Vertical Integration in the Shipping Industry

Contemporary models for international supply chains usually incorporate Just in Time logistics solutions to enable a reduction in warehousing requirements and the need for too much cash tied up in inventory. As such, supply chains have to be streamlined, reliable and integrated. Predictability is everything. Consequently, there could be a logic for selecting a logistics service provider that operated / handled all activities within the supply chain – for example, a shipping line that extended its core function as a carrier to include – port handling, terminal operations, customs clearance, inland clearance depot management, intermodal infrastructure and road / rail haulage, including ‘last mile’ delivery. The advantages are clear, a ‘one stop shop’ service provider with single point of contact and single contractual obligation. For highly sophisticated manufacturers, such as within the automotive sector, where stock holdings are often limited to around four hours worth of inventory, this would seem a very desirable logistics solution. Tracking and tracing is fully integrated within the service and the provision of, all important, real time operational data is relatively straightforward.

However, there may be a down side, particularly in relation to the small and medium sized importing and exporting enterprises who often have to negotiate hard with a number of un-connected service providers to obtain best deals when overall profit margins are tight. The benefits of vertical integration usually come with a cost which could price smaller organisations out of the export market.  Within their report “Integration and Competition between Transport and Logistics Businesses”, OECD noted that the impact of vertical integration on competition has been the subject of much industrial economic research, and it presents a constant challenge to the regulating authorities. Riordan asserts in this context that “ anti trust policy in the United States recognises that a vertical merger can create incentives for anticompetitive foreclosure or facilitate collusion, while remaining mindful that vertical integration can achieve efficiencies” . Accordingly, the overall concern is that vertical integration in the transport and logistics industry can stifle competition, resulting in increased cost to the trade.

Also, there can be an adverse economic impact when these ‘vertically integrated’ organisations take over a multitude of operations in developing and middle income countries. Local providers are often squeezed out and this can have a number of consequences, again, often including rising costs and even labour unrest. It would be very hard for a local, medium sized, clearing agent to compete with a large carrier offering similar services. As privatisation and public, private partnerships become prevalent in port terminal operations and transport infrastructure, the opportunities for large carriers and logistics providers increase. The Maersk group is an example with their forwarding and terminal operating subsidiaries, whilst in many African countries, Bollore provide a mix of services, including rail and road haulage operations. The latter, however, no longer operates vessels.  It is true to say that in the developing world and emerging nations, vertical integration can increase efficiency and professionalism in relation to international supply chain operations. Local providers may lack capacity and resources to provide optimal services to importers and exporters. However, there can be an unfortunate consequence, particularly if contracts, such as port terminal operating concession agreements, are poorly constituted or negotiated. Again, local enterprises can be squeezed out of the market and it can also become very difficult for the host nation to regain control of the facility / operation at the contractually agreed time. Gradual ‘hand backs’ are seldom smooth and can be very contentious.

Inevitably, there are pros and cons to vertical integration in international transportation. Data sharing in international trade operations is being revolutionised by the Single Window concept and, in the future, could be further streamlined by Blockchain technology.  There is currently huge emphasis on speeding up data flow in trade operations. Aligning data flow with cargo flow is quite an exact science – vertical integration may assist this process but, if this is deemed to be the case, an environment of competition, choice and local participation must be allowed to flourish.  Vertically integrated services can be of enormous benefit in sophisticated, and time sensitive, value chains but only if governed by appropriate regulatory controls to ensure that choice is always available allowing professional small and medium sized service providers to succeed and flourish.

Article written by Jon Walden - Associate of Strong & Herd LLP

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