What is shipping digitization as realized by market leaders? The majority will agree that is not some subject matter in itself but rather a new way of its creation. A ship ceases to be “a value chain core”, however, it becomes only one of the elements of evolving new “value streams” as well as one of the sources of services. Nowadays, a main logistic “value” will be created either off ship or not only by the ship; consequently, “ship value” is going to become lower.
Conventional wisdom says that three main aspects should be identified to start using digitization in shipping. First, it is a digital ship. It means that all critical structural elements and processes aboard can be monitored and controlled by Internet of things and communication technologies. To digitize the ship, there should be digital ship equipment that can be integrated in digital environment. Particular attention will be focused on the latest digital ships treated as upcoming market standards that set performance criteria for the whole market.
Another critical aspect will include digitization of operating activities. It is going to improve daily ship operating performance. Since the ship will become to operate in virtual environment, current status of its critical elements will be accessible for remote monitoring in digital model (fuel flow rate, mean time between regular maintenance, etc.). It is expected that environment around the ship will also become digital and the ship owner will be able to acquire data, such as, weather condition, port-to-port fuel cost, freight rate, etc. All data handled by self-learning artificial intelligence will help in taking cost-efficient operating solutions related to heading, routing, cargo composition, etc.
Finally, worldwide trend in digitizing of all areas of human activity will allow for transparent global commodity flows and forecast change drivers. To create such environment, various trading platforms are going to be built to aggregate data on world resource flow. Computers will collect data on all processes related to, directly or indirectly, movement of global commodity flows at all levels and based on such data, these computers have to learn and take solutions in case when the best alternative needs to be chosen. Essentially, shipping is a source of valuable information. 90% of world trade is carried out by sea shipping that allows many industries to take crucial solutions, using this information.
Over 200 years, a concept of world ship market has been based on a four market model that includes ship building, ship breaking, resale and chartering. A ship owner is a heart of this model. Such market is characterized by inadequate forecast, volatility and cycling. However, there are reasons to believe that in the next 20 years, this model will be completely transformed.
Digitization makes shipping market environment more transparent that result in lower volatility of above four ship markets and higher competition. Lower volatility means more accurate forecast and more stable freight and ship resale markets, which are the fast developing ones of the four ship markets. Both of them play a role of a bumper responding rapidly to disproportional supply and demand at shipping markets.
Having digitalized, ship owners will have a clear picture of how big supply and demand in world shipping is, as well as why and how large it is changed. By this reason, investment decisions on building of new ships to be taken by artificial intelligence will be well-thought and well-estimated. It will mitigate investment risk of a ship owner and minimize possible overproduction at shipbuilding market that means volatility of this market.
The most radical view on total transparency in shipping relates to the fact that freight rates will no more depend on supply and demand fluctuations at shipping market and even ship operating costs; they will become stable in the long-term perspective globally and it will marginalize a market character of a ship as such.
Still existing shipping market borders and barriers, first of all geographic and national borders will be changed and the industry will be totally globalized. It is particular important for shipping as one of the most conservative market of world economy, conservatism of which, to a large extent, is based on natural barriers, namely, long distance between market elements and particularities of national legislation in different countries.
Data generated in the course of shipping company’s business will become the company asset that needs to be monetized. It raises an issue related to legal data owners. Data interpretation and evaluation become also challengeable.
Start using digitalization in various sectors of commercial shipping will be characterized by rate of coverage and a type of ship. First of all, sectors of standard popular ships, such as, container carriers, oil tankers, LNG tankers, bulk ore carriers and bulk coal carriers will be digitized. Sectors of specialized vessels will be structurally changed soon after.
Ship owners, which will be able to transform business proactively under the influence of shipping digitization, sooner or later, will come to one of the new business models, that is, creation of off ship value or rethinking of business operating model. Creation of off ship value includes wider application area of ship owner-offered product beyond shipment. For example, door-to-door instead of quay-to-quay shipping, relevant digital data on its own operating activity at data aggregators to be monetized, etc. Rethinking of business operating model includes changing of the ship-owning fact in possession utility that can be accounted for deeper transformation. A typical example of such approach is so called network subscription for ship or “ship as a service”, under which popular and maximally standardized both in terms of design as well as charter and operation of ships are planned to be used.
Certainly, some ship owners will continue to follow a traditional business model. However, it is commonly believed that a winner of this race will take all.
Digitization of world commercial shipping described above is based on innovation development of a few key technical platforms. First of all, large data arrays should be analyzed. It aims to identify patterns, correlations, trends and other data hidden in large and various data array environment more and more generated by current economic and technical environment.
Development of Internet of things and artificial intelligence needs a source of information on a status of a facility to be monitored. Therefore, various sensors and transmitters are given particular importance.
Another driver will arise to develop and start using robots. A robot is used to carry out programmable standard operations automatically; meanwhile, it is easy to control it remotely.
To provide digitization, paramount importance should be given to communication systems, including remote interface facilities to communicate to different components of complex digital systems.
Important role in all innovations is played by special materials used to make sensors and microelectronics components, power generation and storage, as well as programmable transmitters.
Moreover, higher performance of standard propulsion systems and building of innovative systems, such as, hybrids, sail ships, hull friction reduction methods, etc. will be a challenging issue.
If most of the above innovative technologies are put together, it can be said that so called “smart ship” is built. This concept is also closely related to a digital model of this ship used to organize its life cycle. In particular, this area of innovations includes E-Navigation and development of unmanned navigation.
Commercial shipping is a backbone of world shipping. 85% of volume of new ship building worldwide in terms of CGT (compensated gross tonnage) is accounted for cargo commercial ships more than 5 thousand tons in terms of CGT. Most of markets related to other types of ships are developing towards the same area, taking into account the market specifics. Such structure of world fleet will remain in the foreseeable future.
To date, a ship owner as businessman faces two challenging issues, that is, volatility of most of markets he/she worked with, first of all, it relates to demand, resources to be used and asset management performance. Today, there are two types of ship owners, those who make money by shipping goods from А to В, and those who make money, using difference in cost of ship on buying and selling. Business models of both groups of ship owners are based on a concept of four ship markets.
Freight market is trendy and the market demand can change quite rapidly. Supply changes significantly slower. For obvious reasons, a shipbuilding market cannot boost supply rapidly, when demand for new ships will grow. However, ship owners can discard old ships less frequently and buy more used ships. Consequently, in ideal conditions, higher freight rates will result in higher prices and longer time of new ship building as well as higher prices of used ships and lower volume of old shipbreaking. Time of new shipbuilding is rather long and ranges from 20 to 40 months.
After world economy slump in 2008, shipping demand decreased abruptly. However, ship owners, who were optimistic in expectation of rapid economic recovery, continued to build new ships extensively. As we know, it did not happen. Eventually, average freight rates over the past decade are almost two times less than pre-crises rates.
Digitization triggered by changes in all logistic chain, a part of which is commercial shipping, is a major trend that will change the nature of both commercial and technical shipping. Digitization will lead to completely different and new structuring of ship markets and working environment both for ship owners and shipbuilding yards. Model of four ship markets of two centuries is under transformation.
World shipping is hard-to-forecast but at the same time cyclic business. Moreover, due to higher transparency of all processes, large-scale implementation of digitization decreases a value and duration of fluctuations generated when four ship markets are adapted for changing environment.
In world economy, it is commonly assumed to identify a few large sectors of shipping, such as, versatile dry-cargo ships, bulk carriers, container carriers, crude oil tankers, product tankers, LNG carriers, petroleum gas carries and, finally, offshore floating production fleet. Today, each of these sectors is at different stage of a ship cycle. According to expert estimate, the sectors of bulk carriers and LNG tankers are under rapid recovery.
Apart from digitization, promising environment of world shipping is determined by excessive tonnage under growing demand and stringent environmental regulation. Excessive tonnage is shown by much more available fleet of different service life and existing demand as well as high percentage of new fleet in layout used. Most of sectors of shipping are expected to be disproportional to different extent in the next two years; however, there is excessive supply in each of them. Maximum excess will be observed in crude oil tankers and LNG carriers; minimum excess will be observed in offshore fleet.
A main factor of more stringent environmental regulation in relation to shipping is the requirements of MARPOL Convention related to ship engine emissions due to become effective on 01 January 2020. The Convention provisions state maximum sulfur oxide concentration in emissions. There are three ways to meet these requirements by a ship owner, that is, to convert to liquefied gas, to install catalyst converter-scrubber at exhaust line or to use low sulfur residue and distillate fuel. Among other things, the first two ways increase cost of building of new ships and require significant investments to rebuild existing ships that reduces their capacity. Moreover, low sulfur fuel is much more costly than conventional fuel.
This is not the only and the latest update in the area of environmental regulation of shipping. Many developed counties pose more severe environmental requirements in their territorial waters. Frequently, it is non-market instrument in competition and incentivizing shipping and marine equipment market.
According to UNCTAD as of the last year, Russia is honored to be ranked 19 in the world ranking of commercial fleet consisting of 22.2 MT DWT/1707 units. In terms of deadweight, the largest fleet, 330 MT DWT, is owned by Greece. In terms of quantity, most of ships (5512) are in China. It should be noted that when estimating world fleet composition, most of high profile statistic sources handle data that, at the best case, related to cargo and offshore ships only, because it is they which are included in the main part of fleet. Meanwhile, the statistics takes into account a fleet under convenience flag, however, ships, gross tonnage greater than 1000 tons, are included only. By this reason, numerous river ships have not been included in Russian statistics; for that matter, there is no such fleet in many top ranking countries.
To make more impartial estimate, it should refer to Russian statistics, according to which, if small ships (gross tonnage less than 80 tons, 20 m long) are not included, Russia owns a new and large liquid cargo fleet registered under various flags. Marine fleet under RF flag is small, relatively new and can navigate at half-restricted area. River fleet, mainly, tug and tow, is large, obsolete and small-sized.
Russian fleet is characterized by a very low rate of renewal with landslide obsolescence.
If Sovcomflot pattern, according to which, orders are placed at Korean shipbuilding yards regularly, is not taken into account, then, over the last 20 years, liquid cargo carriers were main types of ships built in small quantity for Russian fleet. Recently, also included were private customer-ordered dry cargo ships of combined navigation, dedicated service ships to be built for state needs under different federal targeted development programs as well as private customer-ordered fishing vessels and river passenger ships. However, if the marine fleet under RF flag was more or less renewed, the river fleet has not been further built since 1996. Moreover, unlike marine ships, which can be bought used and very cheap with a wide choice at world market, in general, river ships suitable for us are not built worldwide. Under such conditions, the marine fleet under RF flag is expected to become further obsolete in the next decade and Russian river fleet will cease to exist at all.
Russian shipping is digitized slowly; however, all main trends of world market are topical. First of all, it is supported by global shipping market, at which many Russian ships have been doing business. Apart from that, almost all international conventions that regulate shipping requirements are ratified and implemented by Russian legislation. Innovation factor is given particular attention in different government development programs. Industry institutes have been developing adequate measures to be taken. Also important is the fact that, mainly, non-Russian ship equipment is installed at Russian ships. Finally, until now, there are many non-Russian used ships in Russian fleet.
State support measures for ship building industry include subsidizing of lease payments, disposal grant, investment quotas and Russian International Register. All these measures aim to build new ships, in particular, cargo and passenger ships of combined navigation and fishing vessels.
Meanwhile, general business conditions in Russian legal environment are unfavorable for investment in building of new ships under RF flag. Main reasons of such environment are as follows: high tax burden, excessive regulation of ship company business, unavailable long-term investment financing at low rates, human resources problem and inadequate ship repair/building in Russia.
It is ironic that there is a key element, that is, national cargo base to develop Russian shipping rapidly. Even after USSR collapse in 1992, only 32% of export cargoes were shipped by Russian ships. Today, this quantity is not higher than. Foreign trade cargo turnover at Russian ports has been increasing continuously for many years and to date, it is higher than 750 billion Dollars. Annually, about 30 billion Dollars for freight and carriage of Russian cargoes go to non-Russian ship owners. To return at least 60% of Russian cargoes, large capacity marine ships should be used instead of coastal ships being built today. Moreover, frequently, there is no alternative to river navigation, particularly, on rivers flowing across the North, Siberia and Far East. Therefore, it can be said that there is much work to do by Russian fleet. However, it can be renewed only when comprehensive approach of all parties concerned is applied and proactive national policy in this area is developed.
World shipbuilding does not remain uninvolved in innovation processes related to shipbuilding industry transformation. Currently, it is on the way to so called the fourth industrial revolution, under which “smart shipbuilding yards” are being designed. Again, business processes to be digitized and unified digital information space to be designed are prioritized among main technical trends in shipbuilding. A challenging issue is to integrate design processes, pre-production, procurement of materials and equipment, shipbuilding and after sale maintenance on a unified digital platform. Also important is to automate and control production processes, such as, hull structure fabrication. Another important trend is predicative analytics and simulators that allow forecasting possible situations instead of root cause analysis of historical events. Predicative analytics is designed to analyze large data arrays related to production process at yard with the aim to detect hidden trends. Simulators are applied to estimate ship structure and its individual systems in different operating conditions during ship design as well as to forecast production management options. Apart from that, world shipbuilding is moving towards standardization, such as, standard ship structures-based ship design customization. It improves series production of new building and at the same time allows satisfying individual requirements of a certain ship owner. Another topical issue is modularization that allows building a ship, using equipment/material-integrated individual modules of maximum possible weight. It makes work much less labor-intensive and shortens ship building time. Application of additive technologies can be also mentioned as a special trend relevant to current status of shipbuilding technology.