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General Forum: Monday 2nd October 09.50 - 11.20 Harry Gilbert - Wallem Group Ltd |
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A Ship Manager’s Vision
Rather optimistically I have tried, in this paper, to predict what will happen in the ship management sector of the industry over the next few years. Quite a task when one considers how easily the shipping industry is influenced by everything from wars to currency crises! To look at where the ship management business might be in say five years time we should first look at where it is today. The first thing to realise is that ship management is now a mature business and is an accepted and integral part of the shipping industry. For many years ship management was regarded as the poor relation of the industry and managers were held by some to be the experts at running ships at unrealistically low costs and employing substandard crews. In reality this was far from the truth with many of the bigger ship management companies being some of the few who continued to train sea staff throughout the shipping depression of the 1980’s. The image of the ship management business began to change in the late 1980’s when many managers began to embrace the concept of quality assurance and, in particular the development of the Code of Ship Management Standards and the formation of ISMA itself. Throughout the 1990’s most ship managers have spent considerable amounts of time and money in streamlining their operations, embracing information technology and in meeting the new regulations which have been introduced. The result is that today’s major ship management companies rank amongst the best and most professional ship operators in the world.
In looking at the future I will deal with the following main points:-
1. SIZE
The ship manager seeking to expand must be prepared to manage a varied fleet of vessel types for a number of international clients. This will normally demand that the manager employ sea and shore staff with the skills to manage such varied tonnage and have more than one location from which he can manage the vessels. Additionally, he will have to invest in the latest information technology in order to minimize his costs and maximize his efficiency by running his administration services as leanly as possible. If such a manager operates tankers to the United States and now of course Europe he will also have to maintain sufficient technical staff to deal with the latest changes in legislation as well as to assemble an emergency team capable of dealing with a serious accident or incident. The bigger and more varied the fleet the greater the task and cost of implementing any quality assurance system. Multi-national crews and geographically diverse management locations will only serve to increase the cost of establishing such a system, including the ISM Code. This means that the international ship manager must have a fleet size that allows him to make the investments and bear the costs associated with these requirements. In other words volume is now critical to the ship manager. Having said that there are undoubtedly several niche markets in the ship management business, for example those which specialize in the management of only one type of vessel, or manage vessels from one geographical area or flag. Their experience in managing tonnage of a special type or in a special trade allows niche players to develop an expertise that is difficult for their competitors to equal and the business tends to be protected. This expertise also allows the ship manager in the niche market to be technically innovative in his specialized field, developing techniques, operating practices and even participating in the design of equipment and ships. This, in turn, raises the entry barrier for the competition, thus further protecting the niche manager’s business and client base. Niche markets, however, in any type of industry, are, by their nature, difficult to expand and develop and therefore the client base tends to remain small. As a result, if a client does leave or go out of business, the manager can lose a large proportion of his business — business that cannot easily be replaced. The niche manager also faces the same problems in diversifying into other types of tonnage as his potential competitors do in penetrating his market: a lack of expertise The niche manager who operates only reefer ships, for example, could experience extreme difficulty in obtaining the management of, say, tankers. The smaller manager cannot easily meet the demand by the owners of today for the manager to have more than one geographical location. Neither can he, with a small staff, easily or cost effectively meet the requirements of new legislation or embrace the rapid changes and enhancements in information technology. The result of all the above factors is that it is possible in today’s ship management business to survive either as a niche manager or as a large multi-national ship manager, but it is extremely difficult for a mid-sized ship manager to provide the services required to operate a varied fleet. Such a manager will experience difficulty in maintaining several management offices, in employing the staff required to effectively deal with emergency situations (whilst still running the remainder of the fleet), in developing effective QA systems and in keeping up with the latest developments in information technology. As we progress through the twenty-first century the demands upon ship managers will become even greater and size will become even more significant. The successful ship manager will have to have the "critical mass" and financial ability to meet these demands and challenges and enable him to continue to expand. 2. LOCATION The choice of location of the head office for a ship manager has usually been determined by the original location of the parent company though this is by no means always the case. Glasgow has always been the home of Denholm since the company was founded over 130 years ago but Acomarit, which is also Glasgow-based has its head office in Geneva. The larger German ship managers such as Hanseatic and Columbia have chosen Cyprus as their base whilst Wallem, Univan and Anglo-Eastern have always been based in Hong Kong. With it’s infrastructure and repair facilities Singapore has always been a popular location for ship management, particularly for those companies of Scandinavian origin, whilst Barber have moved to Kuala Lumpur within the last six years. Every ship manager will have his own idea of what comprises an ideal location and each will have his own reasons for having his head office located where it is. So what comprises an ideal location from which to operate a ship management company? Well the answer is that there isn’t one single location that is ideal but a few do offer the majority of advantages. The ideal location would have:-
One of the most important factors is the availability of good staff and, like sea staff good superintendents in particular are becoming ever more difficult to attract and maintain. Certain countries do however allow imported labour and for that reason the Middle East is becoming a viable alternative. For many years sea staff have been drawn from the Philippines and India and in future these countries must be contenders for the establishment of head or regional ship management offices. As I previously mentioned, most of the large international ship managers usually operate from a number of locations in order to be close to their clients or charterers or to be near the vessels’ trading areas. The trend of setting up satellite offices will therefore continue and they will be easier to establish with the continual improvement in communications and information technology. 3. INFORMATION TECHNOLOGY There are few industries today that can afford to ignore the impact of Information Technology (IT) on the business world and the shipping industry is no exception. Furthermore, the impact has been felt and utilized to its maximum extent in the ship management sector and to appreciate why this should be we must go back to the middle 1980s and examine the intervening years. In the 1980s the shipping industry was in a state of acute depression and the ship management sector of the industry felt the bite as great as any. Ship management fees had remained static or even declined since the heady days of the 1970s and ship owners were going out of business on an almost daily basis. For many ship managers costs were also rising rapidly, particularly shore staff salaries and other management related overheads. Ship managers, therefore, found themselves in the classic dilemma of being trapped between rising costs, static management fees and a declining client base. The logical solution was, of course, to reduce costs by shedding staff but that is not an easy thing to do in a service business, particularly if the same staff will be unavailable if business subsequently improves. Most managers at that time had some business processes that were computerized, usually the accounts system, but they tended to be rudimentary and could not be described as being people efficient. It was not until the late 1980s that systems and software began to appear which offered the possibility of linking purchasing and accounts systems as well as subsystems for other functions such as report writing. By that time many ship managers had suffered financially for some years and it was quickly understood that efficient systems could reduce overheads and offer some respite. It also came at a time when many ship managers were beginning to develop quality assurance systems and to link this with a new, efficient IT system gave many the opportunity to radically overhaul their organisations. At the same time as the systems were being introduced for use ashore they were also being developed for shipboard use. Computerized systems for planned maintenance and stock control, portage bills and personnel administration, to name but a few all became available to the ship operator. The catalyst, which brought all these systems together, was the introduction of faster, cheaper and more reliable communication systems, specifically E-mail. It is now possible for a computer-generated spare gear requisition to be prepared on the ship from an inventory system and sent by e-mail direct to the purchasing department ashore. As a confirmed purchase order it can be entered into the accounts system where it becomes an accrual until the invoice arrives. Receipt of the goods by the ship can be confirmed electronically and, once matched to the invoice, payment can be made. If the supplier can quote electronically the entire process is paperless and even the client reports at the month end can, and are, being presented on CD Rom. This is only one example of how advances in technology have allowed the ship manager to be more efficient and manage more ships with considerably fewer staff. The same technology allows an office on one side of the world to download information from another on the other side of the world, even at night. Thus one good system can serve several offices around the world further reducing the number of people required. Those managers who have made the investment required in such systems have seen the margins per ship under management increase, even with today’s low management fee levels. Those who have not made the investment will not only struggle to make ends meet in financial terms but will also face problems in meeting their client’s expectations. 4. LEGISLATION The present round of new legislation began with the American Oil Pollution Act of 1990 known as OPA 90 following the grounding of the Exxon Valdez in Alaska and the subsequent pollution. This far-reaching piece of legislation had a profound effect upon the way that both owners and managers conducted their business and significantly increased the workload and administration requirements of both. Although OPA90 presented potential liability problems for the ship management industry it also presented opportunities for those who were prepared to meet the challenge. In the interim period since the legislation was passed, ship managers have improved their relationships with owners and charterers and have become respected and accepted as a competent vessel operators with all the skills required to safely operate tankers to the United States. The advent of the IMO ISM Code also presented problems and opportunities for the ship manager. Maritime lawyers have pointed out for some time that the potential liabilities for ship managers will increase if an accident occurs and the code has not been complied with to the letter. Similarly, if a vessel is delayed because the Safety Management Certificate (SMC) has been withdrawn, the owner may look to the manager for financial compensation. That these liabilities would attach to the ship manager is conjecture at the present time and will only be proven when such an incident occurs and the matter is tested through the legal system. Now that the ISM Code is mandatory there may be less inclination by the owner to change managers or to set up his own operation. The structure of the code dictates that the Document of Compliance (DOC), which certifies the shore-based operation, must be in place before the Safety Management Certificate (SMC) can be issued to the ship i.e. the two certificates are linked. This means that if a ship is sold or transferred to another manager a new SMC will have to be obtained by submitting the vessel to a further audit. This in itself is not a significant problem until one considers the implications of undergoing an audit with a new crew and new management systems. The problems may then become significant enough to make an owner think twice about moving from one ship manager to another. Following closely behind, and linked to the ISM Code, is the revised STCW Convention. The requirements of the convention are complex but it basically requires that the staff on board the vessel are trained to a certain standard at a facility, which is approved for the purpose, and that the knowledge is updated on a regular basis. When linked to the ISM Code it is further required that the crew, upon joining a vessel, are familiar with the operators’ management systems and the equipment on board. For the owner or manager who uses a third party manning agent and is not large enough to require that the agent provides him with a dedicated pool of sea staff, the STCW convention could present him with major problems. The onus will be on the vessel operator to ensure that the convention requirements are met to the satisfaction of Port State Control. Once again an opportunity is presented to the ship manager who has a big pool of sea staff (or access to one) and is prepared to enter into manning-only agreements. Such a manager should be in a position to provide properly qualified and dedicated crews who are well versed in the requirements of the ISM Code and will thus be able to satisfy a Port State inspection. Whilst new and changing legislation can present problems for ship managers those who are prepared to meet the challenges will potentially gain considerably. The effects of the existing and potential future legislation are to raise the entry barriers for those wishing to enter the business and provide major problems for those owners and managers who are unable or unwilling to meet the new requirements. All of these problems provide unique opportunities for the large, well-established ship manager. 5. DIVERSIFICATION A sure sign that any business or industry has reached maturity is its desire and ability to diversify into other activities The basic service of "ship management" comprises four distinct elements:
Most ship managers have provided these elements as sub-services for many years, generating much needed additional income whilst at the same time incurring very little extra overhead. These sub-services have, however, only served to supplement full ship management fees and, with the possible exception of crew management, they have never been regarded as business in their own right. Many of the larger ship managers have capitalized upon their strength in the market and their large pools of sea staff by offering "manning only" contracts to third party clients. The Cyprus-based companies, in particular, have exploited this market and have refined it to the extent that they frequently offer this service on a fixed (lump sum) price basis. Whilst it is very difficult to obtain statistics showing what proportion of their businesses constitutes manning-only contracts it is reasonable to assume that income from this activity is substantial for the companies which provide this service. Whilst crew management and other services will continue to be provided by many ship managers they do not constitute development or diversification from the core business of ship management. Major ship managers are now poised to diversify into other businesses and industries that utilize the skills gained through decades of ship management experience. Some of the more likely areas into which they may diversify are the management of:
• hotels and resort complexes • ports and cargo handling complexes • power stations (particularly floating power stations) • offshore oil industry support vessels • offshore production facilities • shore bases for offshore support Whilst some of these may appear to be major departures from the core business of ship management it should be borne in mind that some ship managers have already begun to enter these new fields. At least one major ship manager has used the skills he has developed in managing cruise ships to begin managing resort complexes. Others have entered the field of managing offshore oil industry tonnage — a very different business to that of managing deep-sea vessels. Whilst many managers grew from ship owners, a few, pure third-party ship managers have entered ship owning on their own accounts. Wallem, for example, has entered into ship owning in a modest way whilst V Ships has been a ship owner for some time. This represents a change from the perception that prevailed a decade ago that for a manager to own ships would be regarded by his clients as a conflict of interest. This has proven not to be the case and indeed many owners regard such an investment by a manager as a demonstration of his financial commitment to the shipping industry. This conflict of interest perception was largely the view of the ship manager, rather than the owner, and extended to providing other services such as commercial management, sale and purchase broking and other activities such as vessel operating. During the 1990s this view has changed and many ship managers, driven by the need to augment static or declining ship management fees, have begun to provide such services. Users of these services have not only been third parties, i.e. clients who do not use the same company as its ship manager, but also owners who require the full range of marine services. Ship managers who have diversified in this way have seen their businesses grow and they have come to be less dependent on income from their core business of ship management. 6. OWNERSHIP Almost all of the major ship management companies of today have developed from ship owning companies. The questions that must however be asked are: "Will control of these companies continue to rest with their founders?" and if not "Who will own the ship management companies of the future?" Service companies and ship management companies in particular, are extremely difficult to purchase because they are difficult to value. Service companies, by their very nature, do not normally have very many fixed assets and the value is determined by previous profits, which in turn, are a product of "goodwill" i.e. the clients themselves. Unless the company is bought by an entity, which is regarded by the clients as completely neutral, there is always the danger that they will take their business elsewhere. Any prospective purchaser of a successful ship management company must therefore be very aware of these elements otherwise he may find that his client base will disappear and the price he has paid for the goodwill will have been wasted. This will be especially so if one ship manager purchase another. This may explain why, over the last 20 years, there have been very few cases where one ship manager has purchased another. Significantly there have been several cases where ship managers have merged or entered into "joint ventures". The success of these mergers has yet to be proven as in most cases there has been little or no increase in combined fleet size as a direct result of the arrangement. It is extremely difficult to determine what the exact financial details of any specific transactions really are but there have been several examples of ship owners buying into ship managers in recent years. It is notable, if not significant, that in most cases the owner already had his vessels managed by the manager in which he eventually took a financial interest. The purchase of a ship management company by an owner who does not use a ship manager has yet to take place but the regulatory pressures now being felt by some owners could lead them to consider purchasing a ship manager that already complies with the statutory requirements. Expansion by franchising has always been a possibility for a major ship management company, though few have so far tried to do so. The downside of choosing the wrong franchising partner has always outweighed the attraction of expansion. An accident or incident occurring to a vessel in the fleet managed by the franchisee would be potentially catastrophic to the franchiser’s reputation. 7. CONCLUSION So what does the future hold for the ship management industry, what will be the size and shape of the companies involved in it and what services will they provide? One of the best indicators of a business becoming mature is the gaining of recognition by others in the shipping industry. This recognition is as a result of the players in the business as a whole and ship management companies individually gaining both recognition and credibility. This is best demonstrated by the fact that the International Ship Managers Association (ISMA) has been granted consultative status to the IMO. The perceived shift in liability, to the potential detriment of the shipmanager, brought about by the introduction of the ISM Code has caused managers to look closely at how this problem can be addressed and, in particular, the terms of the ship management contract. The industry standard contracts are the BIMCO Shipman contract for full ship management and the BIMCO Crewman contract for crew management. Thus shipmanagers are now in a position to participate in and, therefore, influence, the formulation of legislation designed for the shipping industry. The legislation that is already in place and that which will shortly be introduced will put both challenges and opportunities in front of the industry. It is likely that some will rise to the challenge and others will not, resulting in a reduction in the number of players in the business. This reduction will result in mergers, joint ventures and buy-outs with the larger companies being the beneficiaries of such deals. Thus the industry will segment into the niche (but not necessarily small) players who will survive because they have dedicated clients and a small spread of vessel type and, at the other end of the scale, probably fewer than ten really large players. Whilst the niche players may remain independent there is an increasing chance that the big players will not. The possibility that they will be either wholly or partially owned by shipowners is very real, the driving force behind this being the owners’ desire to obtain compliance with legislation whilst gaining access to well-qualified crew. Those who do retain their independence will come under increasing pressure to enter into joint ventures with owners and operators for the same reasons. Whilst the existing centres of ship management may not change they will be added to as other locations emerge as commercially viable competitors and as sources of technically competent shore staff. In this regard India and the Philippines must eventually be logical choices. Success and recognition should also bring with it fees which are realistic for the services provided. This, in turn, will make the companies increasingly profitable. Investment in ship management companies by third parties will also take place purely for commercially speculative reasons or to provide capital for expansion and diversification. Shipmanagers will add to their range of service in order to offer a complete suite of marine services. The larger companies will increasingly look for opportunities to diversify, the term "management" becoming more apposite than "ship management" to describe their business. In doing so they must be careful not to dilute their focus and attention on the ship management sector of their business otherwise they will find that it will decline rapidly. In this respect they must be very careful to structure themselves in such a way that they can still provide the individuality of service which owners and charterers have come to value so much. Taking into account all factors it is reasonable to conclude that the ship management industry has a positive future. The growing acceptance of shipmanagers by owners, charterers and others in the shipping industry should now ensure the continued expansion of the business. Shipmanagers will be recognised as a responsible and permanent part of the International Shipping business as ship management grows. |