The shipping industry has delivered record profits over the past two years, but the market may be ripe for technological disruption as we potentially enter a cyclical downturn and ESG factors become a key determinant of market share. Here at VGB Insights, we believe that ShipTech is an exciting area as software platforms help to optimize costs and grow their penetration among ship owners and charterers. In this report, we assess the market dynamics within global ShipTech, with some of the key takeaways captured below.
Shipping market ripe for disruption?
Following a surge in shipping demand, supply-chain disruption and record industry returns, the shipping sector remains complex, fragmented, and under-digitized as we enter a forecasted downcycle in 2023. We believe that this provides an attractive backdrop for software adoption.
ESG a growing tide
Ship owners and charterers are under increasing pressure to adapt to downstream Scope 3 pressures and International Maritime Organization (IMO) regulations. Three quarters (75%) of existing bulkers and tankers currently do not meet the requirements of the new legislation for ship design and operations. Increasing voyage visibility and reducing emissions are potentially key to market-share gains and cost optimization.
Capital shift towards ShipTech
Private capital flows in MaritimeTech can be broken down into three areas: FreightTech; ShipTech; and PortTech. Freight forwarding has attracted over $4 billion of private capital since 2015, as this was likely seen as the easiest segment to digitize. ShipTech as a sector remains comparatively under-invested, yet it raised over $600 million in 2022 – a tenfold increase from 2019. PortTech has yet to receive material levels of funding. While these two segments may be harder to digitize, the size of the opportunity appears to be significant, with potentially higher barriers to entry.
Addressable market opportunity
Based on our analysis, we believe that the ShipTech market opportunity lies between $5 billion and $8 billion. We assume that bulkers and tankers present the most attractive opportunity for ShipTech platforms, with software penetration expected to grow.
Three types of platforms have emerged: i) horizontal platforms, which operate across the entire supply chain (including voyage); ii) data/other providers which focus on operating efficiencies and satellite tracking data; and iii) verticalized platforms, which offer a broader suite of tools across a range of point solutions like voyage optimization, emissions reduction, and bunkering.
In our view, verticalized players i) who have the broadest product range, ii) who have the ability to expand into more features across the voyage life cycle, and iii) who enter into market adjacencies like PortTech, may provide attractive opportunities for investors.
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The shipping industry has traded strongly through an unusual period…
Over the past two years, elevated demand for goods and supply-chain disruptions drove a significant rise in shipping volumes. Inelastic capacity saw freight rates rise by around 5x from pre-Covid levels, according to the IMF. Goods inflation reached levels not seen since the early 1980s.
The shipping industry delivered unprecedented returns. Maersk for example, is forecasted to deliver revenue of $87 billion, EBIT margins near 40%, and ROIC in excess of 50% in 2022 – with the company expected to generate more free cash flow than Meta and Tesla combined. These returns are compared to 2019 levels of $39 billion, 4%, and 2% respectively.
…but now the industry seems to be entering a downcycle
Spot freight rates fell close to pre-Covid levels in 2H22, as the global economy slowed, and supply-demand dynamics moved towards equilibrium. Revenue, margins, and ROIC across the sector are now expected to retrench in 2023.
From a venture and growth perspective, we believe that the start of this downcycle may present an opportunity within the ShipTech sector, as ship owners and charterers adapt their business models to meet operational and financial challenges.
In this report we aim to explore the following six areas:
- Shipping market ecosystem
- Fundraising activity in private markets
- Key trends within ShipTech
- The potential market opportunity
- Current players
- Potential areas of growth
1 - Shipping-market dynamics
We believe that the shipping market is complex, fragmented, and under-digitized, with growing downstream and regulatory pressure to meet tightening ESG regulations.
Complex value chain may equate to high levels of operating friction
The industry has many stakeholders. In the chart below, we map the ecosystem in simple terms and highlight three main areas:
- Typical value chain for sea freight
- Cost lines for ship owners and charterers (or operators)
- Breakdown of vessel types
Fragmented market share and volatile margins create challenging ROIC backdrop
There are three main vessel types: tankers (oil), bulkers (dry bulk), and containers (goods), which account for 90% of deadweight tonnes and around 50% of global vessel volume. The residual consists of smaller vessels with mainly single-vessel ownership. There are currently around 30,000 vessels, globally including 12,000 tankers, 13,000 bulkers, and 6,000 containers, with underlying vessel growth of around 1% to 3% per annum through 2026, according to Clarksons Research.
Market share among tankers and bulkers is highly dispersed among both owners and operators. Bulkers and tankers operate across variable routes mostly with lower efficiency and more cyclically exposed margins. Containers, however, operate across consistent shipping routes. Market share here is more consolidated and includes a number of shipping alliances.
According to a recent McKinsey report, tankers have seen an average operating margin of around 1% over the past five years, compared to bulkers at 13%. That said, bulkers’ margins generally have greater dispersion and variability year-on-year. Higher fixed costs and cyclically exposed revenue seem to equate to larger swings in financial performance for both vessel types. Containers comparatively mostly have less volatile margins, consistently more than 30%.
Under-digitized industry creates opportunity
The shipping industry has historically been under-digitized in comparison with other industries. According to Strategy&, only around 1% of sales spend in the industry is allocated to software. This is low compared to sectors like financial services and media, where spend is between 5% and 6%. We believe that there are growing tailwinds to increasing software adoption among owners and operators, including downstream ESG pressure.
ESG factors an increasing tailwind to software adoption
The shipping industry contributes around 3% of the world's greenhouse-gas emissions according to the IMF. Lowering environmental impact has therefore become increasingly important, as global supply chains respond to meet the demands of a lower-carbon future. Key stakeholders are gradually driving the sector towards decarbonization, given multifaceted pressures from regulators, the capital markets, and consumers.
Both ship owners and operators will need to act and consider i) updating and redesigning their fleets, and ii) diversifying fuel suppliers and reducing consumption. Firms who adjust are likely to capture a larger market share and benefit from a ‘green premium.’ The two main drivers of change are downstream Scope 3 emission targets and IMO regulations:
- Scope 3 targets are becoming entrenched within the strategic priorities for shippers and merchants, with firms needing to reduce direct and indirect emissions throughout the value chain. Merchants may rotate shipping providers to adhere to their new targets.
- IMO 2023 is a new shipping regulation which comes into force in January 2023. It aims to cut CO2 emissions by 40% compared to 2008 levels, by 2030. The legislation includes the Energy Efficiency Existing Ship Index (EEXI) and the Carbon Intensity Indicator (CII) which sets out various targets and requirements in relation to the modification of existing operations and integration of sustainability measures within new ship design. Currently around 75% of bulkers and tankers do not meet the requirements of the new regulations, with fleet optimization and vessel-improvement measures needed in the short term.
2 - Fundraising has focused on three main themes
To understand the current fundraising dynamics within the maritime sector, we can break down invested capital into three components: FreightTech; ShipTech; and PortTech. FreightTech includes freight forwarding; ShipTech predominantly focuses on optimization tools for ship owners and charterers; and PortTech relates to automating port processes.
To date, private capital has mostly accrued to FreightTech, likely due to the size of the addressable opportunity. According to Citi Ventures, the freight forwarding market is worth almost $200 billion annually, with investors potentially attracted by factors such as the large TAM, market-share fragmentation, low digitization, and high levels of operating friction. Companies such as Flexport, Sennder, and Forto have all raised large funding rounds, with FreightTech raising over $4 billion since 2015. Notwithstanding FreightTech investment, the gross-margin dynamics within the freight-forwarding sector have often been more challenging.
ShipTech has started to attract more attention from investors, raising over $650 million in 2022, up from $60 million in 2019. Project44, a US-based logistics platform which provides visibility across the shipment life cycle, has drawn the highest share of funding, receiving around 75% of all the capital raised within ShipTech since 2015. We believe that ShipTech may offer an improved margin opportunity compared to FreightTech, given the pre-dominantly subscription-based revenue models and a scalable fixed-cost base. PortTech funding, conversely, has remained nascent to date.
3 -ShipTech market can be broken down across the voyage life cycle
ShipTech relates to the use of digital tools and aggregation of data workflows to standardize processes across the voyage life cycle. The overall aim is to improve efficiency for both ship owners and charterers. We focus on tankers and bulkers, given the higher fragmentation and lower levels of software adoption. Below is an overview of the main use cases:
- Voyage optimization: highlighting optimal route and speed with integrated weather routing
- Bunker optimization: using data to drive decision making across a transparent, marine fuel value chain
- Vessel optimization: improving ship design and performance to identify potential opportunities to reduce fuel consumption and CO2 emissions
- Emissions optimization: providing transparency and insight to accurately analyze, forecast, and proactively improve CII ratings
- Chartering optimization: fixing the right vessel for spot or time charter to improve profitability
- Vessel reporting: simplifying daily workflows to increase quality of data and connect all stakeholders to a single report
- Additional services: providing teams of seasoned experts in the fields of meteorology, weather routing, performance and operations
We map these point solutions across the voyage life cycle below. Intra-voyage applications have been the focus to date but horizontal integration into pre-voyage and onboard operations may become an increasing focus for providers.
We believe that there are three main demand drivers for ship owners and operators to increase their software adoption:
- Durable returns: integration of data workflows and third-party software tools to help reduce voyage friction; lower fixed and variable costs; and reduce margin volatility.
- ESG considerations: increasing downstream Scope 3 requirements to improve transparency and reduce emissions. The impact of ESG on the cost of capital and access to capital markets may also play an important role.
- Increased supply of data-led software: some digital-native software providers have seen strong traction, with integrated tools used to target specific point solutions.
4 - ShipTech addressable opportunity valued between $5 billion and $8 billion
Given the opacity of the industry, the ShipTech market is difficult to size. We focus on the estimated level of software spend, first taking a revenue approach and second, using a bottom-up cost method.
Our revenue-based approach assumes that the shipping market reaches the level of software penetration seen in other industries. To size the market, we use time charter equivalent rates (TCE) as a proxy for industry revenues and apply an estimate for software spend. We take the following steps:
- First, we take the product of vessel count and TCE rates to determine implied annual industry revenues. We remove our estimate of the impact of recent demand through Covid, use 2019 TCE rates, and assume vessel utilization of around 90%. We reach an estimate for industry revenue of around $150 billion, including containers.
- Then, we multiply by software spend. According to Strategy&, the shipping industry spends around 1% of sales on software – we apply 3% to reflect a broader industry average (see figure 7). We apply a 1.25x multiplier to reflect the potential two-sided monetization of owners and operators, to derive an estimated potential addressable market of $6 billion.
- For tankers and bulkers − the main focus for software providers − this equates to an estimated serviceable market of nearer $5 billion (excluding containers).
When taking the bottom-up approach, we estimate the size of the market by estimating total voyage and operating costs for ship owners and charters. But first, we need to break down the unit economics.
Ship owners generate revenues based on daily charter rates. TCE is the key metric, which is calculated by taking charter rates (price charged by owners to charterers) and removing brokerage fees and voyage expenses.
For charterers, revenues are based on sale of the underlying commodity (bulk, oil). The cost base is broadly split into three: charter costs; voyage expenses; and operating costs.
Total costs are split between voyage (port, bunker, agent fees etc.) and operating expenses (crew, insurance, repairs etc.). The main costs items are included below.
The costs are shared between both owners and charterers depending on the type of charter. There are three types of charters:
- Voyage charter: hiring of vessel and crew from port of loading to discharge. Owner pays majority of voyage and operating costs.
- Time charter: hiring of vessel for specified time period, where the charterer has full control of operations, ports, and routing. Charterer pays voyage costs and owner bears operating costs.
- Demise charter: legal responsibility falls with the charterers. Charterers therefore bear both voyage and operating costs.
For our bottom-up sizing, we assume that charterers pay voyage costs and that operating costs are borne by the ship owners. We take the following steps:
- First, we use publicly listed disclosures from tanker and bulk ship owners to estimate average daily operating costs per vessel. Calculated on this basis, these run at $6,000 per day on average.
- Second, we take cost disclosures from broker reports and allocate each cost line into voyage and operating expenses. Based on our analysis, we assume a 45%:55% expense split between voyage and operating costs. We estimate total daily costs (voyage and operating) per vessel run at around $14,000 per day. Then we multiply daily costs by the product of vessel count and vessel utilization of around 90%.
- Third, we take potential software spend for shipping companies of 3% of sales and divide by estimated ship owners’ EBITDA margins. We assume margins of approximately 50%, meaning that software penetration of total vessel costs reaches approximately 6%.
- Consistent with the top-down approach, we apply a 1.25x multiplier to reflect the potential two-sided monetization of owners and operators to derive an estimated potential addressable market of $8 billion excluding containers.
5 - Current ShipTech players
When we explore a little further and map the ShipTech ecosystem, three main types of business models in ShipTech seem to emerge:
First, horizontal end-to-end supply-chain platforms. The core aim is to provide greater transparency for the flow of goods across the entire value chain. The end customers are typically merchants or retailers who can potentially improve inventory and cash-conversion cycles, as well as the consumer experience. Project44 is an example of a firm providing an end-to-end visibility platform, including the voyage.
Second, data-led and other providers. These companies focus on onboard efficiencies or utilize tracking data technology to provide real-time insights to a range of industries. For example, IOCurrents, a boat-monitoring platform, aims to help drive crew efficiencies, while Hawkeye 360 uses satellites to provide tracking insights to a range of end users in the maritime sector, as well as in the intelligence and telecoms sectors. End customers can therefore vary depending on the use case.
Third, verticalized voyage platforms. These aggregate data sets aiming to simplify workflows across stakeholders within the maritime sector. Software providers target specific use cases such as voyage or vessel optimization, bunkering, emissions, or reporting. Tankers and bulkers are most relevant for these players given variability in routing and fragmented share of owners or operators. Both ship owners and charterers are potential customers depending on the relative cost allocations (see section 2). This may provide an opportunity for two-sided monetization.
At a more granular level, we outline some of the main players within verticalized ShipTech below (ordered by capital raised).
We have also analysed the current product portfolios of the above companies. ZeroNorth and Veson Nautical appear to have the broadest product offerings to date. Other players seem to be more focused on particular products.
6 - Potential areas of growth and TAM expansion
Business models for verticalized software providers may also have some potentially attractive features for ShipTech investors. These include the following:
- Market penetration/unit economics: vertical voyage focus may lead to higher market share (sometimes greater than 50%), with one or two players often winning per vertical. This means there is the potential to capture excess economic profits and achieve higher margins.
- Value creator: platforms can build industry-specific operating systems with a focus on specific pain points. Software platforms can also become strategic enablers through third-party API integration and aggregating workflows.
- Competitive moat: compounded growth in technology/data provides continuous improvement in data-led insights which helps build competitive advantages and creates additional pricing power.
- Scalable model: roll-up strategies can deliver an attractive growth model for investors. This often includes three growth levers: i) organic price inflation, ii) product expansion, and iii) customer growth. High net dollar retention can help create increased terminal value.
While we estimate the ShipTech potential addressable market at between $5 billion and $8 billion, we expect vertical platforms to look to increase their addressable opportunity in a few ways:
- First, by continuing to expand their product features across the voyage;
- Second, software providers may expand further across the voyage life cycle, into pre-voyage and operations; and
- Third, players may also enter natural adjacencies, such as ports.
When we look at some of the more successful verticalized software roll-ups in adjacent industries, we can perhaps draw a few parallels with today’s shipping market. We have identified that the market is large, the value chain is complex, market share is fragmented, digitization is low and industry returns are highly cyclical. As the industry may be entering a forecasted downcycle in 2023, the set-up for a software roll-up play within shipping looks attractive.
Based on our analysis and estimates, the potential addressable market opportunity in excess of $5 billion may present a large under-penetrated market for early-stage and growth investors. Such investors appear to be increasingly funding software platforms, which can assist ship owners and charterers to optimize operations.
We believe that companies who meet the following four criteria could be particularly attractive for investors: 1) strong traction (ARR growth) with ship owners and charterers; 2) expansion of product features within the voyage; 3) horizontal expansion across the voyage life cycle (into pre-voyage and operations); and 4) TAM growth through entry into natural adjacencies, such as ports.