The Business Of
Transportation | Maersk | What Do They Do?
Morning All!
Hope you had a great week. So, last time we finished our 3-week series on The Business Of Banking. And we broke down the business models of Goldman Sachs, Barclays and Charles Schwab.
This week we start a new 2-week series and I’m super excited for it because it’s not the easiest industry to understand. But it’s one that touches everyone’s lives… even if we’re not fully aware of it! We’re going to be diving into The Business Of Transportation!
Over the next 2 weeks, we’re going to be looking at these 2 massive companies;
Union Pacific Corp – the world’s largest railway company.
Now, I know Maersk and Union Pacific Corp aren’t as exciting names as Goldman Sachs! But understanding how these companies operate, will really help in your understanding of how the global economy works. Today, let’s look at Maersk and see what exactly they do. And I really think you’ll enjoy the next 2 weeks as we close for 2023! So, without further ado… !
Shipping Companies Only Really Ship One Thing!
Okay, so today I just want to set the scene for the week. And let’s start with the obvious - what do shipping companies like Maersk actually do? Well, they transport goods from one place to another… via ship! The bananas you see in Tesco get transported from Costa Rica, Ecuador and Colombia – via ship. The Jordans you’ve ordered for Christmas get transported from Vietnam and China – via ship. The iPhones around you, the clothes you wear, etc – they’ve all been shipped!
And so Tesco, Nike, Apple, pretty much every company that needs goods distributed around the world, use shipping companies like Maersk. In fact, 90% of the world’s freight is transported via the sea! With planes, and trains making up the remaining 10%.
But when we think about the business of shipping, and The Business Of Maersk, we need to realise that – yes, these ships are transporting all these DIFFERENT types of goods – bananas, shoes, etc. But from the ship’s point of view, they’re actually shipping the SAME thing over and over again. Because what ships are actually transporting are… containers! As we can see in the image below.
Now, inside those containers are the bananas, the Jordans, the iPhones, etc. But let’s just take a moment to appreciate how important these containers are. Before 1956, there were no containers. Ships used to be piled up with all sorts of goods and machinery that needed to be transported from one place to another. But this loading/unloading used to take ages! A trip from North America to Europe would take ~12 days by ship. But just to load all the goods and machinery onto a ship would take workers ~7 days! Mental!
But that all changed in 1956 when the container was invented! The container meant that shipping companies didn’t really care what they were shipping. Bananas, shoes, cars, etc – bring it on! In their mind, they were just shipping the same things over and over again – containers! And these shipping companies became unbelievably efficient in transporting these objects. To really understand how incredible this invention has been for the global economy, I recommend checking out this YouTube video which simply explains how shipping works!
One other thing to mention – which will be important for tomorrow’s newsletter. Containers are very standardised. There’s only really 2 sizes of containers used by shipping companies. And they’re 20-foot containers and 40-foot containers. One 40ft container equals two 20ft containers. More on this tomorrow!
Maersk - Big… But Not The Biggest!
Okay, so we know that the sea is the dominant way of freight to be transported around the globe. But here’s a question – how big is Maersk in this market?
Well, as the chart below shows us, it’s not just Maersk who’s shipping all our Jordans over for Christmas! In fact, Maersk aren’t actually the biggest shipping company! By the end of 2022, Maersk had ~707 ships in their arsenal, which gave them a healthy ~15% of the total container ship market. But another company, MSC, operated over 790 ships! Giving them ~19% of the market!
Now, Maersk was the global leader for decades before MSC overtook them in 2022. But some of us may be thinking - how did MSC overtake Maersk? Why didn’t Maersk just build or buy more ships themselves? And how important is it to be the biggest player in this market? Well, we’ll dive into those questions tomorrow!
Kind Of A Big Deal - But What’s Up With The Shares Then?
To wrap up, let’s just quickly talk about why the shipping industry is so important. Because yes, sea transportation makes up ~90% of global freight transportation. But so what? What is the actual importance of that? What happens if there’s a disruption?
Well, the answer to these questions was seen just a couple of years ago, starting in March 2020. The COVID outbreak meant that a high percentage of port workers in China (the guys and girls loading and unloading ships) were off sick. Some ports were completely shut down. And less workers at ports meant that less freight (bananas, shoes, iPhones, etc) could be transported to and from ships. Because of this lower demand, many shipping companies cancelled sailings in Feb-March 2020…
But then, as the world adjusted to lockdowns, we saw a complete reversal! People were ordering more and more things than they had ever done. The demand for goods grew rapidly. And as shipping companies tried to ramp up their sailings again, they just couldn’t keep up! Everyone, from Apple to furniture companies to auto manufacturers experienced shocks to their supply chains and customers saw big delays to receiving their beloved products.
We’ll go into this in much more detail tomorrow. But the experiences of the last few years have highlighted just how much of a big deal these companies like Maersk and MSC are for the global economy.
On Friday, we’ll look at how this importance has translated into Maersk’s share price. Surely, a company as important as Maersk would see their share price just go up and up and up over the years, right? Well, as the chart below shows… that’s not quite been the case. Maersk’s shares are actually more than 50% lower than they were in Jan 2022. And on Friday, we’ll see why it’s not been all smooth sailing (get it!) for Maersk shareholders!
4th Dec 2023
And that’s a wrap! A lot to look forward to this week. Tomorrow, we’ll be focusing on Maersk’s revenue and looking at how exactly the shipping giant makes all the money they do!
Have a fabulous day!
The Business Of Team