Mega ships and diseconomies of scale

The mega ship the Ever Given was a familiar name in the news recently with it getting stuck in the Suez canal and thus preventing any marine traffic in both directions. The Ever Given is operated by the Taiwan-based firm Evergreen and is a so called mega ship and was carrying over 18,000 containers.

Mega (container) ships have been built in increasingly larger sizes to take advantage of economies of scale and reduce expense as part of using multiple forms of transport without actually handling of the freight itself. The big container ships can carry up to 23,964 twenty foot equivalent unit (TEU) whilst the smaller capacity ships have a maximum capacity of 1,000 TEU.

Herd Mentality and Prisoner’s Dilemma
This being said there is some dispute over the extent that the mega ships achieve economies of scale. A follow the leader mentality in ordering bigger ships have been since the mid 1990’s with firms following Maersk in ordering bigger capacity ships. In most cases it only takes two years for other carriers to catch-up to Maersk and in some cases they can hold more TEU. This has led to operators facing prisoner’s dilemma. Operators are trying to outdo their rivals by building larger ships which help increase its market share through their reduced costs but are fully aware that what actually is needed is capacity rationalisation. This strategy has not only fuelled the never-ending competition for large ships but also led to mistrust among operators, entangling them in the prisoner’s dilemma. The ideal scenario is for operators to refrain from acquiring mega ships and let supply and demand prevail.

Infrastructure costs to cope with mega ships
The graph below shows the savings and costs increases from increasing the capacity of mega ships. There is a saving with carrying more TEU’s but terminals will incur significant capital expenditure to handle larger vessels and terminal yards areas will need to increase by 33% to avoid congestion, even with no growth in volume. There are negative externalities to consider that arise from upsizing as dredging deeper channels and expanding yard area will have environmental effects.

Source: Diminishing economies of scale from megaships? Marine Money Japan Ship Finance Forum, Tokyo 12th May, 2016

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