Vertical integration

This section first discusses the motivation towards vertical integration in liner shipping from the shippers and shipping lines’ perspective. The advantages and disadvantages of vertical integration are explained. Secondly, we discuss the different forms of vertical integration in CSSC with examples. Thirdly, a game-theoretical model is presented to model the vertical integration between a shipping line and a container port in terms of the shipping line’ investment in port capacity expansion.

Motivation and issues of vertical integration

At the beginning, containerisation might be seen as a simple technological innovation for the ease of cargo handling at ports. However, it prepared the ground for intermodal transport and vertical integration. The later development of container ships, quay cranes, yard cranes, rail-mounted cranes, container trains (e.g. double-stack container train), wagons, container trucks, and chassis enabled the same container to be handled and carried all the way from the origin to destination by different transport vehicles. This paved the way for new organisational models in the transport function, as it became possible for shippers to realise door-to-door transport and reach global operations much easily.

Traditionally, shippers used to sign separate contracts with each singlemode transport carrier to move goods from the origin to destination internationally. Containerisation has developed multimodal transport operators, which are able to provide door-to-door transport services by taking the responsibility for the transportation of the goods in the entire journey. This enables shippers to sign a single contract with a multimodal transport operator from a single business perspective. Further, shippers have an increasing desire to take advantage of the opportunities offered by globalisation and containerisation to develop their sourcing, production, and distribution activities on an international scale, which requires synchronisation of their activities over space and time through the logistics chains. As a result, there is a need from the shippers’ viewpoint to achieve a streamlined door-to-door service by vertical integration.

On the other hand, there is also a strong need from the shipping lines’ perspective to pursue vertical integration. The potential advantages of vertical integration for shipping lines include the following aspects (Fremont 2009). Firstly, vertical integration can increase shipping lines’ competitiveness by providing value-adding services and differentiating the transport services from their competitors. This is particularly appealing when the cost-cutting measures are facing difficulty. Secondly, vertical integration provides greater control of the transport chain, which can facilitate the management of both vessel logistics and container logistics. In particular, container logistics involve the storage and flow of the containers in inland transport, which is traditionally beyond the control of shipping lines. Thirdly, vertical integration helps capture the cargo at source by establishing direct relationships with the shippers instead of relying on freight forwarders to fill the ships. This would provide an opportunity for shipping lines to generate more stable cash flows and to reduce exposure to highly volatile freight rates. Fourthly, vertical integration can increase efficiency and effectiveness through information sharing and supply chain coordination between the partners in the vertical channel. Fifthly, vertical integration can reduce the transaction costs between the channel members.

Nevertheless, there are some issues that may arise when shipping lines go for vertical integration (Fremont 2009). For example, [1]

176 Vessel logistics and shipping operations

  • [1] Vertical integration may lead to dominant logistics providers, whichcould limit the choices for shippers and reduce competition. • Shipping lines enter direct competition with other stakeholders (e.g. forwarders and terminal operators), who are its traditional customers or service suppliers. The logistics business is also competitive and fragmented. • Shipping lines may face new challenges in the logistics sector in terms ofthe adaptability, agility and flexibility, in which smaller companies oftenprevail. • Vertical integration requires the investment of financial, technical, and human capacities. Due to the global scale of container shipping networks, thisis particularly challenging. This implies that there is a need to balance thedegree of vertical integration and the extension of geographic coverage.
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