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While the shipping industry can be volatile at times, it has always managed to recover from trying times. This is why the collapse of shipping giant Hanjin Shipping took the industry by storm and had rippling effects on global trade.
Hanjn Shipping was founded in 1977. As South Korea’s biggest container line, it had 230 offices across 60 nations. However, in February 2017, it was declared bankrupt. Whilst this happens to many companies around the world, Hanjin was unique for a number of reasons. They had over 20 container ships on the water carrying cargo that they did not own. Ports around the world would not allow the vessels to dock into their ports over fears that Hanjin would not pay the port fees.
The financial struggles and insolvency of Hanjin Shipping were attributable to an ongoing downturn in the container shipping industry that is the result of numerous interrelated factors such as weak global GDP, overcapacity on container vessels, “bloated” US retail inventories, changing consumer spending patterns, Chinese economic slowdown, and muted growth in demand for container shipping. The downturn dented profits and crippled the financial health for the majority of the top twenty ocean carriers.
Hanjin was the world’s seventh largest shipping line, and the first shipping collapse in 30 years. As Hanjin fell into bankruptcy, its ships and the cargos in them were frozen wherever they sat. As one expert shipper noted at the time, “Ships have been seized. Some are staying out of port to avoid being seized. Some are just puttering around, loaded or unloaded.”
Industry experts estimated that more than 500,000 containers were trapped on these ships, with cargos on board worth more than USD 14 billion. Since any one container can hold consignments from dozens of exporters, the dreadful reality was that thousands of the region’s companies had goods helplessly trapped for almost three months, with no prospect of early release.
Among extreme casualties were Samsung, which used Hanjin to transport 40 per cent of its exports and LG with 20 per cent. Even DHL had 500 containers-worth of consignments stuck on Hanjin ships in different places across the world. Samsung was hastily air freighting replacement smartphones to key export markets in efforts to avoid missing the critically important Christmas shopping season. Thousands of smaller exporters were doing the same, at huge costs, and with little chance of compensation.
Ranjit Singh, BD Container Shipping stated, “Hanjin’s demise was the consequence of poor management and of being overly vulnerable to the shipping industry’s weak financial position. The company was a victim of a bad market and a set of poor decisions made at certain times by the management.”
The south Korean firm found itself in financial difficulty for some time – from 2010 to the first half of 2016, the company’s operating loss amounted to approximately USD 580 million with most of these damages emanating from the container division.
“Hanjin’s volumes were virtually unchanged after six months of 2016 and most industry observers clung to the belief that a solution to its problems could be found. This was particularly so, given the positive noises emanating from the Korean Development Bank well into August,” he continued. However, this was not to be and the company filed for bankruptcy in August 2016, and since then it was making news headlines everywhere.
Many lessons were learnt from the collapse of Hanjin – the Commissioner with the US Federal Maritime Commission, said at 2017 TPM Conference,
“Things could have been done differently. The warning signs were there that a potential collapse of Hanjin Line could occur. However, nobody really thought that South Korea would allow the world’s seventh largest carrier to go bust. The South Korean government pulled its support funding and let Hanjin fail. Should there have been advance notice by South Korean officials to the international community of government and industry prior to pulling the plug?
My concern is that government-supported entities such as Hanjin leave much to be concerned about. Indeed, it was the Korean Development Bank that backed away from financially supporting the liner company, and once that happened, it was over.
We are seeing once again government financed entities stepping in to prop-up liner companies. These include the South Korean-supported Korea Shipping Company, Korea Development Bank, Export-Import Bank of Korea, and the Korea Asset Management Corporation. We are also reading about the National Development Bank of the Taiwan Government and Taiwan’s Ministry of Transport and Communication.
My concern is what is the breaking point for a government to back-out and leave a liner company broke. We’ve seen this before.”
Going forward, he stated, “I firmly believe that if you are going to join an alliance it is the responsibility of the alliance members to ensure the cargo gets where it needs to go. If a carrier company fails and that carrier is party to an alliance, the cargo carried on the failed company’s ships may only equate to one-third of the container volume carried. The Federal Maritime Commission is responsible for regulating the Nation’s international ocean transportation for the benefit of exporters, importers, and the American consumer. The Commission’s mission is to foster a fair, efficient, and reliable international ocean transportation system while protecting the public from unfair and deceptive practices. other carriers in the alliance. So, it is essential that you all take responsibility.”
Ocean Insights offers a couple of tips – As the cargo owner you should diversify your freight, so your goods are not stuck with one party. With appropriate visibility tools that consolidate your freight independent from your booking channels, freight forwarders and contracted carriers, you still benefit from a complete and neutral overview over your goods. Also, know what is going on with your cargo at any time. Get as much visibility as you can. This will enable you to identify possible bottlenecks and to react immediately. This will enable you to identify possible bottlenecks and to react immediately.
It is interesting to take a look at the mighty collapse of this shipping giant and retrace the steps that led to its demise. Industry players must be aware of the warning signs and take measures to find their footing in times of crises. If Hanjin, the seventh largest shipping line could find itself beyond rescue, no company is completely safe. A regular and careful introspection of business and practices is essential to stay afloat and ahead of the game.
Sea News Feature, December 1
