It’s no secret that the shipping industry is struggling with efficiency. Some actors advocate for increased capacity, others for improved logistics, and more focus on potential growth, but they all seem to be at war with one another. AlixPartners, a global business advisory firm, recently published a report entitled “2018 Global Container Shipping Outlook: Though Challenges Remain, Opportunities Exist for Carriers” chronicles the difficulties the oceanic freight industry faces, but also provides some areas to be optimistic about.

The biggest problem

Of all the issues plaguing the shipping world, AlixPartners’ report specifies that the most fundamental is capacity discipline. According to Esben Christensen, the company’s Co-Head of maritime practice:

“Carriers have talked for years about how consolidation was needed, and that has now happened to a large extent in the last couple of years. That is good, because it leads to fewer decision makers that make decisions on capacity that can ruin it for everybody else. But the bad news is that the fewer decision makers that are out there are still more bullish on carrier growth objectives than where the market is. The problem with that is that each carrier feels they can outgrow the market and order capacity that outsizes market growth, but as they all do that then you end up in the situation we all find ourselves in, with capacity entering the market bigger than growth in the market. If this is not done right, then the picture does not dramatically improve.”

Oceanic freight is dealing with a similar problem to on-land: excess capacity. Similar to how trucks drive billions of miles every year empty or partially full, ships sail with more room than is needed. The Shipping Outlook report emphasizes that expanding carrier fleets needs to be paused; it encourages decision-makers to “curb their voracious appetites for new ships.” We don’t need more ships, we need streamlined efficiency.

Another report called Global Shipping is On Course for Recovery in 2018, But All Eyes Are on Orderbooks from credit ratings provider S&P Global Ratings seems to agree, but also mentions that there is hope for economic recovery. American Shipper notes that the report says,

“The broad-based recovery seen in global ocean shipping is likely to continue in 2018, provided vessel owners don’t shoot themselves in the foot by ordering a raft of newbuild ships.”

Overcapacity is clearly a self-imposed problem. Supply Chain Dive believes that the issue stems from companies’ impulse to race to the top and undercut competition. Ebsen Christensen says that too many carriers (in their efforts to become major world players) try to grow their fleets to unsustainable sizes too quickly. The resulting low rates are convenient for shippers, but consequent instability and carrier service issues are detrimental to the overall supply chain.

How can we solve this problem?

AlixPartners’ report encourages consolidation. Companies can improve their capacity management skills by working to combine shipments onto a smaller number of vessels in a logical manner. Consolidation also helps cut redundant costs, which can allows room to modernize operations and incentivizes companies to exercise price discipline.

Fewer vessels also equals fewer decision-makers. Like trucking brokers, people responsible for scheduling ship routes have a lot on their plates. If there are fewer decision-makers, there is less opportunity for excess capacity and wasted fuel.

Mr. Christensen also mentions that digitalization and blockchain technology can kill two birds with one stone, helping update operations methods while also incentivizing price discipline. If suppliers and oceanic carriers could use a blockchain-based platform to access necessary data and plan routes at full capacity with a transparent and decentralized system, they could dramatically improve industry efficiency. Fortunately, we at Fr8 Network have goals to implement our platform into oceanic freight as early as 2019.

It’s more urgent than ever

The Altman Z-Score is used to predict the likelihood of bankruptcy. Anything below a 1.81 suggests a dire financial situation, and a 2.99 is considered a comfortable zone. As of the AlixPartners report’s publication date, the container shipping sector’s Z-score is 1.44. This low score is reason to be nervous — carriers are struggling to get their prices up. However, this score is indeed a climb from 2016’s number of 1.10, which was a historical low.

The current situation is certainly not positive, but there is reason for hope as long as suppliers and carriers are prepared to cooperate with one another and recognize that more ships is not the answer to establishing success and credibility. The oceanic freight industry needs discipline — and transparency, which blockchain technology is more than ready to provide.