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Maersk Line to focus on inland service in India: CEO Soren Skou

It has been a long journey for Danish shipping giant Maersk in India. Global head Soren Skou on a recent visit to India spoke exclusively to BUSINESS TODAY about the company's plans and related matters.

Manisha Singhal        Last Updated: April 7, 2014  | 17:56 IST
Maersk Line CEO Soren Skou
Maersk Line CEO Soren Skou

It has been a long journey for Danish shipping giant Maersk in India. It was in 1932 that its first ship landed on the shores of this country. The company has since expanded its India business and with ports in India growing, it is looking to strengthen its business here. Maersk global head Soren Skou on a visit to India recently, spoke exclusively to BUSINESS TODAY about the company's plans and related matters. Edited excerpts:
 
Q. How do you see the current market sentiment and environment in India?

A. We operate a global shipping business. Maersk Line is a $26 billion company; we have 600 ships in 115 countries. India is the nation where we have the most employees. It's a country we believe in very strongly. We are not here for a year or two years. We are here for the long term. You have 1.2 billion people living here. I think the average age is something like 25 years so obviously the potential of this great nation is enormous and in my humble opinion, what we are providing, so to speak, is one of the things that India needs for its future growth - logistics, transportation, port infrastructure as a group. Our business is very much driven by India's import and export. Right now, India's imports have taken a hit but exports are doing well, at least the container business, I think the effect of the rupee depreciation has made Indian export businesses more competitive and we are there to serve. So, India plays a huge role for Maersk Line not as a market in itself but also as a provider of business process services. We have 8,000 people here just in the service centre organisation doing all of the backroom room and now actually our front room work as well for the global Maersk Line organisation. So all in all we are happy with the development here, we serve the whole country, 14 ports in all of the relevant trades. So we are here to stay.

Q. Can you tell us where the P3 alliance - global collaboration with two other top shipping players - stands at present? Is there anything for India in it?

A. We have number of Indian clients who are not only shipping from India but actually doing business all over the world. The large Indian business groups are not just doing business in India. So I am sure some of our India based customers will also benefit from the P3 alliance.

The key point about the P3 alliance is that if it is approved by the regulatory authorities, it will provide first of all significantly better physical products than what we offer today in the east-west trades that are covered, better products in terms of frequency, better products in terms of geographic coverage and reliability. Secondly, we will be much more efficient.

The whole network the three carriers today use is around 300. When we do the P3 network we will be able to lessen that get down to 250-260 ships. That means saving on cost. Saved cost is very good for our customers because it allows us to be more profitable, allows us to invest in the future. But actually lower costs also means we can keep freight rates lower than what they would be otherwise. As an industry, for the last 30 years, every year on average we have been able to lower the freight rates and I think all out customers-importers and exporters benefit form that.

Q. When do you see the approvals for P3 coming through? China has opposed the alliance.

A. What we know at this point is that the US authorities will have to make a decision soon. We are in constant discussions with the EU and we expect the EU will reach some kind of conclusion too in the foreseeable future. The Chinese authorities have accepted our application as full and final and that means when they did that - it was in December - they have six months time to make that decision. So I think we will know one way or the other by June latest.

Many international players operating in India complain that the Indian market does not give them a level playing field. There are a lot of regulatory restrictions. For you as a logistics player what are the challenges of the Indian market?

There is one area where I believe India is doing itself a disfavor in terms of how the logistics - export and import - supply chain is set off and that's in the area of cabotage trade. Today transport containers between two Indian ports requires an Indian flag and that is true whether or not it is an Indian customer shipping from one Indian port to another Indian port or it is an international container arriving at an Indian port and then moving on to another Indian port. That means that today for instance we use Colombo, Sri Lanka, as a distribution hub for Indian ports because we are not allowed to use an Indian port as a distribution hub. And I just think it's a shame for India. Why not use Indian ports for that business, generate the revenue and jobs and so on...

Q. What is the logic behind doing that?

A. I think it is protectionism. You want to preserve the right to move containers between two Indian ports for Indian carriers. We are not interested in getting into the business of moving the local, domestic freight between two domestic ports but we are being hit by this regulation because we are not able to move international traffic either between two Indian ports. Cabotage is something that many, many countries have but I also believe that there many instances like in the EU where it has been abandoned as a concept because it makes it significantly more expensive to move containers between two ports within the country.

Q. What discussions have you had with the Indian government about this?

A. You know it's an issue that we bring up when we have a chance. I think there is a dialogue with the Indian Association of Shipping Agents and so on. I mean we are doing our business one way or the other. Temporarily we are using Colombo in Sri Lanka and so on as a distribution hub instead. So it is not as if the regulation is preventing business from being done but I am mentioning it as an area where India could become more competitive and at the end of the day you know our mission is to create opportunities in global commerce, basically facilitate trade and we feel we do that best by creating a global framework. We have created it, but maintaining the global network of transportation services, helps our customers trade with their customers in as easy, efficient and low cost a way as possible.

Q. Isn't it very skewed? As I understand it, 92 per cent of carriage is done by foreign companies in India...

A. It is. Globally if you look at the top 20 shipping lines, or even the top 30 for that matter, there is no Indian flag shipping line among them. The global trade and what you are mentioning as 92% is very limited cold store purely domestic transportation. So of course you will have a 92% because that's global trade. That's what India imports and that's what India exports, hence you know the correlation. So, now for an Indian flag shipping line to be competitive it is for the government and the authorities to decide on certain rules to make that investment cost effective. But you will have that 92 % by definition as it is global trade.

There are no rules anywhere in the world that would prevent an Indian company to grow as a big global container...I mean, Maersk Line is the largest carrier today in the world and you know we come out of a very small country, Denmark, with five and a half million people. We have never had any home port advantage anywhere.

Today you can turn the 92% around and say you know 100% of what is moved between Indian ports is moved by Indian businesses.

Q. You have overseen the Beijing business as well for Maersk Line. How do you compare it to India?

A. I think that India has plenty of upside both in the short and the long term. I think the demographic of India is much more advantageous for it than it is for China. Obviously China has had for many years a one child policy and that means it has a very different demographic. So you have a lot of things to build on. India is one of the largest world producers of agricultural products, you have very strong processes, car manufacturing and so on.

I think what is also important for India is that you have truly world class companies here and they are able to compete not just in India but elsewhere. So I really think India has lots of potential going forward.

I mean clearly investing more in infrastructure and so on will make India more competitive. We are investing in India in the port infrastructure here. We have investments in Nhava Sheva and in Pipavav and also in inland infrastructure depos and so on. The more there is, the better.

Q. What are your expansion plans in India?

A. We are a big business here in India and we are certainly interested in continuing to expand our infrastructure investments in ports. We are definitely going to continue to invest in providing more services - more frequency, more departures, better port coverage as the market develops - as we have been doing for the last two decades, under our own name since 1994.

Q. Where will Maersk invest in India in coming years?

A. I don't think we want to share too much...but frankly we are, every year, doing something to upgrade our service. Last year we called at Nav Sheva for our services of new services. I think one of the key challenges and opportunities for Maersk Line is to continue to develop our inland products, we deliver containers and pick up containers with the river containers all over India, not just in the ports and working with that - making it more efficient and cost effective as possible is a big challenge for us. So I think, we will spend a lot of time, effort and money in improving our inland service in India in the coming years and get closer to the customers growth in India is not in few big cities that where the growth is coming from and we are getting closer and closer to customers. Developing tools for that to be ecommerce platforms, dedicated people that are what we will focus on.

Q. There are issues around port infrastructure, port congestion, turnaround time in India. How do they impact you and your business?

A. I can say this very generally: of course the less time a ship spend in port, the better, it basically saves costs...new ports have been developed in India (other port infrastructure is being upgraded) .

Q. Is regulated pricing versus market determined pricing in India an issue?

A. One area where we have a view as AP Moller - Maersk Group is on the tariff for Terminal Services (TAMP) which is a centrally defined price or tariff or what it can cost to load a container. And you know in some terminals, particularly existing terminals, the tariff is set very low - at a level where it is not possible for the terminal operator to make any money. The negative side (of this), is if they don't make any money they don't make any investments and therefore the productivity of container terminals in India (gets impacted) as to make any money you need to renew the equipment, you need new equipment. So from an A P Moller - Mersk Group that owns container terminals and is into container business this is not good. Second, from Maersk Line's perspective, we want to pay a fair price to container terminals but then it has to be a productive port and the less time our ship spends in the port, the better.

Q. A recent equity research report by Goldman Sachs says one of the challenges for you and your service division would be that major oil companies have brought down their targets. How do you react to this observation?

I don't really want to comment on oil business. I mean, I'm the CEO of Maersk Line and this is a business of A P Moller group. I sit on the executive board but I don't know, don't talk about the oil business.

The situation might not really work in your favor because there are talks about Qatar extension and all that. Obviously you are the board member. Are you happy with that?

I'm convinced that my colleagues who look after the oil division have good plans and are executing a strategy that we have put out for that.

Q. How worried are you about fuel price volatility?

A. There is nothing much we can do about fuel prices and hence it has been volatile for us in the last three, four or five years since the crisis. As the AP Moller - Maersk group, we have a natural hedge in the sense that we have an oil company so when fuel prices are going up it is costing Maersk Line money but then all businesses are benefitting and vice versa. There is not much one can do to manage fuel price volatility except reduce consumption as much as we can .

Q. You would not find yourself in a happy situation right now. You have fuel price volatility. Then, also questions about over capacity in the market. Is it one of the most testing times for Maersk businesses?

A. Maersk Line recorded $1.5 billion (net operating profit) last year and we thought that was a very satisfactory result and we have made an investment of $20 billion so we get a 7.4 per cent return on the capital invested. We have guided the market that we will deliver a similar result for 2014. We have to, of course, compare it to the amount of money we invested so we have delivered a 7.4% turn on invested capital.

We will deliver similar results in 2014 for Maersk Line. So, yes, it is a testing time and yes, we have many issues to deal with, but we also have a strategy on every year becoming more cost effective. Saving fuel is a big part of it and we can deliver what we have guided the stock market.

Q. How do you keep fuel costs under check?

The fuel consumption, what we call Bunga, is the single largest cost item for a shipping line. And for Maersk Line it is around 20% of our total costing. This is huge. And obviously we have the financial sense to consume less fuel. We have invested $30 million in fuel-efficiency technology, an investment.

Whether or not you believe in the global warming story, it is very important for us. It's good for the environment (to reduce fuel consumption). And last year we were extremely proud of our track record... In 2013, Maersk Line used a million ton of fuel less than we did in 2012, 12%. And since 2007, we have reduced our fuel consumption by around 30% per container. So that's a very important agenda item. You know, back in 2007 we set the target that by 2020 we would reduce fuel consumption by 25%, that target we have already reached in 2012.

So today, we operate fewer ships than we did in the past but they are on the average speed that means bigger ships which are more fuel-efficient.

So you know all kinds of innovations are going on, if you are, spending as we are 6 billion USD yoy on fuel , then half a percentage or a quarter of percentage investment on something like that is actually significant money.

Q. What is the Far East alliance? Does it include India as well?

A. It is similar to the P3 product and it is a joint product and new cooperation between Asia and India. It's in a similar vein as the P3 service we have with two other carriers, a joint product from Asia to India. It allows us to operate from one efficiently, sell better products and more frequencies . It's good for our customers because it allows us to ship more at reduced costs, inventory costs and so on...and at the same time we can benefit from becoming more cost effective and invest in business freight costs are lower.

Q. In terms of goods exported from India what is the most exported product now and what is the pattern?

A. Clearly some of the big chemical stuff is growing a lot. If you look at the past month India was fortunate last year with a fantastic monsoon we have good agricultural products on our ships and agricultural products are a big part of our cargo. Industrial output is in difficult situation. Its agricultural, garment industry one third of tractors globally are produced in India  the, agricultural crops, rice wheat, tobacco, tea, cotton. . So, India is the world's largest rice producer, wheat producer, and we see growth in these segments.

India is the 3rd largest pharmaceutical products producing nation so we are shipping pills in refrigerated containers . Growth has been mainly on agri and petro chemicals new products like guar gum you have a lot of strong and strength in India industry. 3 billion dollars of meat se food export second largest producer of fish, India feeds a large part of the world. Then grapes from Nasik thousands of containers shipped to Europe. We want to participate in India's growth story.

Q. Is there any manufacturing integration happening? Is it helpful for a business like yours?

A. Our industry has grown historically a lot on and business on first containerization secondly on off shore manufacturing first from Europe from US to Asia. The countries in the US and Europe who wanted to move their business from there to Asia have done so by now. There is couple of other things playing up and that is that the supply chains are becoming more and more complex. So if you are buying today, few garments produced in let say, Bangladesh, what actually is made here is not made from the ground up. Actually, it is the clothes coming from somewhere, then you have any kind of stuff is coming from somewhere else and then it meets there and gets assembled so to speak and many business are like that.

Growth in the manufacturing industry has spurred this growth. Assembly of goods across continents has also become cheaper due to low transportation cost through shipping.

So car manufacturing for instance, if you are buying cars that are being assembled in China, I Think assembling is the right word because all the parts that are being put together as a car are coming from all over the world not just one place and that complicates the supply chain because all the countries are sourcing various parts they need from wherever in the world are exposed to shipping is the cheapest for them. And they are able to do that because transport cost, ocean transport cost is very small fraction of the total delivery cost.

It is the same like you have a pair of Nike brand sneakers that you buy from a European shop. They are typically produced in Asia and transported in container to you and the cost for a pair of sneaker being transported in a container to you what we charge is around 25-30 Euro cents out of 100 . So then what it means is that transportation cost is not big factor in the total part of the supply chain. It is much more important all customer where they can source the things in most effective way or the cheap way.

Q. Is China slowing down a big concern in terms of volumes of trade?

A. You know, what is important for us is the global consumption and global GDP growth. One country might grow faster in a particular year and slower the next year...as long as people continue to consume, somebody's going to manufacture goods, and most likely they are going to be transported...so you know there are lots of customers who are manufacturing out of China...but you know...South East Asia and so on. For all our clients, we want to provide great service.

Q. A lot of critics would say that the alliance is more of a market dictated decision that you guys have to take. How do you react to that?

A. I think our customers benefit when we provide better service and when we lower our costs and invest more in new capacity. The customer benefits, we are able to work efficiently at lower costs and with more top line growth can invest in new capacities.

Q. A lot of people are betting big on the change in government in India...

A. I don't know anything about Indian politics.

*The headline has been changed to "inland service" from "inland services" to accurately reflect what Soren Skou said. A Maersk spokesperson has clarified that the focus on the inland service business is in line with Maersk's strategy to increase its presence in business catchment areas in the hinterland of India. Inland services, on the other hand, in logistics industry parlance, refers to trucking, warehousing etc.

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