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Monday, May 29, 2017

Lessons from Hanjin Line Bankruptcy

Posted to From the desk of FMC Commissioner Doyle (by on March 2, 2017

On February 28, 2017, U.S. Federal Maritime Commission (FMC) Commissioner William P. Doyle participated in a panel discussion at a conference in Long Beach, Calif., where he discussed the August 2016 collapse of Hanjin Line. These are Commissioner Doyle’s Prepared Remarks (note, actual remarks were scaled for brevity and repetition of events highlighted by the moderator and other panelists).

File photo: Hanjin

The August 2016 collapse of Hanjin Line was a wake-up call for the entire ocean transportation supply chain. More than $14 billion in cargo was stranded at sea and ships were scattered all over the globe at anchor or just outside territorial waters. The ports were a mess trying to figure out what to do. Truckers were stranded waiting to pick up containers and return equipment. Chassis in the U.S. were scarce because the empties could not be taken of the trailers. Exporters couldn’t get their goods out of terminals to rebook onto other ships. This went on and on and up and down the supply chain costing tens-of-millions of dollars in additional losses to land-side operations. 

Shippers and carriers need to work in the direction of providing safeguards. It is so important that this does not happen again. Companies may fail, but the responsibility lies with everyone, at least to the extent that we do not have the damage that occurred post-Hanjin.

I have three things I want to highlight today. First, looking back, things could have been done differently. Second, looking forward, things must be done differently. And finally, on world trade all of you in the supply chain need to find a way to speak with one voice on the importance of the entire industry.

Things could have been done differently. Yes, the warning signs were there that a potential collapse of Hanjin Line could occur. However, nobody really thought that South Korea would allow the world’s seventh largest carrier to go bust. Now we know, that is exactly what happened; the South Korean government pulled its support funding and let Hanjin fail. Should there have been advance notice by South Korean officials to the international community of government and industry prior to pulling the plug? I think so. 

My concern is that government-supported entities such as Hanjin leave much to be concerned about. Indeed, it was the Korean Development Bank that backed away from financially supporting the liner company, and once that happened, it was over. 

We are seeing once again government financed entities stepping in to prop-up liner companies. These include the South Korean-supported Korea Shipping Company, Korea Development Bank, Export-Import Bank of Korea, and the Korea Asset Management Corporation. We are also reading about the National Development Bank of the Taiwan Government and Taiwan’s Ministry of Transport and Communication. 

My concern is what is the breaking point for a government to back-out and leave a liner company broke. We’ve seen this before.

Things need to be done differently moving forward. We need safeguards. Upcoming new alliances should be jointly responsible for their partner lines. You get limited antitrust immunity to form alliances and you need to make sure the shipping public is treated fairly. 

I firmly believe that if you are going to join an alliance it is the responsibility of the alliance members to ensure the cargo gets where it needs to go. If a carrier company fails and that carrier is party to an alliance, the cargo carried on the failed company’s ships may only equate to one-third of the container volume carried. The other two-thirds of containers may belong to the other carriers in the alliance. So, it is essential that you all take responsibility. 

The responsibility is to get the ship into port and get it unloaded, get the empties on board and get the ship back out to sea. The industry needs to investigate options such as insurance contracts or pooled funds to protect shippers from the fallout of a carrier collapse. There may be a problem with funding mechanisms associated with catastrophic failure as funds could be subject to creditors’ rights in a bankruptcy. That needs to be worked out worldwide however, and by you the private sector. You don’t want governments coming in and dictating this fail safe through regulatory means.

Let me just provide a little recap of what happened in this regard. The United States was the first country to put commerce first. A federal judge in New Jersey issued an order that Hanjin ships could not be arrested or seized. His order allowed ships to enter ports and be unloaded. We all breathed a sigh of relief. However, before long, we then realized the order only fixed half the problem. The other problem was that the marine terminals in the United States are largely privately operated enterprises. As such, ports did not want their docks tied up with nonpaying Hanjin vessels when they had other liner companies willing to pay for the dock space. So, the terminals were not going to allow the Hanjin ships into port if there were no funds to unload the ships and otherwise pay for terminal services.

Then what happened? In the end, it was the Korean government that had to pay anyway. At the direction of South Korea and the Korean Development Bank or other directed entities would deposit millions of dollars in banks around the U.S. to be used as funds to unload vessels. This was done piecemeal—a few million here, $10 million there and the days turned into weeks and then months in between for the funds to be cleared. 

My point is this: Hanjin was carrying the cargo not only of Hanjin but of the other alliance members of CKYHE as well. Everyone suffered. Wouldn’t it have been less caustic for the alliance to insure against such a catastrophe to protect all alliance members? 

You all in the supply chain need to find a way to speak with one voice on the importance of the entire industry. On world trade, the entire supply chain can do better talking about your importance – from carriers to the ports, to the terminals, to port authorities, to labor, truckers, importers, exporters and distribution centers. And you need to peg a jobs number to all of that. Not a piecemeal number, but a real number, as in how many U.S. jobs does the ocean transportation supply chain support.

***

On January 1, 2013, the United States Senate confirmed President Barack Obama’s nomination of William P. Doyle of York, Pennsylvania as a Commissioner of the Federal Maritime Commission. He was nominated to another term by President Obama on January 29, 2015, and unanimously confirmed by the U.S. Senate on March 23, 2015. Commissioner Doyle served over a decade as officer in the U.S. Merchant Marine as a marine engineer aboard numerous classes of vessels. Combined, Commissioner Doyle has over 20 years of experience in the transportation industry, including both the maritime and energy sectors. Throughout his career, he has held several senior executive positions in the industry. Doyle is a graduate of the Massachusetts Maritime Academy.

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