The financial crisis no one knows about
There’s a huge problem which will drastically affect the economy. Governments are aware. Shipping companies are aware. But the general population has no fucking clue.
That’s a huge problem — and a huge opportunity.
Let’s start with a few simple truths about the world:
We need to eat.
We need commodities.
We need to move things.
The shipping industry is the vehicle for all of these. It moves ~4.7% of the world’s GDP yearly. That equates to roughly $4,000,000,000,000. Yep: 4 trillion dollars.
The shipping industry also “touches” 33.6% of the U.S. GDP (gov data). That equates to ~ $5,600,000,000,000. Yep: 5.6 trillion dollars of value that could be adversely affected.
Considering that the U.S. contributes to ~17% of the world’s GDP, these numbers are frankly, terrifying.
This means, in the most literal sense possible, the world economy will collapse if shipping collapses. Splendid…
Seems slightly far-fetched though, right? Maybe…maybe not. Read on.
Next, let’s take a playful look at the current state of shipping. In concept, it’s simple. When demand goes up, shipping rates go up. When demand goes down, shipping rates go down and everyone has a minor panic attack. Rinse and repeat.
A carrier (like Maersk or MSC) has a certain amount of capacity which is dictated by the type, size, and number of ships it has. Any given commercial ship has roughly a 25 to 30-year lifespan.
When carriers forecast much higher demand than they have capacity, they will either replace smaller, older ships with larger, newer, more efficient ones or they will buy additional ships to increase their total capacity.
More efficient ships mean lower shipping rates. Lower shipping rates mean more business. So you want efficient ships, which tend to be newly built because of more optimized designs and better technology. Most importantly: they’re larger. Much larger.
Now, the problem:
When a carrier places an order for a new ship(s), a typical yard will take roughly a year to build it, and additional years if more than one was ordered. Sometimes it’s a little less, but the new bigger ships are taking roughly that amount of time.
So what happens when a large company places a large order (10+ ships) for an unprecedentedly large type of ship? (And, oh yeah, they paid 40% upfront).
That would mean suddenly, within a few years, they will have the lowest operating cost per volume in the business. They could offer the lowest rates, pulling business from everyone else.
So what if you’re everyone else? They need to be prepared to compete with this. They NEED more capacity to compete. So they buy more ships too.
And boom. The M&A’s started coming from left & right. The bigger guys started eating up the smaller, one after another.
But this is where things went awry. It continued. All of the shipping companies followed suit and began buying more ships, but shipping demand did not hit its projections.
There was too much capacity. And NOWHERE near the demand.
Carriers had paid almost half upfront for ships they would not be able to fill and they couldn’t cancel their orders now.
As much as they hoped, demand did not go up.
So that’s where we’re at now.
Go back to 2008 and the housing crisis:
- An invisible industry with generally unknown workings.
- Unsustainable rates granted to stay competitive.
- Highly needed provider of mortgage products.
- Blatant evidence in the data but ignored by the industry.
In the mid to late 2000’s, banks gave money to people they shouldn’t have. When it came back to bite them, who came in and saved the day: the government who used taxpayer dollars to save their businesses.
Why? Simple: We need them. The economy would have been left in much worse condition if they were allowed to fail, so everyone else paid for the banks’ mismanagement.
What happened to the people that were so careless? Besides a handful of big guys at the top who served time, and another handful banned from the industry, not much. Some banks did not survive, but most are still up and running. Again, we need them. So, despite these frustrating points, I’m happy they’re still here.
Now, let’s think about shipping in the present:
- An invisible industry with generally unknown workings.
- Unsustainable rates granted so shippers can stay competitive.
- Highly needed service provider.
- Blatant evidence in the data but unfortunately little is being done about it.
- Effects of their decisions are relatively unknown to the public.
Governments cannot let these businesses fail. They will step in if need be — and that’s a little scary to me, especially given the international reach of each of these carriers.
What’s more, there is slew of companies that are still very much private entities and family business. Some are empires.
This is not a “diss the shipping industry” piece. It’s worked this way for 60+ years. I don’t blame them at all for their practices. But I do think it’s time to start changing. Let’s address this while there is still time.
Over the next 10–20 years, I suspect technology will be a large part of the needed change. It will not be overnight, but there are opportunities galore.
We’re starting to see adoption of new technology in this industry. Unfortunately it’s going to have to change more quickly if things are going to recover within a reasonable amount of time.
This may not effect you in the next month or even year.
What I will say, if things continue at this rate, the question, “Why can’t I get this in 2 days?!” will will soon be “Why is this on backorder for a year?!?!?”
Disclaimer: I have a new side project called Nautilus Labs where I’m trying to help shippers save money, and reduce risk of accidents.
