Economies of scale; a defunct shipping model?

The shipping sector seems to be slave to a very powerful and addictive idea, called “economies of scale”. This paradigm of always bigger has three elements: mega-ships, mega-carriers and mega-ports. The growth of these three has been spectular over the last decades. Many in the sector seem to believe that big is beautiful. And even those who do not believe this, are convinced that there is nothing we can do about the increase of ship size – and what is related to it: mega-carriers and mega-ports. The paradigm of economies of scale is fairly uncontested. Yet, economies of scale are in nobody’s benefit.

Shipping lines ordered ultra large container ships but do they actually benefit from it? Not really. Almost every line has ordered these ships; this has fuelled fleet overcapacity and depressed maritime freight rates. There is not enough cargo, so container ships sail half empty and lose money. So much for their projected cost savings! What is more, mega-ships have led to mega-alliances, either to finance or to fill the ships; even between shipping companies that never thought they would need to form an alliance and actually hate their alliance partners. Some say that overcapacity is temporary and that we will be happy with mega-ships when trade growth comes back. However, increasing ship size is part of a vicious circle: low freight rates lead to the need to cut costs, so lines order even bigger ships to “save costs” which leads to a new wave of ship overcapacity. The occasions when shipping lines realise benefits from larger ship size are very rare.

Shippers are happy with depressed rates; it reduces their costs. But maritime transport costs were already very low, and low costs is not all that counts. Shippers have traditionally spread risks by using different ships, different lines and different ports. They could now find their cargo on one mega-ship operated by one mega-alliance calling just a few mega-ports. This is a very risky cocktail. A delay will have mega-consequences; an accident will have mega-impacts. Overcapacity has led to blank sailings, so more unpredictability. Mega-ships lower service frequency and mega-ports lead to less tailor-made routings.

Ports and terminals do not benefit either. Mega-ships bring more infrastructure costs to adapt to bigger ships. They bring peaks that lower the return on investment of ports and terminals. Mega-carriers amass huge buying power: they can quickly shift large chunks of cargo from one port to another, so this increases the risks for ports. Mega-ports face huge challenges related to hinterland and emission peaks, that are costly to mitigate.

Is someone actually benefitting from this tendency to have always bigger ships, carriers and ports? Maybe shipbuilders and crane manufacturers, but they would have enough work also if ships would not grow all the time. The general public wants cheap goods, but is at the same time concerned with congestion, jobs and pollution in their port-city. Mega-size makes this all worse. Mega-ships lead to peaks in congestion, air emissions and port activity. Due to peak loads ports will need more land and more labour flexibility to adapt to these peaks. Mega-ships can only be profitable if they are handled very quickly in ports, so they come with demands for more automation, and possibly job losses.

So, a strange situation: nobody has clear benefits, but many continue to believe that “big is beautiful” – and that bigger is inevitable. Economies of scale is the paradigm and its persistence is surprising. As I will argue in one of the next blogposts, we might soon witness the emergence of a new paradigm in container shipping. It is long overdue.