Hiroyuki Sato, Senior Managing Director of Mitsui O.S.K.

Lines, gave a speech at "The 2nd International Gwangyang Port Forum" in Gwangyang, Korea, on 24th April 2002. In this speech, Sato described the globalization of container liner shipping and its contribution to the global economy. He also pointed out that globalization does not always have a positive impact on the shipping industry.

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"Management Strategy of Container Liner Shipping in the Age of Globalization"

Hiroyuki Sato Senior Managing Director Mitsui O.S.K. Lines

Thank you, Mr. Chairman. Good afternoon, Mr. O.H. Kim, Mr. S.Y. Oh, distinguished guests, ladies and gentlemen. My name is Hiroyuki Sato. I have been with a Japanese shipping company, Mitsui O.S.K. Lines, and in shipping business for more than 35 years. It is my great honor to be here today to speak on "Management Strategy of Container Liner Shipping in the Age of Globalization". First of all, I would like to offer my congratulations on the success of the 2nd International Gwangyang Port Forum and on the 20th anniversary of Korean Association of Shipping Studies Inc.
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Whats the globalization of liner transportation?

In my view, marine transport is essentially a global phenomenon, at least in regards to overseas shipping. It has developed in step with the expansion of world trade, providing a critical infrastructure for trade. And, as an occupation involving the navigation of the seven seas, marine transport has always been a global industry. In overseas container transport as well, the great age of expansion was launched by national shipping industries developed to support their own nations industrial expansion. Take my home country Japan, for example. Japanese shipping companies also got their start as specialists concentrating on Japan related trades alone, but expanded and grew along with the world economy and with the globalization of Japanese manufacturing to develop a wide-ranging network of third-country routes. Japan once accounted for more than 50% of the exports from Asia to the Europe and North America. It now accounts for no more than 10-12%, and in its place export volumes from China and Hong Kong combined have grown to take as much as 60% of the total, bringing a rapid and massive change in the trade structure. Globalization of liner transport thus refers to the process of conforming to the development of the world economy and of the trade structure. This process can also be considered a response to the globalization of the customer base. Let us consider how systems and paradigms have changed in response to the globalization specifically. Speaking on the management strategy side, I think there are two choices.

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Two choices on the management strategy side

The shipping companies' response on the management strategy side to globalization can be broadly divided into two choices. One is the strategic alliance approach by federations of shipping companies on multi-trade lanes, and the other is the mergers and acquisitions (M&A) by independent shipping companies. The objectives are all the same for both of them; one for cost competitiveness, two for higher service quality to meet the customers' global requirements, thus to support the desired growth. There have been many people who explained clearly the procedure of these operations, and besides you have known them already. So, I think it is not necessary to talk about it today in detail. Just to mention here that the first approach is a global response ensuring a tight hold on investment, while the second is a global strategic response demanding aggressive investment. Let us consider some of the global customer demands we must respond to: - Accurate and fast transport - More frequent service - Direct port call coverage by mother vessels (reduction of feeder coasters/guarantees of cargo safety) - Provision of so-called global services that simultaneously cover multiple major trades - Smooth and seamless door-to-door transport - Accuracy of cargo/container tracking system at any time, anywhere - Simplified/faster/paperless ship loading procedures - Freight rate competitiveness ..And many other requirements, seemingly without end.

Other global strategy responses

In addition to the above responses on the management strategy side, there are various responses from the operation side at respective shipping companies. These are mainly non-hardware responses, so let us list some of those which have taken place and been introduced in Japan or in our company just as examples.

- Foreign ownership of ships (conversion to flags of convenience) - Utilization of foreign crewmembers

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While I am sure these measures do not require any further explanation, Japanese shipping companies had no recourse but to take them to compete with shipping companies from various foreign countries. The result is that only about 15% of Japan's commercial fleet, based on gross tonnage, is now registered under the Japanese flag. Aboard ships, we also utilize foreign crews who offer international competitiveness. Even if a few Japanese crewmembers are aboard, the majority of the crew is Filipino or other foreign nationalities. The shipboard environment is thus an English-language world, and therefore at the very vanguard of globalization.

- Overseas procurement of ships and containers We have been procuring newly constructed containers from foreign sources, and today most of them are being manufactured in China. In the construction of new ships, a competitive relationship has arisen between overseas and domestic sources, and acquisition of ships built overseas is now no longer a rare occurrence. In this regard, your country, Korea, is a major overseas for many shipping companies including us, Japanese companies. In addition, long-term and shortterm chartering of foreignowned ships is now a normal event, with the procurement sources spread all over the world, for a true manifestation of globalization.

- Globalization of company and trade management Japanese shipping companies for many years have been set their headquarters in Japan and controlled all operations from Japan. Recently, however, they have changed their ways of thinking, accepting that trade management and local control or area management should be performed as close as possible to local areas and markets. In MOL's case as well, we have established regional headquarters in California for the United States, in London for Europe, and in Hong Kong for Asia, and have consigned all local management to those headquarters, along with the relevant trade management including even profit and loss control. Together with the headquarters in Japan, a four-pole system is managing MOL's worldwide activities. Tokyo headquarter is in charge of long-term trade management policies, asset management of ships and containers etc., and coordination of every division within the Tokyo Head Office. Aside from these functions, the head office's main function is to
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coordinate the work of the other three poles, with most activities consigned to the regional headquarters. To bring some 3,000 or more employees in the liner division, or more than 5,000 employees around the world when the logistics sector is included, to these same goals efficiently and aggressively, we need to have clear management methods. MOL has successfully introduced the ideas of group management into the liner division, where all of the surrounding affiliate companies are treated as a single company (a virtual company). We call this organization the Virtual Liner Company (VLC), and we use it to clearly propose our vision and mission, creating a road map for all directors and employees around the world, with top management taking the leadership. Quarterly VLC board meetings set the direction for each of the four poles around the world and their subordinate organizations. The Vision/Mission Paper is just like a constitution for the VLC and circulates among all the directors and employees over and over. We operate under the motto of "Plan, think globally, act locally."

- Strengthening of links with the logistics division To provide a one-stop shopping function as a comprehensive transport service that can meet customers global transport needs, MOL has promoted the integration of all logistics operations around the world under the name of MOL Logistics. Our basic strategy is to promote close cooperation and links between the VLC and MOL Logistics to optimize the synergetic effect. Just like the VLC, the MOL Logistics has also prepared a clear vision and mission under a group management organization. - Construction of a global system network Systems that have been built up just for each trade lane or within each region now also require globalization. In MOL's case, the Starnet System, a project that ties all operations around the world into a single system, is being introduced around the world, and is already in operation on the major East-West trades and regions. We are also working to introduce Starnet on major North-South trade lanes. Based on this system, we are preparing a structure to ensure swifter processing of customer requests, and to meet the specific needs of individual customers. The Management Information System (MIS), an essential part of the VLC operations, is also being developed, a move toward one-step in-house monitoring of everything from the VLC management / accounting processes to profit and loss management.

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- Marine transport portal sites To maximize customer convenience, we have invested in a marine transport portal site called GTNexus, jointly established by the world's major container shipping companies along with a California-based IT company. GTNexus provides our customers with simultaneous access to a number of shipping companies, and is continually expanding its offerings in response to customer demands. I have so far mentioned how we have been adapting ourselves to the globalization. Now I would like to give some observation on what is good and what is wrong, or, what's the bright side and what's the dark side of such globalization.

Globalization of containership management the bright side

As globalization progresses, the world becomes increasingly borderless, with the expansion of currency transactions and capital inflows and outflows reaching levels never seen before, and world trade reaching an unprecedented scale. It is no exaggeration to say that behind this expansion in world trade has been the rapid development of telecommunications, information technology, and the revolution in transport. As I mentioned earlier, container shipping companies globalization efforts have met the needs of customers who themselves face the challenge of globalization. Customers can now obtain large-volume, stable transport at reasonable costs, use todays seamless transport system to instantly track the location and condition of their own cargoes, and enjoy more efficient inventory control. Shipping companies have also adopted new management resources and technologies to successfully ride the wave of globalization. As a result, we have been able to play a key role in the healthy expansion of the world economy and of world trade. After all, these are the core part of the bright side of our globalization thus far achieved.

Whats the dark side of globalization?

The dark side includes distortion, defects, inconsistency, inequality, unfairness, etc.

- Weakness of conference and agreement Limits of convoy system

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Globalization has its dark side, too, such as the weakening of shipping conferences. A special characteristic of liner transport operations is that cartel among shipping companies are under certain conditions exempted from anti-trust laws. The cartel such as freight conferences / agreements with this anti-trust immunity is necessary because the container shipping industry, as an indispensable part of the infrastructure needed for the healthy development of world trade and the world economy, must be shielded from huge fluctuations in rates and other transport conditions that would hinder healthy trade and commerce. Whats more, it promotes the rationalization of shipping company operations and provides an infrastructure that restores value to shippers. This anti-trust immunity having been given to the international shipping for long time, more than 100 years, has been examined and reviewed over and over again, and has been repeatedly concluded that it is necessary. While there have been a move recently in the OECD and other forums etc. to review anti-trust immunity issue one again, I believe our position will be upheld in the end. Nevertheless, we recognize that these cartels must change with the times, and must now decide how it should respond to globalization. For example, in trade involving the United States, the Ocean Shipping Reform Act (OSRA), the latest version of U.S. Shipping Act, requires strict confidentiality of the contents of service contracts between the shipping company and the individual shipper (so-called, Confidential Service Contract). On the other hand, the Transpacific Stabilization Agreement (TSA) and the Westbound Transpacific Stabilization Agreement (WTSA) set guidelines for freight rate levels and service contracts, to help stabilize freight rates, and trades which are, however, all of voluntary and non-binding nature. But the members of TSA and WTSA include companies with different business philosophies and strategies, and it is extremely difficult to keep them in line with non-binding guidelines. In particular, when there are situations such as the large excess of tonnage which exists just now, it is impossible to control the market against a sharp drop in rates only with such non-binding guidelines. Of course, close communications between shipping companies can help avoid major problems,
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and efforts are continuing to establish stable, sound management. In general, however, the issue of companies not keeping in step continues to be a problem. In a globalizing society where inequality and unfairness can be presumed to be the natural state of affairs, the very idea of trying to urge TSA/WTSA members into getting along with each other under certain guidelines may perhaps be the wrong response. Recently I have been wondering whether we need to reconsider our situation.

- Limits to trade response Another area that has been causing some rethinking in recent years is the fact that most trade is individual or local, even for members of conferences or agreements, and there is no organization that has a global perspective on trade. Yes, we have several global organizations like Box Club, Asian Shipowners Forum (ASF), World Shipping Council (WSC) etc. But, they are sometimes not a forum to deal with real business with no such autonomy (Box Club / ASF) nor the one to be global enough in its coverage (WSC). Liner operators, of course, set up business strategies based on worldwide concepts, and their organizations are also worldwide. Yet conferences and agreements appear to be hindering the pace of globalization. I believe conferences and agreements will soon be forced to undergo a major revolution.

- Attacks on anti-trust immunity As I said earlier, anti-trust immunity for liner companies may be essential in building the worlds economic and trade infrastructure, but the nature and significance of that immunity has changed with the times. The people who oppose anti-trust immunity say it has led to price-fixing among shipping companies, which forces higher costs on to shippers. But the facts do not back up this argument, as everybody has seen ever falling rates in the world major trade lanes in spite of the shipping companies' efforts to hold them in line with guidelines set forth under the authority of anti-trust immunity. If conferences and agreements do not have the strength to maintain reasonable rates, and if the benefits of anti-trust immunity serve only to create major misunderstandings of our position, then I must question whether we need to try to maintain that immunity in the face of such opposition. However, I believe the rationalization-purposed agreement such as alliances authorized by such anti-trust immunity is supported by our customers industries for its efficiencies.

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Perhaps a revolution in systems and paradigms in this case is long overdue. That is what we need to study in the future.

- Strengthening of maritime security While the tragedy of September 11 came in the form of terror from the air, it has led to thorough efforts to strengthen the security of both cargoes and passengers. A range of stepped-up security measures has been considered, mainly in the United States, to prepare against all kinds of terrorist attacks. As you well know, these measures include specific steps to prevent attacks utilizing ships or containers. Some of these measures could slow ship entry and exit from harbors, or hinder the transport of containers through harbors and across overland routes, and slow the trend toward a seamless, more efficient transport system. Benefit in enjoying economical and safe global transportation that we all take it for granted is now getting a big challenge. This could also be considered the dark side of globalization. If we face new restrictions, we must respond in a way that prevents them from becoming major obstacles to globalization. The costs associated with these efforts should hopefully be divided fairly among everyone who benefits.

- Huge over-tonnage --- Response to excessive globalization As we saw earlier, to provide stable, large-volume transport at reasonable costs, we have succeeded in boosting both quality and capacity through the use of strategic alliances and M&A. Even multiple weekly sailings on the same route, offering different service menus, have become the norm. Weekly service requires as many as seven or eight high-speed ships on the Asia-Europe routes, and five or six such ships for the North America routes. When the major trade routes grow at around, as in 1999 and 2000, we naturally expect to expand the number of vessels in service. But the demand for multiple ships on single routes has created an explosion in shipbuilding investment, especially in recent years, when ships must be in the 6,000-7,000 TEU range to be competitive. In these next two or three years, tonnage will grow by more or less 10% annually. Trade volumes, however, may fail to grow as expected, with the general slowdown in the world economy. As a result, we now face a serious overtonnage problem that may become worse if the world economy and trade growth keep slow as we see now.

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While we saw this happened repeatedly in the past, the growth in trade immediately before the slowdown was extremely large this time, and the new ships added immense capacity, with the result that todays over-tonnage is on a scale we have never seen in the past. The shipping companies have learned from these events, and have been attempting individually and/or through respective alliances to adjust or withdraw some of the capacities. Also a worldwide economic recovery, led by the United States, is now looking more likely. Moreover, orders for new construction have at last halted, so things appear to be settling down although it will probably take some more time. From another perspective, while we have focused so much attention on globalization and rushed in building too many ships of huge over Panamax size, we may have overlooked some serious issues which jeopardize control of appropriate tonnage.

- Unequal distribution of the benefits of globalization While perhaps an argument from hindsight, the marine transport system that developed in response to globalization demanded huge investment by shipping companies, while shippers are in fact reaping the return on that investment. Rather than obtaining a fair return on that investment, some of the shipping companies have in fact been forced to the brink of stoppage of service trades. While we are aware that globalization brings in its wake inequalities and unfairness, our industry clearly cannot continue in this situation. Shipping companies need to build a system where we can receive some reasonable merits of globalization to at least tp be able to maintain and expand our industry.

Outlook of globalization strategy for the liner business

As I said earlier, the liner business is at an important crossroads. We could face a major shakeup of the industry within the next year or two. While this, too, can be considered one more aspect of the trend toward globalization, it could also sweep away the current alliances and even erase
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the existence of some of the individual shipping companies now in operation. These events may take the form of reorganized alliances, tie-ups between alliances, or even new M&A activity. Or all of these may occur all at the same time. At any rate, we certainly cannot expect the current situation to continue in the age of rapid change. In fact, globalization appears to be a never-ending revolution, and since we have continually been forced to adapt ourselves, we need the flexibility to respond to any situation whatsoever. Anthony Giddens, an English sociologist recently wrote a book titled "Runaway World - How Globalization is Reshaping Our Lives", where "runaway world" means an "uncontrollable, unstoppably changing" world, and that is the real essence of globalization. But this does not mean the world will no longer need governance; in fact, it will need more governance than ever. And what will make that governance possible is nothing other than a deepening of democracy. When we promote further globalization of our industry, perhaps we need to dig deeply into the issues I have discussed today, and establish policies that will ensure an effective governable response. The key word here is probably "deeper communication". Liner company leaders need to engage in frank dialogue on ways to ensure the industrys independence and survival and commit themselves to reforms. I believe it is our mission to create a liner industry that will continue to contribute to the healthy development of the global economy. Thank you very much for your attention.

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