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45 Seiten, Note: 2,0
List of Abbreviations
List of Figures
1.3 Business Opportunities
2. Signals for Business Opportunities
2.1 Macroeconomic Signals
2.1.1 Demand & Supply
2.1.2 Shipping Cycle
2.1.3 Forecasting and Market Research
2.2 Microeconomic Signals
2.2.1 Emerging Maritime Clusters
2.2.2 Professional Networking
2.2.3 Competitive Analysis
2.3.1 Technology Improvements
2.3.2 Electronic-Services and Automation
2.3.3 Regulatory Framework
3. Business Set-up Considerations
3.1 Financing the Business
3.1.1 Traditional Financing Systems in Shipping
3.1.2 Finance Opportunities for Shipping-Entrepreneurs
3.1.3 Attracting Investors
3.2 Business Model
3.2.1 Strategic Framework
3.2.2 Management Team
3.2.3 Environment and Localization
3.2.4 Exit Strategies
4. Management Considerations
4.3 Risk Management
“Identifying business opportunities for shipping-entrepreneurs;
a sequence of strategic and operational considerations”
Master´s thesis submitted to HSBA by Hans-Christian Stockfisch
on August 20, 2015
This thesis develops a methodology that gives guidance through the process of identifying a business opportunity in shipping by spotting an emerging niche in the market and setting up a corresponding business model to establish a promising company. The focus lies on shipping entrepreneurs, who are entirely dependent on investment capital and therefore have to be well prepared to attract investors. The thesis is composed of five chapters. Chapter One is introductory, defines the basic terminology and sets assumptions for the further analysis. Chapter Two explores the signals, indicating emerging niches in the market, covering the first part of identifying a business opportunity. Chapter Three and Four cover the second part of the identification process, discussing considerations regarding the strategic framework as well as the operational management of the startup. Conclusions are drawn in chapter Five. The key findings are that the financial and corporate structure of the business model is mutually dependent. Therefore a holistic approach of the venture must be taken into account to successfully identify and approach a business opportunity. Furthermore it is found that the entrepreneurs have to integrate a prudent risk management to attract investors and to prepare the company for present and future challenges. This should be complemented by a proactive and transparent style of management. However, there is no unique all-in-one solution for the establishment of a new company as every business case is different and must be conducted individually. Nevertheless the tools and considerations presented in this thesis offer practical guidance and lower risks and uncertainties in the decision-making processes of the shipping-entrepreneurs.
illustration not visible in this excerpt
Figure (1): GDP growth and seaborne trade
Figure (2): Incidence of Costs of Sea Transport
Figure (3): Seasonal, short and long cyclical components
Figure (4): Stages in a typical dry cargo shipping market cycle
Figure (5): Forecasting scenarios in Chinese seaborne trade
Figure (6): Shipping Financing
Figure (7): Murabaha transaction
Figure (8): The Business Model Canvas; Blocks of activities
Figure (9): Capesize bulk carrier cost and age
Spotting business opportunities is essential for growth and survival of the maritime industry. This argument takes on greater significance during economically difficult times. From 2002, globalization and the rapid development of Asian economies have led to an increase of demand in the shipping market. This resulted in unprecedented contracting of new tonnage, boosting the order book by about 500 percent (Det Noske Veritas 2012, 10). In 2008, the financial crisis led to world trade shrinking dramatically and created a substantial oversupply of tonnage in the shipping market. This caused depressed freight rates and weak markets in general. The impact of global economic downturn, the crisis in the main shipping sectors and the changes in the pattern of world trade all profoundly affected the maritime transport industry (De Monie, Rodrigue, Notteboom 2011).
On the one hand, this leads to the relocation or even the collapse of financially stricken companies, leaving behind unsatisfied market share. On the other hand, new players on the market arise to fill these vacant roles, as they are able to focus on future growth and further development of the venture in contrast to the companies struggling to survive by managing existing financial obligations (Johns 2014). Furthermore innovation in technology and in processes as well as change in the regulatory framework facilitates the development of entirely new services offering business opportunities.
This thesis deals with the process of identification of these arising business opportunities in shipping. This process is equally dependent on spotting vacant market share by reading the right signals and developing an applicable business model to embrace the opportunity. The analysis of these steps will give guidance to entrepreneurs who are willing to take the risk of establishing a new company in the highly dynamic maritime industry.
To lead the entrepreneurs through the process of identifying a business opportunity, this thesis is structured in five chapters. Chapter One is introductory and defines the basic terminology used in this study. Furthermore assumptions for the further analysis are set. Chapter Two explores the signals, indicating emerging niches in the market. These include macro- and micro-economical signals, as well as key trends that could accelerate existing or create purely new demand in the shipping-markets. Chapter Three discusses the key-considerations regarding the setup of the business model. These contain financing opportunities for the new ventures and aspects regarding the interrelated structure of the strategic framework. Chapter Four highlights issues concerning the management and its impact on the daily operations of the business. These include the management of human resources, costs and risks. After these considerations have been illustrated, the paper concludes with a short summery and suggestions for further research.
In general an entrepreneur is someone “who exercises initiative by organizing a venture to take benefit of an opportunity and, as the decision maker, decides what, how and how much of a good or service will be produced. He supplies risk capital as a risk taker and monitors and controls the business activities” (Business Dictionary 2015).
In this study further assumptions are defined. The entrepreneur is not equipped with private capital and depends therefore on external investors. Furthermore he has sound knowledge and experience in the field of shipping but he does not hold an advantageous track record for his team or himself. Therefore it is believed that only a limited amount of investment capital (up to 20 million US Dollars) can be raised for his startup. From this follows that only second-hand vessels can be purchased. An additional assumption is that the entrepreneur wants to establish a long-term oriented business that will develop and diversify with time.
In this context the following three types of shipping-entrepreneurs will be taken into account in this study.
The entrepreneur searches for an opportunity to buy and operate second-hand vessels. Due to the assumed limited investment-capital available, the purchase of newbuilds or tankers is not an option.
2) Shipping Charterer
The entrepreneur searches for an opportunity to charter and operate vessels for a limited time frame. This includes an entrepreneur who charters old tonnage with a buy option. Due to the assumed limited investment-capital available, only operations of dry-bulk-, feeder-, or multipurpose vessels are taken into account.
3) Shipping-Service Provider
The entrepreneur searches for an opportunity to offer service-solutions to agency-, brokerage, software- or other shipping related facilities. These include software-development and other services not regarding the charting or ownership of vessels.
However, in this paper the main focus is set on the first two types of entrepreneurs, actually having vessels in the management. Further business-fields like the offshore business, the scrap-market or legal-advice services will not be taken into account for shipping-entrepreneurs in this thesis.
In general a business opportunity is an “exploitable set of circumstances with uncertain outcome, requiring commitment of resources and involving exposure to risk” (Business Dictionary 2015).
In this study the focus for business opportunities is on niche markets with long-term growth-potential in the maritime industry. Due to the assumed limited investment-capital available and the negligible track record of the entrepreneur business opportunities in matured shipping-markets including strong competition will not be considered. In this paper the identification of a business opportunity contains two parts. Firstly an entrepreneur has to spot current or prospected vacancies in the market. The second step deals with a corresponding setup of the business model aligned to the needs of the discovered vacancy. Only if both steps are properly managed, the entrepreneur can evaluate the presumably potential of the business opportunity.
While the core theme of this paper is the identification of business opportunities for operating shipping entrepreneurs, these ventures may equally be seen as investment opportunities for capital lenders.
The following chapter presents the most relevant signals that indicate vacant niches in shipping. Firstly, the macroeconomic signals, including demand and supply of sea transport, the periodic shipping cycle as well as forecasting and markets research methods are discussed. Secondly, the microeconomic signals containing emerging maritime clusters, professional networking and competitive analyzes are evaluated. Thirdly, innovative key trends like technology improvements and the development of e-services are examined, complemented by an analysis of the effects of the changing regulatory framework.
The demand function is based on five variables, according to Stopford (Stopford, Maritime Economics - 3rd edition 2009). These variables are the world economy, seaborne commodity trades, average haul, political events and transport costs. The world economy generates economic output, mainly depending on resources and technology. This output determines the merchandise available for foreign trade. Seaborne commodity trades are therefore linked to changing industrial demands, changing transport policies, discovery of resources and the relocation of processing plants.
As shown in figure 1, the world economic growth and the demand for seaborne trade transport are closely linked. During periods of low world Gross Domestic Product (GDP) growth, the volume of seaborne trade shrinks. Therefore GDP growth forecasting diagrams may be used as an assisting forecasting tool for shipping.
illustration not visible in this excerpt
Figure (1): GDP growth and seaborne trade. Source: Clarkson Research Service Ltd.
The next variable for the demand function is Average Haul and Ton-Miles. They give a more precise measurement of the demand side (Stopford, Maritime Economics - 3rd edition 2009). Political events, economical downturns and natural disasters may intensify the impact of seasonal or economic cycles. And finally transport costs are having a positive effect on the demand side, as long as they are declining due to emerging economies of scale (Schinas; Grau; Johns 2015). The interpretation of the current stage of these variables may support the entrepreneur to spot a niche market through predicted growing demand in certain regions.
On the other hand, the world fleet, fleet productivity, shipbuilding deliveries, scrapping and freight rates influence the supply of shipping services. The world merchant fleet is contracting and expanding in cyclical movements of up to two decades, introducing new designs and ship types, while scrapping older vessels. The fleet productivity gives information about the effective use of the vessels managed by shipping companies. The shipbuilding deliveries are again cyclical, as the time span between the placement of the order and the actual delivery of each vessel can vary up to four years. Scrapping is the natural counterpart to the shipbuilding production, removing old tonnage from the market. Finally the freight revenue, as a key driver for the supply side, encourages the owners and charterers to offer their tonnage with higher speeds to the market (Stopford, Maritime Economics - 3rd edition 2009). These variables may also send signals to be interpreted by the startups.
With all these variables affecting the demand and supply function it is obvious, that the according signals for sea transports are complex and variable. In order to identify the current demand and supply of sea transport, the application of macroeconomic models should be considered. Evans and Marlow applied such general models to maritime economics and offer quantitative methods to gain real-world assumptions. The use of these methods especially for the charter-market and its sub-markets may lead to useful guidance, since the real-world conditions in the time-charter-market get the closest to the underlying and required principles of the theory “perfect competition” (Evans, Marlow 1990, 75). In contrast the liner market does not follow the underlying principles of perfect competition due to its rather inflexible conditions of operation depending on given schedules.
Therefore the use of these quantitative methods is restricted. Furthermore, the theoretic approach of these models requires quality data. If such data is gathered the following models can be formulated:
illustration not visible in this excerpt
Figure (2): Incidence of Costs of Sea Transport. Source: (Evans, Marlow 1990, 69)
The simplified figure (2) “Incidence of Costs of Sea Transport” shows how to calculate freight rates for importing and exporting players (Evans, Marlow 1990, 68-69). If entrepreneurs get sufficient data for a potential niche-market they consider to enter, the respective expected freight-rates could be calculated, and therefore business opportunities identified.
However it must be considered that not all parameters that occur in the real world can be implemented in these models. Furthermore it is hard to collect sufficient quality data needed to run these models, even though universities, trade organizations or other sources like Clarksons Research Services or Alphaliner may provide relevant information. From this follows, that the value of these methods for real world applications is limited but it can be used as an assistance-tool for strategic and operational planning by the entrepreneurs.
The demand and supply function is also influenced by shipping cycles. These cycles pervade the shipping industry through long, short and seasonal periods, as shown in figure 3.
illustration not visible in this excerpt
Figure (3): Seasonal, short and long cyclical components. Source: (Stopford, Maritime Economics - 3rd edition 2009, 95)
From statistics over a very long period of time short business shipping cycles last on average about 6-8 years but each cycle is different and its stages are rather unpredictable (Stopford, Maritime Economics - 3rd edition 2009, 130).
A short and therefore usual business shipping cycle has four main stages. A market through (stage 1) is followed by a recovery (stage 2) leading to a market peak (stage 3) and is followed by a collapse (stage 4) as shown in figure 4. The function of short shipping cycles is to coordinate supply and demand in the shipping market (Stopford, Maritime Economics - 3rd edition 2009, 101).
illustration not visible in this excerpt
Figure (4): Stages in a typical dry cargo shipping market cycle. Source: (Stopford, Maritime Economics - 3rd edition 2009, 97)
While it is impossible to predict when the market will move upwards, an obvious strategy for entrepreneurs is to exploit the volatility of freight rates by taking positions based on the expected development of the cycle (Cufley 1972, 80). To keep the risk down, decision makers should not fall for enthusiastic consumer sentiment while markets go upwards. Due to this sentiment many shipping companies undertake too much in booming markets, ignoring the fact that a peak is naturally followed by a collapse. This phenomenon of psychology driven overestimation itself, promoting the slogan “this time is different”, leads to financial crises and has been analyzed in several studies (Reinhart, Rogoff 2011). This phenomenon has been recently studied in academic papers and led to an alternative approach of the interpretation of the shipping cycle strategy. Academics have found, that the market sentiment of investors may serve as a contrarian indicator for future cycle phases. The empirical findings concern the dry bulk shipping market and they could be used as a strategy to benefit from higher returns by the sale and purchase of real assets compared to the buy-and-hold benchmark (Nomikos, Papapostulou, Kyriakou, Pouliasis 2013). The effort of predicting the next stage of a cycle has a significant influence on the business strategy of the emerging company. However, as with all theories and suggested strategies, the process of decision-making involves high risks and remains with the interpretation of the entrepreneur. Stopford underlines this business essential by saying, “Shipping cycles manage investments but investors manage strategy” (Stopford, Third Shipping-Dialog 2014). From this follows that managers have to be strong in decision-making and risk management. These relevant attributes will be presented in the according chapters of this paper.
While investment banking is an own business, shipping entrepreneurs may use information out of the equity and capital markets to identify business opportunities. All players in the market cope with the same challenges of forecasting in the maritime industry. Identifying certain niches as business opportunities and therefore forecasting freight rates for specific regions or services is dependent on many factors. Future freight rates depend on how many ships are ordered, a variable that is unpredictable at the extremes of the shipping cycle, and developments in the world economy, which has again its own business cycles and crisis as presented in the previous chapters. Therefore forecasting methods will only have limited success (Stopford, Maritime Economics - 3rd edition 2009, 699). However, shipping-entrepreneurs may monitor the capital- and shipping-markets, obtain and analyze the gathered information, and emulate respected investing players to identify a niche with growth-potential. To conduct such a forecast, the entrepreneur should identify relevant and rational information through professional research. He has three methods available to collect and analyze the specific information. Firstly he may create and analyze a classical market report. Secondly, he may use a forecasting model in assistance with a computer program that models some aspects of the business in numerical terms. Or thirdly, he may design different scenarios about the future and prepare himself for the corresponding decision-making processes.
An example for the scenario-based model is shown in figure 5. The graph shows the growth rate of world seaborne trade in tons since 2000 and the outcome in full year 2015 on the basis of the four scenarios A to D for Chinese seaborne trade in the major cargoes (Clarksons Research Services 2015).
Figure (1) shows the supply curve (SS1) of goods from an exporting country and the demand curve (DD1) of an importing country. If there were no transport costs, the price paid and received for the goods would be P; but when the freight element is equal to AB for example, the importing country suffers an increase in price equal to PPd while the exporting country sustains a fall in price of PPs. Clearly PPd+PPs=f where f is the freight rate per unit of goods transported.
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