-time delivery and costs savings, as well as access to data about consumers. In two words, they are doing it to achieve customer satisfaction. How does this encroachment into the transport sector of shipping impact the maritime industry and what does it imply?
As Amazon moves into the shipping business it is signing leases for aircraft, and beginning to compete with FedEx and UPS. Between the three they have over 700 aircraft under lease. Amazon has also expressed an interest in acquiring an airport in Germany. Walmart is looking to take control of its own shipping - even on ships. We have also seen in recent weeks, Alibaba sign up with Maersk, CMA CGM and Zim Lines.
Clearly the line between the logistics, e-commerce companies and the shipper is beginning to blur. For years FedEx operated its planes and delivered packages. Now they will face direct competition from the e-commerce companies. The natural progression would be for global shippers to start to lease their own assets in the maritime industry, challenging the traditional maritime business model. If they lease planes, own airports and manage their own logistics, then why not ships, ports and port operations? For the container and parcel delivery segments of the shipping industry, it is easy to imagine electronic cargo booking and digital port operations, with the e-commerce giants owning ships, owning ports or sections of them, controlling the complete logistics chain. What then for the traditional maritime company?
For the maritime industry the impact will be dramatic and is also not far away. The discussions about unmanned ships, smart operations and improved efficiency are really only code for the end of the current maritime model. The maritime industry is part of the ‘first mile’ segment of the shipping business. The efficiency of the maritime industry is the last piece to be addressed in the e-commerce model and the digitalization of the shipping of goods.
This digitalization leads to commoditization and to disruption. The ripples of this change might be felt across today’s ecosystem; in the insurance market, the charter market, cargo booking, port operations, ship design, logistics, navigation, communications, shipyards, owning and managing ships. I think it is the changing model of shipping cargo and logistics will change the ship owning and operating model, and that will create the smart maritime operations, and it needs scale to be more efficient. So it is possible that just being a smart operation may not save some of the current ship owning entities. Do not forget Hilton did not create AirBnB. Nor did the taxi companies invent or support Uber.
When we examine how the drive for greater efficiency and accompanying disruption might affect current business models, some elements of today’s maritime industry players are endangered more than others.
Ships will have to be built more efficiently and that means modernized, robotic shipyards and fewer of them. The ships that are built will have to be more automated, more efficient and built for purpose. We could see smaller ships for the local routes and some larger ships for the longer haul. This will probably evolve based on what the shipping innovators demand and as they become the main players. Even outside the container sector, we will see dramatic changes as the maritime industry seeks to remain competitive.
Smart ships, smart operations and even automated ships leads to a scaled operation requiring super-size ship management companies. The large charterers leasing these ships will become increasingly reliant on these super-size management companies to operate the ships. Either the charterer or the leasing companies could be the client of the management company. Anything is possible once you introduce the efficiency of a scaled smart operations model in the maritime industry.
Some people believe that smart ships and smart operations is only possible because of broadband communications and that this will drive huge amounts of data. We are not so sure. Automated or smart ships can operate without constant contact with shore. Even when contact is required, they could rely more on more modest machinery level communications. The analytics and decision support could reside on board, and only in times of urgency would the communications and data grow. As long as there are crew on board, there will be a need for more communications for welfare purposes. I think maritime communications suppliers could be particularly at risk in the same way as Kodak/Blackberry once were. The levels of capacity coming on line, along with the race to the bottom in pricing is going to make communications yields very hard to achieve. However this pans out, the maritime industry is going to be the winner.
Smarter operations could and should lead to less claims and improved risk management. Fewer incidents will mean less work for the insurance industry and the legal industry.
Ship traffic control and e-Navigation will become critical to ensure efficient and safe operations in the maritime segment of the shipping market. Whether there are manned ships, automated ships, smart ships and smart operations, we are going to see increased digitalization, better decision support, better monitoring and a scaling up of ship management operations. Just like the e-commerce giants the drivers will be on time delivery, efficiency and cost savings. Scale will, in some cases, deliver the competitive advantage. For others it will come from the level of service and capability.
Many well known manufacturers are trying to reinvent themselves into service businesses, often by bolting on data analytic packages monitored from their own local service centers. But this won’t work. It is like trying to put a square peg in a circle hole. The market is too fragmented and outdated for this approach to succeed. Each vendor setting up its own data center runs counter to the efficiency promised by a digital world characterized by smart operations. I think there will be an emerging requirement for larger shared service centers in the ship management operations.
At Transas we have created THESIS, the Transas Harmonized Eco system of Integrated Solutions. This essentially provides a unified platform for the maritime segment of transportation. THESIS is a platform with shared data services, decision support tools and applications to enable the digital maritime industry to operate. In this respect we see the navigation sensors along with ECDIS as the brain employed both to operate and to monitor the ships operation.
The Fleet operations center is where the super-sized fleet management takes place. If we are to create a safe environment, one that reduces accidents, incidents and manages manned or unmanned ships we need a global monitoring service. The ship traffic control assumes the overarching role of monitoring vessel activity for safety, security and efficiency of the eco system.
We also have to consider the human dimension; both the crew on board or working ashore? How will we attract new blood to the industry? Will this speed up the need for an overarching smart operations ecosystem? In any event, the Academy, whether for ships officers or shore based staff, will continue to play a critical role in providing training, competence and support for human factor requirements.
Our business will be about more than supplying an ECDIS. We have shifted to supplying the decision support infrastructure tools to enable the smart operations of the maritime section of the shipping industry. As we have already discussed, the largely untouched maritime segment of the supply chain is now changing, and that change is going to accelerate as more innovative players come in and challenge the status quo. Ship-owners, vendors, equipment suppliers, service providers, agents, repair companies will all face major challenges in the digital environment. The role of the middle man becomes redundant, eliminating many of the inefficiencies that have traditionally cushioned the industry, as a new more streamlined model takes shape.
The perfect storm is developing as the e-commerce players encroach, while technology impacts the way of doing business and the middle man is removed by the digitalization creating commodity driven efficiency and a new world for maritime. Smart operations is the result not the reason.
Imagine the new world, but understand it is here already.