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High Value-added Maritime Services: The Rise in Third-party Ship Management

Managing ships is not an easy task. This is especially true these days when many ships are of an enormous size in order to satisfy the demand for a wide and growing range of sophisticated shipping services. Currently, ship management services typically include crew and supplies organisation, dry-docking, maintenance and regulation compliance. In addition, ship management experts may also offer consultancy services in ship engineering, construction and shipyard selection.

Traditionally, shipowners managed their own ships. Now, though, ship management has become an increasingly specialised and technical business. An increasing number of shipping companies who previously ran their own in-house management team have chosen to outsource their regular operational functions to professional managers.

It's worth noting that not all shipping services can be provided at one location for the desired price and quality combinations. Professional third-party ship managers strive to identify the best shipping services at the most attractive costs available in their region or indeed around the world. 

Recently these challenges have become more acute due to a rapidly changing global business environment. On one hand, the overhang of worldwide vessel oversupply post-2009 has continued to exert downward pressure on freight rates, driving down income. On the other hand, compliance costs have grown given the tightening of regulatory measures on greenhouse gas emission from the International Maritime Organisation (IMO).

Hong Kong as a Ship Management Centre

Thanks to its rich maritime history and the huge cluster of shipowners based there, Hong Kong has a well-developed ship management industry. The city is home to many renowned and established shipping service providers. This includes the Anglo-Eastern Univan Group. The company, one of the largest of its kind in the world with some 600 ships under full management, formed as a result of the merger of Anglo-Eastern Group and Univan Ship Management in 2015.

A host of factors have been instrumental in the establishment of Hong Kong as a competitive maritime services hub, as well as it becoming a leading ship management centre in the region. Critical mass always requires one decisive factor behind any maritime services cluster, that is, the transparency of the city's rules and regulations, which underpins Hong Kong's ability to attract ship management companies to establish a presence in the city. 

Whenever shipowners rely on third-party managers to run the day-to-day operation of their fleets, both parties are exposed to substantial risks, whether related to regulations, information security, finances or  general risks to reputation. Hong Kong boasts an institutional advantage of having a strong legal tradition, having inherited the British Common Law system with its well-respected maritime applications and resources. It also offers a conducive and transparent business environment which conforms to international best practices.

Of course, a key element in ship management is crew deployment and administration. The high efficiency of Hong Kong’s Immigration Department in expediting the processing of work permits, which typically takes as little as six weeks, is highlighted as a key advantage in facilitating overall ship management activities. In comparison, Shanghai and Singapore are cited by industry players for their comparatively lengthy and complicated processing procedures of applying and processing working visas. 

In addition, Hong Kong has a highly efficient airport which operates around the clock, and is ranked the third busiest airport after Dubai and London in terms of its number of international passengers. This makes a significant contribution to the problem of recruiting or re-organising the crew for any vessel calling at the Hong Kong port. Crew members from South Asia or Southeast Asia can stand by at short notice and fly from their home cities into Hong Kong in order to take up new assignments or contracts.

Indeed, a number of shipping companies interviewed by HKTDC Research, including Bernhard Schulte Shipmanagement (Hong Kong) Ltd Partnership, have highlighted the fact that Hong Kong is ideally positioned to capitalise on business opportunities arising in Asia. The city has significant geographical and institutional advantages in offering a full range of ship management services. As a maritime centre in the region, Hong Kong is attracting not only overseas companies but also many mainland enterprises to set up offices in the city. These include Hua Yang (Hong Kong) Shipping Ltd, a subsidiary of Beijing-based Huayang Maritime Center (HMC).

Riding on the Tides of Technology and Regulatory Changes

The control of sulphur oxide emissions is a good example of current developments in maritime regulations. Globally, the maximum sulphur content for marine fuel[1] is set to decrease from its present level of 3.5% to 0.5% as of 1 January 2020, when the new international standard takes effect. Within the Sulphur Emission Control Areas (SECAs), covering the North Sea, Baltic Sea and English Channel as well as most of the North American coast, the applicable standard is even more stringent, with a maximum sulphur content limit of 0.1% effective from January 2015.

In order to comply with these regulations, then, shipowners are more inclined to seek and take advice from professional managers. This advice could relate to matters such as the correct marine fuels and ship engines or the transition timetable for related investment to achieve the maximum cost savings.

In the face of increasing compliance requirements, the move towards adopting an integrated fleet management system seems essential for many shipping companies looking to remain competitive within the market. For instance, in 2015 Maersk Line, the world’s largest container shipping company, contracted third-party ship managers for the first time. Namely, Bernhard Schulte Shipmanagement from Germany and E.R. Schiffahrt from Denmark, who are now managing 12 ships from the Maersk Line fleet for a period of five years. The services required cover crewing, technical operations, safety performance, environmental performance and energy efficiency.

Masterbulk, the Singapore subsidiary of Westfal-Larsen Shipping based in Norway, also announced plans to close its in-house ship management division in favour of seeking third-party ship managers for its own fleet. In early 2016 it was also reported that third-party ship management company V.Ships Shipping, part of the V.Group, had entered into a partnership arrangement with Empros Lines to provide technical management of dry bulk carriers in Greece. By doing so they are successfully promoting the use of third-party management services among the traditional Greek shipping community.

This trend should yield new business opportunities for ship management companies capable of offering shipowners with better operation systems which support better data collection and analysis. 

To stay ahead of the game, Hong Kong ship management companies are eager to deploy new technology. For example, in 2015, Hong Kong’s Wah Kwong Ship Management adopted new ship management software supplied by DNV GL to further improve operational efficiency. According to a press release from DNV GL, this covers the areas of technical management, dry-docking, procurement, document management, risk management, safety management reporting, crewing and BI/fleet analytics.

Apart from this growing worldwide interest in third-party ship management services, it's worth noting that, according to the Baltic and International Maritime Council (BIMCO), only about one-third of the entire global shipping fleet is currently under third-party management. This suggests that third-party ship management companies can expect to further capitalise on the growing business demand for their work and technical services in the foreseeable future.

Asia to Enjoy an Extra Push

At the regional level, Asian ship mangers and operators will likely benefit from the global trends driven by the changes in regulatory and technical standards. There's also the matter of extra help due to the persistent increase in intra-Asian trade, which is expected to continually outperform global trade. In particular, many small-scale shipping companies with limited technical knowledge and resources are more likely to look for third-party ship management experts to manage their fleets. As such they will surely contribute to the expected surge in demand for ship management services within Asia.

Chart: Container Traffic Growth by Trade Route in 2016
Chart: Container Traffic Growth by Trade Route in 2016

In reaction to the huge demand for and potential of the Asian market, in 2014 Germany container ship manager Reederei NSB opened a branch in Shanghai to provide ship management, crewing, supply chain and agency services tailor-made for the Chinese market. Operating under a 50-50 joint venture with the Chinese Shanghai Nan Dou International Ship Management Co., the newly created Asia Marine Shanghai has built up a customer base of more than 400 vessels since its formation.

By the same token, according to IHS Fairplay maritime magazine, Hong Kong-based Wallem Ship Management is also optimistic about the market outlook for third-party ship management services. The company is looking to expand its fleet by around 10% per annum in light of this growing demand for ship management services and expects to bring in a total of 400 ships under its full management in 2016.

A New Breed of Shipowners

Apart from managing ships for traditional shipping companies, a new and increasingly important source of new business for third-party ship management companies has arisen from a new group of investors in the shipping market, including private equity funds and export credit agencies. By their nature, these investors are more likely to join force with third-party ship management companies, relying on the latter’s professional knowledge in order to meet fleet management requirements. Indeed, the rise of such non-traditional shipowners in Asia could be seen as one of the reasons behind the increased presence of foreign ship management companies who are setting up their offices in China.

Cruise Market Opportunity for Hong Kong Ship Managers

Despite the global economic downturn, cruise business has become one of the few bright spots within the global shipping market. Having managed to expand by a CAGR of 4.3% between 2006 and 2015[2], the growth in the global cruise fleet is likely to continue apace. It's being driven by the retirement spending of baby boomers in the west, and more importantly, by a fast-growing middle-class in Asia.

According to Cruise Lines International Association (CLIA), the Asia cruise market, which takes in China, Japan and Korea, handled some 2 million ocean-going cruise passengers during 2015, which represents an increase of more than 20% from 2014.

While there is no doubt that Asia is one of the fastest-growing markets for tourism, the cruise industry is still very much dominated by the traditional North American and European markets, in particular trips to the Caribbean and Mediterranean. At present, the Asian market represents only about 9% of international cruise ship deployment, but it looks set to expand further.

The huge growth potential of this market suggests that this is a good time for ship management companies to tap into the market and meet the need for expertise in running the expanding cruise business in Asia. Notably, many cruises calling Asian ports are of a considerable size, and typically require a variety of sophisticated shipping services that third-party ship management companies would be capable of providing.

For example, in March 2016, BSM established a partnership with Optimum Ship Management, a division of Cyprus-based Celestyal Cruises, to provide passenger vessel management services for clients in the niche market of cruising.

In Hong Kong, the addition of the Kai Tak Cruise Terminal (KTCT) in 2013 has helped the city to better capitalise on this growing industry. With two terminals dedicated to international cruise liners, KTCT can vie to become the home port for regional as well as international cruise companies. This will in turn generate strong business potential for related maritime services providers, including ship management services tailor-made to fit the taste of Chinese mainland travelers.

[1]  Marine fuel refers to five individual types of fuels used in maritime vehicles, including marine gas oil, marine diesel oil, intermediate fuel oil, marine fuel oil and heavy fuel oil.

[2]  Source: Clarksons Research

Content provided by Picture: Winnie Tsui
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