Maersk: Digital Transformation of Global Trade

• Maersk aimed to digitally transform not only the container industry but global trade

Rotterdam Port Visit

• In March 2018, Mike White, Maersk's head of global trade digitization, visited the Port of Rotterdam
• The visit was to assess the progress of a new project aimed at addressing the difficulties in the global trade industry

Observations at the Port

• The port was experiencing a chaotic scene with large cranes unloading containers from cargo ships
• The containers were filled with a variety of goods, and customs authorities were inspecting cargo using paper documents.
• Trucks queued at the port entrance to transport goods across Europe.
• The Madison Maersk, one of the world's largest container ships, was being towed into the terminal and can haul more than 18,000 standard shipping containers

Challenges in Global Trade

• Global trade suffered from inefficient, paper-based processes
• Companies lacked visibility into the status of goods in transit
• Communication between firms was complicated and expensive
• Administrative costs associated with shipping containers were high

Maersk and IBM's Initiative

• Maersk partnered with IBM to create a global trade digitization platform to address industry difficulties and lower trade barriers
• Blockchain technology, associated with cryptocurrencies, would power part of the platform
• The goal was to provide clarity to the supply chain, acting as a distributed ledger for all trade participants

New Platform's Leadership

• Once regulatory approvals were secured, Mike White was set to become the CEO of the independent joint venture

Maersk's Origins

• In 1904, A.P. Møller and his father, Peter Maersk Møller, purchased a used steamer in Denmark and created A.P. Moller Maersk (Maersk)

Expansion and Diversification

• Maersk initially focused on tramp trade, which involved ships with no fixed schedule that moved cargo on demand
• The company transitioned to liner service using vessels on established routes
• In the early 1960s, Maersk entered oil and gas exploration, forming Maersk Oil, which later included Maersk Drilling, Maersk Supply Service, and Maersk Tankers
• Maersk expanded into various sectors, including airlines, IT services, supermarkets, and medical device manufacturing, before divesting these units due to a decline in shipping in the 2000s

Focus on Shipping and Logistics

• Although the energy division made up 23% of company revenue in 2016, Maersk refocused on its shipping and logistics division
• In 2017, the company sold Maersk Oil and Maersk Tankers for over $8 billion.
• Headquartered in Copenhagen, Maersk operated in over 130 countries with over 88,000 employees, generating nearly $31 billion in annual revenue in 2017

Business Units

• Maersk Line was the most prominent business unit, as the largest container shipping firm globally
• By April 2017, Maersk Line grew its market share to over 19%, purchasing rival Hamburg Sud for $4 billion
• Maersk Line delivered almost 80% of Maersk's overall revenue in 2017.
• Maersk operated more than 600 vessels and shipped 12 million containers annually
• Almost 60,000 customers entrusted Maersk Line to deliver their cargo to almost 350 ports across the globe.
• Maersk's APM Terminals unit operated 74 ports and terminals worldwide, and also offered inland services like transporting goods

Additional Units

• Damco was a freight forwarder offering services like customs brokerage and supply chain management
• Maersk Container Industry manufactured shipping containers
• Svitzer provided towing, emergency response, and salvage services in the maritime industry

Containerization Origins

• A North Carolina businessman innovated the modern container industry
• By placing truck trailers directly onto ships, goods could be transported without unpacking cargo
• This led to the shipping container, which allowed easy transfer between trains, ships, and trucks

Standard Sizes and Volume

• Standardized container sizes included 20-foot and 40-foot containers, with the 20-foot container referred to as a 20-foot equivalent unit (TEU), an industry measurement for cargo volume
• Estimates stated over 200 million TEUs were shipped in 2017
• Maritime shipping accounted for 90% of global trade

Container Transportation Efficiency

• Container transportation offered a cost-effective method for moving goods over long distances
• It was more efficient than other transportation options, as vessels could haul more containers

Industry Revenue Decline

• In 2016, the container fleet industry's revenue was $135 billion, a decrease from 2012 when industry firms made over $180 billion
• The main cause was falling freight prices
• One source determined that the price to ship a container had fallen more than 50% from 2012 to 2016
• A poor global economy and many ships caused reduced freight rates
• Experts predicted growth after 2018

Market Consolidation

• The container shipping market underwent a period of consolidation
• The top five firms controlled 32% of the market in 2000, which increased to 61% by 2018
• Firms formed alliances, with the three main alliances representing around 80% of the market
• Maersk partnered with MSC in 2014 to create the 2M alliance, which allowed carriers to split vessel capacity for better utilization and lowered costs

Market Share

• Firms with worldwide operations, made up 0.5% of the customer base but accounted for approximately 50% of all container traffic
• These companies distributed shipments among multiple shipping lines to avoid depending too heavily on any single company
• Working with multiple shipping lines, bigger firms gave themselves more transportation options and created price competition between the lines.
• Other than paper documentation, companies in the shipping industry transferred a great deal of information through electronic data interchange (EDI)
• EDI solutions had difficulties because the document-based messages, used in an EDI system, are exchanged with participants immediately before and immediately after an event
• The messages are sent out in batch format, and the information was not transmitted in real time

Shipment Overview

• The shipper contracts a freight forwarder who acts as an intermediary between the shipper and the assorted players participating in the supply chain

Documentation Challenges

• Documentation from Kenya to the Netherlands required various steps
• Customs officials reviewed documentation
• A copious amount of documentation was required to ship a container

Collaboration

• Maersk and IBM began working together trying to find a technology that could help solve some of the issues that afflicted global trade
• Many resources are wasted due to inefficient and error-prone manual processes

Fraud

• The industry kept relying heavily on physical documents, papers, and stamps because it was the safest way to do business and less subject to fraud compared to technology that was available in the past.
• Maritime fraud cost about $600 billion a year
• Supply chains are slowed down

Shipping Predictability

• There are multiple trade lanes
• Shippers have real challenges in predictability because things go dark, particularly as they go through customs
• Visibility on the status of shipment clearance through a specific country's customs authority still leverages expeditors who rely on personal connections, emails, phone calls, etc.

Shipping Delays

• The container arrived at the port, but the port employees wouldn't let the container in because customs needed more documentation
• These types of delays were commonplace in the shipping business
• The shipping industry only delivered on-time 64% of the time
• A single shipment of avocados from Kenya to the Netherlands required almost 30 people or organizations to complete its journey

Barriers in Trading

• Global trade could increase by 15% and worldwide GDP could rise by 5%, if the barriers in the global supply chain were reduced.
• Barriers included difficulties in border administration and the sharing of information

Evaluating Blockchain

• Blockchain refers to a bookkeeping method that chains together entries so that they are very difficult to modify later
• It provides a way for large groups of unrelated companies to jointly keep a secure and reliable record of their transaction
• Blockchain functioned as an immutable database where all parties had access to every entry
• The technology linked all transactions to the transactions that occurred previously

Cryptocurrencies

• Blockchain first gained popularity as the technology behind cryptocurrencies like Bitcoin, which began in 2009
• Cryptocurrencies were virtual tokens and differed from traditional currencies, which were aligned with specific nations
• Bitcoin did not require users to identify themselves
• At the beginning of 2017, the value of a single bitcoin was under $1,000, but by mid-December of that year, Bitcoin's price had skyrocketed to over $19,000

Permissions

• IBM's solution allowed for the creation of permissioned blockchains
• With a permission blockchain, people know who they are doing business with

Blockchain Evaluation and Digitation

• The customers that we were using were Dupont, Dow Chemical, and Tetra Pak
• Maersk and IBM announced that they planned to create a global trade digitization (GTD) platform for all of the shipping industry

Platform Stake Holders

• The platform would be made available to every stakeholder in the shipping ecosystem including freight forwarders, ports, shippers, customs authorities and rival shipping lines
• Maersk envisioned a variety of parties exchanging information through the GTD platform

Blockchain Capabilities

• Blockchain provides capabilities that weren't present up until this point
• Blockchain offers a level of security that is significantly higher than paper documentation
• People can have information transmitted on a secure platform where they can have trust
• Instead of having one centralized party determining what is true, trust can be distributed and ownership of truth to a large number of different parties

Commercial Solutions

• Maersk hoped to help with the digitization of the supply chain and its major data and information requirements
• Maersk intended to offer a capability called paperless trade which would digitize and automate paperwork filing by enabling end-users to securely submit, validate, and approve documents across organizational boundaries"
• Blockchain-based smart contracts would ensure all required approvals are in place, helping speed up approvals and reducing mistakes
• Everybody recognizes that that something that needs to be done

Joint Venture Concerns

• Both IBM and Maersk would have board seats in the joint venture alongside independent board members
• Getting the ecosystem to engage and participate is going to be the critical factor
• Industry competitors could be worried about sharing their data
• Firms might be hesitant to adopt the platform