In December 2015, Singapore's investment fund Temasek
agreed to sell its shares in Neptune Orient Lines or NOL
to French shipping line CMA CGM. The board unanimously approved the transaction.
For nearly fifty years, NOL was Singapore's national shipping line. Rising up from nothing
to a top 15 shipping line, NOL reflected Singapore's rise in the global economy.
But as the industry changed, the company's performance started to fall behind its
competitors. Burdened with a high cost base and unable to invest in its future,
NOL lost the ability to compete. And that would lead to its decline and eventual sale.
In this video, we are going to take a deep look back at what had been
a Singaporean national champion.
In the 60s, the Singaporean economy was dominated by the manufacturing and service industries.
Because exports and trade were so important to the economy, the government made the
shipping industry a critical priority. They pursued two methods towards achieving that.
The first was to open the Singapore flag register to foreign shipowners. The second
was the founding of Neptune Orient Lines in 1968 as the country's national shipping line.
NOL was founded just three years after the country's 1965 founding
(same as Taiwan’s Evergreen) and was wholly owned by the Singaporean government.
Guided by then-Finance Minister Dr Goh Keng Swee, who pushed hard for its creation, Neptune aimed to
build up a modern fleet that can compete with the world's best merchant shipping companies.
A year later in 1969, NOL bought its first two ships. The first, from the German company
Hansa - the 18-year old Neptune Topaz. The second, a tanker named Neptune Taurus from
Worldwide Shipping Group. They shortly thereafter started building their own ships as well.
These early years were difficult. The company struggled to compete
for high value cargo customers in the competitive shipping market.
NOL was very small and young. Its five-ship fleet was considerably smaller than that of its
competitors. Their staff lacked experience and knowledge of how the market worked.
The company also clashed with the Far-East Freight Conference. The FEFC as it was called
was an Asian-European cartel that controlled all shipping routes between Europe and Asia and set
their freight rates. NOL fought to gain entry and have a seat at the table in global trade.
In 1969, the Singaporean government converted the loans it made to the company into equity
and then transferred those shares to Temasek Holdings, a sovereign wealth fund.
Neptune Orient's fortunes turned in the 1970s when the company decided
to move into the container business. The success of that move allowed the
company to modernize its fleet and compete for better business.
Under the leadership of future Prime Minister Goh Chok Tong, NOL turned its first profit in 1975.
The company joined several shipping conferences to Australia and began gaining market share.
In 1981, NOL became the first Singaporean government founded company
to go public on the Singapore Stock Exchange. They raised $155 million,
money that would be reinvested into the business.
After the IPO, Temasek progressively sold down their holdings in NOL,
but still held a big stake going into the late 1990s - somewhere in the high
twenties. It allowed them to hold significant influence.
I should stop here to expand on the shipping industry and its business dynamics.
Liner shipping companies are in the service of transporting goods across
the world in massive high-capacity ships. Most of these things are in containers.
Early on in the industry's history, the liner shipping companies were just that. They put things
in their ships and transported them to their port of destination. Their work ended there.
And this was fine because the aforementioned shipping
conferences were cartels that regulated freight rates and looked after everyone.
If you were part of the club then the freight rates kept you afloat.
This changed in the 1980s when Evergreen Marine opened a fully containerized regular
service from Asia to Europe. It broke the back of the century old Far-East Freight Conference
and shocked the shipping industry. Combined with increased anti-trust scrutiny,
the shipping conferences lost their influence and the industry began to de-regulate.
With deregulation comes competition. Container carriers could no longer
count on regulated routes to always make money. Like with the airliner industry,
companies began to find themselves in an increasingly competitive space. Shipping-only
companies thus began expanding both horizontally and vertically in a bid to find advantages.
Horizontally, shipping lines began buying bigger ships. Larger ships are more fuel efficient and
have economies of scale. Samsung was one of the first companies to show that a ship with carrying
capacity of 12000 twenty-foot equivalent units or TEU on the Europe to Asia route is 11% more cost
efficient per container slot compared to a 8000 TEU ship. It is 23% compared to a 4000 TEU ship.
Second, shipping lines began looking vertically to take control of more of
the shipment's journey. They sought to become more than just a shipping company
but general logistics companies. It allows them to take more of the margin for shipping
over ground to help compensate for lower margins on shipping things overseas.
Neptune, facing these competitive pressures, sought an acquisition to help gain these economies
of scale and survive in this new, changing industry. In the late 1990s, they found a big one.
In 1997, Neptune made a bid to acquire the 150-year old American President Lines
or APL Ltd. This Oakland-based company owned 10% of the Asian-North American
container business and would complement NOL's already strong Asian-European routes.
The merger would be worth $825 million USD - the biggest acquisition ever by a Singaporean company.
The combined company would have 113 ships,
80 of them container-style ships. The new company would generate $4 billion in revenues.
Critically from a strategic point of view,
purchasing APL would grant NOL access to prized US-based logistic railway links
and terminals. It would help NOL develop their vertically integrated logistics network worldwide.
Lua Cheng Eng, Neptune's chief executive at the time, said about the merger:
> It will put both companies in a very much stronger position by combining their
complementary strengths ... [it] will be very cost effective in terms of service
and enhanced level of service to our customers
The merger was unfortunately timed as a year later,
the Asian Financial Crisis threw the entire shipping industry into a crippling down cycle.
Shipping rates collapsed on routes across the Pacific and to Europe.
NOL lost an immense amount of money through those years. From 1997 to 1998, the company lost $460
million USD and debt swelled to over $4 billion USD. The company had to write down the value
of part of its acquisition and suffered from a longshoremen's lockout at US West coast ports.
Lua vacated the CEO spot in 1999 but remained chairman. Flemming Jacobs,
a former executive at Maersk, stepped in as the new CEO. The move shocked the shipping industry as
Jacobs had risen to a very high level at Maersk, one of the world's biggest shipping companies.
As an outsider, Jacobs had the leeway to remake NOL. And he took full advantage
to bring the company in line with his vision. NOL issued $500 million USD of equity shares,
diluting the current shareholders to pay down debt. And he sold assets
including APL rail subsidiary Stacktrain to Pacer International for $315 million.
And he let go over a thousand employees, a tenth of the entire company. Many of the people cut came
out of the US-based APL. But at the same time, he began bringing Westerners into NOL's upper
ranks - to such an extent that the joke at the time went that NOL stood for "No Orientals Left".
In 2000, the company turned a profit of $178 million USD
as trans-Pacific container rates rebounded and the company's improved cost structure shone through.
The turnaround seemed complete.
As NOL entered the 2000s, the company sought to expand in the growing third-party logistics space.
Jacobs wanted to position NOL as a big player in this area:
> "This is the third of the three steps we identified to take the company into
the future ... we have prepared ourselves for the third step--focusing on our Logistics business."
The company divested its tanker businesses and in 2001 established APL Logistics
as a separate operating company for its third party logistics efforts. And in 2001,
they paid $210 million for GATX Logistics, one of the biggest logistics providers in the USA.
The acquisition boosted APL Logistics revenues by 70%
and gave it access to 21 million square feet of warehouse space across the Americas.
But at the same time, it was a pretty penny to pay for a business that was hardly profitable.
This purchase - along with the subsequent acquisition of German freight forwarder
Mare Logistik & Spedition (which kind of sounds like a
pair of Twitch streamers) - seemed likely to have been an over-pay.
Then September 11th happened and again the whole industry plunged into a massive downturn.
Revenues at the liner business fell despite shipping volumes going up. In the first
half of 2002, the company lost $151 million, after closing 2001 with a loss of $57 million.
In 2003, Jacobs lost his job as Neptune CEO. The losses were simply too much.
Chairman Cheng Wai Keung said that the Board had felt that it was time for a change.
In leaving before his contract was up, Jacobs received a $2.5 million USD severance payment.
Jacobs had left but the changes he made helped lay the foundation for a healthier company.
And things turned around again in late 2003 and 2004,
when economic growth and export demand in the United States surged. This drove
up trans-Pacific shipping rates and in 2004 NOL turned a record $429 million USD profit.
The company took advantage of this ray of sunshine to issue another $300 million in equity.
Temasek felt so good about the company's prospects that they bought control of NOL,
raising their stake from the high twenties to 53.5%.
By this point, NOL had gone through two major financial crises within a five year span. Both
of them have led to big annual losses and company leadership resigning. But then just as quickly,
economic conditions would turn around and the company would post a profit again.
It seemed like the company had finally worked through its volatility and was moving towards
a brighter future. But the company's up and down profits implied that it was tied closely,
too closely perhaps, to the global business cycle.
And that meant exposing itself to massive risk if things went bad for a very long time.
Neptune on the surface was a top 15 shipping company. But below the line,
there were serious problems. The company positioned itself as a premier legacy operator
charging premium prices. This is in contrast with companies like Singapore Airlines,
which offered premium services at relatively low cost.
NOL constantly suffered from capital shortage. Like foundries,
ships require a lot of cash up front. When times were good in the 2004-2007 time period,
they did not sell equity to raise cash and tried to make do with what they had. Selling shares
would have diluted current shareholders, including the majority owner Temasek.
But without that cash, they could not invest in larger, more profitable ships. And they
had to take measures that saved capital in the short-run but also presented long-run risks.
During the economic boom in the run-up to the 2008 Financial Crisis,
NOL chartered other people's ships rather than building their own to scale up faster and take
advantage of favorable conditions. And as long as the market was good, that was fine.
But when the financial crisis struck in 2008, everything turned around.
Demand in the container supply business crashed 6 points from 2007, a boom year,
to 2008. And then another 15 points from 2008 to 2009. Container freight rates dropped by 33%.
Every shipping company lost money. Maersk lost $2.1 billion in 2009.
South Korea's Hanjin lost $1.1 billion.
NOL lost $700 million and had to dilute shareholders
in a $1 billion share raise. The shares of all the liners crashed over 60% from the 2007 peak.
Despite the lower freight rates, NOL still had the same cost structure as during the boom years
because the rates for these chartered ships had been locked in for years.
The losses and a botched acquisition bid for German line Hapag-Lloyd
would cost then-CEO Thomas Held his job, continuing a string of short term CEOs.
2010 saw a brief resurgence and a small profit,
but NOL saw losses for the next four years afterwards.
The losses meant they could not find the money to buy new, bigger ships when prices for them
were cheap. Leading liner Maersk ordered 20 18,000 twenty-foot equivalent unit ships
in 2011. Prices for those ships continued to fall into 2015,
when Evergreen bought 11 such ships - each for $35 million less than what Maersk paid in 2011.
Over the next four years, Neptune cut costs by returning chartered ships to their owners,
taking their high costs off the books but also missing out on potential business.
In other words, giving up what little market share they had in order to get back to profitability.
Over 60% of their costs are fixed and cannot be changed on short notice. So the shipping business
is all about economies of scale - bigger boats. Without bigger ships, NOL does not have the cost
structure to compete. Its shrunken stock already removed from the benchmark Straits Times index.
Thus some time in 2015, the company positioned itself for a sale.
They sold their APL Logistics unit Japan's Kintetsu World Express for $1.2 billion
USD in February. They cut their order book to nothing, at one time the only top 15 shipping line
without a pipeline of new future ships. All of this would slim down the business and
make it more amenable for an acquirer to integrate into their operations.
The writing was on the wall and in December 2015, some six years after the sale of Chartered
Semiconductor to GlobalFoundries, NOL was sold to French operator CMA CGM for $2.4 billion USD.
The price reflected a mix of priorities. 2.4 billion was at a slight discount to the total book
value of NOL's assets - which based on this data seems to be around 3 billion. But the discount is
in consideration of the company's long history of operating losses while taking into account
the value of NOL's prized routes in Asia and to the United States. So all in all, a good price.
Furthermore, CMA agreed to move a third of its traffic out of Malaysia to Singapore.
And it agreed to relocate its regional headquarters from Hong Kong to Singapore.
Doing this would help cushion the economic blow to the country.
Now I have seen a lot of people pointing to NOL afterwards turning a $26 million profit
in the first quarter of 2017 - its first since 2011.
On the surface it seems like a damning indictment of incompetent management.
But the reality is a bit more complicated. The core liner division had been showing
improvement all the way back in 2015, with a mere $11 million loss in Q2.
Consolidating NOL into its French parent would alone remove more than
enough fixed costs to bring it to profitability. CMA also sold off
its APL container terminals and other assets to raise $1 billion.
Furthermore, the shipping industry underwent a brutal 2016. South Korea's biggest shipping
line Hanjin Shipping filed for bankruptcy and creditors got just 2 cents on the dollar. It
took a lot of capacity out of the market and along with a booming economy allowed for a 2017 rebound.
Focusing on whether or not NOL could have made a $26 million
profit by itself though misses the main point.
Probably the way out for NOL after the fall of the shipping conferences
was billions more of investment dollars for ships and scale. Taiwan's Evergreen Group, which started
at the same time as NOL, ordered 11 boats in 2015. Each of them costs around $130+ million USD.
But Evergreen Group also had a profitable domestic shipping market,
an expanding electronics export business, and diversified business lines (EVA air!) to fall
back on. I don't think NOL could have raised money on that scale to match without government help.
For NOL to get those billions, it needed to turn to the government purse. And by 2015,
people in government were realizing that NOL did not mean as much to the country anymore.
Back in the 60s and 70s, Singapore wanted to have a shipping line of its own
in order to make sure that its manufacturing goods exports can be carried to its trading partners.
They made it a strategic priority.
But things are different now. The shipping business is much harder to run. China and
Malaysia are looking for their own seat at the table. The shipping cartels that looked
after everyone are now gone. But at the same time, securing shipping capacity is today a lot easier.
Over the decades, Singapore's economy has shifted to more of a services, life sciences,
and high-tech manufacturing economy. Temasek still owned companies that shine in those industries:
DBS Group, SingTel, and Singapore Airlines - the jewel in the crown.
The way I see it, Temasek would have made the decision even if NOL went green for a while.
They knew that NOL could not compete and so they made the best move they could.
Give it to someone who can do something with it and move on to their priorities.