Illuminating: the supply chain repercussions of Hanjin's collapse reached far and wide
If the customer is always right, what happens when the customer goes bankrupt? Felicity Landon reports
Ships arrested, ordered out to sea to avoid arrest, stuck out at sea because terminals were owed huge amounts; thousands of containers stranded, cargo in limbo. The impact of the collapse of Hanjin Shipping, the world’s seventh largest container line, was instantaneous and significant. And it has left a big question mark in the air – who might be next and what can ports do about it?
“These are risks nobody really thought about before,” says Professor Gordon Wilmsmeier, chairman of the Port Performance Research Network (PPRN). “We have been in this glass bubble. But the honeymoon is over and now we have to deal with the headache in the morning.”
He adds: “If you focus too much on one shipping company, you have a significant risk of losing business and revenue. But it isn’t only about the port – it is the terminal, the region, the trucking companies and those who rely on the connectivity. It is a domino effect.”
In today’s uncertain climate, can ports do anything to lessen the impact in the event of a customer going bankrupt? This is a tough issue for the industry, says Dean Davison, general manager for Inchcape Shipping Services’ consulting and commercial advisory services. “Do ports simply refuse to accept ships because there are press reports or anecdotal evidence that the line is struggling financially? That will never happen.”
Relationships between ports and their shipping line customers are often long-term arrangements that have been through several economic cycles, he says. “Ports have to balance the good and bad times – i.e. rapid growth in the last decade and the global financial crisis.
“But mitigating risks is a major challenge. A port’s position will be heavily influenced by its competitive position; a port regarded as a ‘must-call’, for example for local cargo demands or because there is not a real alternative in the same region, knows that if a shipping line went out of business, its cargo will likely be picked up by another and the call would be made, irrespective of the logo on the side of the ship. The issue is more applicable to vulnerable ports –where there might be overcapacity or several port-call options.”
As the Hanjin collapse became public, the Hanjin Europe was berthed at Eurogate Container Terminal Hamburg and was not allowed to leave the port.
“After two-and-a-half weeks, all uncertainties concerning terms of payment for port services were clarified and the vessel received permission to leave,” says a spokeswoman for Port of Hamburg Marketing. “An insolvency is always the same, whether it’s a shipping company or another industry. So it’s the individual decision and business policy of each player, whether it’s useful to modify and adjust the respective payment procedures.”
A source at another major container port said: “Rumours about Hanjin were there for a long time and nobody should have been surprised when it happened. A lot of shipping lines take much more credit than they are allowed. Our credit controllers kept on top of Hanjin and they were actually our most up-to-date account. A port should keep close to its customers and, if it does have an inkling something is wrong, use credit control procedures appropriately.”
The Port of Long Beach was one particularly affected by Hanjin. Chief commercial officer Noel Hacegaba says: “Soon after Hanjin Shipping announced its decision to file for bankruptcy, its carrier alliance partners and service providers reacted by banning the transport of Hanjin containers and refusing service or requesting payment up-front. This effectively halted Hanjin’s operations, as vessels were arrested, containers were stranded and the flow of Hanjin containers was interrupted. The impact to operations was felt immediately and cargo owners, terminals and trucking companies were forced to look for alternative ways to access inbound Hanjin containers.”
Hanjin’s bankruptcy also impacted the chassis supply in Southern California, he says. Without a place to drop off empties, thousands of Hanjin containers ended up sitting on chassis. “At its peak, we estimate there were as many as 10,000 empty Hanjin containers scattered across Southern California, significantly slowing the fluidity of the chassis supply in the region.”
The Port of Long Beach acted quickly and worked closely with terminal operators, trucking companies and chassis providers, among others, to ensure Hanjin-operated vessels were discharged and cargo owners had access to their containers, says Dr Hacegaba.
The port also worked with Hanjin and terminal operators to look for ways to collect empty containers and load them on to a vessel for repositioning to Asia. The Total Terminals International (TTI) terminal, in particular, worked with shipping lines to evacuate Hanjin-owned empties, and also began accepting Hanjin leased containers that came with a booking number.
As a result of these efforts, within weeks, the number of stranded containers fell by 40% to 6,000. In early November, the port partnered with TTI to secure an empty vessel to reposition about 4,300 Hanjin empties to Asia. This brought much-needed relief to the supply of chassis in Southern California, says Dr Hacegaba.
In retrospect, were there lessons to be learned? Could anything have been done in advance? While Hanjin was working with the Korea Development Bank on a self-rescue plan, the general feeling was that it would find a path out of financial distress, he says.
“Service providers were being compensated by Hanjin for the services provided and even cargo owners, who had signed contracts with Hanjin Shipping, were assured of a positive outcome. When Korea Development Bank rejected Hanjin’s self-rescue plan, it was a surprise to many. But the biggest surprise came a day later when Hanjin announced its decision to file for bankruptcy. There was no way to predict the timing of these two events, which left very little time to prepare. Almost immediately, service providers, alliance partners and others reacted by refusing to transport Hanjin containers, bringing Hanjin’s supply chain to a halt.”
While there will be many lessons learned, the question of what can be done to prevent something like this from happening again is less clear, he says. “Although this is not the first shipping line bankruptcy, Hanjin is the largest carrier to follow this path. By virtue of its membership in the CKYHE Alliance and other slot-sharing agreements, as many as 29 carriers were exposed, meaning that Hanjin containers were not limited to one shipping line or one alliance network. This had the effect of broadening the impact to the global supply chain.
“From a port authority perspective, we have learned about the importance of being agile and responsive to these events. In a supply chain comprised of several, discrete partners, the port authority has to facilitate a forum to bring the supply chain stakeholders together to discuss and address system-wide issues. By facilitating such a forum, for example, we were able to mitigate the impact of empty Hanjin containers on the chassis supply. We were also able to work with our terminal operators to ensure they were co-ordinating with shipping lines and trucking companies so that cargo owners had access to their cargo and found alternative ways to remove their containers from the terminal, as necessary. The bottom line is that dealing with an issue as big and complex as this requires close communication and coordination coupled with clear facilitation.”
NEED FOR DIVERSIFICATION AND BESPOKE SERVICES
We are living in difficult times and if another shipping line goes bankrupt in a few months’ time, people can’t escape from that, says industry expert Thomas Vitsounis. “Also, with consolidation happening more and more, these dangers and risk profiles will be increased for terminal operators. However, once a port realises a crisis could be coming up, it’s a case of being well prepared to micro-manage the effects of the crisis and make the right decisions."
Here, technology is coming into play, he says: "With more information in hand and more sophisticated analysis and tools, ports should be able to get plenty of good insight in advance. If they have the right tools in place to be the first to realise something is happening, that gives them time to be better armed than the competition. That could make a big difference.”
Mr Vitsounis says ports and terminals could better protect themselves by looking at the whole supply chain system from a higher level – offering more customer-oriented services rather than standardised services, and gaining more control of the supply chain so that they are not relying solely on shipping lines for their income.
“Terminal operators would also do well to develop more sophisticated portfolios in order to diversify their risk,” he says. "Some ports are so obsessed with containers that they overlook the fact that there are so many cargoes and freight out there where you can actually make solid growth, and that there are other really good connections – Europe and Africa, for example - and not only Asia."