Home' Baird Maritime : July 2011 Contents Why the container crane monopoly?
David Wignall* on the latest port developments
How "special" is container handling equipment? How hard is it
to build a container crane? Speak to Joe Public or my wife and
the answer you get is that 1,200 tonnes of steel moving forty
containers an hour looks impressive and must be really special.
Taking an engineer's look at one, disassembling both design
and construction, they appear rather less special. It is relatively
simple to weld together 1,200 tonnes of steel and there are
fabricators capable of doing this that exist, in significant numbers,
in most countries and particularly near big ports. Suitable drives,
motors and control systems are supplied by a range of companies
and their assembly in the right order is not "rocket science".
So, why over the last twenty years has the port industry raced
down a road to what is starting to appear to be an effective
monopoly in the supply of ship-to-shore container cranes? 80
percent of the world's cranes are now supplied by Zhenhua Port
Machinery Company (ZPMC). Economists specialising in anti-trust
and monopoly law may argue to a degree about the definition of a
monopoly but even the more lenient laws suggest that controlling
75 percent of a market segment is a monopoly.
Before anyone construes this article as an attack on ZPMC it is
important to understand the effort and energy they have put into
getting to their now rather enviable position. In 1995 when I first
came across them in the market they were not the only Chinese
company building container cranes. They had some quality issues
and more issues related to being accepted in the market.
Over a period of years they have invested in production and used
the pricing advantage based on low costs that they started with and
then developed further through investment in production and cost
effective delivery. The factory they have built, the associated design
and production standardisation they have achieved and in particular
the delivery ships they designed, built and operated all have
contributed to their market takeover. Now market acceptance is not
their problem; that is their competitors' problem.
The first contract I was involved with ZPMC saw them
struggling to convince a port authority that their cranes were every
bit as good as other manufacturers, even though (at that time) they
were 20 percent cheaper. Today it is hard for a port authority to
reject a ZPMC crane and their competitors are struggling to show
why they have equivalent experience and capability. ZPMC is the
standard in the ship-to-shore container crane market.
Is the dominance of ZPMC in the market a good or bad thing? If
it is a bad thing who should worry and why? What could be done
about the market dominance of ZPMC, by whom, and why would
they bother? Is there an opportunity for another company to
replicate the achievement of ZMPC or through a different business
model offer them real competition?
Let us return to considering what a monopoly is, it is a price
maker. The monopoly is the market and prices are in theory
(and over the long term) set by the monopolist based on his
circumstances and not the interaction of demand and supply.
The two primary factors determining monopoly market power
are the firm's demand curve and its cost structure. So, although
today ZPMC offers value for money there is little constraint on
their cost structure and for them to continue to make money
they will need to distribute that over whatever demand exists.
The cost structure of ZPMC is rather different now than it
was fifteen years ago; it is also rather different from most
crane builders from fifteen years ago. ZPMC has invested heavily
in factories, equipment and ships. This all presumably needs to
be written down over a long period. Such an approach also
increases the fixed costs of the company; an area that years ago
could be controlled effectively by far more subcontracting and a
more itinerant approach to crane building by manufacturers.
With the change in cost structure and the investment made
by ZPMC, it could be said that the prices of today are subsidised
by those to be charged in the future. This is particularly going to
be the case if the market for container cranes does not continue
to grow but falls back close to replacement and upgrade levels.
It is difficult to make a case for the market dominance of
ZPMC being a bad thing at present. Good cranes, reasonable
prices and good delivery times. Perhaps in the future things
will not be as good. In five or ten years time a case can be
made for much higher crane prices to cover the high overheads
of ZPMC. The need for the company to control quality will
decrease and concern within the company about delivery times
will fade but not be matched by a reduction in concern in
their clients! Well, who knows what may happen? Their ships do
after all have a life span and need replacing. Who would suffer
in such scenarios? The terminal operators, who would,
presumably, pass the pain on to the shipping lines. The pain
may not be that great measured per box so perhaps no one
suffers that much at all.
That said, the nature of investment projects is that the pain
and irritation would reverberate in a close community and the
need for action would be highlighted within that community.
Who would or could take action is harder to assess. Let's face it,
anti-trust action is not likely to be effective or even practical
unless it was unified across many countries including China. To
say the least, such action is unlikely. What stress would make a
terminal operator decide to move away from the safe option of
ZPMC? It would all depend on what competition was offered and
how it was presented.
So being practical, a new competitor(s) would be the way to
deal with the monopoly or perhaps more likely, the revival of an
older competitor to challenge again? A new competitor would
face the same problems of acceptance that made ZPMC's early
progress so difficult. The revival of an older company, perhaps
even the granddaddy of them all, Paceco, could offer a more
practical way of challenging the market dominance of ZPMC.
Alternatively, if a new competitor is to emerge, how about an
Indian company with a mix of itinerant manufacturing and low
cost inputs (labour and equipment)?
It would be interesting to hear others' views on the ship-to-shore
crane market and the presence of ZPMC. Comments on the rubber
tyred gantry market would also be interesting.
*David Wignall has worked in ports for 25 years. He founded his own
company, David Wignall Associates, to develop ports and help managers
get the best out of their terminals.
July 2011 BAIRD MARITIME
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