By the end of August 2016, the world’s seventh largest shipping line, South Korean global transportation giant Hanjin Shipping, filed for bankruptcy protection.
This came as no surprise to the international logistics industry, since container lines have witnessed some pretty rough years due to a drop in freight rates (low demand and oversupply of ships), which resulted in extremely low prices and continuous efforts to boost profitability. The downfall of a major shipping line was inevitable in a way, the only question remaining: which shipping line would buckle under the pressure first?
Hanjin Shipping accounted for about 3% of global container liner capacity. This collapse was nonetheless totally unprecedented, especially since all big container lines are linked to each other in some form of partnership. The shock rippled through the global transportation industry and supply chains.
Firstly, Hanjin’s services were interrupted all of a sudden, and supply chains were left with about $14 billion’s worth of cargo stuck on ships, refused to be handled since ports and transport companies would not be compensated for their services. Half a million containers got stuck on the sea, loaded with South Korean and Chinese merchandise, mostly Samsung and LG products destined for the US and EU countries for the holiday season, which eventually forced the US court to allow some containers to be unloaded in order to avoid a big negative impact on third parties.
Freight forwarders went out of their way to reorganize transport services, planning alternative routes for cargo that was to be carried on Hanjin ships. Air freight was offered as a pricey alternative in some cases. In the second phase of the collapse, higher rates and capacity demand encouraged competitors to provide additional services in order to replace those of Hanjin on routes and ports previously serviced by the Korean giant. Thanks to strong competition, the rates decreased yet again, and in a couple of months’ time the shipping industry was able to provide apt substitution for Hanjin’s services.
Last but not least, there was the question of what to do with Hanjin’s assets. Through bankruptcy procedure, most assets were to be purchased at a discount price. The South Korean government allocated $5.6 million to support the shipping industry and helped other local companies to absorb Hanjin’s assets. Hyundai Merchant Marine (HMM) purchased 20% of California’s container cargo terminal while MSC purchased the remaining portion. Hanjin’s bankruptcy left 1469 people unemployed but some of them have already been hired by HMM.
The majority of Hanjin’s fleet is destined to be used again, so in the medium term there will still be an overcapacity in the market (i.e. higher supply than demand), and consequently, shipping rates will be pushed under the minimum yet again. This means the shipping industry is bound to bounce back to its state prior to Hanjin’s bankruptcy, and further bankruptcy procedures are still an option.
In response to a highly fragmented and competitive market, there is a tendency of market concentration, both through mergers and the formation of alliances. However, since there is no natural capacity regulation in the industry, these initiatives do not solve the structural problem of overcapacity by themselves.
The crisis of Hanjin Shipping reflects the importance of international logistics and the impact it has on organizations very well, as it can be both a source of serious damage as it can make profit for organizations.