Risk management in a challenging industry

Chinthaka Jayaweera always had a thirst for challenges in his career. Today he is one of the top executives with non-Western backgrounds at multinational A.P. Moller - Maersk, a big player in oil and shipping, industries going through challenging times

By Rohan Gunasekera.

Published on July 14, 2013 with No Comments

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Drawing up a career planning flow chart at 18 is something few teenagers would normally do, even going by the often crazy standards of adolescent years. But then, Chinthaka Jayaweera’s career has been no normal one.A Vice President of A.P. Moller – Maersk, Jayaweera, 41, is the Head of Group Internal Audit at Denmark’s biggest company, a multinational conglomerate with interests in shipping and logistics, port terminals, oil exploration and drilling, and even supermarkets. Its subsidiary Maersk Line is the world’s biggest shipping line, and Colombo Port’s biggest customer.

The A.P. Moller – Maersk conglomerate has annual revenues of around US$59 billion, almost half the size of Sri Lanka’s economy and its market value is around US$32 billion, almost double the value of all the shares in the Colombo Stock Exchange. A.P. Moller – Maersk made a profit of USD 4 billion in 2012. At the end of 2012, the price of one share of the group was 42,600 Danish kroners, which is about a million rupees.

Having pursued his career with extraordinary focus and determination, Jayaweera was appointed to his present position just over a year ago, 15 years after joining Maersk group in Colombo. Today he is responsible for the internal audit function of the entire Group, looking at risk management and controls of the different business units and giving independent assurance to the Chairman of the Maersk Group and the Audit Committee.shipping2

He acknowledges having had a liking for challenges from his early days and probably would not have been able to find a more exhilarating job, in a more challenging company or industry, nor at a more challenging time.

For, these are very challenging times in the shipping industry. Most lines have been wallowing in a sea of red ink for the past few years, suffering losses because of high fuel prices, a huge oversupply of tonnage, and slowdown in world trade owing to recession in advanced economies. Mighty Maersk Line itself has been in the red as freight rates have sunk to loss-making levels in recent years.
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“It is a very challenging period,” Jayaweera, declared in an interview with Echelon during a brief visit to Colombo for a speaking engagement on behalf of Maersk Line at an international conference. “If you look at 2012, the shipping industry as a whole lost US$3 billion, three billion – that’s a big number. Operating profit margin in the shipping industry was just 0.1%. The profit margin from 2005 to 2012 was around 1% and the shipping industry has had a negative cumulative cash flow of $14 billion. So it has been a very difficult time period for the industry and there are many factors contributing to that.”

One of the biggest of these was increasing bunker costs. Ship fuel prices have gone up significantly – by 16% a year on average – and bunker cost is the largest costs for shipping lines right now. Another factor is surplus capacity.

“There is a mismatch in the demand and capacity and even if the shipping lines don’t order any vessels from now onwards then there will be a mismatch at least till 2015,” says Jayaweera. The third factor is the performance of the global economy which has been very volatile, with a double-dip recession that has had a huge impact on the shipping industry.

Maersk Line, at the beginning of last year, was losing $9 million every single day. That’s about a billion rupees a day. But effective cost and fleet management initiatives ensured Maersk emerged as one of only three shipping lines which made profits last year.shipping3

“In the first quarter of last year Maersk Line lost $600 million,” Jayaweera recalls. “But then, with all the profit improvement initiatives that we have brought in, we have worked hard on reducing the cost so that we attain sustainable cost leadership. We have worked hard on managing our network, so that we bring down our capacity, and then we have worked hard on having the right prices for our services. With those actions taken, we have been able to actually turn around from a $600 million loss in the first quarter to a $461 million profit for the full year last year. And we made a profit of $204 million in the first quarter of this year.”

This is a satisfactory performance, especially when considering the depressed state of the shipping market. But still not good enough for Maersk when looking at the investments it made in the industry,

For instance, Maersk has invested $1.9 billion in ‘reefers’ (refrigerated containers used to keep perishables like fruits and vegetables fresh during long sea voyages) since 2008.

“It’s not good enough because we get a return on invested capital of about 4%  when we have a profit of around $204 million for the quarter. Shareholders would expect a return in the range of 10% to 12%,” says Jayaweera. “So while the industry has gone through a difficult time, we have gone through a difficult time too, but we have been able to come on top compared to the industry.”

That required some tough measures such as laying up vessels, scrapping older ships, adjusting the network and slow steaming. The last measure means that instead of going fast, to achieve fast transit times between ports, Maersk slowed down the speed of its ships by about two knots. This has the two-fold effect of burning less fuel and reducing costs and at the same time reducing capacity on trade routes.

The overcapacity problem for shipping lines could get worse with several ultra large container carriers (called ULCCs) being deployed in the coming months, starting with Maersk’s own Triple-E class vessels, each capable of carrying 18,000 TEU (Twenty-foot Equivalent container Units), to be followed by similar-sized ships ordered by rival lines. Triple-E stands for Economy of scale, Energy efficiency and Environmentally improved.shipping quote2

The first five out of 20 Triple-E container vessels suited for the Asia-Europe trade will be delivered in 2013, starting in June. “The reason why we ordered the Triple Es was, it will give us economies of scale, it will be energy efficient and it will be significantly higher on the environmental performance,” explains Jayaweera. “A Triple E vessel deployed in the Asia-Europe service will be 50% more energy efficient than existing ships in the industry. So we are able to lower our cost significantly and we also contribute a lot to this world by having a lower CO2 footprint.”

Maersk Line’s fleet consisted of 270 owned vessels and 326 chartered vessels by the end of 2012 with a 2.6 million TEU total capacity. Maersk also managed to retain its reputation as the most reliable shipping line with a scheduled reliability for 2012 of 91%. That’s an achievement in the shipping world where delays are not uncommon, in contrast to the airline industry which has to maintain higher levels of reliability since their main customers are passengers, not cargo.

Jayaweera says Maersk has no intention of depressing freight rates with its new tonnage, noting that: “We have our tools to manage capacity at Maersk Line. For us, it is very clear – our intention is to grow with the market. We are not planning to grow above the market or less than the market. So, I believe that it would not lead to a capacity increase because we are also managing the capacity as these vessels come in. The industry doesn’t need to order new ships ahead of demand growth because there is a capacity-demand mismatch right now.”

Shipping lines, Jayaweera believes, have to resign themselves to slow growth in the coming years. Jayaweera says that it is vital for the world economies that the shipping industry generates sustainable profits. Shipping is the engine of global trade. “When I go to a supermarket in Denmark to buy say, a banana, that banana comes from somewhere else in the world. Infact Maersk Line shipped more than 8 billion bananas in 2012. Because of shipping the consumers are able to buy products at an affordable price, and because of shipping producers are able to sell their products in markets they wouldn’t have otherwise had access to.”

The A.P. Moller – Maersk group has four core businesses. Apart from Maersk Line, there’s APM Terminals, again one of the largest sea port terminal operators, with 62 terminals in 40 countries. Then there’s Maersk Oil, not so well known in this part of the world, which is into oil exploration and production, having started operations in Denmark in the North Sea 50 years ago and now expanded to other parts of the world. Maersk Oil is known to transform marginal oil fields to commercially successful ones. Maersk Drilling specialises in drilling oil wells. Maersk Drilling is well known for drilling under harsh weather conditions and in very deep waters. In addition, the group has several other businesses like Damco, which handles freight forwarding and supply chain management, Svitzer, which does towage and salvage operations, and Maersk Tankers which is into transportation of oil and gas products. Another unit, Maersk Supply Services supplies equipment and services to the oil industry. The group has a large retail arm called Dansk Supermarked with a chain of 1,300 retail stores in Poland, Sweden, Germany and Denmark. And it also has a 20% stake in Dansk Bank, one of the largest banks in the Nordic countries.

Maersk group maintains a significant presence in Colombo where Maersk Line is the largest customer of Colombo Port. Port officials have said Colombo’s new deep-water expansion was partly propelled by the need to accommodate Maersk’s 18,000-TEU ships and fear that the line would pull out if this requirement was not met.

Damco, Maersk’s freight forwarding and supply chain management arm, also operates in Colombo. And APM Terminals has a 34% stake in Colombo’s sole private facility, South Asia Gateway Terminals (SAGT), the second largest shareholding after John Keells Holdings (JKH), which owns 42% of the SAGT. “We’re happy with the investment we have here,” says Jayaweera.  Maersk does not reveal profits from individual terminals. However, the terminal must be very profitable indeed judging by the money it makes for JKH, Sri Lanka’s largest listed conglomerate. According to Fitch Ratings, SAGT accounted for nearly 50% of JKH’s recurring dividend income in FY12 and 59% in FY11. Revenue from SAGT also accounts for a big chunk of profits of the Sri Lanka Ports Authority, which along with the Taiwanese shipping line Evergreen, is a shareholder.shipping4

Between the time Jayaweera left with his family to join the Maersk group in Copenhagen and his most recent visit in June, Sri Lanka’s shipping sector has undergone considerable changes. A new deep-water port has been built in Hambantota and another one is coming up next to the existing Colombo harbour, whose first berth, owned and operated by China Merchants Holdings International Ltd., is set to open in July 2013.

Fitch has warned that SAGT’s profit-margins might come under pressure and market share get eroded with the increase in container handling capacity when Colombo International Container Terminals Limited, 85% owned by China Merchants begins operations.

Ongoing port infrastructure development coupled with location augurs well for the island’s maritime future. “I think Sri Lanka has a key advantage of being strategically located,” Jayaweera says. “That’s one of the assets we have. Definitely it is something we should take advantage of. Sri Lanka has so much potential in terms of developing in the maritime area.” Jayaweera began his career at Maersk as Assistant General Manager – Finance in its Sri Lanka office in 1997 and has been going full-steam ahead even as Maersk Line’s vessels have resorted to slow steaming. It took him seven years to make the journey from Colombo to Copenhagen where he is now based, having moved there in 2004 with his wife Vasanthi and daughter Ruhini who just turned 13. His second daughter Methuli, 7, was born there.

A wide global view and desire for travel and to be at the heart of international trade prompted him to join Maersk. He acquired a liking for Maersk even before joining the group, when as an accountant at the Sri Lanka unit of KPMG, the international audit firm, the shipping line was one of his clients.  Today Jayaweera is among the 8% of top executives with non-Western backgrounds at Maersk after a fast, 16-year climb up the corporate ladder. When asked, he says he never faced any discrimination. “We are a company that promotes cultural diversity and that’s absolutely important for us as an international company. We have the head office in Denmark but yet we have more employees outside Denmark than in Denmark. Ours is truly an international company and we are trying to promote diversity as it is vital for the continued success of the business.”

Self-confidence and a positive attitude helped him cope with the cultural differences and his new global responsibilities. Culturally, Denmark is very different from Sri Lanka but when the family moved to Denmark, from day one they felt at ease and started integrating in to Danish society. “It’s actually very strange. Living in Denmark has been absolutely fantastic. And that’s interesting because I also have friends who have lived in Denmark and who have not been happy about living in Denmark. I think because of our mental attitude and our large network of good friends – Danish, Sri Lankan and other nationalities – we feel very much at ease living in Denmark.”

His passions outside work are skiing and exploring the world with his family. Although he took up skiing only eight years ago, he has taken an immediate craving towards the sport. He explains: “Because I am out there in pristine nature and I keep on testing myself further and further expanding my limits. In skiing you need to think fast and take fast decisions. Steepness and width of ski runs, snow conditions, visibility vary, making it lot of fun. Furthermore, you fall and learn from your mistakes spontaneously. It is also interesting that all that comes to my mind in the ski run is the end goal rather than the obstacles or challenges around me. Skiing is exhilarating for me as it gives me the physical and mental challenge of testing myself all the time where I need to navigate often outside my comfort zone. Whether it is work, sports or anything else, I know by experience now, I give my best, achieve my best and enjoy my best when I have to operate outside my comfort zones.”

That’s an attitude he’s had from childhood, when he drew up that career planning flow chart at 18. “A bit weird I would say, that I had a flow chart at that time,” he admits with a smile, referring to his early attempts to predict or forecast where he wants to be in his career, how he would get there, what education he needed and what kind of business experience that he would have to get to be where he wanted to be in the next 17 years. Now he’s become more mature, Jayaweera does not plan 17 years ahead, rather a shorter time frame. But he remains very much focused on the present and at the same time tries to envision where he wants to be in future.

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