Hanjin Shipping Co., Ltd.
Hanjin Shipping Co., Ltd.
Employees: 3,673 (1999)
Sales: W 4.61 billion (US$3.57 billion) (2001)
Stock Exchanges: Seoul
Ticker Symbol: HJS
NAIC: 483111 Deep Sea Freight Transportation; 483113 Coastal and Great Lakes Freight Transportation; 483211 Inland Water Freight Transportation
Hanjin Shipping Co., Ltd., a Korean global carrier, was established in 1977 by its family-run parent conglomerate, the Hanjin Group. In an industry that requires significant investment and industry knowledge to compete successfully, Hanjin Shipping surpasses expectations and proves to be an adaptable operation when it is faced with a variety of political and economic challenges. Leading a fleet of 123 vessels transporting containers, bulk cargo, liquefied natural gas, and oil, Hanjin Shipping serves 70 ports in 35 nations. Since its inception, the company has carefully weaved its way through influential industry conferences and powerful strategic partnerships while maintaining an independent focus on corporate priorities.
In the Beginning: The Hanjin Group and Hanjin Container Lines, Ltd
The Hanjin Group is one of Korea’s influential chaebol —large conglomerates that are generally family-run and active in a variety of industries. In 1945, Choong-hoon Cho founded Hanjin Transportation Co., Ltd., now one of Korea’s largest transportation and logistics companies and the mother firm of the Hanjin Group. The diversified affiliates that currently comprise the Hanjin Group cover the spectrum of air, land, and sea transportation; information and communication; heavy industry and construction; banking; and social welfare operations. In addition to Hanjin Shipping, the group’s 20 other companies include Korean Air Lines, Hanjin Heavy Industries and Construction Co., and Hanjin Information System & Telecommunications Co.
In the early 1970s, developing nations, Korea among them, controlled just 8 percent of the total world shipping fleet. And compared to traditional categories of cargo, very few companies operated container vessels, the area in which Hanjin Shipping would make an impact, due to the significant investment and industry knowledge required. Containers are truck trailer bodies that can be detached from the chassis for loading onto a vessel or railcar.
In 1972, the Hanjin Group introduced its first container liner operation, Daejin Shipping Co., but it was only a regional feedering service that transferred containers to a larger ship, which conducted the ocean voyage. The Hanjin Group and Sealand Service of the United States established a joint-feedering venture in 1977. Later that year, Daejin and Sealand created a new company to compete in the international container liner market—Hanjin Container Lines, Ltd. The new company established a trans-Pacific service in 1979.
Korean Government Subsidies and Consolidation Policies in the 1980s
Korean operators overcame the high investment and know-how requirements of container shipping by functioning as low-cost competitors and gaining knowledge through cooperative agreements. For five years beginning in 1979, the Korean government provided its container vessel operators, Hanjin Container Lines included, with annual grants supporting their efforts. This assistance was critical as an international shipping recession developed in the early 1980s.
In 1984, the Korean government aimed to improve its world position further through its Shipping Industry Rationalization Policy. Continuing over the next two years through government pressure and, in some cases, demands for consolidation, the policy resulted in the reduction of the number of Korean shipping firms from 70 to 12—helping the remaining companies benefit from greater economies of scale through larger operations. Hanjin Container Lines was excluded from this government program due to the minority ownership interest held by the U.S. firm Sealand. By 1985, Korean container vessels neared 2 percent of the total world fleet. In 1986, Hanjin Container Lines opened an exclusive container terminal in Seattle, Washington. This facility was the first of what would eventually become a series of ten dedicated terminals in strategic port locations around the world for the company’s fleet.
In November 1986, Hanjin Container Lines announced its resignation from the Asia North America Eastbound Rate Agreement (ANERA). The conference was about to restrict its 16 members from entering into individual service contracts separate from ANERA, so Hanjin Container Lines decided it should function independently to be as competitive as possible. The company reduced the size of its fleet slightly, as well as the number of port calls, allowing it to target high quality of service for its core customers. The Korean government, as a debt reduction measure, offered a new financial assistance package to five leading Korean operators, with Hanjin Container Lines excluded as before.
Hanjin Shipping Co., Ltd. Established in 1988
While Hanjin Container Lines was not included in the government’s initial consolidation efforts, it did acquire Korea Shipping Corporation, which was suffering from almost US$1 billion of debt in December 1988, to become Korea’s largest shipping company under the new name of Hanjin Shipping Co., Ltd. The company began to compete based on service through its expanded operations, rather than focusing mostly on price as it had done in the past. Hanjin Shipping’s net profit for 1988 was W 1.5 billion Korean (US$18.3 million), a recovery from the previous year’s loss of W 800 billion.
At the beginning of the 1990s, Hanjin ranked 12th in the world’s container carrier industry. Having separated from other industry conferences in the past, Hanjin Shipping again exerted its independence by leaving the Transpacific Westbound Rate Agreement in October 1990. Hanjin Shipping’s total fleet had grown to 25 container liners and 14 bulk vessels.
A variety of new routes were added by Hanjin Shipping in the early 1990s to continue its rise as a major player in shipping. Due to growing demand in the Asia-Europe shipping market, a “pendulum service” was introduced in 1991, with vessels coming from the U.S. West Coast, stopping in Asia, continuing to Europe, and then returning to the Far East. And to strengthen the link between Asia and the U.S. East Coast, Hanjin Shipping and Yang Ming Marine Transport of Taiwan established a joint operation for an Atlantic all-water route in April 1991. With partner companies, Hanjin Shipping added container service in Mexico, a Singapore-Australia route, and a new around-the-world route.
During 1991 and 1992, new container terminals opened in Long Beach, California and Osaka, Japan. And the company’s market share grew an impressive 13 percent during 1993 due to competitive pricing and large new vessels in its fleet. Mr. Sooho Cho, third son of Choong-hoon Cho, was elected as president of Hanjin Shipping in 1994, and the company opened an exclusive container terminal in Tokyo, Japan.
Global Expansion in the Mid-1990s
Hanjin Shipping moved toward its goal of offering comprehensive worldwide service through the introduction of a new trans-Atlantic route between the U.S. East Coast and Northern Europe in January 1995. The service operated through a slot-charter agreement under Tricontinental Group’s DSR-Senator Lines of Germany and Cho Yang Shipping Co. of Korea. In June, the three carriers announced an agreement to form a worldwide carrier service network which was phased in starting in January 1996 and fully operational two years later, covering major east-west routes supported by north-south feedering services. The global shipping alliance broadened the companies’ scope of service significantly, helping them reduce the cost-per-container through the greater economies of scale in the partnership.
- Choong-hoon Cho founds Hanjin Transportation Co., Ltd., the first firm of the Hanjin Group.
- Hanjin Container Lines, Ltd. is established by the Hanjin Group.
- Hanjin Container Lines, Ltd. introduces a trans-Pacific service.
- The company opens its first exclusive container terminal in Seattle, Washington.
- Hanjin Shipping Co., Ltd. is created through a merger with Korea Shipping Corporation.
- Soo-ho Cho, third son of Choong-hoon Cho is elected president of Hanjin Shipping.
- The company introduces a new trans-Atlantic service.
- The company acquires a majority interest in DSR-Senator Lines of Germany.
- The company launches the United Alliance, an around-the-world service with DSR-Senator, Cho Yang Shipping Co., and United Arab Shipping Company.
- Hanjin Group is charged by Korea’s National Tax Serivce (NTS), US$445 million for tax evasion due to Hanjin Shipping’s involvement.
- Chan-gil Kim becomes president; and CyberLogitec is established to provide logistics services through advanced technology.
- CKYH, the world’s largest alliance, is formed with Cosco Container Lines, Yang Ming, ‘K’ Line, and Senator Lines.
New sea routes were launched by Hanjin Shipping to Thailand and Vietnam, as well as a China-Europe express service—a first for a foreign carrier. Hanjin Shipping also began to transport liquefied natural gas (LNG) between Korea and Indonesia via the first Korean vessel specialized for that purpose. Two additional LNG ships were introduced over the next five years. Container operations generally made up 75 percent of the company’s cargo, but its fleet also provided sophisticated wet and dry bulk service.
Hanjin Shipping became the world’s eighth largest container carrier by 1996, with approximately 60 percent of its revenue from the U.S. market. And while conferences for particular routes ruled the shipping industry in the late 1980s, the creation of several strategic alliances in the 1990s became the new guiding force consolidating the industry in order to compete globally.
In February 1997, Hanjin Shipping purchased 75 percent of DSR-Senator Lines, a company with strengths in each of Hanjin’s sensitive areas. DSR-Senator Lines still managed itself independently, though this transaction marked the first foreign acquisition of a majority interest in a German shipping company. With the purchase, Hanjin Shipping became the fourth largest container carrier in the world based on cargo volume, after Sealand Service of the CSX Corporation, Evergreen Line of Taiwan, and Maersk Line of the A.P. Moller Group (Sealand and Maersk, members of one of the first worldwide alliances, would later merge in 1999). Hanjin Shipping continued its growth by adding new routes and investing W 550 billion in new ships and the creation of new logistics infrastructure. By August, the company reached an important benchmark in the shipping industry by becoming the first Korean corporation having transported a cumulative of 10 million, 20-foot equivalent units, or TEUs. During the fall of 1997 at the Port of Long Beach, California, Hanjin Shipping opened a new US$300 million exclusive container terminal with a rail-yard—a 170-acre complex with an extra 30 acres available for expansion—making it the largest U.S. marine terminal and on-dock rail-yard at the time and tripling the company’s existing space in Long Beach.
Mergers, Alliances, and the Asian Economic Crisis during the Late 1990s
A currency crisis soon developed in Asia, with the value of the Korean won falling dramatically in October 1997, leaving Asian markets in poor condition. In 1998, Hanjin Shipping left the Trans-Atlantic Conference Agreement (TACA), which it had joined in 1994, freeing the company from the conference’s price controls. The company planned to pursue a larger share of the trans-Atlantic market through lower prices in high-volume areas. In response, TACA cut shipping prices by nearly 18 percent for its members. Outgoing DSR-Senator Lines’ Chief Executive Karl-Heinz Sager considered industry prices to be dangerously low, and the competition only intensified.
In February, Hanjin Shipping and its partners began replacing its costly bidirectional around-the-world service with three pendulum services for North America, Europe, and the Far East. The partnership of Hanjin Shipping with DSR-Senator Lines, Cho Yang Shipping, and United Arab Shipping Company was then officially named the United Alliance.
To improve its cash flow during the Asian economic crisis, Hanjin Shipping sold 17 container ships and laid off employees to produce an additional US$350 million. The company also began to manage DSR-Senator Lines directly, though they did not merge despite Hanjin Shipping’s 80 percent interest. New exclusive container terminals opened in Hamburg, Germany; Kaohsiung, Taiwan; and in Korea. Despite poor expectations from the start of 1998, Hanjin Shipping survived the Korean economic downturn over the previous year. And considering the industry as a whole between 1990 and 1998, container vessels’ share of world trade had increased from 9 percent to 13 percent.
Effective May 1, 1999, the U.S. Ocean Shipping Reform Act aided the industry’s long-term recovery by permitting confidential negotiations and contracts between individual shipping lines and importers or exporters. And the Trans-Pacific Stabilization Agreement, in which Hanjin Shipping was a member, raised container fees by 50 percent once the partial deregulation began. The shipping industry continued to enjoy immunity, granted in 1916, from U.S. antitrust laws.
Reform and New Leadership at the Dawn of the 21st Century
The Korean government turned its focus to reforming the chaebol, blamed for nearly bankrupting the nation through questionable business practices and expansion funded by extraordinary amounts of debt. In October 1999, the Hanjin Group, Korea’s sixth largest chaebol, was hit with a W 541.6 billion fine (US$445 million) by Korea’s National Tax Service (NTS) for tax evasion due to W 1.08 trillion of unreported income—some of which was diverted for personal use. Included in the group’s violations, Hanjin Shipping directed 3.8 billion won into foreign bank accounts 16 times. The Hanjin Group apologized to the public for its behavior and promised to “renew itself as a company that will contribute to the economic and social growth of the country.”
With such scrutiny of its financial management over the previous year, the Hanjin Group replaced four of its affiliate companies’ presidents, including Hanjin Shipping’s Soo-ho Cho, who became the company’s vice chairman in 2000 after six years as president. Mr. Cho was replaced by Chan-gil Kim, who had been serving as vice president. Hanjin Shipping and Yang Ming, developing a partnership that began in 1991, announced that they would ship between Asia and the U.S. East Coast together.
To enhance the company’s logistics efforts while embracing e-commerce, Hanjin Shipping launched CyberLogitec in May. The information and telecommunications operation provided logistics services enhanced by Internet technology, while also raising venture capital to invest in logistics-related companies.
In October, Hanjin Shipping signed a 25-year lease, valued at more than US$1 billion, with the Port of Long Beach to move from the company’s existing container terminal to a new 375-acre facility, with the first phase of 260 acres to be constructed by summer of 2002, and the remaining 115 acres to be completed in 2003. By the end of the year, Hanjin Shipping had transported 2 million TEUs—a record for the company in a single year. Despite the record cargo volume, the company suffered a net loss of US$58.8 million for the year (compared to a net profit of US$32.2 million for 1999).
Cross-Alliances, New Technology, and Logistics in Early 2001
In January 2001, Hanjin Shipping joined an existing partnership for a Gulf-Asia Express route reaching the Middle East, India, Pakistan, and Asia. During the following month, Hanjin Shipping established Atlantic Gulf Europe, its first direct South Atlantic route, complementing its North Atlantic service through the United Alliance. The company, along with fellow members of the new Independent Carriers Alliance, began to provide service from the U.S. East Coast to eastern South America. Hanjin Shipping also entered into space-sharing agreements on various routes with ‘K’ Line of Japan in order to fill excess capacity and cut costs. This arrangement was notable as the partners were members of competing alliances. In 2001 there were more than 150 space-sharing agreements filed with the Federal Maritime Commission, compared to 87 in 1997.
A shipping Web site partnership, GT Nexus, was launched by Hyundai Merchant Marine in 2001 with Hanjin Shipping and other carriers. The comprehensive service allows carriers and importers or exporters to communicate with each other confidentially, managing pricing, contracting, and tracking processes through the site. Hanjin Shipping then established Hanjin Logistics in Chicago, Illinois, as an inland operation focusing initially on transporting cargo by train, east-to-west, while planning expansion across the country and into Canada. After a difficult period experienced by Cho Yang, its ships in the United Alliance’s two major pendulum routes were replaced in April by Hanjin Shipping and Senator Lines.
With an economic downturn in the United States, container rate negotiations in spring of 2001 did not continue the trend of higher rates enjoyed by shipping companies for the two previous years, although Hanjin Shipping was able to retain most of its customer base. Worldwide rankings in 2001 placed Hanjin Shipping fourth, its same ranking for a number of years, behind Maersk Sealand; APL Limited, a U.S. cargo carrier; and Evergreen. Hanjin Shipping opened its tenth exclusive container terminal, a 120-acre facility, in Oakland, California in June 2001.
Ailing Global Markets and Uncertainty in 2002
The year of 2001 became a mix of extreme highs and lows. For the first six months of 2001, Hanjin Shipping earned operating profits of W 232 billion, a 60 percent increase over the same period of the previous year, and a company record due to cost reduction measures and oil price stability. However, high foreign exchange rates resulted in a net loss of W 15.9 billion, compared to a net profit of W 60.7 billion for the same period of the previous year.
The terrorist attacks in the United States on September 11, 2001, beyond the immeasurable human impact, had a devastating effect on the shipping industry as well. Many U.S. ports were immediately closed for security reasons. London’s Wartime Insurance Council quadrupled carriers’ insurance premiums. And the U.S. economy, in a major downturn already, fell into an even worse position with a similar effect on the global economy which sent shipping prices down as well. Hanjin Shipping’s service to the Port of Portland, Oregon, was suspended at the end of the year, though it was restored by the following summer. Continuing cost reduction and garnering new customers became even more important to carriers during such unpredictable economic times.
In November 2001, Hanjin Shipping signed a global alliance agreement with Cosco Container Lines, Yang Ming, ‘K’ Line, and Senator Lines—forming the world’s largest alliance in the shipping industry with gradual implementation expected to be complete in 2003. The alliance was named CKYH (CYK was the name of Cosco, ‘K’ Line, and Yang Ming’s existing venture). Participating carriers in the alliance planned the sharing of ships, terminals, and equipment—enabling them to cut costs while improving overall service to secure new customers. Other competing alliances smaller than CKYH include the Grand Alliance led by P & O Nedlloyd of the United Kingdom, Maersk Sealand of the A.P. Moller Group, and the New World Alliance headed by APL of the United States. For 2001, Hanjin Shipping posted a W 230.4 billion operating profit, although after taxes, charges, and exchange rates are considered, the company had a net loss of W 78.3 billion.
Cargo volume began to show signs of recovery along with the U.S. economy during the spring of 2002. In May, the business media reported that the debt-burdened Hanjin Group would break itself into four independent affiliate operations. Hanjin Shipping responded to the speculation in June by explaining that the Hanjin Group remained intact, although the company admitted that events over the next year or two may result in the group’s split as reported. Such a move would likely affect shareholding arrangements of the group’s affiliates without altering the operations of Hanjin Shipping and its 123 vessels, as the company has run independently of the Hanjin Group for years in its service of 70 ports in 35 countries.
Rather than focusing on becoming the biggest in the business, Hanjin Shipping now aimed to provide customer-centered shipping service that is safe, punctual, and seamless through integrated logistics. Despite signs of recovery, great uncertainty lingered in the world markets during 2002. In the early stages of the largest global shipping alliance, and with an impressive record of adapting to and surviving challenges over its relatively short history, Hanjin Shipping is in a reasonably strong position to continue its mission to become the world’s most reliable and trusted name in the industry.
CyberLogitec; Hanjin Logistics, Inc. (U.S.); Keoyang Shipping (48.6%); Senator Lines GmbH (Germany; 80%).
The A.P. Moller Group; CSX; Neptune Orient.
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—Christopher W. Frerichs