Major ocean carriers move into a brave new world of forwarding, offering D2D to the global supply chain
 One can have misgivings at the latest trend by ocean carriers to diversify into freight forwarding, even assuming the role of integrator by providing full door-to-door (D2D) delivery.
Denmark's Maersk has said as much, most recently while expressing equanimity at the prospect of surrendering its top spot as the head of industry's league tables to its Swiss-Italian rival, the Mediterranean Shipping Co (MSC), having been the world's biggest carrier since the 1990s.
Maersk says it is no longer in the biggest-is-best game, and has charted a new course as an integrator as it plans to focus more on other aspects of supply chain service and less on ocean shipping.
Misgivings arise after reading an article in the Harvard Business Review detailing the risks of diversification and innovation, while outlining serious prospects of failure that loom ahead if one is not truly suited to make a change of course into the unknown.
One can recall Germany's travel giant TUI ten years ago finally extricating itself from ownership of Germany's big ocean carrier Hapag-Lloyd. What seemed like a good idea at the time for TUI, turned out to be a very bad idea indeed once the company found itself mired in a business it did not really understand and having to compete with companies that did.
Urging caution in diversification is a Harvard Business Review article by Constantinos C Markides, a professor at London Business School, cited as and one of the most influential management gurus by Forbes.com.
"First," he said, "companies usually face the decision in an atmosphere not conducive to thoughtful deliberation. An attractive company comes into play, and a competitor is interested in buying it. Or the board of directors strongly urges expanding into new markets. Suddenly, senior managers must synthesize mountains of data under intense time pressure.
"To complicate matters," said Prof Markides, "diversification as a corporate strategy goes in and out of vogue on a regular basis. In other words, there is little conventional wisdom to guide managers as they consider a move that could greatly increase shareholder value or seriously damage it."
There is little doubt that this diversification among ocean carriers is fashionable. French shipping giant CMA CGM is setting up its own airline and has hired 50 pilots ahead of gaining its French air operating licence.
Taiwan is poised to deploy EVA Air subsidiary and NYK Line, which owns Yusen Logistics, and Nippon Cargo Airlines (NCA) which has eight 747-8Fs. is thinking along similar lines.
This inter-disciplinary approach to one's role in the supply chain appears has become the thing to do for major players. Amazon has its Prime Air.
It is not as if Maersk and CMA CGM do not have experience in forwarding, with Maersk having had and disposed of its forwarding arm Damco, an unhappy experience. CMA CGM has had better luck with CEVA, by increasing its equity in the company in 2018 to 25 per cent then taking over in 2019.
One question that arises is whether this is a brief foray into air cargo is opportunistic to take advantage of Covid-driven soaring rates as much as it is a more substantial move into forwarding and the D2D world. Air freight capacity, has been laid low after the Covid scare slashed passenger traffic, which had carried 45-50 per cent of air cargo volume, sending rates soaring.
But taking the big boys at their word one assumes this is a comprehensive thrust into attempting end-to-end total supply chain coverage. Yet, even if successful, one can look at success as problematic. If global growth as continues once the Covid scare is over, will this bid for total supply chain coverage arouse bureaucratic suspicions of monopolistic practices, spawning probes and hard to mount regulatory hurdles?
Certainly shipper choice will be reduced as the distinction between forwarder and carrier is blurred to extinction. It would seem likely that one or other of these conglomerated behemoths would become dominant in a particular market or trade lane, arousing a crescendo of shipper complaints, spurring regulators to greater levels of intrusion and market distorting measures.
Then there are historic pitfalls of diversification itself to consider, outlined by Prof Markides in his Harvard Business Review article.
"Consider the case of Blue Circle Industries, a British company that is one of the world’s leading cement producers. Blue Circle decided to diversify on the basis of an unclear definition of its business. It was, the company’s managers determined, in the business of making products related to home building. So Blue Circle expanded into real estate, bricks, waste management, gas stoves, bathtubs - even lawn mowers," he recounted.
"According to one retired executive, 'Our move into lawn mowers was based on the logic that you need a lawn mower for your garden - which, after all, is next to your house.' Not surprisingly, few of Blue Circle’s diversification forays proved successful," Prof Markides said.
Blue Circle’s less focused, business definition approach to diversification didn’t answer the more relevant question: What were company’s strategic assets, and how and where could one make the best use of them, he said.
Companies such as British Petroleum and Exxon, he said, broke into the mineral business because they could exploit their competencies in exploration, extraction, and management of large-scale projects. Ten years later, the companies had dropped out of the game. The reason: In addition to the oil companies’ capabilities, the mineral business required low-cost extraction capabilities and access to deposits, which the oil companies lacked.
"To diversify, a company must have all the necessary strategic assets, not just some of them." he said. Too many companies mistakenly assume that they can break up clusters of competencies or skills that, in fact, work only because they are together, reinforcing one another in a particular competitive context. Such a misjudgment can doom a diversification move." said Prof Markides.
If what the carriers - and other major players in the supply chain - are really making long-term structural changes, it would be best they look before they leap. There are risks and rewards for innovation and it would be best if those making the decisions are fully aware of the perils before risking costly mistakes. |
