- Pages: 8
- Word count: 1992
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In this analysis of the case Meli Marine, the current CEO David Tian is trying to decide if an expansion to TS vessels would be the right move when trying to rebuild the Meli financial state. This case will discuss many factors that will play into the final decision.
The shipping industry provides the links required for global commerce, making international trade possible. This industry is comprised of four segments: container shipping, roll-on roll-off (used for vehicles), industrial of bulk shipping for commodities (steel, grain, etc.) and tanker shipping (gas, oil and chemicals). Container shipping is used for consumer goods, food products, industrial machinery, intermediate goods, etc. The first shipping container came into use in 1956, this provided shipper with a standardized steel box that kept goods sealed and secured. These products were “intermodal”, which means that they could easily be unloaded and transferred between ship, rail and truck (Hamermesh 2012). Challenges of the Shipping Industry
The industry has endured dramatic swings in profitability and dealing the weaker competitors who failed in the industry. For Meli Marine, keeping their customer relationships and costs under control which took cautious efforts from management. Managing variable costs became difficult. The container carriers were exposed to fuel prices, known as “bunker costs” which could be 20-40% of cash operating costs and fluctuated with the price of crude oil. Firms attempted to apply the “bunker adjustment factor” when oil prices rose, however, a lag was present between the oil price movements and the catch-up by carrier. Competition meant that carriers were never able to pass on the full costs.
Fixed costs were also high, averaging about half of the total cost structure. The shipping industry was asset-intensive and vessel expenses, including maintenance and financing, were significant. Capacity was “perishable”, once the vessel left the port, any excess space was wasted and operators faced fixed costs because shipping schedules were established far in advanced, and trips took weeks to complete. Other fixed costs came from terminal charges and overhead.
Carriers also faced global trade imbalance impaired the fixed cost issue. The busiest shipping lanes-Asia-Europe and Asia-North America- were highly irregular. The concentration of manufacturing in Asia meant vessels could depart from locations at fill capacity and come back with half empty. For the North American and European exporters, keeping prices at a fraction of the ex-Asia freight rates, but they found that they could not fill their capacity (Hamermesh 2012). Meli Marine Background
In 1974, the Chang family founded Meli Marine in Singapore. It provided short sea services between the home base and Tanjung Pelepas, Malaysia, later expanding into major ports in Taiwan, Japan and Korea. Meli Marine’s focus early on was to be a feeder for the mainline operators, including major shipping companies like Maersk, Evergreen and Hapag-Lloyd. Meli would bring the containers from the major hubs where cargo was consolidated and transshipped to Europe and the Americas. Meli primarily worked with the mainline operators and freight forwarders in which they benefited from the volume and rapid growth by serving these prestigious customers.
The major exporters arranged shipments with the MLOs who made arrangements with the feeder lines. Smaller exporters worked with the freight-forwarding firms who arrange the routing and procure space on the feeder lines and the MLOs. In 1990 with the fall of freight rates, Meli lost one of their main MLOs, causing Meli to be in a financial crisis. Cost base was high, with corporate overhead not being managed properly and the fleet was old and expensive to operate. Meli couldn’t keep up with their competitors with bigger, more fuel-efficient ships, and they were forced to go to creditors to restructure their debt. Later in the paper, David Tian’s efforts will be discussed (Hamermesh 2012). Trends affecting the Shipping Industry
One trend was an increase in competitive intensity- meaning that operators were exempt from anti-trust laws and cooperated using formal conferences to discuss aggregate supply, pricing and policies. The degree of industry cooperation diminished since the 1990s due to the regular scrutiny and an increase in nonconference competitors, with the incentive to cut price for market share remaining high.
Another trend: Bigger ships and cascading. Bigger ships provided economies of scale assuming capacity was utilized, increasing per-container profit for operators. This trend led to cascading; where container carriers deployed their biggest ships on key shipping lanes from Asia, then they would cascade the excess tonnage of their existing fleet to smaller shipping lanes. The final trend is: Threat of overcapacity. The shipping industry was adding capacity faster than global trade would absorb it. The influx of “post-Panamax”ships and cascading lead to overcapacity across all shipping lanes (Hamermesh 2012). Meli Marine’s Strategy
David Tian was hired as new CEO in 1991. He came in with over 20 years of experience in the shipping industry with some exposure to Hapag-Lloyd and TS Lines. Tian was hired and had thoughts on how to put Meli back to a financially positive company. He was moving to create a greater flexibility in Meli’s cost structure. Using many long-term charters and spot charters Tian transitioned the company from owning all vessels, to only 30% of the total fleet capacity, with 70% still chartered. He also shifted the focus from feeder services to liner services, in which shipped intra-Asia exports-cargo that stayed in the region. With the liner services, Meli worked directly with the manufacturers and traders, managing the sea and land logistics door-to-door. This also meant that regular loop services were added between spoke ports instead of shuttling the vessels between the hub and spoke.
Tian prioritized a narrower set of customers and commodities. Meli now pursued foodstuffs including packaged foods, perishables, and halal products, which were for the Malaysian, Indonesian and Indian markets. The company also focused on shippers of intermediate goods, such as chemicals and textiles and by 2007 the intra-Asia liner services accounted for 80% of Meli Marine’s revenues. Meli also achieved significant share of each port, filling capacity more effectively. Soon after, Meli built its own freight forwarder arm. The company now had its own sales force building relationships with exporters. They developed capabilities in managing importation, logistics and transshipments for rail and road delivery.
Competitors regularly attempted to steal accounts from Meli Marine by undercutting prices, but they found out that many of their customers were very loyal valuing the quality services rather than savings. Expansion has always been a thought for Meli. TS vessels would give Meli the opportunity to gain the right ships and sizes at the right price to move services out of Asia. This trans-Pacific market was attractive, and did offer volume opportunities and rapid growth. Having the loyal customer base that Meli has would make this expansion much easier and would provide a stable source of revenues. Moving beyond Meli Marine’s current services also provides the benefit of diversification, however over capacity and strict competition was also a problem for the displaced vessels in the intra-Asia market (Hamermesh 2012). Performance compared to Competitors
Evergreen Marine was founded in 1968 and was the fourth-largest container carrier in the world with a total capacity of 620,000+ TEUs with a presence on all major shipping lanes. Among intra-Asia carriers, Evergreen was the market leader in capacity with over 140,000 TEUs. Evergreen diversified themselves into segments such as: container manufacturing, vessel leasing and container terminals. Wan Hai Lines was founded in 1965 as a log shipping company, who later evolved into a container carrier and established a strong presence in the East and Southeast Asian markets. Wan Hai had over 80% of revenues coming from intra-Asia service. They are diversified in a logistic unit, container and vessel leasing and terminal operations.
Yang Ming Marine was founded in 1972, and was diversified in operating a logistic unit, container and vessel leasing and had terminal operations in four countries. Meli Marine’s return on assets is higher than those of the industry. Meli Marine’s ROA is 11.9% while the other three are 7.5%, 2.2% and 5.1%. This is due to the large competitors having huge overhead costs and the competitors are at a loss due to half empty returns. Additionally, customer value increases as the services offered increase. Both liner and feeder together give more customer value to Meli Marine than they do individually (Damodaran 2013) (Hamermesh 2012). Possible Expansion Efforts and Recommendations
The first option would be to purchase TS Lines. There would be a localized route economy and they would be able to invest in specialized containers with trans-pacific route is consumer goods intensive, is one of Meli’s expertise? Meli would have an average vessel capacity of 1200 TEUs, would Meli have the strength and resources to manage 4500 TEUs? Will Meli still have a strong customer bas in Asia and will Meli have the same demand pattern in the Trans-pacific route? One advantage of this option is the diversification of services in terminal management operations. With this option there would also be attractive market opportunity in Asia-North America sea-lanes, a place where Meli doesn’t have a presence thus far. Some disadvantages of this option would be cascading, which as mentioned before can lead to overcapacity.
There is also a weak demand for the North American market and half empty vessels return. According to Exhibit 7 in the case study, The NA to Asia route is below the rate they started at, showing the weak demand. The other option that Meli has is to lease the required capacity. This would allow the lease vessels to carry loads up to 10,000 TEUs. This would also require Meli to enter the North American market. Some advantages of this would be the expansion into the North American market. In order to keep up with competitors, Meli will have to diversify them a little more and moving into the North American market would help. Meli would also gain new customers. This is a good thing because Meli’s current customers are very loyal to the company and they value what Meli provides to them. The two disadvantages to this option would be that Meli would lose the strategy of the company and they would be more susceptible to loss. The final option for Meli would be a horizontal expansion, expanding across all verticals.
They would concentrate in the Intra-Asia market, where most of the competitors have found success. Meli would also build a brand value to bring in the loyal customers in the new markets and they would watch to see if the demand increases for presence in the North American to Asia market. This would possibly make Meli the leader in the present segment. Which would steadily increase the ROA even more and Meli would be financially stable. Meli Marine would also have better control over the supply chain as well as providing service differentiation. As shown in Exhibit 2 from the case study, if Meli would expand into operations such as terminal operations, that market makes up 25% of the Return on capital for the industry, bringing in about $35 billion (Damodaran 2013). Recommendations
Meli Marine shouldn’t acquire the vessels of TS Lines, but focus on the last option of horizontal expansion in the supply chain. The Asia- Pacific line has a major demand for consumer goods, in which Meli is lacking share. The return trips of the vessels are not much in demand, which could possibly lead to competitive price wars, which could lead to lower margins. The horizontal expansion would increase Meli’s control in the supply chain, the ROCE would increase and there is a huge opportunity for service differentiation in which Meli is lacking in comparison to competitors. This option would be the best for the success of the business.
Damodaran, R. (2013, September 24). Meli Marine Case Presentation. Retrieved December 3, 2014, from https://prezi.com/cd4qx9ucu28d/meli-marine-case-presentation-team-7/ Hamermesh, R., & Yong, S. (2012). Meli Marine. Harvard Business School, (4426).