Nippon Yusen Kabushiki Kaisha

Table of contents
2. Porter's five forces analysis for NYK.
2.1 Bargaining power of suppliers..
2.2 Bargaining power of buyers.
2.3 Threat of new players.
2.4 Threat of substitutes.
2.5 Competitive rivalry....

2. Porter's five forces analysis for NYK

The situation, a lot of shipping companies are currently facing, could be truly described by
an old nautical idiom Between the devil and the deep blue sea, where the sea is the field of their
operation and the devil is the changing market conditions with constantly growing competition.
Therefore it is necessary to look into competitive forces, influencing the industry, to have a
better understanding why NYK announced its new medium-term management plan, More Than
Shipping 2018, and introduced certain strategies to address the so-called devil.
According to Michael Porter, competition extends beyond existing rivals in the industry. In
his article How Competitive Forces Shape Strategy, published by Harvard Business Review in
1979, five competitive forces, influencing all the companies, independent of the sphere of their
operation, were introduced as illustrated below:

Figure 2.1. Porters Five Forces (Porter, Michael E., 2008)

The five forces include:

Bargaining power of suppliers,
Bargaining power of buyers,
Threat of new players,

 Threat of substitutes,
Competitive rivalry.
As it was mentioned in part 1, NYK conducts its operations through seven business
segments. Since the sphere of its operation is so broad, it was decided to concentrate on the Liner
Trade Segment and analyse which factors have the greatest impact on the profitability of the
company.

2.1 Bargaining power of suppliers

In accordance with the Journal of Management and Strategy (2013), the major suppliers to
the liner shipping industry are oil producers, shipbuilders, and port terminals. The bargaining power
of suppliers is high if the supplier group is dominated by a few large companies or/and the product,
the supplier offers, is unique for the buyer and it could be difficult to find its replacement.
As for oil, in 2013 fuel costs accounted up to 45% of NYK operating expenses and faced a
fourfold increase since 1993, as it can be seen from the graph below (NYK Report, 2014) .

Graph 2.2 Fuel costs as percentage of operating expenses NYK (NYK Report, 2014)

Consequently, oil prices account for a substantial portion of the costs, NYK incurs in the liner trade
segment and can greatly affect the NYK business, operation and financial results.

In fact, since 1980s oil prices rapidly increased (from 1.21 US $ per barrel in 1970 to 35.52

US $ per barrel in 1980), which led to a switch from oil to coal for new power plants and slowed
down the the demand for oil (Statista, 2015). As a consequence, it triggered the competition among
oil producers and gave the shipping lines a better bargaining position. However, in 2012 the price of
crude oil accounted to 109.45 US $ per barrel and now again reduced to 49.22 US $ per barrel in
2015 (Statista, 2015).
NYK seeks to minimise such fluctuations by purchasing oil from diverse regions, using
financial hedges and cutting down fuel consumption by introducing low-steaming and airlubrication system, enlarging and redesigning vessels, applying performance-monitoring system and
investing in technologies of the future like NYK Super Eco Ship 2030. Part of the NYK strategy to
be accomplished till 2018 is reduction of fuel oil consumption by 15% (NYK Report, 2014).
As for shipbuilding, leading companies in this sphere worldwide came from South Korea as
of June 2014. At the top of the list was Hyundai HI followed by Daewoo Shipbuilding and Samsung
HI (Statista, 2015). The number of shipbuilders and constructed ships is large. Moreover, according
to the Shipping Market Review (2014), only 83% of the fleet is currently in demand. The freight
rates are quite low, which is a sign of oversupply in the market. As it can be seen from the graph
below, the world fleet increased by 44% between 2008 and 2013. At the same time, seaborne trade
volumes only increased by 18%. These figures indicate a nominal gap between supply and demand
of 26 %.

Graph 2.3 The increase of the world fleet (Shipping Market Review, 2014)

Nevertheless, in some segments, such as LNG-carriers, car carriers, offshore supply vessels, there is
a reasonably good balance between supply and demand, which can be seen on the graph.

Graph 2.3 The balance of the demand&supply by segments (Shipping Market Review, 2014)

In response to the current market conditions NYK adopts a light-asset business model.
While the number of dry bulk carriers will be significantly reduced, NYK is planning to increase
the number of LNG and car carriers. This strategy shall strengthen the companys competitiveness.
As far as port terminals are concerned, they have a stronger bargaining power if they are
situated in unique geographic locations, provide better port facilities or higher service quality, or for
political reasons. In general, many ports may be able to provide access to a common hinterland and
there is an intense rivalry for market share. Numerous ports on the U.S. East, Gulf, and West Coasts
compete for traffic to and from the Midwest. Likewise, a number of large ports in Northern Europe
and the Mediterranean compete for the European hinterland. In Asia, Hong Kong, Shekou, Yantian,
Fuzhou, and other ports compete for access to the Southern China market and numerous ports in
Northern Asia are available to service the Japanese and Korean markets (Port Reform Toolkit, 2d
edition).
Thus, having looked into the main suppliers to the liner shipping industry, it can be
concluded that their bargaining power is currently low.

2.2 Bargaining power of buyers

Moving on to the bargaining power of the buyers, it is necessary to consider the number of
customers, the size of their orders, number of firms supplying the product and the cost of switching.
There are a few positive megatrends for NYK such as growing world population and shift of
the global economy towards Asia. The increase of the population results into increase of demand
which is always a good sign for shipping companies.
On the downside, in accordance with the Danish Ship Finance (2014) seaborne trade
volumes increased by 2.8% in 2013, while the world fleet grew by 3.7%. In this situation there is an
oversupply of ships, creating a high competition between the shipping companies. At the same time
the size of the buyers and the cargo to be transported is increasing and the customers are now able
to set terms and conditions for work, having a good bargaining position. The decreasing factors to
their strength are the high switch costs due to long-term contracts and limited number if substitutes
for international trade.

2.3 Threat of new entrants

The entry of new players leads to an increase in the competition for market share and lowers
the current costs in that market. Pursuant to the Journal of Management and Strategy (2013), the
following factors define the barriers to entry in the segment:
Investment Costs;
Government Regulations;
Access to suppliers;
As for the first factor, investment costs are very high. To make a significant impact in the
industry, a larger number of vessels are needed. The largest companies have more than 100
vessels. Moreover, great capital investments are required to build up information systems on these
vessels, employ staff and provide appropriate training.
The second factor, the government regulation, has also a great influence, since the industry
is highly regulated and in each country and/or union there are specific requirements and
restrictions.
As for suppliers, there are a lot shipbuilding companies, but the new entrants may not have such a
great control over prices as the old players on the market. Lead times should also be considered.
The new companies will need a certain amount of time before they are able to penetrate the

industry. Besides, the new entrants require professional sales team which could be difficult to
attract without substantial pay.
Therefore, there is little threat for NYK that there could appear powerful new entrants.

2.4 Threat of substitutes

The customers of the shipping liner industry may shift to the substitutes, if the substitute
offers better prices and/or higher performance. The threat of substitute depends on how important is
the service to the customer, their loyalty and if there is a substitute is available, the degree to which
it is better than the original product in terms of price and performance (Journal of Management and
Strategy, 2013). Possible substitute services for shipping are:
Rail,which may be quicker but it is generally more expensive and connections may not exist;
Trucks, which might be quicker, but much more expensive and not applicable to all lanes;
Airfreight, which is again much quicker but much more expensive and may work for very small
LCL shipments;
All the services can be characterised by low customer loyalty and low the switching costs, aside
from the cases when it leads to breaking the contracts.
However, because of different target customers, liner shipping still dominates the market of
large cargo volumes transportation. Therefore, air, rail and trucks can rarely be a

complete

substitute of liner shipping.

2.5 Competitive rivalry

The fifth and the driving force behind Porters model is the competitive rivalry. In the Liner
Trade Segment competitive rivalry is very strong. According to Alphaliner.com (2015) NYK has a
2.5% share of the world liner fleet, which is similar to 6 other major players in the industry. The top
share is owned by APM-Maersk, accounting to 15.0%, which is way ahead of NYK.
However, the industry of container shipping is facing a fairly constant growth since the
economic recession. The projections from Statistica.com from 2009 to 2016, as illustrated below,
also look promising with the industry facing growth.

Graph 2.4 Projected global container market demand growth, 2009-2016 (Statista, 2015)

This is good news for NYK as it allows for possibility of gaining more market share by identifying
the regions in which this growth occurs.
With offices in over 70 worldwide locations, NYK Line offers a comprehensive customer
service. To address the diverse cultures of its customers, NYK adapts a very flexible customer
service policy, brining the customers to the level of advocates (NYK Report, 2014).
On basis of Porter's five forces analysis for NYK, it can be concluded that competitive
rivalry and barging power of buyers show a relatively strong force in liner shipping industry and
can affect the financial performance of the company to a very large extent. However, NYK is
already taking these critical forces into consideration and reflects its strategic planning in their
management plan More Than Shipping 2018 , while striving to gain a competitive position in the
market.

REFERENCE LIST
Alphaliner - TOP 100, 03 May 2015, [Online], Available: http://www.alphaliner.com/top100/ [2015,
May 2d]
Danish Ship Finance, May 2014, Shipping Market Review, [Online], Available: http://
www.shipfinance.dk/Shipping-Research/~/media/PUBLIKATIONER/Shipping-Market-Review/
Shipping-Market-Review---May-2014.ashx
Gao1, Ziyi & Yoshida1, Shigeru, Analysis on Industrial Structure and Competitive Strategies in
Liner Shipping Industry, Journal of Management and Strategy, Vol. 4, No. 4; 2013 [Online],
Available: http://www.sciedu.ca/journal/index.php/jms/article/viewFile/3625/2138 [2015, May 4th]
Leading shipbuilding companies worldwide, by volume 2014, Statista Inc, [Online], Available:
http://www.statista.com/statistics/257865/leading-shipbuilding-companies-worldwide-based-onvolume/ [2015, May 3d]
OPEC Monthly Oil Market Report, 15 January 2015, [Online], Available: http://www.statista.com/
statistics/262858/change-in-opec-crude-oil-prices-since-1960/ [2015, May 3d]
Porter, Michael E., 2008, The Five Competitive Forces That Shape Strategy, Harvard Business
Review, [Online], Available: https://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy
[2015, April, 30th]
Projected global container market demand growth, 2009-2016, Statista Inc, [Online], Available:
http://www.statista.com/statistics/253931/global-container-market-demand-growth/ [2015, May 2d]
Taking a step forward, NYK Report, 2014, [Online], Available: http://www.nyk.com/english/ir/
library/nyk/pdf/2014_nykreport_all.pdf [2015, May 2d]
The Evolution of Ports in a Competitive World, Port Reform Toolkit, 2d edition, [Online],
Available: http://www.ppiaf.org/sites/ppiaf.org/files/documents/toolkits/Portoolkit/Toolkit/module2/
overview.html [2015, May 3d]