Pierre Aury writes for Splash that in shipping, low barriers to entry are being offset by digital barriers to exit quietly built by IT vendors.
The dry bulk and tanker markets are classic examples of commoditized, low-differentiation industries with hardly any barriers to entry. Vessels are more or less standardized assets. A newcomer can easily acquire a vessel and begin trading immediately, while at the same time, incumbents cannot use proprietary technology, brand, or network effects to defend their existing market positions. Chartering is executed mainly through brokers, where market information is reasonably transparent, meaning that even a first-time entrant can access the same cargo opportunities as a long-established owner, especially if the newcomer is 10 cents cheaper!
Financing is often mentioned as a barrier to entry, but in practice, it is still accessible: banks, leasing houses and alternative capital providers still actively seek shipping exposure and lend against vessels rather than the operator standing. Because operating costs vary only marginally across the industry, scale provides limited economic advantage. No owner can significantly undercut another on Opex. As a result dry bulk and tanker are competitive markets where profitability depends almost entirely on the global freight cycle rather than strategic entry barriers: buy low and sell high and try to make money or lose as little as possible in between! Price formation is solely dependent on supply and demand and not on cost plus margin, like in most other industries.
On the one hand, we have bigger and bigger shipowners with huge balance sheets operating in a highly cyclical market with no barrier to entry and on the other hand, we have IT vendors busy creating customer captivity through barriers to …exit with these big owners!
There is now an established trend pushing shipowners and charterers to operate more efficiently in an environment with more regulations, which are changing all the time and improve transparency across every step of internal workflows. As a result, digitalization has moved from being a simple option to being an absolute necessity. Following that trend, a lot of shipowners and charterers are now using so called VMS. VMS stands for Voyage Management System, which is a tool designed to optimise, track, and evaluate the entire lifecycle of a maritime voyage. From planning and execution to post-voyage analysis, a VMS structures and automates commercial shipping. IT vendors are willing to help! But this help comes with strings attached.
An IT vendor will have its proprietary architecture and will use closed standards, ending up with unique workflows being embedded in the customer’s system that don’t translate well to alternatives. As a result, the customer will soon face high switching costs because migrating data or re-engineering integrations requires major efforts and costs and comes with big risks attached.
In addition typically a VMS will be deeply integrated into other business processes, some of them being mission-critical processes, through a high level of customization in order to align the VMS with the customer’s precise needs. De facto, the VMS becomes part of the operational backbone of the company, using it. Removing it or replacing it carries a serious risk to business continuity, discouraging change!
A barrier to exit is created mainly through switching fear due to the high level of risk associated with switching to another IT vendor. The main risks are operational downtime during migration, data loss or corruption, user resistance and unexpected incompatibilities.
This is putting IT vendors in a very strong position to increase their fees!
Last, how long will it take for some of these IT vendors to have the idea to connect the VMS of shipowners to the VMS of charterers through a ship/cargo matching solution, leading to massive disintermediation?
