This paper analyzes the causes of Hanjin’s shipping company demise

This paper analyzes the causes of Hanjin’s shipping company demise. The analysis uses porter’s 5 forces theory to analyze the external factors, and 7s framework to analyze the internal factors that affected the company. The aim of this analysis is to explain how significant was the effect on container shipping lines, customers, and members of CKYHE. It is proposed that the merger was the best solution to avoid bankruptcy.

2.1 Introduction
Since the 20th century, the shipping industry has become more complex due to its competitive environment (Sys, 2009). Declining demand for maritime shipping on the Eastern Asia–Europe trade route, an economic slowdown in China (UNCTAD, 2009) and the effects of the financial crisis in 2007 have led to substantial levels of overcapacity and historically low freight rates (DSF, 2016). Moreover, the progressive increase of the shipping fleet that has started to stagnate considerably since 2013 (figure 2.1), with the lowest growth rate in a decade due to the introduction of a considerable number of newly-built vessels to the market in 2012 (UNCTAD, 2015).
As a result of the compounded effect of all these factors, the container shipping industry eventually faced one of the worst slowdowns in its history during 2015 (AlixPartners, 2016).

2.2 Hanjin shipping bankruptcy
The Korean shipping industry found itself affected by the challenging post-crisis environment after the 2007-2008 financial meltdown (Ha & Seo, 2013). Until 2016, HJS was the dominating national carrier of Korea and 9th largest container fleet in the world in 2012 (UNCTAD, 2012). On February 2017, HJS was officially declared bankrupt by a Korean court (Tan, 2017).

2.4 Porter’s five forces theory
Porter’s five forces strategy used to evaluate and analyze the external forces that affected Hanjin shipping company strategy.

2.4.1 potential entrants
Container shipping is by nature a high capital intensive industry (Hellenic shipping news 2018). The fixed costs of the company and the assets required to run a shipping line are very huge. Moreover, the logistic support required to operate a global market is also large. These factors act as a deterrent to entry any new competitors. So, Hanjin had a low threat from new entrants.
2.4.2 Substitutes
Maritime transport is the cheapest means of transport as over 80 per cent of the volume of global trade and about 90 per cent of developing countries’ volume of international trade is transported by sea (UNCTAD 2015). Whereas, the air transport cannot transport very heavy goods and large in volume. Moreover, it will be very costly compared to maritime transport. So, maritime transport is the most cost-effective way to transport goods around the world (Allen 2009). For those reasons, Hanjin had a low threat of substitutes as there was hardly any effective alternative to maritime transport.
2.4.3 Suppliers
Hanjin suppliers were from all around the world. Whereas, Hanjin was not depending on only one supplier to serve its business. Hanjin also had started its own logistics solutions which will assist their container operations. Moreover, Hanjin Transportation was the most stable company in Korea in their logistics operation (Park ; lee 2015). So, Hanjin had faced a low threat from suppliers.
2.4.4 Buyers
Hanjin faced a threat from buyers who had huge trade among them because it is very easy to turnover trade between shipping companies to another due to the cost. Hence Hanjin may miss out on those buyers. Hanjin as a top ten players in the maritime shipping industry had a good reputation in the market. Therefore, it faces moderate threats from buyers.
2.4.5 competitors
Hanjin had faced a high threat from competitors. Whereas, there is a very intense competition among all the container shipping lines. Because of this fierce competition, the container shipping companies started to reduce cost, increase service frequency and increased geographic coverage by forming strategic shipping alliances (Caschili, Medda, Parola, ; Ferrari, 2014). Whereas, HJS was a member of the CKYHE alliance (Cosco container line, K line, Yang Ming line, Hanjin shipping and Evergreen line). And this alliance occupies 16.46% of the market (Lee, 2017).

Mergers and Acquisitions (M;As) strategy allowing for fast growth and can be regarded as a result of the failures of alliances, making it the preferred choice of growth. Whereas the South Korean government urged Hanjin Shipping to review a merger with Hyundai Merchant Marine (HMM), Hanjin felt the move was impractical (Zeng 2016).

2.5 7s framework
The 7s framework was used to analyze the internal forces that affected Hanjin shipping company strategy. This will give a broad view of what are Hanjin internal weaknesses that led to bankruptcy.
2.5.1 Structure
Hanjin demise did not happen due to onboard mistakes like pollution, but it happened because some members of the top management did not display professionalism and being part of conglomerates (chaebol) might have been one of the contributing factors for Hanjin collapse (Pauli ; Wolf 2017). Whereas Chaebols are family-run businesses, so it is preferred to keep top management positions within the family even if these persons lack appropriate knowledge (Chan 1988).
2.5.2 Strategy
HJS managerial decisions can be further divided into three pillars
(Operation, investments and financing)

2.5.2.1 operational strategy
In 2010, HJS changed its price strategy and implemented a general rate increase as well as bunker adjustment factor (BAF) and peak season surtax. For that reason, HJS had slightly higher freight rates than other carriers. In the low-income rate environment of the last years, HJS also made continuous fleet and passageway to and from ports in Northern Europe that had become unprofitable. Moreover, the decision of suspending some service passageways was made to enhance the load factor. The trade imbalances between Asia and Europe became a problem as the volume that was shipped to China started to decrease with a slowdown of the Chinese economy (Pauli ; Wolf 2017).
2.5.2.2 investment strategy
HJS started to highly invest in vessels from 2006 and almost doubled its vessel fleet between 2009 and 2013 (Tan, 2017). This rapid fleet expansion has negatively affected the financial strategy. HJS also invested in terminal infrastructure, equipment, facilities, logistics and IT (Pauli ; Wolf 2017).

2.5.2.3 financial strategy
HJS financial strategy was negatively affected by its operations and investments strategy and experienced serious financial problems (Lee, 2017). furthermore, The permanent dependency on the government-controlled Korean development bank(KDB) as the most important creditor to fund and operate HJS assets is a sign of an improper approach to financial risk management (World maritime news 2017). It was clear that this dependency was a nonconscious choice by HJS management and displayed ignorance of the risks in the shipping industry.

2.5.3 Skills
HJS problems exacerbated when a person without sufficient knowledge of the shipping industry became the carriers appointed CEO. Pauli ; Wolf 2017 argued that the position was awarded based on family ties rather than merits. A former chairwoman Choi, who was appointed after her husband’s death and managed the company between 2006 and 2014, had acknowledged that she was partially responsible for the CSL’s demise (Marine insight. 2017).

2.5.4 Systems
Transformational leadership is all about being able to adapt to change the system and to inspire others to achieve their potential within the challenge of a dynamically changing situation and link all information and processes together with the organization. However, HJS top management did not have the ability to adapt to changes. It was unwilling to lose the brand name instead of letting the company survive in a different form by merging with Hyundai merchant maritime (HMM).
2.5.5 Staff
There is no evidence that Hanjin invested in the development of their staff through education to develop managers and to improve their personal skills, performance and competency.
2.5.6 Style
Hanjin insolvency can partially be blamed on its organizational culture. The chairman and the CEO were hoping that HJS would be considered ‘too big to fail’ by the government (Pauli ; Wolf 2017). When they realized that the government would not step in to rescue the carrier, it was already too late for the management to change the situation. Which showed poor leadership.
2.5.7 Superordinate goals
In 2004, Hanjin had an objective to ”continue to remain competitive in the marketplace and continue to improve on its management strategy and financial position”. After the financial crisis, HJS shifted their focus towards the enhancement of the risk management of its exposure to oil prices, foreign exchange rate in order to stabilize its financial foundation and soundness.

2.6 findings
As a result of evaluating and analyzing Hanjin external and internal factors, it was found that the external threats which impacted HJS were common threats for all shipping companies and that did not directly lead to bankruptcy. So, Hanjin internal weaknesses played a major role in HJS collapse. This collapse consequences impacted many sectors in the maritime industry:
2.6.1 Members of CKYHE alliance were little affected after HJS’s demise through limited increase in operational costs and delay in delivery time.
2.6.2 Customers had been affected by having fewer options to choose in regard to the number of available container carriers.
2.6.3 Container shipping lines (CSL’s) began to give attention to risk mitigation measures, and the need to re-evaluate their strategies. Moreover, a formation of three new major alliances had been sped up in response to the Korean demise to avoid another bankruptcy.
2.6.4 HJS collapse had affected the Korean maritime sector. Consequently, the whole Korean economy was negatively affected.
Hanjin’s strategy was not a sustainable strategy. Therefore, the merging was the best solution to avoid bankruptcy. There was a need to focus on risk management strategy and invest in education instead of a rapid fleet expansion investment.

2.7 Conclusion
The whole maritime industry was affected by the 2007/2008 financial crisis, there was a declining demand for maritime shipping on Eastern Asia–Europe trade route. The economic slowdown in China and the progressive increase of the shipping fleet, with the lowest growth rate, have led to substantial levels of overcapacity and historical low freight rates. As a result of the compounded effect of all these factors, the container shipping industry eventually faced one of the worst slowdowns in its history during 2015.
Until 2016, HJS was the dominating national carrier of Korea and 9th largest container fleet in the world in 2012. On February 2017, HJS was officially declared bankrupt by a Korean court.
Porter’s five forces strategy was used to evaluate and analyze the external forces while 7s framework was used to analyze the internal forces that affected Hanjin strategy.
As a result of evaluating and analyzing Hanjin external and internal factors, found that the external threats which impacted HJS were common threats for all shipping companies and that did not directly lead to bankrupt any competitive company. So, Hanjin internal weaknesses played a major role in HJS collapse. Hanjin demise happened because some members of the top management did not display professionalism and being part of a chaebol might have been one of the contributing factors for Hanjin collapse. In addition to, HJS Operational, investment and financing managerial decisions.
In 2010, HJS changed its pricing strategy and became slightly a higher freight rate than other carriers. In the low-income rate environment, HJS also made continuous fleet and passageway to and from ports in Northern Europe that had become unprofitable. Moreover, the decision of suspending some service passageways was made to enhance the load factor and the trade imbalances between Asia and Europe. This created a problem as the volume that was shipped to China started to decrease with a slowdown of the Chinese economy (operational strategy).
A rapid fleet expansion was not very strategic and created many problems. Hanjin shipping company has also invested in terminal infrastructure, equipment, facilities, logistics and IT (investment strategy).
The permanent dependency on the government-controlled Korean development bank (KDB) as the most important creditor to fund and operate HJS assets is a sign of an improper approach to financial risk management (financial strategy).
Hanjin shipping company top management did not have the ability to adapt to changes because they were unwilling to lose the brand name. Moreover, the chairman and the CEO were hoping that HJS would be considered ‘too big to lose’ by the government.
Hanjin internal weaknesses played a major role in HJS collapse. Whereas, the collapse impacted members of the CKYHE alliance by increased operational costs and delays. Customers had been affected by having fewer options to choose in regard to the number of available container carriers. Container shipping lines (CSL’s) began to give attention to risk mitigation measures, and the need to re-evaluate their strategies. Moreover, the establishment of three new major alliances had been sped up in response to the Korean demise to avoid another bankruptcy. Also, HJS collapse has affected the Korean economy. Finally, The Company could have avoided bankruptcy in case of a merger.