Emirates Shipping is the young upstart of its industry. While most of the major container shipping lines can trace their roots back to the turn of the 20th century, Emirates was set up less than two years ago. The company, which is headquartered in Dubai and Hong Kong, has placed China, India and the Middle East at the heart of its emerging global network. Having started out with two ships and a capacity of 3,000 20-foot equivalent units (TEU), Emirates now has a fleet of 12 vessels and can carry 30,000 TEU. Vikas Mohammed Khan, the company’s chairman and CEO, talked to CHINA ECONOMIC REVIEW about price pressure, quality service and doing business in China.
Q: What is the principal challenge of operating in China?
A: If you are running oil tankers, then you may have just two customers. If you are carrying bulk iron ore, you make a deal with one mining company – BHP Billiton or whoever it is – and this one customer fills up many ships. In the container shipping business, there are thousands of customers, each with different requirements. And then in China’s transportation industry there are not just two or three big supply chain managers – it is very, very fragmented.
Q: How do you establish yourself in such a fragmented market?
A: It’s very much driven by personal relationships. There are lots of little companies moving 1,000 containers a year and the people who are responsible for shipping it have relationships with people in a shipping company, not necessarily a shipping line. These relationships are fluid. If you want to set up a new shipping company, apart from expertise in what you are doing and some ability on the marketing and sales side, you need people who are in the business. At some large shipping lines there will be a few key account managers who deal with 50% of the cargo. This 50% is 10 or 12 customers, big boys like Wal-Mart. We are not looking for this kind of base cargo, as our entire capacity would be pooled between four companies, which would be very difficult for us and would put the companies in a powerful position. We target medium-to-small logistics providers and beneficiary cargo owners – the ones who actually own the cargo, like shoe manufacturers in Shenzhen.
Q: How do you compete with the domestic shipping lines?
A: Obviously they have a big advantage in terms of doing business with Chinese companies, but this can make them complacent – they spend more time on relationships than on service quality. We try to provide more in terms of service quality. It’s a peculiar industry with a unique means of marketing. If you want to buy a car, you can go to Google and find out the prices and specifications of different vehicles. If you want to ship 1,000 containers over the next year from Shanghai to Hamburg, the available service criteria are not in the public domain. It is all done by word of mouth. Reputation is very important.
Q: There is a lot of anecdotal evidence suggesting companies are leaving China because of rising costs. Are you seeing this kind of movement?
A: Yes. It is a continuous movement. They go from somewhere else to China and then from China to somewhere else. But where are costs not going up? Costs are going up in Bangladesh, India and Vietnam, so it’s really only a small percentage of firms moving out of China. The best thing about China has been its concentration on infrastructure. China is able to override the costs through the availability of extremely efficient infrastructure in the ports. There is also a lot of other infrastructure, such as related manufacturing facilities, in the same area. You don’t have this in Vietnam and you certainly don’t have it in Bangladesh.
Q: How does Shanghai Port rate in terms of efficiency?
A: It’s excellent – but it’s not just about the port, you have to look at the hinterland. If the hinterland gets too large, then you have to look at the cost of transporting goods to the port. Near Shanghai you have Ningbo, and Qingdao isn’t far away. So as the hinterland expands, Shanghai won’t have to bear the brunt of the extra volume. In the US there is a long coast from Vancouver all the way down to Mexico and there are only one-and-a-half ports: Los Angeles and Oakland. This leads to a situation in which the majority of the cargo entering the US is pushed forcibly through California. With the exception of China, no country has made sufficient investment in transportation and this means the overall cost is too high.
Q: This makes things even more difficult at a time when companies are trying to preserve their profit margins …
A: Say it takes US$5 to make a pair of shoes in China and they sell in the US for US$60. I can tell you that we take only about US$0.17 out of that pair of shoes. The rest of it is going to Nike. I was at a conference in Shenzhen with the global head of logistics for an international-brand electronics manufacturer. I said to him: “You are selling flat screen TVs so I assume you are looking for good-quality service. Why then are you trying to squeeze everybody? The price of oil is going up and you want us to give you a quote for a fixed price over a whole year. And, by the way, what is the transportation cost of a flat screen TV that goes for US$3,000 in the US?” It was US$25. My point was that these costs do not figure in his balance sheet like they do in ours. As a result, shipping lines are reducing their prices to the extent that they are no longer viable. Mergers are the only thing that these shipping companies can do to survive.
Q: So are we to expect a wave of consolidation in the shipping industry?
A: In my opinion, mergers between shipping lines do not work. They say that after the merger there will be US$1 billion in cost savings and US$2 billion in synergies, and so on. Three years later you find none of this has happened. Maersk was profitable and had a good reputation for service when it bought P&O. Any competent person could have predicted that a merger between the two wouldn’t lead to improvements. Mergers in shipping are not leading to advantages for the shipping lines or the customers. If a bank with 100 branches mergers with another bank that has 100 branches, they will make some cuts and have 150 branches. If a shipping line merges with another shipping line, after the merger you still have 200 ships to fill. In shipping, one plus one does not equal two, it equals 1.8 max because a lot of customers will say they don’t like the merger and go away.
Q: To what extent can firms differentiate their business to avoid these situations?
A: Our business is dominated by supply and demand. You cannot put the rates up unless the market allows it. The problem is there is not much differentiation in product. There are 45 sailings a week between the Far East and the Middle East/India. Cargo can go on any of those.
Q: What about on-time delivery and distribution center bypass services?
A: We offer all of this, all the tracking services. Here we have an advantage as we started new; so our IT system is not built on an earlier system. We are very IT-driven. In this way I suppose you have a top tier and a bottom tier in the shipping industry. Although it doesn’t make that much difference – our pricing is always going to be within 10% of everyone else – we put a high value on this. We don’t necessarily want to grow big, but we will focus on information flow, flexibility and reliability. You don’t relate Dubai to low quality and low cost.