Insights

How COVID-19 Is Driving Maritime Digitalization

The challenges of the maritime industry are not for the faint-hearted. Whether you are managing container, tank, or bulk shipping carriers, there is a continuous series of headaches and obstacles to address. These include fluctuations in the duration of vessel charters, pricing competition, availability of vessels, and unpredictable cargo volumes. COVID-19 has exacerbated these issues and brought about opportunities created by a short-term increase in rates. This situation will not last forever, though it does allow maritime companies to benefit from the short-term financial advantages provided by a shortage of capacity on specific trade lanes. We believe that now is the time for the new generation of maritime leaders to tap into the potential that digitalization, automation, and big data have to offer, to ensure resilient operations and sustainable returns for the future.

In Europe, for example, within the containership segment, ship calls to ports have dropped, vessel delays are in excess of five days, average gross tonnage is 23 percent lower due to limited availability of vessels and only 1.8 percent of global fleet capacity is available for use. While there has been a temporary increase in shipping rates, these dynamics coupled with limited digital capabilities make mid to long term profitability and return on invested capital unpredictable. These pressures naturally lead to short-term decision making and uncertainty.

Digitalization can help mitigate the impact of volatility, ensuring more timely and accurate communication between the industry and its customers, and in turn, a better understanding of how to manage and use capacity. And this is not about tapping experimental technologies but rather leveraging well-proven technologies in which most maritime organizations have already invested.

To date few maritime companies have come close to realizing the full potential of digitalization in voyage planning, voyage and transport management, cargo management, and ship maintenance. This is due to the fragmented nature of the industry, as well as unpredictable revenue cycles, and the presence of relatively small niche software services providers. An overreliance on legacy systems also makes it harder for organizations to extract value. It’s a climate that fosters little or no investment in innovation.

If operators are to remain profitable and compete successfully, we see three areas in which they should focus their digitalization strategy: improving costs during operational upgrades, seizing revenue-growth and profitability improvement opportunities, and combining ambition and agility.

Improving costs during operational upgrades  

Digital technology can produce substantial cost improvements in vessel maintenance and operational performance. In our work with airlines and rail companies, we have seen the upside of digitalization. The maritime industry has the potential to reap similar, if not more substantial, rewards.

We've recently been doing analysis for a major shipping operator based on cost levers that have proven to work in the aviation industry. Based on our calculations, the maritime industry’s digitalization and optimization of maintenance processes can reduce per-vessel costs by US $2 to $3 million over the lifetime of a ship, depending on the type of vessel. The lower maintenance costs reflect, among other things, less reactive maintenance, increased reliability of assets, and reduced inventory costs, plus eliminating the costs involved in the maintenance process itself. Our findings suggest that this approach could produce even greater savings when scaled up to cover the industry’s largest fleets and shippers.

How does this work in practice? Cost improvements of 15 to 20 percent can be achieved by using predictive maintenance analysis to shift the balance from reliance on routine scheduled activities to greater increased preventative maintenance. For instance, predictive maintenance using continuous digital monitoring can increase both the reliability and lifespan of assets. Further improvements can be achieved by optimizing time spent in dry dock, better integration with equipment and maintenance standards, and closer coordination with strategic suppliers. In comparable industries like aviation, component level repairs are presented using ‘teardown reports’ that provide technical managers with the data necessary to push for additional improvements and question the status quo.

Seizing revenue growth and profitability improvement opportunities

One of digitalization’s greatest benefits is that operational (location specific, for example), market, and customer sentiment intelligence is increasingly available. Maritime organizations can take this information and use it to better determine  time charter rates, time charter contract periods, or even spot rates to stay ahead of their competition in the constant cyclical change cycles that are prevalent in the industry due to fluctuating demand and supply.

While the cargo owners are looking at getting the lowest possible freight rates, maritime companies should leverage the advantage of having access to multiple information sets and monetize data by providing leading sector indicators to large sector specific customers to make key trade related decisions.

In some other examples, digitalization can support profitability goals by helping reduce laytime and demurrage costs, which carry significant financial implications. Having the ability to digitally assess statements of facts provided by vessels using the automatic identification system (AIS) information and artificial intelligence (AI) to analyze data can help avoid significant penalties imposed on charterers.

Combining ambition and agility

Post-COVID-19 success in digitalization will require companies to be both bold and pragmatic, combining ambition with agility. We believe that expenditure on digitalization needs to be at least double what is being spent today to meet the current challenges, which would translate into as much as six to eight percent of overall operating expense (OPEX) spending, on average.

COVID-19 has resulted in many key players in the maritime industry considering further consolidation or an evolution of their business models. Traditionally, both maritime companies and financial institutions, which have invested in this sector, have struggled to meet expectations. The root cause of this has been poor integration — the consequence of traditional organizational structures, systems that don’t talk to each other, and limited transparency. Having the parent company invest in the right digital platforms creates a pathway to the kind of high-quality data and information that supports integration and provides a solid foundation for boosting return on invested capital by five to 10 percent.

The container segment on the trans-Pacific route is a good example of how digitally-integrated shipping carriers have been able to use technology to capitalize on opportunities and meet the changing demands of their customers. This route is renowned for issues including port congestion, limited availability of land transport resources and container space, and fluctuating demand patterns. We’ve seen several carriers use their digitally enhanced platforms to plan and reallocate their vessels to serve high-demand routes, as well as secure berthing capacities and the operational requirements needed to arrive at ports, thus sustaining service levels and reliability. This level of visibility and agility is simply not possible with legacy systems.

The way forward                                

Customers, regulators, and owners will continue to drive the increasing pace of maritime digitalization. Customers are looking for solutions that ensure fewer port delays, greater supply chain visibility, improved control over services, and increased integration. The combined effect of lower-cost satellite internet, real-time weather intelligence (for navigational purposes, for example) and more advanced tracking solution (such as vessel emissions footprint) will increase the outside-pressure on the sector to digitize and innovate in order to retain value pools. Regulators are imposing new standards for sustainable fuel use that demand the introduction of new technologies, while owners are looking to improve utilization as well as their bottom lines and breadth of capabilities to establish a niche position in the sector.

Companies need to be pragmatic and flexible in executing their digitalization strategy. This will mean building incrementally with the goal of extracting as much value as possible from existing technology investments, while abandoning or changing elements that are not working. By focusing on cost, revenue, and agility, leaders in the maritime industry can look forward to an innovative and profitable future.