The shipmanagement industry is at a critical juncture. A drift towards the commoditisation of the sector, digital disruption and in-house management threaten to erode the earnings of third-party managers.

But shipmanagers remain confident they can weather the storm and are lining up to battle it out on three fronts: quality, cost and service.

It reflects a desire among larger managers to more clearly differentiate their services in a move away from the commoditisation of shipmanagement.

If successful, multinational shipmanagers believe they will be able to better compete in an ever-more crowded market of traditional family-run organisations and digital start-ups.

“You’re seeing a real polarisation between quality on the one hand, and cheaper services and reduced quality on the other. That’s a real game changer,” says Mark O’Neil, president of Columbia Shipmanagement.

No frills

That thesis will be tested as larger shipmanagers with heavy overheads compete alongside a new breed of low-cost rivals that can operate on a shoestring.

Cheaper “no frills” shipmanagers seem to appeal to financial institutions that through need or greed do not expect to hold onto ships for too long a period.

There is little doubt that savings from using low-cost managers can be substantial.

One German shipmanager claims to have secured docking fees of $200,000 — around half the $400,000 per day of what the traditional manager quoted for a vessel to meet class and flag-state requirements. “We don’t need golden door handles,” he says.

Mark O'Neil of Columbia Shipmanagement says the polarisation between quality and cost is a game changer Photo: Hikaru Funnell

However, traditional managers baulk at the prospect of reducing costs.

“You’re dealing here with lives, expensive assets and huge environmental issues. You cannot afford to cut costs too far,” says O’Neil, whose company manages more than 300 ships.

“If something goes wrong, you as a top international operator have just tried to cut costs and screw the last penny out of the manager — that doesn’t look good to shareholders.”

The problem for leading shipmanagers is being able to justify charging a premium rate.

V.Group chief executive Graham Westgarth believes the industry has “not always been good in demonstrating real value”.

“We need to move way from the traditional transactional, contractual and commercial relationship — which drives you down the lowest common denominator route — to a commercial model which aligns you more with your customer,” he says.

Alignment

The ultimate expression of that “alignment” might be taking management of vessels in-house.

That path is being taken by a handful of companies, most recently by John Fredriksen-controlled Flex LNG.

But shipmanagers argue that in-house management is not an attractive option.

“You don’t get the benefits of scale,” Westgarth says. “The other benefit of shipmanagement is that it allows people to focus on the commercial side of the business. If they’re buying and selling assets through the cycles, they don’t always have to think about 'what do I do with my people?',” he says.

“Subcontracting in the shipping business still makes sense as it does in most other service sectors where you achieve economies of scale, expertise and focus on core businesses and ancillary services.”

Low threshold

Thome Group chief executive Olav Nortun, whose company manages more than 200 vessels, argues there is a future for shipmanagers who are large enough.

But he believes it is getting harder for new entrants to enter the business.

“It used to be an industry with a low threshold to join. That threshold is rising,” he says.

He points to the increasing complexity of a business where meeting the demands of regulatory and environmental compliance requires heavy investment.

A particular risk for managers today are political issues, which led to the Thome-managed 47,000-dwt Andrea Victory (built 2005) being damaged in an attack off Fujairah in May.

Nortun admits being worried by such incidents that have to be accepted as “part of the risk”.

While consolidation has been a feature of shipmanagment in recent years, there are signs it may have reached its limits.

V. Group's acquisitions of companies over the years has turned it into the largest player in the business.

But further expansion of its core shipmanagement would be “more challenging,” says Westgarth.

“You get to a point where if you have 600 ships as we have, it’s the law of diminishing returns. Will you get better pricing with a 100 ships than with 600? Probably not. So it becomes much more selective,” he says.

Moreover, smaller, family owned shipmanagers argue they are capable of keeping costs down, or have bundled together with other companies to form cooperatives.

A good example is Trampko, a German association of 15 shipmanagers with more than 350 ships.

Olav Nortun, CEO Thome Ship Management, at InterManager's London meeting in September Photo: Ian Lewis

Digitalisation

The biggest challenge is the uncertain impact of digitalisation.

Smaller managers are seeking digital opportunities by, for example, investing in cloud shipmanagement technologies to cut costs.

Larger managers, such as V.Group, Columbia and Bernhard Schulte Shipmanagement, are investing heavily in digital services that allow clients to benchmark their operational systems. That would be impossible for the smaller operations.

“The margins in shipmanagement are very, very small. You require scale, huge levels of investment in technology and digitalisation,” O'Neil says.

But there are signs that shipmanagers are reining in expectations on the digital front.

“We should use technology in the right way, but we don’t need to say we’re transforming the industry,” Westgarth says.

He adds that shipmanagement is different to other forms of outsourcing.

“When people are giving you their assets, they’re giving you often all of the capital that they have within their company and sometimes within their family taken generations to build up. It’s a huge responsibility,” he says.

That may explain why some still believe shipmanagement remains a conservative business where people will for some time take precedent over technology.