Rising geopolitical tensions, increased pressure on capital returns and an appetite to be a one-stop-shop for end-to-end logistics are all contributing to the trends and behaviours of ocean carriers, logistics companies and terminal operators.
Coupled with improvements in technology and possible new entrants to the sector, the complexity of intermodal transportation and port infrastructure is quickly evolving.
The Belt and Road Initiative (BRI) continues to generate momentum and reshape the intermodal transportation sector. It is estimated that the overall investment on the BRI will exceed $1 trillion by 2027 with an estimated $20 billion dedicated to port and terminal development. There have been numerous port milestones to date including for example the development of the port and special economic zone in Duqm in Oman.
Notwithstanding the successes to date of the BRI, both local and international criticism is mounting, centred on China’s lending and business practices under the BRI. Recent examples of the resistance include Sri Lanka, Malaysia and the Maldives seeking to renegotiate or unwind some of the BRI projects. Specifically, in Malaysia, the newly elected prime minister reportedly cancelled or suspended $22 billion worth of BRI projects upon taking office in May last year.
A knock-on effect of the growing criticism is heightened awareness of other infrastructure projects in emerging and frontier markets in Africa and in Asia, such as for example Japan’s Expanded Partnership for Quality Infrastructure and the Japan and India led Asia-Africa Growth Corridor which aims to integrate Africa and Asia in a sustainable manner via a sea corridor.
The most recent success of this last initiative is the agreement between Sri Lanka, India and Japan to develop a deep-sea container terminal known as the East Container Terminal at the Port of Colombo in Sri Lanka. Whilst it would be difficult for any infrastructure project to rival the BRI due to its sheer scale and the expense behind it, it is interesting to see alternatives emerging.
While the BRI is geographically changing the intermodal transportation and logistics landscape, the increase in automation in container handling is persisting to physically transform port operations. Following the development of the first automated container port 30 years ago, there are now roughly 40 ports which are partially or fully automated around the world, 20 of such having been automated in the last 6 years. It is estimated that at least $10 billion has been invested in the automation of ports to date with an additional $10 to $15 billion expected over the next 5 years.
Singapore’s Tuas Mega Port is not only adopting automation, but also other technology such as driverless vehicles, drones and automated quay cranes aiming to achieve efficiency and productivity. The Tuas Mega Port, the first stage of which is due to be completed in 2021, will be able to handle 20,000+ TEU capacity vessels, resulting in fewer but larger calls. This, coupled with the technologically advanced system, aims to bring down the cargo’s unit cost to ensure the status of Singapore as a leading global transhipment hub.
An obstacle to automation is that in the short term, the process of automation can have significant operational challenges reducing productivity, a particular difficulty in today’s environment with increasing pressure on capital returns. In the long term, if the initial hurdles can be overcome, it is estimated that operating expenses could fall by 25% to 55% and productivity could increase by 10% to 35%, improvements that are difficult to ignore.
Today there is also increased appetite for vertical integration of intermodal transportation, ports and logistics. Liners and terminal operators are seeking to become integrated logistics providers in an attempt to heighten profitability. The trend of vertical integration is motivated by a number of factors, including the pressure to maximise capital returns and the overcapacity in the shipping market, but most notably, the desire to offer end-to-end logistics solutions. DP World, one of the most prominent players in the market highlights this trend as it continues to invest in logistical centres around the world and in shipping lines, such as for example its recent acquisitions of P&O Ferries and Unifeeder.
In a similar attempt to control the whole supply chain, there has been a continued investment by e-commerce giants such as Amazon in end-to-end logistics as they seek to have control of their own global supply chains. Since Amazon’s trucking fleet launch in 2005, its logistics supply chain has expanded rapidly including the launch of Amazon Air in 2015. Amazon Air currently has a fleet of 40 planes with plans to expand to a fleet of 100. It is estimated that Amazon would save $2 to $4 per package by using its own air delivery service rather than its current heavy reliance on USPS, UPS and FedEx.
Amazon has progressed less with ocean freight since registering as a freight forwarder several years ago. However, Amazon’s recent hire of a former CEO of a global freight forwarder may suggest there is more to come in to the near future. While for the moment the likes of FedEx have not vocalised their concern, most analysts consider that while investors are focusing on Amazon’s last-mile efforts, the risk posed by Amazon Air is just as important. With the recent developments in Amazon’s ocean freight business, there is the further possibility that it could also begin to muddy the waters in the shipping sphere.
As purse strings tighten, carriers struggle to meet IMO 2020 standards and technology continues to have a significant impact on the market, it is an exciting time in our sector. Whether the likes of Amazon make a successful foray into the ocean freight supply chain remains to be seen but the automation, vertical integration and BRI make it certain that the landscape is changing.