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Investment into ocean freight capacity

  • This dissertation assesses investment decisions in container shipping. To understand the current state of the industry, key characteristics and challenges, such as overcapacity, eroding margins due to low freight rates, long investment lead times, and frequent changes in alliance structure are introduced. The nature of the industry motivates the application of real options, hence a real options investment model in oligopolistic competition is presented. An analytic solution in continuous time as well as a dynamic programming solution in discrete time are derived. The model takes into account an endogenous price function, fuel-efficient investment, endogenous lead times, and endogenous price formation in the secondary vessel market. This allows to study the impact of competitive intensity, number of players, volatility, fuel-efficiency, lead time, and variable cost on optimal capacity. An investigation of optimal investment policies shows that strategic action increases firm value and strategic alliances might help alleviate some of the industry’s challenges. Since the container shipping market is characterized by frequent alliance changes, the performance of the real options model in the context of a cooperative shipping game is assessed. Extending the coalition structure value concept it can be shown that, compared with discounted cash flow, the real options trigger performs better, especially in light of high competitive intensity and freight rate volatility while not exhibiting substantial disadvantages in other settings. A further assessment of a number of drivers for alliance instability finds that alliance complexity cost, freight rate volatility, and competitive intensity increase alliance changes. To verify the investment approach, a characterization of the container freight rate is provided with an empirical Autoregressive Integrated Moving Average (ARIMA) model. It can be observed that the freight rate exhibits a negative relationship with capacity deployment; hence the oligopoly price function is confirmed. Based on the freight rate characterization, a back testing of the real options investment approach is provided. It shows that if players had applied the presented approach, capacities would have decreased and rates improved. A number of limitations of the real options approach are identified, i.e. substantial impact of volatility expectation, potentially induced cyclicality from trigger approaches, and the timing impact of investment and divestment lead times. The implications of this research are that strategic action in the container shipping industry is worthwhile and understanding the market specifics (such as competitive intensity, volatility, and freight rate characterization) is very important. Container carriers should add a real options approach to their investment toolkit and keep an eye on potential overcapacity. Finally, entering strategic alliances is suggested, but complexity should be avoided.

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Metadaten
Author:Philipp Wilhelm Josef Rau
URN:urn:nbn:de:hbz:992-opus4-5769
Subtitle (English):development of a real options investment model in oligolopolistic competition to evaluate investment decisions in shipping
Publisher:WHU - Otto Beisheim School of Management
Place of publication:Vallendar
Referee:Stefan Spinler, Arnd HuchzermeierORCiD
Document Type:Doctoral Thesis
Language:English
Date of Publication (online):2018/03/07
Year of first Publication:2017
Publishing Institution:WHU - Otto Beisheim School of Management
Granting Institution:WHU - Otto Beisheim School of Management
Release Date:2018/03/07
Tag:Frachtkapazität; Frachtschifffahrt; Investition; Seefrachtverkehr
Cargo shipping; Freight capacity; Investment; Ocean freight shipping
Page Number:113
Institutes:WHU Supply Chain Management Group / Chair of Production Management
Licence (German):Copyright this PhD thesis