Car carrier challenges

Deepak Sekar

Introduction
The car carrier is the unique segment in the shipping industry. The car carrier industry has the oligopolistic market and the challenges; game theory is faced high compare to the other sector of the shipping industry where the market structure is perfectly competitive in nature. The companies NYK line, Mitsui OSK line, K line, Wallenius Wilhelmsen Lines and Eukor car carriers holding the market holding over 70 % of car carriers (lin, 2014). The remaining market share is holded by the firms Neptune lines, CSAV, Hoegh lines, Grimaldi lines, NOCC and other small firms which also serves the short sea shipping in geography wise. Anti Trust and the competition law is the biggest challenge for the regulators and they are keen to promote the perfect competition in the car carrier industry since five firms controlling over 70% of the market share. Recently several fines were imposed on the car carriers due to the violation of the competition law. There are many actors in maritime logistics sector like vessel owner, charterer, broker, agent, insurance, terminal, 3PL, intermodal transport etc. Let us briefly analyse the challenges faced by the various actors in the Maritime logistics.

Carrier Challenges
The global economic fluctuation is the main challenge faced by the car carrier industry. The global economic fluctuation is linked to car consumption, scrapping rate, new building rate, freight rate etc. The predicted automobile industry growth and the economic growth before financial crisis is now proved to be not in aligned with the current situation. The result due to the slowdown in economic growth after the 2008 is the increase in supply of the vessel and the reduction in demand for the cars. The global economic fluctuation is the fundamental driver for the majority of the actors and challenges faced by carriers and other actors in the industry. But the economic fluctuation affects only marginally since the industry is well placed owing to the reason of firms owning their own vessel instead of employing for the long term charter party terms. When the firms own their own vessel instead of long term chartering, the carrier has the flexibility to adjust itself to the demand fluctuation (Traganida, 2012). i) Competition challenge and game theory between the carriers Even though there is a strong anti-trust law and the competition rule in the European Union, US, Japan etc but still the price setting takes place between the carriers. Recently Japanese

anti- trust law has imposed 224 million dollars of fine for the four carriers NYK line, K Line, Wallenius Willhelmsen logistics and Nissan motor car carrier (a MOL subsidiary). According to the Japanese fare trade commission (JFTC), the four firms colluded as cartel in setting the freight rates and volume trades in routes between Japanese ports and N.America, Europe, Middle east and west Asia to gain strength in the market. There is much other similar case in price setting scenario in the car carrier market (lin, 2014). Recently MOL and rickmerlines got fined by US Federal maritime commission for price setting. And Compaa Sud

Americana de Vapores (CSAV) got fined for allegation in the anti-trust rule by the US federal maritime commission. The top 5 firms controlling the market are strongly linked to each other. Out of the five firms, three firms were Japanese firm and remaining two with Europe and Korea. In the EUKOR Company, Hyundai motors and Kia motors holds 20% share, Norwegian company Wilhelmsen holds 40% share and the Swedish firm Wallenius holds 40 % share (EUKOR, 2014) . This shows how these firms were strongly bonded with each other. And the majority of these firm has strong bond between automobile industry this makes the new entry and exit into the markets difficult. The price setting in the industry also upsets the shipper since it increases the freight rate than it is in perfectly competitive market. The price setting behaviour in the car carrier also makes the industry difficult for the small firms like Neptune lines, Grimaldi lines, Hoegh lines etc. compete with the top-5 firms in the industry. ii) Pricing challenges for the careers The trade volume difference between the geographical route and the pricing methods in the car carrier gives the big challenge to the car carrier industry. The car prices its customers on basis of volume, weight and the handling charge of the vehicle. Let us consider a 5000 CEU (Car Equivalent unit) vessel which is on fixed round voyage schedule which makes around 6 round voyages a year. The time chartering rate for the carrier is X dollars per day to run the car carrier ship and Y dollars to handle the each car. The car carrier strategy is to cover its cost in first hand and the profit maximisation goal is next. The fixed cost is the cost of running the vessel, i.e., X dollar per day and the variable cost is the cost to handle the vehicle in port and it is varied according to fluctuation in the utilisation of the ship. When the ship is partially empty, the marginal cost is the cost to handle the additional car i.e., Y dollars to handle each car.

Fixed cost pricing is a strategy of fixing prices per vehicle considering the average cost into the account. The reasonable margin over the fixed cost gives the considerable margin in profit. But in the condition of competition and the industry where the price discrimination is high, fixed cost pricing strategy will not takes place naturally. The demand fluctuation is also one reason that the fixed cost strategy is not a good solution. If demand for the car carrier drops, then profit get squeezed in the fixed cost strategy. In his kind of pricing, customer a have a stable freight rate in the market condition. Strong policy, regulation and correct judgement of pricing are required for the fixed pricing strategy. This kind of pricing system doesnt work for the car carrier industry. Marginal cost pricing challenge in car carriers

D2 Average cost curve USD / CEU D1 B

X USD Marginal cost line Y USD A

Cargo Volume CEU

3000 CEU

Consider the situation of 5000 CEU car carrier where X USD the car carrier must generate in order to cover the average cost. We can put in other words that if the carrier mange enough to fill the vessel by 3000 CEU it can cover its average cost. But when there is more space in the ship, the car carrier competes against the marginal cost with each other. When the demand for the car is more, the marginal cost increased since there is more cargo demand for

the fewer amount of space in the ship. So the marginal cost depends upon the demand for the vessel in the particular period of the time. In this kind of pricing strategy, the revenue fluctuates severely. The firms makes large amount of profit when the demand is more for the carrier and conversely the vessel makes loss when there is a less demand for the vessel. This makes the carrier to follow the strategy of utilising the profit from peak market and surviving in the trough market. The marginal cost for the different vessel is different since the carrier utilisation and other factors like operational cost difference. Consider the situation of two vessels with similar characteristics of the vessel but with the different utilisation of the carrier. Consider the vessel A with 50% utilised by cargo loading in Rotterdam and Vessel B with 75% utilised by cargo loading in same port also. If they receive the loading order for 5 big bull dozers, the carrier will compete on marginal cost to attract the cargo. Now the vessel B with 75% utilisation capacity has to lift one deck to load the 5 bull dozer but the opportunity cost of losing the car loaded is incurred in the vessels marginal cost in vessel B. For the vessel A with 50% utilised by cargo, it doesnt matter to lift one deck upwards. So the vessel A has lesser marginal cost than Vessel B and the vessel-A attracts the cargo. The marginal cost pricing will be a great advantage to the shipper in the trough shipping market. Price Discrimination Price discrimination is widely used in car carriers. Vehicle size price discrimination takes place in car carriers. Price discrimination takes place in the form of loyalty rebates, commodity discounts and service agreement between carriers and the automobile company. During the recession period, car carrier attracts the second hand cargo to fill the ship and earn the revenue. This pricing benefits the shipper of second hand cargo in the recession market. It is evident in car carrier due to the cargo utilisation of the carrier in the inbound and the outbound passage of the particular voyage. The car carrier attracts the second hand car during the seasonal fluctuation in order to earn the operational cost. This kind of discrimination benefits both the shipper and the carrier depends upon the market fluctuations. This is also one of the reasons why carrier ends upon in price setting illegally besides the anti-trust law and competition.

Economies of scale challenge The economies of scale will be a significant challenge in car carrier in future if proper measures were not taken in the future. As we can see in the bulk and the liner shipping industry that the economies of scale is also one of the major driving factors for the oversupply of the vessel. Recently Swedish ship owner ordered 8000 CEU car carriers in china and owner expecting a bright car carrier future (Eason, 2013).Previously in 2011 Wilhelmsen is the first company to build worlds largest car carrier MV Tonsberg with 8000 CEU capacity and also energy efficient ship (Eason, Wilh. Wilhelmsen takes delivery of largest ro-ro vessel, 2011). The economies of scale drives down the unit cost in the per CEU carried by the car carrier. As it is proved in the liner shipping, that as the size grows bigger and bigger the savings per CEU gets reduced. Another problem associated with the scale economy is that capacity utilisation in geographical particularly in the inbound and the outbound transit. The trade imbalance, economies of the scale will be great challenge if it is not carefully monitored by the car carriers. The economies of the scale will not be profitable once it is not carefully monitored, it may also cause the diseconomies to the port sector. There is optimum ship size for every geographical trade and if it exceeds the optimal ship size there is a spill over effect or cascading effect of the ship. Suppose the 8000 CEU vessel creates overcapacity in Asia Europe trade, and then the 6500 CEU has to be redirected into other geographical region. This will make the capacity unutilised. Even theses ship competes with the short sea shipping sector to get the average cost. However the shippers will get benefitted due to the less freight rate and it increase the consumer surplus since cheap cargo will transported in order to fill the ship. Freight rate and chartering challenge This is one of the biggest challenges for the car carriers. Whether to employ the vessel for long term time charter party, short term time charter party, Own the vessel etc depends upon fluctuation in freight rates. This freight rate in turn closely associated with global economy and the demand for the cars. Car carriers current market is d riven by the emerging economy markets and any slowdown in growth will affect the freight rate. The firms which use the proper strategy in speculating the market will maximise the revenue. The proper mix between

chartering, owning and hedging the risk should be done. This strategy will only be efficient if there is sufficient fleet size and market power. Terminal operator and port challenge The economies of scale in car carrier cause diseconomies in port also. The diseconomies in the port are caused due to the increase in cost to handle and store the vehicle as the size of the port increases. Also the shippers and carriers give pressure to the terminal operator to keep the turnaround time of the ship constant. Proper port and terminal planning is required to keep the port in pace with the carrier. There should also be flexibility in case of the car carrier terminal. The flexibility to use the terminal for both cars and other purpose to utilize the port space should be adopted by the port authority. Flexible strategy is very important in terminal operator strategy in case of the fluctuation in the market. The port cannot built car carrier terminal unless there is a strong competitive advantage like good intermodal connectivity for distribution and consolidation, ports located to close to the automobile port etc., Port competes for the ro-ro cargo since it has value ton of 1 compared to conventional cargo (1), containers (3), dry bulk (5), Other liquid bulk (2) and crude oil (18) according to Heazendock,2001. Also port competes because the employment is also high in Ro-Ro cargo. But the challenges faced by port terminal whether the situation will remain same in the future. If other sectors gain the leap, then the revenue generated by the car carriers will be less. In many emerging economy countries, there is no dedicated car terminal instead they use the general cargo terminal as car terminal since the car terminal doesnt require any infrastructure except the huge parking lot space. Also the carrier started to compete for the small amount of the cargo. They are even ready to load/ Unload 10 cars in a port instead of discharging in a volume to consolidate or distribute the cargo. The loading of the cargo takes place near the port near the automobile plant even there is a small volume since the intermodal transport cost is high compared to shipping cost. The economies of scale, competition also makes the carrier to compete against small volume of cargo and in the short sea shipping. This makes the volume handling ports in dilemma in future to whether to invest in other sectors of the port. The competitive port also price discriminate the carrier depends on volume and Just in time. It is essential to mix the right

mix of strategy in future to stay ahead in race. The demand for the sea borne cargo in car also continuously increasing and it also gives dilemma to expand the port in relation with the demand for cars. Third party logistics challenge If the volume of the cargo is high, then the automobile company itself do the truck logistics to port from the factory. The third party logistics depends purely upon the freight forwarding agreement between the agent and the carrier. Usually trucking, Warehouse and the ship will be acts a third party logistics provider for the shipper. If there is a sufficient volume generated for the automobile industry, then they will try to enter into the logistics sectors. This is more evident in car carrier that Hyundai and KIA have shares in the EUKOR and the Nissan Car Company is a subsidiary company in MOL. So there is a strong link between car carrier and the automobile company. Even some of the company are in ship building industry also. This is also main challenge and the threat to the third party logistics sector whether the automobile industry will enter into the logistics sector. Also there is a challenge to trucking, warehousing and terminal whether the maritime carriers will enter and this service into the segment. These are the main third party logistics challenge. Intermodal challenge The barges cannot be used for transporting new cars due to the threat of salt water sprays and the rust in the barge. Any new kind of arrangement in the system through rivers will provide a intermodal transport across river viable with shorter draft. This will also drives down the intermodal transportation cost compared to the trucking and also a sustainable way of transport. Next the rail mode of transport for the cars has not been proved significant in the emerging economy due to infrastructure expenditure. It requires special kind of rail carrier to transport the cars via rail. Rail mode of transport is cost viable if there is huge land mass to be covered for the logistics. In future if the emerging economies build rail car carrier, then it drives down the intermodal transportation cost and also it is sustainable. This will also possess the challenge to other substitute mode of transport.

Bibliography
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