Who is driving, and to where?

December 11, 2019

L-R: Rex, Schroeder, Lund, Zangrando

When we talk about shipping’s business model, what do we mean? An inefficient, debt-laden, asset-heavy industry mired in manual procedures, unable to leverage data or achieve genuine innovation perhaps? That is one of the prevailing narratives which has over the last couple of years become something close to orthodoxy, at least when one listens to the debate on the disruption that digitalisation brings.

But if true, the question is, what then? It may be simple and sexy to declare an industry out of touch and ripe for disruption, but the fact remains, while fortunes have been lost in shipping, plenty have been made – and the industry supports thousands of businesses as well as enabling the global economy to function.

So is it possible to effect a major change and still make money, especially if you wish to transform the basis on which shipping has made a profit – albeit a cyclical one – for centuries?

Part of the answer depends on whether digitalisation comes from within or without; driven by the end user or perhaps by the requirements of the trading company, finance or service provider. In either scenario, the change management necessary requires a completely new level of integration and collaboration with start-ups and third party service providers.

And as a panel at the recent Smart Maritime Network conference in Copenhagen discussed, this new approach can be as difficult to reconcile with sustainable profitability as the existing one; unless the participants are able to identify what new value looks like and how to capture it.

To Maersk Tankers’ Chief Digital Officer Peter Schroeder, the prospect – much discussed but little achieved – of optimising the freight market to reduce costs and achieve just in time sailing requires too many parties to come together to make it happen. “We looked at this by starting as simply as possible to make changes in the way we operate vessels, but unlike the tech industry we’re not used to working together across the value chain. It has a lot to do with culture and mindset and leaderships, if we really want to make it happen,” he said.

That has not stopped Maersk seeking to bring new sources of talent into the organisation he said and the change might be internal or it could be capturing what start-ups might bring.

To Rainmaking’s Eric Christian Lund, an industry questioning its growth models is ripe for partnerships from outside. “The industry is considering what is important to build, what to buy what to partner for. We also see companies questioning what is core and non-core. What we try to do is unleash the entrepreneurial talent process around it, understand the innovation landscape and help companies address partnerships,” he said.

Start-up Wharf’s Leonardo Zangrando has a decade of experience with start-ups and 25 in maritime and says shipping still has an issue with innovation. “No industry wants to be disrupted but we are not the drivers of change, you can take it or leave it, in which case you might disappear. The question is how open we are to change,” he said. “Will we have a Google in shipping – we might but we don’t know, but we need to be open to it.”

There are certainly radical areas being discussed, among them concepts like ‘the ship as a service’ which would associate shipyards more closely with vessels over their lifetimes. As Chris Rex of Danish Ship Finance pointed out, after the guarantee period there is no comeback on performance or quality. A service-led approach would move shipping closer to the aviation leasing model.

Rex also had a more fundamental question. “As new technologies emerge and they are available to everyone, it changes the landscape but where is the competition? We will need to find new sources of revenue that distinguishes us so that we can make money in future. New technologies can lower cost and improve performance management but that is not enough, we will need to earn some money in future.”

Schroeder agreed there is too much emphasis on technology ‘because you can, rather than for the realisable benefits’. In bulk shipping, talk of online chartering platforms has come and gone for decades but the value is hard to prove. “Who is trying to solve what problem and why and where is the money made? Yes brokers charge a fee but they also provide a service. The money doesn’t lie in disintermediation, there is much more value in other areas of the value chain using technology,” he said.

Lund believed the issues lies in a legacy mindset that prioritises the physical over the digital; a realisation that the industry is yet to accept, despite the noise around digitalisation. “Ownership and operation are two different things. Value used to be created through assets, now it is digital business models.” By that measure, he said, shipping is the Standard & Poor’s index in 1975. Nowadays, value creation is through digital business, driving valuations in a few years that it used to take years to build.

The problem with that argument is what happens when they money runs out, or valuations crash because profitability is never achieved. Shipping may be some way from a Silicon Valley bubble (though some believe we are already close), but we need only need look at the valuations of tech ‘Unicorns’ compared to their P&L to understand where the risk lies.

In this context, Zangrando was worried that shipping is experiencing the ripples of this much larger effect. As ‘a supporter start-ups’ he expressed concern that often they are being used to put huge amounts of capital into the market, the value of most of which is lost.

“What is the business model of software, to create innovation or to create hype? [Japanese investor] Softbank is supporting [logistics platform] FlexPort which is quite open about saying it is creating a platform that just repeats what all freight forwarders have done before but with a nicer interface. So where’s the value, to get to IPO and let the market pay for it? It harms smaller start-ups and real innovation.”

Lund believed that such smaller maritime-focussed start-ups would get funded anyway but what is needed is a more open-minded attitude from the industry, defined by engagement that will ultimately drive value out of the process.

“They are ready to deal, the start-ups want to work with maritime, it is us who don’t know how to deal with them. We need a programme that sets out the needs for data and the people to make it happen.”