A Good Crisis

A Good Crisis

You should never let a good crisis go to waste, and despite what people may tell you, the drop in bunker costs could present one for shipping.

Good_crisis_featAs business leaders converge on Davos for the World Economic Forum, the plummet in the oil price is generating plenty of heat and light. The consensus from shipping commentators is that it’s a positive thing for our industry. Well I’m sorry, but I have to disagree. In fact the drop in the oil price could represent a far bigger crisis for shipping than anyone has yet begun to appreciate.

“The lower oil price is good for shipping as well as for the oil importing countries as it brings costs down and boosts demand,” says Peter Sand of BIMCO. He’s correct when he says that any reduction in operating costs is welcome in shipping. After all the high costs of both fuel and regulatory compliance are the two reasons most cited by ship owners and operators for the industry’s failure to innovate and invest in new technologies. But is that really the case? Isn’t the truth of the matter that high fuel costs and compliance represent the main reasons operators have been forced to invest in new technologies?

In our July 2014 issue we pointed out that spend on connectivity—the gateway to every industry’s future, particularly shipping—represented on average less than 1% of a ship operator’s budget. Despite mounting evidence that connectivity and increased digital operation offers significant efficiencies—and the basis for more in the future—ship managers continue to report that they can’t justify the ROI to owners, even when managers themselves can see the benefit.

The quickest—and sometimes the only— way for suppliers flogging technology solutions to attract the attention of a ship operator or owner has been to claim its kit will save them money on fuel. The second quickest is to tell them that its kit will save them money by complying with regulations and therefore allow them to avoid being clobbered by a fine. With projections suggesting that oil will hover around $70 a barrel for the next two and possibly three years operators could be looking at reasonable savings and a slight easing of pressure on margins.

But that isn’t a new trend. In fact despite the constant whining, the actual operating costs for shipping have been very quietly dropping off, even before the oil price began to tank. Yet shipping is barely recovering, let alone showing growth and certainly not anywhere near enough for the PE that came in with such high hopes of turning it around.

Given the choice between attempting a risky, long-term transformation, and a steady hand on the tiller most CEOs and boards will opt for the status quo.

Given the choice between attempting a risky, long-term transformation, and a steady hand on the tiller most CEOs and boards will opt for the status quo.

No one disputes that shipping has had a tumultuous ride since 2008. But whilst the economic crash was a global phenomenon it also exposed how dysfunctional and archaic our industry has become. It’s possible that everyone has just been too busy surviving since then to take a breath and really address the root causes of our problems. But seven years on, despite continued, desperate optimism that the upturn has to come shortly, there is a creeping realisation in many sectors that we will never go back to what was. That what we are experiencing is a ‘new normal’.

There is a well-known saying about mending the roof when the sun shines, and this brief respite the drop in the fuel price is offering us could be a lifeline. With a little of the pressure off, now is the time to embark on the kind of transformations that are badly needed. At the heart of those transformations is the adoption of new strategies underpinned by the exploitation and deployment of a range of new technologies, and an appreciation that the world—and doing business in it—is in the process of changing completely.

These transformations are complex and difficult and there’s a key structural reason for that. Short term thinking driven by the share price and pressure on quarterly earnings is usually enough to scupper the attempt. Given the option of attempting a risky, long-term transformation, and a steady hand on the tiller most CEOs and senior management teams will opt for the status quo.

But the status quo could be fatal. In 2011 Babson’s Olin Graduate School of Business predicted that 40 per cent of today’s Fortune 500 companies won’t exist a decade from now. Yale University’s Richard Foster calculated that the average lifespan of an S&P 500 company has fallen from 67 years a century ago, to just 15 years today. We are entering the era of billion dollar start-ups and will soon see trillion dollar corporations.
But these organisations aren’t only hugely valuable, they are fundamentally different from the ones virtually everyone reading this article is likely to work in.

These new organisations are able to scale and generate massive growth and value by keeping costs low, and leveraging digital mindsets and technologies. The challenge for everyone else is how to compete. It seems that the only answer is to radically transform existing organisations to look more like them.

The bottom line is that starting from scratch with a new idea and building a new organisation is undoubtedly easier than taking an existing business and retrofitting what’s needed. But it is possible for big organisations to change, and change completely. Nokia started out as a tyre company; Samsung was a trading company while Intel started in memory chips. For an example of how change can be perpetually managed by a big company take a look at GE which has constantly reinvented itself over the years.

The rate of success of such transformations is low however, and that’s often because the company concerned has left it too late—hasn’t fixed the roof when the sun was shining. Even then there are notable exceptions. Both Apple and IBM were just a few months away from running out of cash when they finally pulled out of the dive.

Of course the prerequisite for this kind of transformation is accepting that it’s required, and it’s often a crisis that precipitates that. The evidence of a pressing need to make organisations which are leaner, more agile, technology and information driven and capable of significant, accelerated growth has been mounting in shipping since 2008, but the drop in oil prices is the crisis point. No one in shipping has yet recognised why though. Its unshakeable optimism has convinced it that cheaper oil is the light at the end of the tunnel, when it could well be the oncoming locomotive. Here’s why.

The drop in the price of bunkers will lengthen the payback time for efficiency technologies, and could make ship operators less interested in investing in them.

The drop in the price of bunkers will lengthen the payback time for efficiency technologies, and could make ship operators less interested in investing in them.

There was a post recently on the Lloyd’s List website with the title, “Lower bunker prices have a negative effect on innovation.” The article reported on the reaction at a shipping conference to the drop in oil prices, and it makes chilling reading. In short, as far as shipowners are concerned, the drop in the price of bunkers will lengthen the payback time for efficiency technologies, and make them less interested in investing in them. Just to compound matters, slow steaming will come under review, potentially exacerbating the already crippling overcapacity problems.

Considering that to date about the only way it was possible to get operators to really engage with technology was when you could demonstrate a saving against fuel, the implications of this attitude could be far-reaching. In many respects the high fuel price has allowed technology onboard vessels almost by stealth, offering a business case for connectivity and software which suppliers found almost impossible to quantify any other way. With that impetus gone—temporarily—the argument for technology adoption amongst what Lloyd’s List describe as ‘pragmatic’ owners is an even tougher one to make.

As the Lloyd’s List article points out, if the fuel-cost incentive lessens, the industry may find itself left with only the regulatory framework as a driver for change. It’s precisely that situation which has contributed to the mess we’re in now. With the lead time for regulations coming into force in shipping measured in decades, compliance has never driven the kind of innovation shipping needs, and with the pace of technological change accelerating all the time it has absolutely no prospect of starting.

And it’s worth bearing in mind that what goes up must come down and vice-versa. Already there are warnings about the consequences of slumping oil prices leading to under-investment in the oil industry.  Italian oil firm Eni’s CEO Claudio Descalzi, has warned that mismanagement by OPEC could prompt longer-term shortages, causing oil prices to soar in several years time, easily jumping to $200 a barrel by the end of the decade.

As we pointed out in the last issue shipping is facing a new paradigm in which volatility, uncertainty, complexity and ambiguity are constants. The only possible way that we can create organisations capable of surviving and thriving in such conditions is to fundamentally change them.

As Economist Paul Romer famously said, one should never let a good crisis go to waste. The fall in the oil price is a crisis for shipping, and it could mark a real divergence in fortune between those who fix the roof, and those who just enjoy the sunshine.

 

Images credit © Getty Images

This article appeared in the January 2015 issue of Futurenautics

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