YCD Trivia Shipping alliance refers to various alliances formed between liner companies in the field of transportation services, such as complementary routes and ports of call, coordination of shipping schedules, and mutual leasing of space, as well as in the field of transportation auxiliary services, such as mutual sharing of information, construction of common wharves and yards, and sharing of inland logistics systems.
Advantageous features:
I. Cost reduction
- Economy of scale
In liner transportation, shipowners can easily generate economies of scale from mutual cooperation and thus gain benefits. Shipowners can operate larger tonnage ships and improve the utilization rate of marginal cost through mutual leasing of cabin space; they can also carry out capital alliance to buy larger tonnage container ships and reduce the unit purchase cost of ships.
- Reduce capital cost
For capital-intensive industries like liner shipping, the benefits of resource sharing are self-evident. On the one hand, through the alliance, the carrier can reduce the number of ships and lower the capital risk due to the acquisition of ships; on the other hand, signing the terminal yard sharing agreement with other carriers can improve the utilization rate of terminals and yards, effectively recover part of the cost, and avoid the loss of idle resources in the off-season of shipping.
II. Enhance competitiveness
- Increase the frequency of sailing. Increase the frequency of sailings means that, through the alliance on a certain route, the shipowner only needs to provide half of the capacity before the alliance, it can make both sides of the ship frequency doubled, which greatly improves the competitiveness of the carrier. At the same time for the majority of cargo owners, can have more ship schedule to meet the needs.
- Expand the scope of services. Liner owners can expand the scope of services through the shipping alliance to develop new markets. Members of the alliance use each other’s long-established market network, cheap labor and various resources to gain advantages in new routes.
- Reallocation of excess resources. Carriers usually face the problem of excess capacity for various reasons. For example, seasonal factors, strategic shifts of carriers, or when the market is in a downturn, carriers want to downsize their capacity to reduce risk. Shipping alliances allow members to exchange capacity on different target routes and reallocate excess resources.
- Reduce industry barriers. As we all know, container capacity is basically in surplus. A new market entrant or a shipowner who wants to expand his existing capacity must consider the supply and demand situation of the market, to avoid exceeding the capacity of the market, resulting in a decline in freight rates. The alliance helps carriers to share resources or capacity and reduces the willingness of shipowners to buy new ships.
- Reduce tariff volatility. Although the agreed tariffs have been subject to constant protests by shippers over the years, due to the capital-intensive and low return on investment characteristics of the shipping industry, it has been enjoying certain immunity in the legislation of governments, so the agreed tariffs are still common in various routes of liner shipping.
- Compared with liner conferences that strictly set common tariffs, shipping alliances are softer in their pricing policies, and they reduce competition through various forms of alliances. When alliance members offer undifferentiated services, they also usually reduce the difference in rates between each other.
Forms of cooperation:
Shipping alliances for liner shipping can be categorized into 3 forms:
Operational alliances,
Financial alliances.
Logistics alliance.
First, the operating alliance
There are various forms of operating alliance, such as joint operation of ships, mutual chartering of ships, swap or share space. The main goal of this type of alliance is to improve service levels and reduce capital investment. No additional large investment can significantly improve the level of service, alliance members do not need to develop a common goal, but only in line with their own long-term planning can be.
Operating alliance is the most important component of shipping alliance, which is mainly categorized into box space purchase, box space swap, capacity sharing and facility sharing. It is important for shipowners participating in alliances to maintain their independence in decision-making. The advantages and disadvantages of each form in the operating alliance are different.
II. Financial alliance
Carriers involved in financial alliances have the same goal, which is to maintain market stability. Members of the alliance generally have a certain market share, its predecessor is the liner conferences. Now the financial alliance also control their own transportation capacity, to avoid excessive capacity, resulting in an oversupply situation in the market. It can be said that the maintenance of freight rate stability is the core factor for the establishment of this kind of alliance. The financial alliance in shipping alliance is a deeper alliance, and the participants have a long-term cooperation basis.
- Rate Agreement
Tariff agreements are the most important means of limiting price competition and maintaining freight rate stability. Although fluctuations in freight rates can sometimes be profitable for liner carriers, in the long run, freight rate stability is more important than short-term profitability. Through alliances, carriers can benefit from negotiated rates and avoid the risk of fluctuations in market rates. However, joining a financial alliance often leads to a partial loss of independent carrier autonomy.
- Capital alliance
Shipowners engage in capital alliances, generally for the purchase of ships and terminal construction. For a capital-intensive industry like shipping, building infrastructure through capital alliance can reduce investment and risk. The advantage of shipowners purchasing new ships through capital alliance is that carriers can configure larger tonnage ships to improve competitiveness, and at the same time, due to the role of economies of scale, and can reduce marginal costs.
Third, logistics alliance
Since the containerization, shippers on the carrier’s two most important demand is the frequency of classes and the convenience of the port. In the door-to-door logistics concept is very popular today, the carrier’s responsibility has been from the exporter’s delivery until the importer’s factory rather than the traditional part of the sea, which leads to the carrier needs to be in the field of logistics to make a large investment, thus giving rise to the logistics alliance.
- Container Sharing
Containers are a core part of liner shipping, and the cost of operating containers accounts for a major portion of operating costs. It includes not only the cost of purchasing or renting containers, maintenance and repair costs, but also the cost of transferring empty containers. For the transportation of the imbalance between the volume of the outbound and the return trip, the cost of empty container transfer is unavoidable. The high cost of transferring empty containers is what motivates liner owners to join alliances and share containers.
Shipowners recognize that the extra boxes they spend time and money to bring back may well be exactly what other shipowners need. Container sharing also takes many forms: empty container leasing in, empty container leasing, subleasing, and empty container swapping. Carriers often give preference to sublease or swap.
- Information sharing
Shared logistics information system can improve operational efficiency and decision-making response speed. Information system sharing is divided into internal office system sharing and outside network sharing. Outside includes sharing the upstream of the supply chain such as container trucks, railroad transportation, terminals, and even the office access of shippers, customs agencies, and systems for shipper box tracking.
Information sharing is a necessary safeguard to promote the efficient operation of shipping alliances, but it may also lead to the loss of information resources, leakage of business secrets, and increased business risks. If information is protected out of self-interest, it will in turn accentuate the problem of information asymmetry and subsequently increase the operational risk of the alliance.
Market impact:
1、Increase the number of voyages, improve the quality of transportation range, shorten the transportation time and reduce the cost.
2、Expanding the coverage of routes and establishing a global service network can provide customers with “one-stop service” to improve the quality of service, reduce costs and improve operational efficiency.
3、Improve the utilization rate of ships and equipments, reduce fixed and variable costs. Make full use of idle ships and facilities to increase the backlog rate and improve cargo-acquisition capacity.
4、Improve market share and increase transportation of high-priced cargo.
5、Reduce inland container stations and save port yard usage fees. Member companies share port yards, inland container depots and transportation equipment.
6、Improve coordination with feeder transportation sector and port authorities. Through the alliance transportation, member companies can avoid repeated port calls and develop global transportation by allocating routes, reducing transportation time, increasing transportation flights and expanding service scope.
7、Coordinate and unify MIS and EDI system.
8、Improve market share and increase the possibility of opening up new markets.
9、Improve the level of logistics management, common use of equipment, warehouses, container port stations, alliance transportation, to achieve economies of scale.
Limitations of the alliance:
1, the alliance members of the loss of some of the independence, so that each attrition in the operation of the lack of a certain degree of flexibility, may lose some of the good business opportunities. After forming an alliance, each alliance member company has lost some “freedom”. For example, an alliance member cannot freely charter or buy or sell vessels without the consent of the alliance partner. In a rapidly changing market environment, this often results in lost opportunities. This is more prominent in the alliance formed by a number of companies, and the more members, the more serious the situation.
- Alliances that are not asset-centered often result in a situation where equality and efficiency cannot be achieved at the same time. For the alliance member companies, because the union between them is not based on assets as a link, so partners in the pursuit of their own profit maximization, it is difficult to avoid the formation of the “bed of different dreams” situation. At the same time, it is also difficult to avoid competition among the partners because the alliance members have their own independent solicitation networks but share the same flight routes. If the allocation method within the alliance is too rigid and restricts competition, it will affect the full play of the alliance member companies and make the alliance lose its vitality.
- Conflicts among alliance members in terms of their respective business characteristics, corporate culture and management systems. Because of the cooperative relationship between the alliance member companies, they share the same ships and terminals and provide the same shipping schedule, which often affects their own playfulness and makes it difficult for them to show their own service characteristics. At the same time, due to the different cultural background and management system of each company, it will bring certain obstacles to the cooperation of the alliance.
4、It is difficult to coordinate the distribution of interests of alliance members. The formulation of strategic alliance benefit distribution program is one of the key factors for the success of strategic alliance, and it is also the place with the most disagreements. When evaluating an alliance, alliance members are more interested in fairness than efficiency. It is difficult to distribute benefits due to the imbalance in the proportion of resources invested by alliance members. A “fair” distribution plan acceptable to all alliance members is the guarantee of successful operation of the alliance, but in practice it is difficult to guarantee that liner shipping companies feel “fair” in the alliance, and the imbalance in the distribution of benefits among the alliance members often makes the strategic alliance loose, or even leads the alliance to the danger of falling into the wrong direction. However, in practice, it is difficult to ensure that the liner shipping companies feel “fair” in the alliance.
Challenges of changes in the external environment of the alliance. In view of the greater benefits that cooperation may bring, liner companies participating in the alliance attach great importance to coordinating their interests. However, when encountering unexpected events, liner companies will often instinctively react to protect themselves first, which may result in the disintegration of the alliance.