Container shipping: the $200bn problem

Smedvig Capital recently invested in Xeneta, the leading price comparison platform for the container shipping industry, as you may have seen on TechCrunch and elsewhere. In this article I’ll explain why we think their approach is set to disrupt this enormous but old fashioned industry.

The container shipping market is enormous, volatile and opaque

Companies spend around $200bn a year buying container shipping to have their goods transported around the globe. You might imagine that a market this large must be efficient: prices should be fairly stable and easy to understand, and companies should be able to work out if they are getting value for money.

We spent some time looking into the container shipping market and discovered that this is very much not the case.

Before we go into more detail, I’ll give a quick overview of the market. At a high level, there are three key types of players involved:

  • Shippers: companies looking to have goods transported by sea in containers, e.g. Walmart
  • Shipping lines: operators of container ships, e.g. Maersk Line
  • Freight forwarders: intermediaries managing logistics on behalf of shippers, e.g. Kuehne + Nagel

Shippers can either arrange transport directly with a shipping line (typically only very large volume shippers do so) or have a freight forwarder manage this on their behalf.

Fig. 1: High level container shipping value chain

Given the volume of goods transported every year, the size of the market is not a shock. Perhaps more surprisingly, the market is extremely volatile with frequent, large price swings.

Fig. 2: Average cost to ship a 40ft container, East Asia to South America (USD)

Source: Xeneta data

Matching supply and demand in the market is difficult given the long lead times to manufacture new container ships and the volatility of global demand for shipping. As a result, prices can vary wildly, often pitching shipping lines into losses. They have recently been losing vast amounts of money, leading to new alliances, M&A activity and bankruptcy (notably the South Korean line Hanjin last year).

Finally, the market is very opaque: all players in the value chain struggle to know if they are offering or procuring competitive prices. Most contracts, particularly long term deals, are the result of one to one negotiations that are not made public and there is no centralised industry pricing system equivalent to Amadeus for passenger air travel.

Hundreds of billions are spent with no way of knowing if the price is right

Due to the opacity in the market, firms buy and sell hundreds of billions of dollars of shipping capacity with very limited ability to accurately negotiate rates and assess the efficacy of their procurement processes. Shippers, shipping lines and freight forwarders operate more or less in the dark.

For example, if prices fall sharply, as was the case at the beginning of 2016, many shippers’ negotiated long term rates will be significantly higher than spot rates. On the other hand, if prices rise then shipping lines will prefer to transport containers booked at spot rates. This can result in shippers finding their cargo attractively priced but left on the dock as shipping lines prioritise more profitable containers. As a result, shippers are in need of a solution to allow them to be confident they are paying a fair price, given their size and the state of the market; the optimum price to pay is often not the cheapest in the market.

Crowdsourcing data brings much needed transparency

So how could you go about fixing the inefficiencies in the market? Price volatility is a fairly intractable issue due to the structural difficulties matching supply and demand. Solving the issue of price opacity is more achievable as data obviously exists showing prices that were paid for shipping. The issue is how to get hold of this data, given it sits with shipping lines, freight forwarders and shippers all over the world, not in a centralised database.

This is where Xeneta comes in. Over the past few years they have labouriously signed up large numbers of firms which buy container shipping. These firms provide regular updates on the prices they pay, which Xeneta cleans and standardises before storing the rates in a single database. As a result, it operates the world’s largest database of short and long term contracted ocean freight rates: the actual prices shippers pay freight forwarders and shipping lines to transport their containers.

For the first time, Xeneta’s customers can understand pricing in the container market in real time, using benchmarks based on large scale data samples (23 millions individual rates and counting). They can see current and historic market low, high and market average prices cut across different port pairs, by size of container and length of contract. As a result, price negotiations can be conducted in the context of actual historic and current market prices and customers can assess the efficacy of their procurement or sales compared to the market. Additionally, customers can see when prices in the market are changing, allowing them to adjust strategy accordingly.

Customers we spoke to during our pre-investment due diligence process were uniformly positive about the benefits of Xeneta and the overdue transparency it brings to the market. We set great store by the opinions of actual customers when assessing the quality and value of products, and Xeneta’s were among the most positive we have spoken to.

Helping the industry will also grow a great business

I’ve spoken about the benefits Xeneta brings to its customers and the industry, but we are of course also interested in investing in teams who build large, sustainable businesses. We believe that Xeneta can continue to grow revenue rapidly and, as importantly, benefits from network effects which will provide it with a sustainable competitive advantage in the long term.

Xeneta only needs to capture a tiny share of the $200bn+ spend on container shipping (not to mention the even larger opportunity from addressing other logistics markets) to be a very large business. Given the central role its product already plays in its customers’ procurement processes, this should be very achievable.

Xeneta also benefits from strong network effects: as more and more companies sign up to provide data, the quality and scope of the product improves, making it harder and harder for a new entrant to replicate it. Given no one else currently has access to similar data, the company already has a large head start over anyone looking to catch up.

Finally, no matter how attractive the opportunity is on paper, great people are essential to building great businesses. Led by Patrik and Thomas, Xeneta has a strong team in Oslo and around the globe which is pushing hard to change the industry.

In summary then, we think that Xeneta can modernise and bring transparency to a huge, old fashioned industry, and in doing so create a great European tech company.