Container shipping is a massive global industry. According to the World Shipping Council, containerships move more than $4 trillion worth of goods annually, contributing the equivalent of more than $400 billion to the world's economy. And while many of the largest shipping companies are based overseas, the U.S. boasts a few of its own, including Matson, Inc.
Getting even a small piece of this global pie would be a huge benefit to any company, even one as large as GE. So is this a new revenue stream or just a one-off?
The nuts and bolts
GE will provide its "Power Take Off/Power Take In" technology to 11 new Maersk containerships. The equipment consists of two drives, two induction motors, and a power-management system. These work together to provide excess power on demand while reducing a vessel's fuel consumption. When not being used for propulsion, the PTO/PTI technology uses the surplus energy to power onboard systems and equipment.
According to GE, use of the system results in significant fuel savings. "Unlike its competitors, the electric machine is equipped with induction motors instead of synchronous motors," the company said in a press release. "By removing transformers, it offers a simpler design and therefore reduces the complexity of the system, making it more reliable and requiring less capex. The arrangement of induction motors reduces the frequency and extent of maintenance and combine[s] with the system's fuel saving characteristics, bringing down the operational expenses for customers."
A sinking ship
Operational expenses are a big concern for shippers, particularly in the current economic climate. Unfortunately for all of these companies, the entire container-shipping industry has been tempest-tossed for the last several years. And many analysts have issued gloomy forecasts for 2016.
At issue is containership supply that's outpacing demand, a trend that's expected to continue. Moody's projects supply to outpace demand by an additional 2% in 2016. And although low fuel prices are helping the industry, many shippers have passed those cost savings on to customers as they compete for business.
You might think that this poor industry performance would lead to a reduction in new purchases among shippers, limiting the potential market for GE. Well, yes and no.
In fact, new capacity for containerships has been coming on line at higher rates than ever. BIMCO, the world's largest international shipping organization, which counts Maersk among its members, reported a new record of newly built freight capacity in 2015. It's projected that 1.6 million 20-foot-equivalent units (TEUs) would be delivered by the end of that year. (TEUs are the international standard for measuring container-shipping freight; one TEU is the equivalent of a single 20-foot metal shipping container.)
But even though more capacity came on line in 2015, fewer ships were built. In fact, fewer than 200 new ships are handling those 1.6 million TEUs, for an average of 8,400 TEUs per vessel in 2015. Compare that with 2008, when 436 ships comprised 1.5 million TEUs, for an average of 3,435 TEUs per ship. The average ship capacity has more than doubled in less than 10 years. The reason is simple: Container shippers such as Maersk are cutting costs by introducing bigger and bigger ships.
This is mixed news for GE. On one hand, it's good for the company, and its new foray into containership fleets, that hundreds of new vessels are being built every year, even in tough times. On the other hand, fewer ships being built mean fewer ship power systems being sold.
Charting the course
Two things are working in GE's favor here.
First, even if fewer ships are being built, the thin margins on which shippers operate and demand for larger vessels creates a market for efficient engines and sophisticated systems that can help a shipper squeeze every last cent out of its operations. GE is an industry leader here and claims that its Maersk contract "marks its intention of contributing to the technological advancement of the industry at large." This could yield further benefits and cost-saving potential for companies such as Matson and Maersk.
Second, in 2015, GE had no contracts with any shippers at all. Now it's scored its first with Maersk, the largest shipper in the world by volume. If Maersk is invested, it's likely other companies will follow suit. Put another way, there's nowhere for GE to go but up.
The best-case scenario is that GE's technology will become widely adopted by cost-conscious shippers, resulting in a huge ongoing revenue stream. But even the worst-case scenario, in which GE picks up one or two contracts for modest amounts, is still a net positive for the company. This news strengthens the thesis for buying GE.
John Bromels has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.