As shops go cashier-free, are retail jobs checking out?

For a long time it looked as if online shopping would gradually replace the high street. But the same digital development that was considered to be the end of physical shops may have brought a new beginning.

AmazonGoHow? Over the past two years a number of cashier-less stores have emerged in Europe and the United States, including the digital check-out test shop opened by Amazon in Seattle last year.

The innovative grocery store with no checkout line was called Amazon Go. But it wasn’t a new idea: some 15 years ago the German Metro Group, one of the world’s largest retailers, experimented with something called the Future Store, where radio frequencies and electromagnetic fields were applied to identify and track the tags attached to products. The concept was never commercialized.

Fast-forward to today, and Amazon Go uses sensor fusion, historic customer data and artificial intelligence; it connects to customer accounts via an app on their mobile phones.

Digital cashier-less stores promise certain advantages for business. For a start, the information they acquire and store can enrich existing data and help companies to analyse and plan. It also helps forecast consumer demand, predicting what buyers are going to buy before they know it themselves. The result is cost savings on shipping, inventory and delivery, and increased sales. It’s also good for consumers, in that it represent a significant shift towards seamless 24/7 retail and would open up new options for people in remote locations.

One thing that a digital store doesn’t do, however, is deliver products quickly. The solution here is in the scaling: delivery on the same day, or even within hours or minutes, becomes easier in a close network of stores and distribution centres. The denser the network, the shorter the distance to the customer, and the faster the goods arrive. This is where more stores and the use of drone delivery, reportedly just around the corner, could speed things up.

But this is only one side of the story. There’s another, darker question hanging over the whole enterprise, one perhaps reflected in the public’s mixed response in the chart below: the future of jobs in the retail sector, which after all is one of the largest employee groups.

No more shopkeepers?

In the digital store, the number of check-out staff is expected to decline dramatically. By contrast, jobs for business oversight and store security – as well as in technical positions – will persist. People will always be the best candidates for customer-service roles on the shop floor. It’s an important area of differentiation and it’s already happening. Following the centralization and automation of accounting and invoicing tasks, Walmart announced it was shifting 7,000 jobs to the sales floor. It seems clear that the responsibilities of employees are going to change.

Amazon, for example, has filed a patent for 3D printing within mobile manufacturing units. This concept of a moving factory or a moving manufacturing store would mean more flexibility, less stock and more tailored manufactured products for end consumers. In store, 3D printers can be used to produce made-to-order goods or offer 3D printing as a service. Customers pay with smartphones – no checkout line, of course. On the other side of the world, another tech revolution is taking place. In China, the commerce platform ULE is transforming stores into hundreds of thousands of hubs for e-commerce business.

In order to prepare for the future, both businesses and governments need to really understand the impact of automation on the supply and value chain. But information and opinions on this impact tend to vary. Bill Gates and Elon Musk, for instance, believe consequences will be severe. Roman Zitzelsberger, meanwhile, head of the German labour union IG Metall, considers robots less as a threat and more as an opportunity to move our professional lives towards higher-value tasks and more flexibility.

It seems that whatever happens, not only our professional lives but also our private lives – and many, if not all, businesses – will be affected significantly.

This blog was originally posted on the World Economic Forum Agenda.

 

How blockchain can restore trust in trade

containerInternational trade is under pressure. Fears fuelled by the global refugee situation and terrorist threats have led to tighter border controls – and these come at a cost. Every inspection of goods, every stop along the supply chain, eats up time and drives up prices. It harms businesses and consumers alike. Those involved in international trade – whether manufacturers, trading houses, transportation companies or banks – are seeking ways to ease the situation and cut time and costs.

Blockchain technology can help. The cloud-based ledger ensures that records can’t be duplicated, manipulated or faked, and increased visibility in parts of the supply chain promotes an unprecedented level of trust. It means governments can better protect citizens, while business partners can be certain trading documents are real. Consumers can check the quality and provenance of products, and banks can reduce processing time. And it’s all paperless.

Thanks to blockchain, all kind of legal, financial and product-related information can be made available. This allows even the least trusting parties to comfortably conduct business. With further investment and experimentation, blockchain could potentially hide confidential information to protect the interests of trading parties – pricing information, for example.

Does it work in the real world? Barclays reported the first blockchain-based trade-finance deal in September 2016. The transaction guaranteed the trade of almost $100,000 worth of cheese and butter between Irish agricultural food co-operative Ornua and the Seychelles Trading Company. The process – from issuing to approval of the letter of credit, which usually takes between seven and 10 days – could be reduced to less than four hours. Other banks are also exploring ways blockchain technology can improve processes along the supply chain. In August 2016, banking consortium R3CEV reported that 15 of its members had joined a trade finance trial to test its distributed ledger protocol, named Corda. Also in August, Bank of America, HSBC and the Infocomm Development Authority of Singapore (IDA) revealed that they had built a blockchain application to improve the letter of credit (LC) transaction process between banks, exporters and importers.

It’s not only banks: Maersk, the world’s largest container-shipping line, has been participating in a proof-of-concept initiative, using blockchain expertise from the IT University of Copenhagen to digitize the ships’ cargo inventories. These so-called “bills of lading” require an enormous amount of paper. A shipment of roses from Kenya to Rotterdam, for example, can result a pile of paper 25cm high. And the cost of handling it can be higher than the cost of transporting the containers. Maersk’s aim is to optimize the flow of information while raising visibility along the supply chain.

Often when making a purchase, buyers don’t know where the goods they ordered are coming from, or even whether they have been shipped at all. With blockchain, consumers can be informed of every step in the process. Combined with the internet of things, this could also extend to the care with which a product is transported. Swiss start-up Modum, for example, uses blockchain as a way of assuring recipients that pharmaceuticals have remained within an acceptable temperature range while in transit.

Trust and transparency

Citizens are worried that reduced barriers at the borders, as well as trade agreements, increase the risk of terrorism and illicit trade. Blockchain technology can in fact provide the backbone of a system of authorized trusted participants, bringing everything into the light, whether it’s a product, the party selling it or the path it takes to reach the buyer. Consumers and watchdogs, public and private, can trace every item moved through the authorized blockchain-backed channel and validate or reject both product and party. Customs clearance, too, can be optimized using blockchain. Parties that are part of the group can act quickly and efficiently, while others face scrutiny.

Immutable records on every aspect of a transaction – from the source of the raw material to where and how the products were manufactured, to their distribution, maintenance, repair, recall and recycling histories – are the new basis of trust. Information about ownership, provenance, authenticity and price are all held in the blockchain. Digital product memories connected to smart devices along the supply chain will provide secure proof of everything from manufacturing processes to quality controls. This will reduce the cost of compliance, i.e. the adherence with laws and regulations. Furthermore, this will open doors for replacing current product labelling practices to protect consumers and accelerate customs-clearance processes. Customers and consumer-protection organizations, as well as customs authorities, will have all the information they need to decide to buy or not to buy, to let goods through the border or to block them.


Blockchain has the potential to become the new gold standard of business and trade. But first, all nations need to accept the new technology. There are technical hurdles to overcome too. First, blockchain protocol(s) used to secure the ledger of global trade and manufacturers must be trusted by all of its users and be effectively un-hackable. Technical capabilities to handle very large transaction volumes will also need to be enhanced and the cost of maintaining the protocol may need to be lowered. Ordinary companies and individuals will need to be onboarded into the machine-to-machine (M2M) economy. The liability model of trade conducted on the blockchain will need to be reviewed as the appropriate treatment of liability may differ from current models.

Blockchain can help to reinforce trust in today’s complex and globalized world – giving citizens and governments fresh confidence in the global exchange of goods.

Image: Erwan Hesry

This blog was originally posted on the World Economic Forum Agenda.

Why China could lead the next phase of globalization

Donald Trump is the 45th president of the United States. Among his promises are a 45% import tax on Chinese products, the cancellation of the Paris climate agreement and, as was confirmed today, the end of the Trans-Pacific Partnership trade deal.

chinafutureIf he doesn’t go back on his plans for global trade and international affairs, Trump will give room to other nations to take the lead in shaping globalization. While the US might be taking a step back from the world – a world it helped to create, to a large extent – China in particular can be expected to take on a more prominent role.

While the US is currently the world’s largest economy, in purchasing-power terms China is expected to overtake it in 2016, according to the International Monetary Fund. China has benefited significantly from globalization. Over decades, it has invested in enhancing its capabilities and built economic links with many countries. It has become viewed as an important overseas partner and investor.

This chart shows how China is forecast to overtake the US as the world’s dominant economic power by 2030, based on share of global GDP, trade and exports.

economicleaders

Image: Economist

Something China understands very well is the importance of connectivity – and hence transport infrastructure – for economic growth and development. Its major development framework is the One Belt One Road initiative with its two pillars, the Silk Road Economic Belt and the 21st Century Maritime Silk Road. This development project involves a territory equal to 55% of global GDP, 70% of the global population and 75% of its known energy reserves. “The investments will involve about 300 projects extending from Singapore to Turkmenistan,” reports Reuters.

One building block of One Belt One Road – also known as OBOR – is the Regional Comprehensive Economic Partnership (RCEP). This China-driven alliance will comprise Australia, New Zealand, China, India, Japan and South Korea – as well as the ASEAN region. In 2014, ASEAN was the seventh-largest economic power in the world. It was also the third-largest economy in Asia, with a combined GDP of US$2.6 trillion – higher than all of India.

China on the world stage

On the African continent, China is lending billions towards large-scale infrastructure investments, again part of OBOR, and particularly in transportation. One of its flagship projects is the Standard Gauge Railway in Kenya. There’s also the development of deepwater ports in cities such as Dakar, Dar es Salaam and Djibouti. These are likely to become industrial hubs, following the model of China’s development of the new Cameroonian deepwater port of Kribi.

The Russian Trans-Siberian Railway (TSR) is at the origin of rail transportation between Europe and Asia. Recently, Anthony Cuthbertson wrote in Newsweek that Vladimir Putin may be envisaging a Hyperloop Silk Road. This could present an alternative to the planned construction of 64,000 kilometres of rail tracks that are intended to strengthen existing pathways between the east and west. CRRC Corp, China’s largest maker of railway equipment, was in talks for a potential investment in Hyperloop One, the company behind the idea, Bloomberg reported earlier this year.

Meanwhile, China is launching an $11 billion fund for Central and Eastern Europe, targeting investments in infrastructure and high-tech manufacturing, among other things, both in the region and beyond. Supply-chain operator DB Schenker started running weekly block trains between China and Germany as long ago as 2011. Four years later, the first train carrying containers from China arrived in the Rail Service Centre freight terminal in the Port of Rotterdam.

With the New Development Bank (NDB), the Silk Road Fund and the Asia Infrastructure Investment Bank (AIIB), China has prepared itself for responses to major financing needs – within and beyond the Belt and Road area. This shows some similarity with the Marshall Plan, the US support plan that helped to rebuild western Europe after the end of the Second World War.

With the US pulling out of the TPP, as Trump has indicated it will, China holds an advantage. The binding agreement, which connects Asian countries to North and Latin American nations, has been perceived by many as an obstacle to China’s reach and a way to solidify US alliances with other nations in the Pacific region. Other Asian countries with high export potential, such as Malaysia and Vietnam, are expected to benefit significantly from TPP, while countries that did not sign the agreement, such as the Philippines, risk losing out. This could have a disruptive effect on the region due to trade and investment diversion.

So far, China has faced scepticism and criticism for its international activities. Many have questioned its development in Africa, for example. But China could yet regain a level of moral authority; it could lead the global climate adaption effort if the US pulls away, for instance. It has already warned Trump against backing away from the Paris climate deal.

What’s in store for relations between the US and China? For a start, there may be tough negotiations over the US import tax on Chinese goods. If both nations find the right balance, they will not only avoid a global trade war, as in the 1930s when the implementation of the Smoot-Hawley tariff act intensified nationalism around the world, but they could also move their bilateral relations to new grounds.

Whatever happens, if the US pulls away from globalization, China stands ready to fill the gap.

This blog was originally posted on the World Economic Forum Agenda.

Why border controls won’t protect Europe against terrorism

In mid-December, people and families all over Europe and in many parts of the world were gearing up to celebrate Christmas, one of the most important events in the Christian calendar. But on 19 December 2016 at 20:02 local time, a hijacked truck veered into a traditional Christmas market next to the Kaiser Wilhelm Memorial Church in Berlin. Twelve people were killed. Four days later, the suspected perpetrator was shot and killed by police on an Italian plaza in Sesto San Giovanni, a suburb north of central Milan.

bordercontrolsOn the same day, ISIS extremists released a video of the perpetrator, filmed recently in Berlin. His name was Anis Amri. Having pledged allegiance to the group, he suggested that the Berlin attack was vengeance for coalition airstrikes in Syria.

Amri was from Tunisia and had arrived illegally in Italy in 2011. The New York Times reported that after he had showed signs of radicalism, Amri was classified as a terrorism risk in 2014 – one of a group of a few hundred individuals only – before making his way to Germany in 2015. In Germany he had been under covert surveillance for more than six months. Italy and Germany had failed to deport him due to a lack of cooperation by his home country.

After the Berlin attack, Amri had travelled for three days and 1,000 miles across Europe. A train ticket found on his body showed he had come from Chambery in France via Turin. European right-wing politicians, including Marine Le Pen, the leader of French far-right National Front, and Nigel Farage, the former leader of the UK Independence Party, responded by demanding an end to the Schengen agreement, a historic deal signed by five European countries in 1985, which had led to the creation of Europe’s borderless Schengen Area.

bordersschengenfailure

Are borders ever the answer?

Few national borders are absolutely impermeable, and controls may fail due to fake and stolen documents. The Chicago Tribune reported that in 2015 around 170,000 people escaped detection at the US border with Mexico and 200,000 eluded capture when adding those who entered by sea. This is barely half of people who entered the US illegally. The wall that made Berlin one of the most difficult places to cross the border could not stop illegal crossings. The wall only reduced the number of escapees to 868 per annum during the 1970s and to 334 per annum between 1980 and 1988.

Aviation security measures are considered most tight in the world of travel and transport – but two passengers were able to board Malaysia Airlines Flight 370 on stolen passports. The Berlin suspect had used at least six different aliases under three different nationalities, reported the Daily Mail.

The threat often lies within: “Not one Paris attacker has been identified as a Syrian refugee”, Mashable wrote. All people named in connection with the Paris attack of 13 November 2015 were French or Belgian citizens who held European passports. The BBC reported that on 23 December 2016, Australian police detained six men and a woman – four Australia-born. Three are suspected to have planned a Melbourne Christmas Day terror attack which Australian Prime Minister Malcom Turnbull called one of the most substantial pots to have been disrupted in recent years.

According to Eurostat, it is estimated that the European Union’s citizens aged 15 or over made 1.2 billion tourism trips in 2014, for personal or business purposes – 25.1% were to destinations outside the country. Labour markets would also be affected: 1.7 million people cross European borders every day to get to work. Waiting and inspection times at the borders would need to be factored into the prices of goods, as well as the required changes to the highly cost-optimized just-in-time concepts – largely applied in the automotive industry – and the efficient goods supply out of European distribution centres. Consumer prices would rise due to the forced slowdown, necessary adjustments and increased logistics costs. Many products would disappear from supermarkets – at least temporarily. The Bertelsmann Foundation warns that reestablishing permanent border controls in Europe could produce losses of up to 1.4 trillion euros over 10 years.

A united Europe

The current terrorist threat requires collaboration across all European countries, the use of advanced technology and a common European anti-terrorism strategy. Instead of investing time, money and energy in individual and isolated efforts to protect each country, Europe could be made much safer through consolidating budgets and other resources to better protect the outer borders of the EU and leverage advanced digital technology. The most effective way would be for all European countries to unite under one strategy – for example in a “homeland security alliance”. There is little chance that European countries with long and highly permeable coastal borders can manage the protection challenge alone. The effort cannot be shared but needs to be concentrated where needed.

The potential measures range from increasing EU security forces at the southern European borders to identifying and registering new arrivals; introducing waterproof authentication checks for example at train and bus ticket booths. The digital age brings solutions that allow smooth travel and fluid transport while also ensuring the highest level of security.

The exchange of security-relevant information should be mandatory. Country authorities need to be able to authenticate every individual and check for security risks. Facial-recognition software on surveillance cameras, which is available yet still rudimentary in many places, needs to be improved.

Blockchain technology – which can ensure the authenticity of goods – will possibly help in future to track the origin of freight. The transport of weapons and explosives would become significantly difficult. Manufacturers have already started to use blockchain technology to confirm the authenticity of luxury goods. The AMBER alert, a child-abduction alarm system that distributes alerts via TV and radio as well as emails and text messages, could be transformed into an effective measure to put the entire European population at the disposal of its own security system.

Even the most secured borders have proven to be permeable. And borders cannot stop local-born and locally operating terrorists. Political leaders need to explain why digital and coordinated European measures are better suited to protect the lives of European citizens and visitors than the reinstallation of intra-European borders.

The situation demands an act of solidarity across all governments in Europe. In its own interests, the private sector is required to support this effort. Leaders could leverage the current threat as a historic chance to unite Europe under an urgently needed common security vision and execution plan.

Image: REUTERS/Vincent Kessler

This blog was originally posted on the World Economic Forum Agenda.

Don’t Blame China For Taking U.S. Jobs

The problems are more complicated than that.

Where have all the manufacturing jobs gone? If you ask Republican presidential candidate Donald Trump, the answer is clear: China! But there is another, more plausible explanation. To paraphrase Democratic presidential candidate Hillary Clinton, “It’s the robots, stupid”.

The U.S. has lost 5 million factory jobs since 2000. And trade has indeed claimed production jobs – in particular when China joined the World Trade Organization in 2001. Nevertheless, there was no downturn in U.S. manufacturing output. As a matter of fact, U.S. production has been growing over the last decades. From 2006 to 2013, “manufacturing grew by 17.6%, or at roughly 2.2% per year,” according to a report from Ball State University. The study reports as well that trade accounted for 13% of the lost U.S. factory jobs, but 88% of the jobs were taken by robots and other factors at home.

If not China, what then explains these jobs losses? It’s simple: factories don’t need as many workers as they used to, because robots increasingly do the work.

manufacturing1Investment in automation and software has doubled the output per U.S. manufacturing worker over the past two decades. Robots are replacing workers, regardless of trade at an accelerating pace. “The real robotics revolution is ready to begin” writes BCG and predicts that “the share of tasks that are performed by robots will rise from a global average of around 10% across all manufacturing industries today to around 25% by 2025.”

With increasing automation, the manufacturing industry is becoming more productive. From 1998 to 2012, all sectors experienced a productivity growth of 32% when adjusted for inflation – the production of computer and electronic products rose 829%. The researchers at Ball State University calculated: If 2000-levels of productivity are applied to 2010-levels of production, the U.S. would have required 20.9 million manufacturing workers instead of the 12.1 million actually employed.

Many of today’s customers demand fast products, such as fast fashion with quickly changing models. Producing far away is only then still an option when margins are high and able to absorb high transport cost for air transportation. Moving closer to markets means more distributed manufacturing which reduces also the impact of disruptive events, such as the tsunami in Japan and the flooding in Thailand.

Focus on manufacturing pays off. One example is Greenville, South Carolina. Greenwille was for decades the state’s heart of the textile industry till its gradual decline when confronted with competition from Mexico and South East Asia. “In 1990, 48,000 people still worked in textile manufacturing in the Greenville area, according to the U.S. Bureau of Labor Statistics. Today fewer than 6,000 do” we can read in MIT Technology Review.

The U.S. needs to aim at leading the adoption in robotics. According to the BCG report, manufacturing labor costs in 2025 are expected to be 33% lower in South Korea for example and only 18% to 25% lower in the U.S. Therefore, South Korea is estimated to improve its manufacturing cost competitiveness by 6 percentage points relative to the U.S. by 2025. Focus need as well as skilled workers due to the fundamental shift in competences and because programming and automation talent will replace low-cost labor as key drivers of manufacturing competitiveness.

The focus on China is diverting energy from the real challenge. This is not only misleading but puts at risk the future of the U.S. economy.

Read my full article on Fortune.

Wildlife crime: a $23 billion trade that’s destroying our planet

Between 2007 and 2013, rhino poaching in South Africa increased by 7,700%. Rhinos, which are poached for their horn, aren’t the only victims of this illicit trade, which is driving many species of wild animals and plants to extinction: elephants are poached for ivory, tigers and leopards for their skin, pangolins for meat and scales, and iguanas are caught for the pet trade. Rare timber is targeted for hardwood furniture.

wildlifecrimeWith a value of between $7 billion and $23 billion each year, illegal wildlife trafficking is the fourth most lucrative global crime after drugs, humans and arms. Trophy hunting is estimated to create around $200 million in annual revenue. Only 3% of the fees paid for the hunts reach local communities.

wildlifecrime1

Image: African Wildlife Foundation

In 2015, the United Nations General Assembly unanimously adopted a resolution for tackling illicit trafficking in wildlife. The Sustainable Development Goals specific targets to combat poaching and trafficking of protected species. That’s quite some progress, but more action is urgently needed, because more than 7,000 species, in 120 countries, are at risk.

Fighting this type of corruption requires civil servants, including park rangers, who are properly paid, trained and equipped. Along the entire supply chain, awareness needs to be raised and measures must be increased.

Commitment and collaboration to break the chain

Transportation and logistics is not only the backbone of a modern economy but also a key enabler for trafficking wild animals and wildlife products. Therefore, the transportation and logistics sector plays a critical role in identifying and eliminating risks along the supply chain. In light of the surge in wildlife crime, the industry has been taking a range of actions to break the chain between supply and demand.

At the end of January 2015, TRAFFIC and the World Customs Organization (WCO), with the support of the United States Agency for International Development (USAID) and the Wildlife Trafficking Response, Assessment and Priority Setting (TRAPS) Project, convened a two-day consultative workshop. Delegates from shipping and logistics companies, airlines and courier and transport associations were seeking solutions to deter wildlife smuggling activities.

In March that same year, representatives from logistics and transportation companies operating in China made a public declaration pledging their zero tolerance towards illegal wildlife trade. The 17 companies, which include EMS, DHL, FedEx and SF Express, account for 95% of the Chinese courier market.

The same month, the Declaration of the United for Wildlife International Taskforce on the Transportation of Illegal Wildlife Products, which outlines 11 commitments to help bring an end to the illegal trade in wildlife, was signed by some 40 corporations, agencies and organizations, including Maersk Line, Kenya Airways, IATA and the World Customs Organization (WCO).

Many airlines have banned hunting trophies: Air Canada, Air France, British Airways, Brussels Airlines, Emirates Airline, Etihad Airways, Iberia, KLM, Lufthansa, Qantas, Qatar Airways, Singapore Airlines and Virgin Atlantic Airways. Following the killing of Cecil the lion in early July 2015, Delta Airlines banned all lion, leopard, elephant, rhinoceros and buffalo trophies in the cargo holds; United Airlines and American Airlines later followed suit. US embargos are important. The person who killed Cecil, Walter Palmer, is one the estimated 15,000 American tourists who visit Africa on hunting safaris each year. Although he had a permit and was not charged with any crime, Cecil was an illegal kill.

In June 2016, the International Air Transport Association (IATA) adopted a resolution on the illegal trade in wildlife at the 72nd IATA Annual General Meeting. IATA denounces illegal trade in wildlife and wildlife products, and calls upon the member airlines to consider the adoption of appropriate policies and procedures that discourage the illegal wildlife trade.

Modern technology can stop the crime at the root

Breaking the chain is important. However, it would be better to stop wildlife and forest crime at its root. Satellites, drones and internet live-streaming enable solutions which capture the crime taking place to inform law enforcement agencies and the general public in real time. Solutions like this could not only protect wildlife and forests, but also support important initiatives in many fields and areas, such as deforestation, illegal fishing and natural disasters.

The development has already begun: Global Forest Watch is providing data and high-resolution alerts. Witness, established in 1992 by Peter Gabriel with the help of Human Rights First and its founding executive director Michael Posner, trains and supports activists and citizens around the world to use video safely, ethically and effectively to expose human rights abuse and fight for human rights change.

Building new tools requires support from the private and public sector, international organizations and consumers. Until new high-tech solutions arrive, collaboration in fighting corruption and wildlife and forest crime along the supply chain needs to be tightened and strengthened.

This month, leaders and experts are in Johannesburg for the 17th meeting of the Conference of the Parties to CITES. The participating parties are discussing a dedicated resolution on prohibiting, preventing and countering corruption facilitation activities.

As Yury Fedotov, the executive director of the United Nations Office on Drugs and Crime, said: “We all share a responsibility to act where we can.” Hidden in fashion or furniture, as food or pets, the products of wildlife and forest crime find their way into our homes and lives, so we all have a responsibility to act.

This blog was originally posted on the World Economic Forum Agenda.

What does Hanjin’s collapse mean for world shipping?

hanjin2The world has just witnessed “by far the largest container shipping bankruptcy in history”, writes the JOC. But the collapse of the South Korean shipping line Hanjin, the world’s seventh-largest container carrier, should not come as a surprise.

The shipping industry is ripe for an overhaul. In the past quarter alone, 11 of the 12 shipping companies to publish results have announced heavy losses. Freight rates have been under pressure for some time, due to a combination of slow global trade and surge in capacity created by new cost-effective mega-ships.

So how can the industry find a route out of the crisis? While alliances between shipping companies have failed to reduce overcapacity, mergers might achieve this goal. Data-based systems, which improve interaction between ship and shore, offer cost reductions of up to 30%. But is it enough to significantly change market dynamics?

This chart shows the alliances created among shipping companies, and their share of worldwide capacity.

hanjin3Image: Thomson Reuters

A lot is at stake: $14 billion in goods are currently marooned at sea on Hanjin ships. Container ships and bulk carriers are being denied access to ports and several vessels have been seized (or are likely to be seized) by charterers, port authorities and other parties. Around the world, Hanjin cargo ships are dropping anchor at sea to avoid losing more ships to creditors waiting on land.

South Korea’s maritime ministry expects cargo exports to be affected for another two or three months.

The collapse comes at a critical moment in the year, as retailers prepare for the holiday shopping season. The National Retail Federation in the United States fears a potential ripple effect throughout the global supply chain that could cause significant harm to both consumers and the US economy. British retailers, too, have voiced concerns about pre-Christmas supply.

Hanjin Shipping filed for bankruptcy protection on 31 August, after a long struggle to raise liquidity and restructure debt. Should shippers have seen it coming? In 2009, the container industry posted operating losses of close to $20 billion, but none of the shipping lines went under.

The shipping industry is a complex network of maritime alliances and relationships. Importers and exporters are currently finding their freight blocked on Hanjin ships – even though they booked with other lines. And Hanjin’s membership of the CKYHE alliance – which includes China COSCO, Yang Ming Marine Transport Corp and Evergreen Marine Corp Taiwan Ltd – has now been suspended. What this situation shows is that globalized trade requires new legal mechanisms to protect carriers, shippers and consumers.

What does this mean for global trade?

Short-term impact on the global supply chain will depend on the time needed to unload Hanjin ships. In the meantime, customers will have to seek alternatives while rolling out their contingency plans. Competitors will take on the additional cargo – but at a price. Hyundai Merchant Marine, for example, will deploy at least 13 of its ships to two routes once exclusively serviced by Hanjin, while the South Korean government plans to reach out to overseas carriers for help, writes Reuters.

Mid-term, the shipping industry might see healthy rates and revenues coming back. Prices have already surged upwards – by up to 50% for a 40-foot container from China to the US. The surge may be partly due to the forthcoming China National Day on 1 October, as well as the number of vessels made idle to reduce overcapacity. However, the Korea Maritime Institute has estimated that, in the near term, shipping rates will rise – by 27% between Busan and the US, and by 47% between Busan and Europe.

In light of these increasing risks and their impact on the global economy, there are two likely outcomes. First, the market and existing legal mechanisms will be left to clean up the failure. Alternatively, the South Korean government will find a way to support its struggling shipping industry.

For decades, South Korea’s shipping lines were engines of the nation’s export-driven economy. Their role going forward might depend on the assessment of their ability to significantly reduce costs and become competitive in the global market.

This blog was originally posted on the World Economic Forum Agenda.