Changing Landscape in Container Shipping and The Implications To Shippers

Changing Landscape in
Container Shipping and the

Implications to Shippers
27th Annual Apparel Importers Trade and Transportation

Conference
04 November 2015
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Key Drivers Impacting Ocean Shipping Industry
▪ Macro-Environment remains ▪ Structural Over-Supply continues, will

challenging be the case for many years
▪ Prospect of continued slow growth ▪ Longer Term pressure on rates &
globally but higher growth in parts of profitability
Asia & Middle East
▪ Industry structure coalescing around ▪ Fuel cost relief temporary

large/expanded Alliances ▪ Focus remains on reducing operating
▪ Complexity increases dramatically as cost
a consequence ▪ Drive to reduce fuel consumption
▪ Barriers to consolidation remain continues
▪ Factors that will result in the Liner shipping sector struggling with profitability
pressures for many years to come…
▪ Near term fuel cost reductions will positively impact results…but beyond the short
term carriers have to find new means maximizing asset utilization and reducing
cost
These dynamics are structural not just the effects of a cycle !
McKinsey & Company | 1

Scale has become a key differentiator
Alliances have had impact but not
Economies of scale are becoming increasingly visible in driving
on scale (other than on the
liner profitability
ocean)
Operating profit margin ▪ Allow smaller players to offer
Percent, FY 2014 1 wider service scope
▪ Helps reduce ocean-side costs
(e.g., allowing smaller players to
Real returns MAERSK acquire and employ larger
Wan Hai
to scale vessels)
High Intra-
Asia share
MSC*
MSC* estimated ▪ But, alliances do not help
OOCL CMA CGM overall scale (e.g., overhead,
K Line landside)
Hanjin
▪ And, the alliance structure
Yang Ming CSCL perpetuates the fragmented
Evergreen
COSCO nature of the industry: to a
Zim NYK degree minimizes consolidation,
APL Hapag-Lloyd and allows smaller players to
remain in the game, not exit
HMM
MOL ▪ However, with the evolution of
the Mega Carriers and
CSAV dramatically larger alliances,
the game has changed and the
industry will have to seek new
methods of attaining a
Total capacity competitive position and
Million TEUs, February 2015 improving profitability
1 Operating profit margin of 1H 2014 for COSCO and operating profit margin of 9M 2014 for Zim and CSAV
SOURCE: Alphaliner; Company annual reports

Scale has become a key differentiator – H1 2105 mostly fuel cost
contributing to improvement…underlying business still problematic
Alliances have had impact but not
Economies of scale are becoming increasingly visible in driving
on scale (other than on the
liner profitability
ocean)
Operating profit margin ▪ Allow smaller players to offer
Percent, 1H 2015 1 wider service scope
▪ Helps reduce ocean-side costs
Wan Hai (e.g., allowing smaller players to
Real returns
acquire and employ larger
to scale Maersk
High Intra- vessels)
CMA CGM
Asia share MSC ▪ But, alliances do not help
OOCL (estimated) overall scale (e.g., overhead,
Zim 1 landside)
Hanjin Hapag-Lloyd
▪ And, the alliance structure
perpetuates the fragmented
Evergreen nature of the industry: to a
NYK degree minimizes consolidation,
COSCON and allows smaller players to
K Line APL remain in the game, not exit
Yang Ming
CSCL ▪ However, with the evolution of
HMM the Mega Carriers and
MOL dramatically larger alliances,
the game has changed and the
industry will have to seek new
0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 methods of attaining a
competitive position and
Total capacity improving profitability
Million TEUs, November 2015
1 Zim turned around first time since 2012 after debt restructuring in July 2014
SOURCE: Alphaliner; Company annual reports McKinsey & Company | 3

Profitability is expected to remain rather flat with downside risk
Container shipping industry EBIT margin 1

Percent
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1H-
15
1 Industry avg EBIT of APL, Maersk, Hapag, Hanjin, EMC, MOL, NYK, K Line, HMM, MISC, CSAV, RCL, Wan Hai, ZIM, 2Q15 excludes MSC and CSAV
SOURCE: Annual Reports McKinsey & Company | 4

Container shipping lines experienced a tough period again this
year, especially for the third quarter…a couple of examples
Operating profit Operating profit

Revenue growth, Revenue growth, margin margin
Revenue, 9M 2015 9M 2014-15 1H 2014-15 9M 2015 1H 2015
USD bn Percent Percent Percent Percent
4.1 -21.2 -18.0 -0.8 1.1
3.9 -10.1 -7.9 -4.2 0.2
1.6 -3.7 3.7 N/A N/A
The acceleration of performance deterioration is obvious in Q3…in spite of significantly

lower fuel prices y-o-y.... a clear indicator of bigger challenges to come
SOURCE: Annual Reports McKinsey & Company | 5

Profitability pressure has translated into an intense drive to reduce cost –
which unfortunately has negatively impacted customers and their supply
chains
Many of the steps that the carriers have taken in the chase to reduce cost have
had a negative impact on service levels and consequently a direct impact on
their customers supply chains
▪ Slow steaming
▪ Constant changes in network; service suspensions and adjustments in the process
of seeking lower network operating cost
▪ Reductions in organization; sales and customer facing resources
▪ Expanded alliances that have made for a much more complex operating
environment particularly on the U.S. West Coast; multi terminal operations is much
more challenging than most anticipated
▪ Exiting the provision of chassis concurrent with creating a more complex operating
environment
▪ There remain opportunities for the carriers to focus on initiatives that would target
improved flow/velocity through their terminals (particularly on the U.S. West Coast)
Next phase….focus on driving down costs, but attack barriers to improving

flow through the terminals, result; lower costs and better service….
Delivery Schedules through 2019…..Scale game is over for many

Another view of the scale differences
19 of the top 30 carriers shown below by share of global market share…
SOURCE: Alphaliner
These rankings will change shortly should the Chinese carriers combine; day one they
move up to #4, their current orderbook takes them to #3 by 2017
All carriers outside what will be the top 4 will have a structural cost competitiveness
challenge and little realistic way to achieve competitive scale organically

In aggregate, oversupply is expected continue for many years
Global container shipping volume, TEU mn standing slots

Demand - Historical Active fleet - Historical Total fleet - Historical
McKinsey’s forecast an
over-supply condition
Actuals Forecast existing through 2019
24
But it’s really about
Supply supply/demand gaps in
22 specific trades; East/West
Layup trades will take the brunt of
pool the orderbook so utilization
20 Eff. 82% there will be a challenge
utilization
Bottom line is the industry
18 Demand has to construct a basis of
becoming profitable without
supply/demand coming into
16 78% balance for many years
The Supply-side in this

14 graphic does not account
for many orders of
14,000’s to 20,000 teu
0 ships by Maersk, China
2013- 14- 2014- 2016- 17- 2018- 2019- 2019- Shipping, Cosco and
01 01 11 01 01 01 01 12 others during 2015
SOURCE: Global Insight for macroeconomic indicator outlook; McKinsey Container Model (Jan 2015); Drewry

Alliance Trade Lane Positioning…tells you something about the future
The relative “under-weight” presence of the 2M and the O3 alliance in the U.S. trades will
likely be an area of focus for the carriers in these two groups in the future…this along with
the growth of Evergreen will put heavy pressure on this trade in 2016 – 2017

Cascading – Implications for the Transpacific
• 1.5 M TEUs of capacity from Asia to North America is carried by ships of 7,500 teus or
smaller … most will have to be cascaded out of the trade
• There is ~1 M TEUs of capacity deployed in Asia Europe currently on ships below 10,000
TEUs … many will be shifted to the Transpacific
• Will be part of the dynamics that will be disruptive to the stability of Transpacific pricing
over the next few years
SOURCE: ALPHALINER

Dramatic growth by some coupled with the deployment of larger tonnage
will have a potentially significant impact on the market
Transpacific trade has yet to see the impact of cascading from Asia/
Europe and the influx of larger tonnage on the West Coast (MSC,
Maersk and few others with some 14,000’s already but most still
operating smaller tonnage in the TP
▪ Large number of 4–6,000 teu ships currently serving the WC will begin to be
replaced by 9-10,000’s and in some cases 14,000’s
▪ The Panamax ships currently serving the USEC will become uncompetitive as soon
as the expanded Panama Canal opens in 2016/2017
▪ Low fuel prices and charter rates may keep some around longer, however the
transition to at least the 9-10,000 teu range will begin immediately upon the widening
of the canal
▪ 2016 through 2018 will see a major transformation in the ship sizes serving the U.S.
market
▪ The challenges that the carriers and terminals have today will be made more difficult
if the operating methodologies/processes the carriers employ don’t begin to change
▪ Greater “peaking” will require improvements in velocity through the terminals or
service levels will be more significantly impacted

Alliance Evolution
From 3 Major Alliances and Numerous Independent Operators in 2011 …to 4
Large Alliances in 2015….the future will bring further changes
2M
2m
O3 +
G6
CKYH
SOURCE: Lloyd’s List

Consolidation of “National Carriers”- some yes, some no…or not for now?
The combination of the two Chinese carriers appears to be in the works

Will create what will quickly become the 3rd largest carrier in
the sector (ahead of CMA) as their orderbook is delivered
Combining the three Japanese carriers has been talked about for years
Some very deep competitive dynamics that is at the core of these companies history
A suggestion by the Korean government that the two Korean carriers should merge has
just last week been reported in the trade press; the rumored step by the two Chinese
carriers probably the catalyst
Followed immediately by sources attributed to the two carriers indicating no interest in
doing so…a lot of history to overcome

Increasing Complexity

Complexity Varies by Geography
Alliances add Largest complexity challenge; many Few carrier
Challenges are
complexity; Japanese & carrier owned/operated owned/operated terminals,
congestion and poor
Korean carrier terminals/multi-terminal challenges handling
infrastructure not
owned/operated environment and sub-optimal big largest ships at some
Alliance impacts
terminals a challenge ship capabilities ports
Europe
Japan &
U.S. W/Coast U.S. E/Coast
Korea
Middle
India & China &
East
Subcon SE Asia
Latam
(Panama
ME generally has
Europe has some China and most of SE Asia New connectivity
capacity and capability
added complexity adequate capacity and capability to opportunities/changes in
for larger ships and
due to new adjust to Alliance structures…some networks driven by larger
adjusting to new Alliance
Alliance structures challenges in Hongkong (HIT/MTL) ships
structures
Network complexity increases, however it is the impact on the landside

that is the challenge for most of the expanded alliances

Terminals are a major complexity driver, especially where alliance
members operate their own facilities
Five of the G6 have their own terminal assets in L.A. … … driving substantial complexity
3 13 13 ▪ Each carrier has a strong

incentive for their vessels on a
2 4 service to call at their terminal
10 – Terminal costs are not shared
5 12
1
11 – Some carriers run terminals
6 as profit center, some as cost
centers (some now with JV
7 13
partners/financial investors).
9 8 – Sets up difficult negotiations
within alliance on rates to be
charged to alliance partners
Berths Operator Ownership
▪ This leads to less efficiency
1 100 China Shipping (CS) CSCL compared to if each alliance
2 121 - 131 Yang Ming (YM) Yang Ming was using one terminal
3 135 - 139 TraPac (TP) MOL – Higher” peakiness”
4 206 - 209 Port of LA (POLA) Port of LA – Customer service
issues/confusion
5 212 - 225 Yusen (YTI) N Y K Line
6 226 - 236 Seaside (STS) Evergreen
– Chassis location complexity
7 302 - 305 Eagle Marine Services APL

– Trucking to-from rail head
complexity
8 401 - 404 APM Terminals (APM) Maersk
– Sub-optimized utilization of
9 405 - 406 California United (CUT) Hyundai assets; ships, terminals,
10 T130 - 140 Total Terminals (TT) Hanjin trucking, rail
11 G226 - 236 International Terminal (ITS) K Line – Higher costs
12 F6 - 10 Long Beach (LBCT) OOCL – Negative impact on service
13 Piers J,A,C1 SSA Terminals (SSAT) Carrix
1 Includes berths J243 – 247, J266 – 270, A88 – 96, C60 – 62

SOURCE: Drewry research; McKinsey & Co

Implications to Shippers

Implications to Shippers – Broad Industry Dynamics
What are the major implications to shippers from the environment affecting
the container shipping sector?
 Continuing access to rates that reflect intense competition and capacity surpluses…for a
long time to come
 Carrier behavior continues to focus on reducing costs to counter revenue/profitability
pressures unfortunately, that have a habit of shifting costs to others
 Continued supply chain impacts
 Alliance structures that are complex and will continue to evolve
 Service related challenges due to these complex operating arrangements
 Consolidation, while slow will occur; some disruption in market and service structures
during each consolidation event/reshaped alliance cooperation
 Reduced “choice” as a consequence of the alliance evolution…trade off is more scope
 Ongoing nightmares with chassis supply and logistics; challenges to ensure sufficient
chassis supply, at the right location, and at the right time and at a reasonable cost
 A growing NVO/Forwarder market share as carriers reduce customer facing/organization
to reduce costs

Landside Collaboration

A New Approach to Alliance Cooperation…
▪ Alliances have overall brought a number of benefits to small and mid-size carriers
through:
– Combining their ocean assets to gain significant increases in scope, aimed at
minimizing the capital investment in creating a more competitive service structure as
compared to the largest carriers
– Achieving economies of scale by enabling usage of larger vessels utilizing the
combined volumes of the group
– As a result, smaller carriers are beginning to close the gap in terms of slot costs
compared to the largest carriers (Maersk and MSC), on the trades covered by alliance
agreements (e.g. E/W)
SOURCE: McKinsey & Co, RDW & Assoc, Team

A New Approach to Alliance Cooperation…
 However, there remains a number of challenges for smaller and mid-size Carriers
remain sub-scale on the landside, where carriers’ cost is largely a function of only their
volumes
 Expanded alliance structures have created a dramatically more complex operational
environment, particularly on the U.S. West Coast, e.g. larger vessels hence higher move
counts, increased “peaking”, terminals operating close to full capacity, carriers decision to
exit the provision of chassis, ILWU labor unrest tied to an unresolved contract negotiation
and an alliance service structure calling at 7 different terminals in the LA/LB basin
 The combination of these events resulted in a calamity, vessels stacking up unable to
berth, lack of trucks to service the flow in/out of terminals due to longer cycle times, delays
in customers accessing their cargo, a breakdown in intermodal flows, a loss of terminal
velocity and significantly increased costs
SOURCE: McKinsey & Co, RDW & Assoc, Team

Example: Asia/U.S. trade lane, alliances (aggregated volumes) create
ocean scale but members only have their own landside scale once “off the
ship”….cost competitiveness remains challenging
FE - N. America weekly capacity Landside volumes at US ports 1
Thousand TEUs, 1 January 2015 Million TEUs, 2014

Maersk MSC MSC
2M 38 28 66 Maersk Line
Hapag-Lloyd/CSAV
WC EC Evergreen Line
CMA CGM CSCL UASC
CMA CGM
O3 24 21 7 52 APL
Hanjin
WC EC
Cosco
COSCO K Line Yang Ming Hanjin Evergreen
OOCL
CKYHE 34 21 17 30 39 140 NYK Line
WC EC Hyundai
NYK OOCL Hapag-Lloyd MOL Hyundai APL
"K" Line
Yang Ming
G6 17 22 20 21 17 31 128 MOL
WC EC China Shipping
CKYHE is the leader But, CKYHE members -16%

lag MSC and
in Oceanside scale Maersk in landside scale working
alone
1 Include both import and export volumes in U.S.
SOURCE: Bluewater, Alphaliner, JOC McKinsey & Company | 23

Alliances can and must work closer together on the landside to reduce
costs and improve flow/fix operational issues
▪ Need to get a competitive cost base across combined operations – as close as possible to
acting as a single entity, without a merger
Overall ▪ Need to resolve the operational complexity (e.g. US WC today) which is putting the alliances at
a major disadvantage
▪ Have got to address distruction of service and damage to customers supply chains
▪ Pool operations – especially on U.S. WC – allowing multiple terminals to operate as close as

possible to being one large terminal
Terminals
▪ Key savings on terminal management costs, utilization of assets and potentially labor (optimizing
gang deployment) and revenue sharing/lease cost to Port Authorities
▪ Establish single intermodal entity as the operational interface with rail companies; with a single
focus to managing the planning and execution of flow improving velocity through terminals. This will
Rail have positive impact on costs for the carriers, railroads and positively impact shippers supply chains.
▪ Improvements in co-ordination will show as trucking/repositioning savings (e.g., better empty co-
ordination), but improvement in rail carrier asset utilization will translate into savings on rail spend.
▪ Form a combined trucking and truck dispatch entity to plan movement of all carrier controlled
drayage, thereby increasing roundtrip utilization. This involves boxes inter-terminal, to/from rail
Trucking ramps, common co-ordination of chassis logistics/flow.
▪ Better use of the scarce trucking resource in the U.S. (LA/LB in particular)
Overhead
▪ Combine operational teams into one single team (potentially in a new operating company) to
reduce overlap and enable the above levers
▪Pool container fleet/procurement as well as pool management as the overall fleet required is
Other probably smaller than total from each player
▪ Combine alliance level chassis requirements (within the broader “Pool” to better manage chassis
logistics
Approach described initially for U.S. operations, but principles can be more
broadly applied across the network
Clear cause for action, so where do we go from here?
▪ Carriers have to get away from the mind-lock

of “I don’t get paid for it” …if you can improve
your costs, and as a consequence flow improves
regardless of whether the customer pays a nickel
more, are you not better off?
▪ We believe Railroads will engage in the

process given positive implications to the
railroad’s cost and service delivery
▪ Shippers can help the process but not enough

yet willing to engage differently….
▪ Peaking effect will increase as larger ships

begin to show up in the Transpacific…..they’re
coming
▪ Efficiency levels are going to have to improve

or the terminals will be adversely affected

Intermodal Example

Implications for intermodal transportation
One of the more significant drivers of improvement – the coordination of

the flow; to/from the railroad, use of on-dock rail – would require the
following:
▪ Single operating entity to coordinate information and physical flow of intermodal volumes
for an entire alliance’s intermodal activity
▪ Provide the railroad with the data, one time, the same time, in the same format for all 4-5-
6 members of an alliance
▪ Pre-planning of all intermodal flows; on-dock rail as well as dray to ramps
▪ Collaborate to maximize the use of the collective on-dock rail assets
▪ Coordination of all trucking related to intermodal flow (inclusive of chassis logistics
planning and execution)
▪ There is new technology emerging that could provide new visibility tools that would
enable improved upstream visibility and more efficient preplanning from both a terminal
and a rail planning perspective

Implications for intermodal transportation
There are significant opportunities from a change in methodology. Some

examples of what might be achievable:
▪ Improved velocity through the terminals; improved flow reduces extra handling,
enables ship productivity improvements
▪ Reduce the demand on the scarce trucking resource
▪ Enable the reduction in “empty legs” for trucking to ramps, improve chassis logistics
and related costs….reduce delays/congestion related to not having sufficient chassis
at the right place at the right time
▪ Building of more, longer trains to maximize road power utilization
▪ Minimize rail switching to make/break trains
▪ Create more “run through” trains to reduce X-town drayage and steel wheel
interchange at interior points (Chicago….others)
▪ Improved use of rail carrier assets in LA/LB basin
▪ Aggregating volumes and coordinating flow to increase density in certain lanes
There are 20 carriers today flowing intermodal volumes to 2 railroads (2 ramps) in

the LA/LB basin…there’s a way to be smarter about managing the complexity

Chassis Situation Update

Chassis environment….
Major Problems– Split Moves & Chassis Supply Imbalances/Dislocation
 Mostly a problem for the trucker, who must drop off container at one terminal and
return chassis to another.
 Impairs trucker’s ability to pick up next load. Time could be spent delivering
another revenue load.
 Trucker usually not paid for chassis repositioning
 Some terminals have an adequate supply of chassis, while others are short
 Main cause: lack of collaboration among key stakeholders
“The problem isn't merely the quantity of chassis, but

the mismatch between where they are located and
where they are needed.”
– Eric Kulisch, Editor, American Shipper

Labor Update

Labor Developments -
ILWU Contract Negotiations Outcome –

 4.7% annual wage increase– impact of roughly hundreds of millions over the 5 year life of the
contract
 Offset by some savings to the employers for healthcare benefits…significant but not enough
to negate the financial impact of wage increases
 Introduction of a new Arbitration structure; industry arbitrators replaced by a three member
panel (one union, one employer, one independent) – remains to be seen the impact
 Union achieved expanded ILWU Chassis Roadability inspections (LA model spreads to the
rest of the W/Coast (Chassis leasing companies challenging ILWU jurisdiction in court)
 Another “standoff”…little gain/loss on either side
 No erosion in Technology/Automation provisions….doesn’t mean resistance to new
automation will change
Was the impact on the industry and the shipping community broadly worth the
agony? Depends on where you sit….
Is there anything that can be done to change the process/dynamics?

Next Up – OCU (LA/LB ILWU Office Workers Negotiations - June 2015
 Notoriously difficult negotiations
 Employers (other than Maston) traditionally attempt to negotiate as a group, the OCU attempt
to force negotiations with individual carriers
 This and guarantees of the number of jobs have in past negotiations resulted in protracted
and difficult negotiations
 Labor force of hundreds not thousands with the power to disrupt many terminals/carriers
business
 ILWU leadership has some ability to influence but this is a separate unit with their own
leadership
 Not all carriers/terminals have OCU labor but due to the spread of cargo flows as a result of
the expanded alliances “multi-terminal” operating environment, most could be affected by
disruptions should negotiations not go well….as a practical matter other than Matson, nearly
every carrier’s cargo could be affected to some degree by OCU negotiations related
disruption
 Latest news; appears that 3-4 carriers have already broken with the “group negotiations” and
already reached settlements with the OCU
 Given the broader operating challenges being worked through, one would hope that rational
minds prevail…..something to keep an eye on
ILA Negotiations – Underway

 How much can ILA capitalize on “tailwind” from what the ILWU achieved on the West Coast?
 M&R jurisdiction (some of the same issues as were tough points with the ILWU)
 The ILA has less “coastwise” leverage than their brothers on the W/Coast, however, given
the need for the majority of the freight to move over the N/East ports, their ability to achieve
similar objectives as the ILWU is there
 Use of the East Coast gateways are not a guarantee of “no problems” down the road….but to
many shippers the angst over the PMA/ILWU relationship will drive some shift until/unless the
ILA proves not to warrant a somewhat higher level of trust

Teamsters Organizing Efforts – West Coast Trucking (Harbor Area)

 Teamsters continue their efforts to organize “owner operator” trucking in the LA/LB areas
 Given insufficient trucking supply in general due to a number of factors, not a positive
impact on efforts to improve flow
 The tough operating environment created by more complex alliances (dwell time increases,
turn time deterioration for truckers) the teamsters have a clear window of
opportunity/message that may resonate with their targets
 The Teamsters have, over the last 12 months successfully organized a number of
companies in Southern California
 Shippers generally see success on the part of the Teamsters as resulting in higher cost and
less service

Feedback from Shippers
What follows is a sampling of quotes from face to face interviews conducted

with shippers, both BCO and NVO’s, large and small as part of McKinsey’s
initiative to provide greater insights into the dynamics affecting shippers and
their customers and examine some possible solutions and how the various
players can collaborate to bring about improvements

Related to Leadership
 “There is a lack of leadership in the container shipping sector”
 “There is a void in CEO’s taking an active role in helping to address the most
pressing issues in ports, legislation in Washington, pushing for infrastructure
changes, and bringing shippers together to solve problems. The void today is
greater than it has been in my tenure in this industry.”
 “There’s nobody to talk to….local management doesn’t make the decisions”
 Many seeking more Ocean carrier involvement and accountability for terminal
performance, especially at terminals the carrier doesn’t own
 Stop being followers and be innovators. You have too many ocean carriers out
there today who simply “follow” the market leaders which result in severely
negative revenues. Government subsidies needs to stop as well so the ocean
carriers can conduct a business with repercussions.
 “Openly work with customers on new cost containment ideas and process improvements”
 “Carriers top decision makers have to adapt; options have to be more carefully
evaluated in order to prevent major problems for other players in the supply-chain”

Related to Service Levels
 “Service has not met the defined transit standards, but is improving. Some carriers are
more engaged in delivery to the final destination and some are disconnected from
managing the final leg.”
 “Port related delays are generally identified as 1-2 days (post ILWU negotiations)
on top of the 2-3 days impact of slow steaming”
 “Solution to the delays to our supply chain; ship early and seek more near-
shoring”
 Still seeking better on time performance regardless of the transit time
 “This has certainly impacted our business. Not as much with slow steaming as
most customers are ok with this as long as ocean carriers stick to the published
schedules. The terminals continue to pose a major issues from the management of
demurrage to efficiencies in handling the cargo off the vessels and to IPI and local
G4 area it’s a mess.”
 “There is simply no sense of predictability anymore which impacts customers
planning and inventories. The specific impact relates to more and more customers
paying and budgeting more than they need to create a buffer level for these
charges and transit.”

Related to Service Levels - continued
 “Take ownership for quality of service and operations at ports.”
 “For a member in a large VSA, such as the G6, its almost impossible to maintain an
individual service profile”
 “More predictable choice of terminals with regard to any given vessel string (hard to route
to avoid terminals with history of problems). More reliable transit times. “
 “More predictable choice of terminal with regard to any given vessel string (hard to route
to avoid terminals with history of problems). More reliable transit times. Better partnership
with dray carriers and drivers.”
 “The NVO’s/Forwarders are filling the service void left by carriers who only want to serve
port-to-port”
 While slow steaming has added days some days to the overall supply chain, the
most significant impact has been the impact of congestion at the terminals. In
particular NY/NJ and LA/LB. The advent of the alliances, mega vessels, the
elimination of chassis and lack of infrastructure improvement has created
significant levels of congestion at a number of terminals. The terminals in a
number of gateways were not designed for the level of activity. “

Related to Chassis
▪ “The chassis debacle continues; forces me to recover my added cost from the
carriers, but service impacts remain”
▪ “We leased chassis directly to ensure that we had a reliable supply….I get the cost back
from the carriers we utilize”
▪ Most acknowledge increased cost associated with chassis provision and the logistics of
chassis (mainly in the ports) but few willing to disclose the cost impact on their
businesses; some clearly have “netted” the cost impact out of the overall rates they pay
carriers
▪ “Ports with Gray Pools helps re chassis, ports without can result in 1 additional day delay
depending on day of the week and level of terminal congestion”
▪ Many have seen their trucking cost increase as a function of congestion at terminals and
the additional time related to chassis
▪ “Don’t change horses in mid-stream; Neutral chassis pool should have been
agreed upon “before” the carriers stopped providing chassis….Stop providing
chassis before and during the ILWU negotiations caused additional delays….what
were they thinking”
▪ “There is some undetermined amount of additional dray cost due to dray carriers having
to sometimes spend more time hunting for the chassis.”

Related to Labor
 None see any changes coming in the labor negotiation/union issues that expose them to
“debilitating problems around each contract negotiation; desire to see stronger federal laws
and the will to use them (Taft-Hartley)
 “The government needs to step in and pass laws that disallows both parties to
leverage their strengths and cripple the economy. This is starting to become an trend
which can be severely detrimental to the growth of US ports. Canada and Mexican
ports are certainly growing and investing in rail connectivity and we continue to lose
market share methodically from this.”
 “Concern regarding the continuing efforts of organized labor to push the owner operators to
unionize; if they succeed shippers will pay more for less”
 “Clearly the relationship has to be strained. This past negotiation was long, elongated,
frustrating and cost the supply chain billions. This negotiation coupled with the one
on the East Coast earlier has the shipping community weary. The PMA and ILWU
started negotiations too late and shippers concerned with disruptions moved cargo to
other gateways which led to increased congestion and costs. Negotiations have to
start earlier, and at some point need to be considered part of a national interest where
the government steps in much earlier.”

Related to Alliances
 “The alliances were needed by a number of carriers to address the overcapacity

in the market and for the smaller carriers to compete against the super carriers
such as Maersk or MSC. However the downside is that operationally the carriers
were not ready to handle multiple carriers within their terminals. How containers
were stacked by ocean carrier and lack of a plan for chassis contributed to
confusion and congestion within a number of terminals. Those port operations
that are state owned and operated such as Charleston or Savannah have not
experienced the same issues as landlord ports.”
 Uniform view that the expanded alliances have resulted in worse service
 “Alliances are needed and there is no way around this given complexities of the
business and the widening gap between supply and demand. However the sheer
number of carriers within an alliance is the main issues. G6 as an example
compared to 2M. The effectiveness of a smaller alliance compared to a larger is
very clear on how the operations are handled at the terminals. Even with these
alliances, operationally 2M has a better grasp on operation compared to other’s
which is good as they tend to be profitable while others are not.”

Related to Communications/Visibility
 “Communication gaps and inefficient coordination among shippers, terminals,
ocean carriers, and land transport companies in the scheduling and movement of
containers in and out of the ports”
 A consistent message of the need for better real time visibility of event data from the
carriers and the terminals they use
 “Looking for more transparency to individual terminal turn times (inclusive of trucker
waiting time”
 “More accurate and timely information flow reporting arrival, berthing and container Ba
availability”
 “Terminal information about container status that would readily integrate back to visibility
system/TMS (vs. separate place to go for information”
 There needs to be more EDI connectivity between carriers, rail lines, dray carriers,
NVO’s and BCO’s to help manage better and effective information and to eliminate
manual data entries. There also needs to be a better structure for IPI/RIPI cargo
movements which by far is a major choke point.

Related to Port Authorities
 “Looking for Port Authorities to be a single source of performance information for
terminals within their port and to be a driver of best practices…recognizing that
some ports are landlords and do not have an operating role.”
 Port Authorities should “broker” solutions between the interested parties
 They need to do a better job being proactively to help Importers problems.
 Demurrage at the terminals are a perfect example, none of the WC port authorities
stepped in to help any importers on the ridiculous demurrage charges imposed by
the terminals when the clock continued to run when the ports were extremely
congested, closed and containers being in closed areas. This was very different
from the South Eastern ports that are state owned who tend to be flexible.

“Factors that should be top priorities for carriers/terminals;
 Automation
 Cost effective off-dock depots to get work off the marine terminals and reduce
transactions at the terminals
 Standard appointment system
 Improved rail and highway connectors
 Improved highway infrastructure through metro areas
 Stabilize rates, eliminate the wild swings.
 Get aggressive with the port authorities to design terminals that fit today’s new
norm.
 Take a leadership role in defining a chassis strategy for LA/LB markets.
 Partner with shippers and trucking providers to design a better flow of cargo in
and out of the terminals.
 Find a way to communicate more proactively when encountering issues”

“What do you see the liner shipping sector looking like in 5-10 years?
 There will be fewer carriers. Fewer options means additional expense.

 Bigger ships will continue to enter the market
 Alliances will exist in some form.
 There will be terminal consolidation.
 Perhaps 'alliance terminals' as that seems to be the next obvious area of expense
reduction.
 Possibly t or 2 carriers will be gone - merged or out of business.
 A few niche carriers will emerge with focus on service/speed at premium price
 Remaining large carriers will continue to compete by focusing on lowering costs”

What can shippers do to counter to these impacts?
 Engage more intensely at a senior level to press for changes in operating
methodology; landside collaboration and other steps to address negative impact on
supply chains will need a push from Shippers, Shipper Associations, Railroads and Port
Authorities
 Bring your CEO’s to the table, not only the transportation purchasing people…press for
interaction and involvement by the CEO/Chairman of the carriers
 Be more vocal publically regarding the economic impact of the slowing of your supply
chains
 Continue efforts to bring about changes to laws affecting how government can more
effectively assist in avoiding or mitigating what most shippers see as labor/management
dysfunction on the U.S. West Coast….a tall task…
 Collectively continue efforts to raise awareness with government regarding; poor
productivity at U.S. ports and keep banging away at the need for improved
transportation infrastructure

What actions can shippers take to contribute positively to affect the

operating environment?
 Improve upstream visibility/forecast of your needs; capabilities vary dramatically from
shipper to shipper
 Be more “refined” in the service demands/priorities you put on your carriers;
demanding higher service and then letting the box sit at a marine terminal for days after
arrival wastes resources at the terminal
 Be proactive in moving activity to “non-peak” days, hours of the day
 Support appointment systems at the marine terminals
 Demand carriers and terminal operators provide greater transparency….make
transportation purchasing decisions based on those to either can provide or are
committed to greater transparency
 Make it clear your support will be focused on carriers who undertake making
improvements to their service, particularly improving flow through their terminals
 Reward those carriers who move in a helpful direction, build new/better service
capabilities

What actions the carriers/terminal operators take to bring about

improvements in flow/velocity through the terminals?
 Collaborate/cooperate on landside activities that are key to flow/supply chain impacts;
terminals, intermodal and trucking
 Focus on opportunities to reduce cost that have a positive impact on flow/velocity
through the terminals…in other words; lower cost but how about doing things that are not
damaging to your customers in the process….
 Provide better visibility/transparency to planning and event execution
 Upgrade/develop new visibility technology and be supportive of providing access to a
broader constituency of participants in the supply chain…understand that more
transparency means taking on greater accountability for performance
 Re-think how to better address the chassis nightmare that the decision to eliminate
provision of chassis has created…there are better ways to handle even in an
environment of no longer owning/providing these assets
 Show some leadership in addressing the problems; carriers made the decisions to
operate in the way they do …..carriers can make different decisions that would have
positive impact…

Bottom Line….
 There is a need for a greater level of engagement between the shipper

community, the carriers (at an alliance level) at a more senior level (decision
makers) targeted at bringing about a mindset shift related to the industry’s
service delivery
 The carriers will need to continue to focus on finding means of reducing their
costs, but need to focus on landside initiatives that not only reduce cost but
positively impact the flow/fluidity through their terminals
 As a result of the more complex operating environment that the evolving
Container Shipping landscape has produced, solutions will require greater
collaboration and the engagement of Shippers, Railroads, Port Authorities
and others in the supply chain to help the industry find a better path

Changing Landscape in Container Shipping and The Implications To Shippers

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Changing Landscape in

Container Shipping and the

27th Annual Apparel Importers Trade and Transportation

CONFIDENTIAL AND PROPRIETARY

▪ Macro-Environment remains ▪ Structural Over-Supply continues, will

▪ Industry structure coalescing around ▪ Fuel cost relief temporary

These dynamics are structural not just the effects of a cycle !

McKinsey & Company | 1

McKinsey & Company | 2

SOURCE: Alphaliner; Company annual reports McKinsey & Company | 3

Container shipping industry EBIT margin 1

SOURCE: Annual Reports McKinsey & Company | 4

Operating profit Operating profit

4.1 -21.2 -18.0 -0.8 1.1

3.9 -10.1 -7.9 -4.2 0.2

1.6 -3.7 3.7 N/A N/A

The acceleration of performance deterioration is obvious in Q3…in spite of significantly

SOURCE: Annual Reports McKinsey & Company | 5

Next phase….focus on driving down costs, but attack barriers to improving

McKinsey & Company | 7

McKinsey & Company | 8

Global container shipping volume, TEU mn standing slots

The Supply-side in this

McKinsey & Company | 9

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McKinsey & Company | 11

McKinsey & Company | 12

SOURCE: Lloyd’s List

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The combination of the two Chinese carriers appears to be in the works

McKinsey & Company | 14

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Network complexity increases, however it is the impact on the landside

McKinsey & Company | 16

3 13 13 ▪ Each carrier has a strong

7 302 - 305 Eagle Marine Services APL

1 Includes berths J243 – 247, J266 – 270, A88 – 96, C60 – 62

McKinsey & Company | 17

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SOURCE: McKinsey & Co, RDW & Assoc, Team

McKinsey & Company | 21

SOURCE: McKinsey & Co, RDW & Assoc, Team

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Thousand TEUs, 1 January 2015 Million TEUs, 2014

CKYHE is the leader But, CKYHE members -16%

SOURCE: Bluewater, Alphaliner, JOC McKinsey & Company | 23

▪ Pool operations – especially on U.S. WC – allowing multiple terminals to operate as close as

▪ Carriers have to get away from the mind-lock

▪ We believe Railroads will engage in the

▪ Shippers can help the process but not enough

▪ Peaking effect will increase as larger ships

▪ Efficiency levels are going to have to improve

McKinsey & Company | 25

McKinsey & Company | 26

One of the more significant drivers of improvement – the coordination of

McKinsey & Company | 27

There are significant opportunities from a change in methodology. Some

There are 20 carriers today flowing intermodal volumes to 2 railroads (2 ramps) in

McKinsey & Company | 28

McKinsey & Company | 29

“The problem isn't merely the quantity of chassis, but