Container shipping is vital to and a driving force behind global economic growth. One of the industry’s largest carriers collapsed in August 2016, an event of unprecedented magnitude and predicted to cause major disruptions for world trade. Hanjin Shipping was Korea’s main container shipping line and played an essential role for the country that is exceedingly dependent on seaborne trade. The carrier collapsed at a time when market conditions had gotten progressively worse and market participants believed that a bankruptcy would be imminent. The causes and effects of Hanjin Shipping’s demise were not only exceedingly complex but also highly debated. Thus, the purpose of this paper was to investigate the contributing factors to Hanjin Shipping’s insolvency and its effects. A qualitative case study was conducted by means of in-depth interviews with seven respondents with extensive knowledge of the container shipping industry. The findings suggest that Hanjin Shipping’s demise was a combination of a number of interdependent factors. The carrier’s managerial decisions played a decisive role in its collapse and can be traced back to its operational, investment and financial strategies. These decisions were implemented over the course of several years and were based on developments of the changing, external market conditions the carrier operated under. The actors closest to Hanjin Shipping, in particular its fellow alliance members and customers, as well as the international shipping industry did not suffer too severe consequences from the carrier’s bankruptcy, but the Korean economy at large has been affected more profoundly.

Hanjin shipping HJS container business was founded in response to Korea’s rapid economic growth in the late 1970s and became the country’s biggest container shipping line CSL as well a significant global player over the course of just four decades. The long-term alliance member prospered enormously under the progressing globalization and the accompanying increasing trade volume fuelled HJS’ rapid expansion as Asia rose to become the factory of the world and a new market for western products. The financial crisis of 2007/2008, however, heralded a period of financial hardship for the carrier for the years to come and is assumed to have ultimately laid the foundation for the CSL’s eventual demise.

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Supply and demand
In recent years, the container shipping industry has faced enormous overcapacity that is predicted to become fatal for some carriers. Despite an annual growth of seaborne container demand of 3% since 2010, shipyards have supplied tonnage at twice that rate, thereby creating a significant supply-demand gap. Furthermore, the growth rate at which container ships have increased in size has accelerated noticeably which has consequences for the associated transport chains as it calls for greater financial investments to handle these vessels in the future. Shipbuilding reached its most recent peak during the years 2011/2012 with capacities of approximately 1.2 million TEUs delivered in both years respectively while only a negligible amount of mostly smaller vessels was permanently removed from the fleet. In 2015, only 211 new container vessels were delivered to the market (UNCTAD, 2016)

Freight rates
In fact, freight rates are to a large degree confidential and carriers often reserve the right to include a range of separate elements. Commonly they are various surcharges, such as terminal handling costs (THC), bunker adjustment factors (BAF), currency adjustment factors (CAF) or other features which create a severe lack of transparency in the freight rate generation process. In fact, CSLs have been accused of keeping BAFs artificially high, after box rates and fuel prices dropped and it became harder to fill capacities in the aftermath of 2008, in order to continue to generate revenue for their businesses.
The increased vessel size has actually fuelled overcapacity which has exerted a downward pressure on both freight rates and profit margins. In order to not stay behind and miss out on the potential economies of scale, many competing CSLs began to invest in greater capacity as well which eventually led to a deviation of fleet capacity growth from actual increases in shipping demand.

Financial crisis
The maritime shipping sector did not escape the effects of the financial crisis of 2007-2008 and was hit hard like many other industries. The whole industry faced “extreme changes in revenues, operating cash flows and asset values” , resulting in the bankruptcy of many shipping companies in the global recession that followed the financial meltdown.
During the crisis, financially strong companies avoided assets sales as they received new long-term loans Shipping banks offered these loans as they wanted to avoid liquidating their collateral due to low vessel prices, i.e. reduced values. However, banks reduced their financing in the shipping industry as a whole since these specialized shipping banks were also affected by the crisis, e.g. syndicated loans were reduced by 60% in 2009.

Hanjin main problems began when the management changed in 2007 Former chairwoman Choi, who was appointed after her husband’s death and managed the company between 2006 and 2014, has acknowledged that she was partly responsible for the CSL’s demise. For example, Mrs. Choi made several irresponsible investments and introduced lower fees that exaggerated the carrier’s financial difficulties after the financial crisis.
Hanjin did not act as quickly as the other Korean CSL to lower its debt-to-equity ratio in order to meet the government’s requirements of 400%.

Operation strategy
Hanjin appeared to have concentrated only on Asia for too long and did not genuinely start focusing on new and emerging markets until 2013.
In 2010, Hanjin changed its pricing strategy and implemented a general rate increase as well as bunker (BAF) and peak season surcharges. Consequently, Hanjin had slightly higher freight rates than other carriers as more services were included in its standard rates, including all actually incurred costs (capital costs, fuel, etc.) and it was assumed that other carriers’ profit margins were too low to cover all these expenses.
Hanjin was called ‘price slasher’ as the carrier accepted cargo no other liner was willing to take in time of space shortages, including scrap or chemical cargoes which are heavy and have a low profit margin.
During the last decade, this focus increased and Hanjin started to increasingly restrict capacity in order to avoid volume asymmetries
In general, timing played an important role as several actions were taken too late to ensure a successful rescue of Hanjin. This issue of time management was not only limited to the CSL’s operational but also impacted its investment strategy.

Investment strategy
Hanjin Shipping recently invested in building very large container ships and almost doubled its vessel fleet between 2009 and 2013. The rapid fleet expansion was not very strategic and generated several problems.
Hanjin also invested in terminal infrastructure, which has gained in strategic value in recent years because alliances can potentially amplify the possible gains from terminal operation as several members might get serviced at the same terminal. The carrier did invest in equipment, facilities, and the establishment of affiliated companies, logistics and it as well, providing Hanjin with a competitive edge over HMM. Hanjin investments in vertical integration activities was a good strategy (risk management) since it is considered a basic trend to provide one- stop services to customers.
Hanjin had been struggling since the financial crisis but thought that it had turned the tables in 2015 when the carrier achieved operating profits again (see Figure 2). However, Hanjin liabilities exceeded KRW 6.5 trillion and based on an estimate by the Korean government, a minimum of KRW 600 billion would be needed to cover Hanjin outstanding expenditures, e.g. fuel and charter costs. In short, Hanjin problems were assessed to be too great and the government did not have the financial means to rescue the CSL.

The inability to read the charter market properly left Hanjin with long- term contracts whose rates were considered too high in an environment of decreasing profitability after the financial crisis.
Hanjin charter strategy has been generating positive cash flows due to leverage strategy and revenues from chartering activities had amounted to 20-30% of total operational revenues during the last 12 years. Hence, Korean legislation restricted the CSL’ earnings due to Hanjin limitation in number of chartered vessels.

During times of low freight rates, it is essential that carriers lower their operational costs. Hanjin invested heavily in VLCSs in order to gain market shares by expanding its fleet, similar to the market leader Maersk. CSLs that do not follow general market trends risk losing competitiveness.
Hanjin tied up most of its capital by its investments in new vessels and the carrier’s debt-to-equity ratio displayed a strong positive correlation with the vessel investments. Wrong managerial decision can prove fatal in the long run. It can be claimed that it was partly Korean legislation that set Hanjin on a riskier path to finance its assets which became one of the many sources of its demise.

Causes of demise
Although there were many contributing aspects, Hanjin managerial decisions, as a result of external factors, were the main causes. The carrier’s operational, investment and financial strategies were all intertwined but the greatest issues derived from its financial decisions.
Hanjin bankruptcy largely came from bad conditions in the market environment that started after the financial crisis in 2007/2008. Raising fuel prices, wrong managerial decisions and strategies with respect to investment and finance, overcapacity and sluggishly growing demand culminated in historically low freight rates that forced carriers to become increasingly more competitive and strategic in their planning in order to stay in the market.

Effects on customers and alliance members
Hanjin demise affected both alliance members and customers because all Hanjin ships were not allowed to enter any port. Delay in receiving cargo and extra fees to be paid.
The effects of Hanjin insolvency on the CKYHE alliance were increased costs due to issues with containers, reduced capacity and a lower utilization rate. However, it can be argued that the additional costs only arose in the immediate response to the demise. As the members were already preparing for the establishment of new major alliances and their role in them, the consequences were less severe than what they could have been. The problems with containers affected many shippers and after these supply chain disruptions, customers have become more careful when selecting CSLs. Yet, if the behavior of requesting financial information is appropriate or not can be discussed but at least it signifies that customers are trying to evaluate other factors than solely price quotations. Instead of fixating on the two cent price difference per TEU, shippers need to address potential underlying iceberg costs and service aspects, e.g. reliability, as well. Customers will also be affected by the ongoing consolidating process as fewer carriers mean fewer options to choose from. These factors suggest that risk mitigation is not only needed by CSLs but also by their customers, i.e. the uncertainty of the container shipping industry has been extended upward the supply chain as well.

Effects on marine industry
The containerization industry has increasingly become more consolidated due to Hanjin demise. It intensified the uncertainty in the international shipping industry that has resulted in individual cases in the foundation of three new alliances, 2M, the Ocean Alliance and THE Alliance and appearance of financial safeguards to prevent such collapse. Of The Korean carrier’s market share was redistributed between the existing CSLs and the bankruptcy give raise to the formation of the new alliances.
CSLs should not become too dependent on governmental support; carriers should neither rely too much on their respective alliance structures. In particular, as CSLs are more inclined to prioritize their own well-being on the behalf of the alliances. Thus, it can be claimed that carriers need to have a solid internal foundation in order to remain competitive in the container shipping industry.

Things could have done to avoid bankruptcy
Hanjin could have avoided bankruptcy by:
• Adoption of a different business culture.
• Top management personnel should have sufficient knowledge of the shipping industry and its features. And should be professionals
• Taking its own business and conditions into consideration prior to investing in VLCS (following general market trends).
• Merging; the fact that former independent actors such as Evergreen and MSC have joined alliances indicates that the importance of alliances has continued to grow stronger.