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NYK Celebrates Its 127th Anniversary Ceremony
- Moving Forward Together -

October 3, 2012

NYK president Yasumi Kudo addressed company employees on October 2 at a ceremony in Tokyo marking the 127th anniversary of NYK’s founding. An abbreviated version of his speech is provided below.

 
I would like to start off by expressing deep regret for the recent suspected violation of Antitrust Laws and the inspection by the Japanese and U.S. authorities that resulted. As a company, we are cooperating fully with the investigations. In line with previous messages, I would like to remind all employees to take utmost care in conducting your work to ensure that proper attention is paid to compliance with Antitrust Laws.
 
Overview of the Economy
 
Let me next turn to the current global economic and business environment. Although consumer spending, industrial production and capital investment are on the path to recovery in the U.S., the outlook still remains somewhat fragile. In Europe, economic growth is expected to be negative as weaker economies seek to address budget deficits in an austere economic and uncertain Euro climate. Meanwhile, in the Middle East, increasing tensions between Iran and Israel and the aggravation of the civil war in Syria are causing concerns over the effect this could have on surrounding Arab nations and even the global economy.
 
Hopes have been high that Asia would drive the global economy. Despite a slowdown in the pace of growth in China and India, the solid growth maintained in this region has been one of the only rays of hope. However, the latest increases in tension between Japan and China may adversely affect our expanding Chinese business activity. I am concerned about this.
 
Focusing on the Japanese economy, it has been supported by demand related to reconstruction following the Great East Japan Earthquake and the special demand stemming from the government’s Eco-Car Subsidy system. But, fundamental problems such as the chronic lack of demand have yet to be resolved. This means that the structure of the Japanese economy remains reliant on external demand. Yen exchange rates, however, are beginning to settle at levels far exceeding our sustainable capacity.
 
Business Progress and NYK Results
 
Despite this difficult economic situation, the rush of newly built vessels entering the market, ordered to meet previous higher levels of demand growth, has caused an excessive oversupply of ships. In terms of the NYK Group’s performance, vessels lacking long-term contracts in the dry bulk carrier division and crude oil tanker division have recorded the poorest bottom line ever. On the other hand, in the LNG transportation business where most vessels are on long-term contracts, the Group has recorded profits, underpinning the importance of business linked to long-term contracts. Additionally, recovery of profits in the car carrier division has been a positive factor, following the disruption caused by the Great East Japan Earthquake and the Thai floods during fiscal 2011.
 
However, it is perhaps the containership business that has had the biggest impact on the recent recovery in profitability. Despite the fact that the gap between supply and demand has persisted and been not too dissimilar to the bulkcarrier and tanker sectors, some significant recovery of ground has been made, with freight rates moving towards a position where revenues and expenditures are at an even level. However, as I will touch upon later, the situation is in fact far from relieved.
 
Challenges experienced in the air cargo transportation and cruise business, which both remain highly reliant on the US and European markets have added to the previously mentioned losses from uncommitted vessels within the bulk shipping segment. Yet, such losses have been mostly compensated by long-term contract business and other businesses in the first half of fiscal 2012. The recurring profit target for fiscal 2012 is ¥40.0 billion and I would like the entire Group to work together in the second half in order to achieve this goal.
 
Next, I will talk in some detail about the conditions in each business segment and issues that now need to be addressed.
 
 
Global Logistics Business
 
Firstly, as previously mentioned, despite the large gap between supply and demand, the bottom line is beginning to improve in the containership business. There was a sudden and drastic decrease in cargo movements following the global economic recession in 2009 when container operators recorded significant losses. Following this, however, cargo movements drastically recovered at an unexpected pace. Demand became tight, freight rates significantly rebounded, and profitability recovered considerably heading into the end of 2010. For the supposed purpose of aiming for differentiation in response to sky-rocketing fuel costs, newbuilding orders increased in particular for the fuel-efficient ultra large container vessels, despite the fact that effects of fleet expansions before the global economic recession still remain. Meanwhile, as the contradictions of the European currency union were exposed, cargo volume bound for Europe and U.S. through fiscal 2011 plunged, as did containership freight rates. As a result, the industry posted enormous losses on a par with those recorded in fiscal 2009. As became obvious, it was impossible to sustain previous trading patterns and faced the absolute necessity of seeking further rationalisation. The reorganisation of consortia was an example of this trend. As a result of these efforts, we have been able to balance earnings and expenses. However this status of affairs is still fragile. As the rush of completed container vessels, substantially exceeding cargo demand,is set to continue until 2014, which makes future market predictions very difficult.
 
Therefore we have to steadfastly maintain our established policy of migrating to a light-asset business model within our containership division, and quickly expand our logistics activity namely “More Than Shipping”, including non-vessel operating common carriers (NVOCCs) business. We have to expand our business in the strong emerging countries, especially in the Asian market, with which the Group is familiar.
 
The business environment is expected to remain harsh within air cargo transportation over the near term, as it is highly susceptible to market conditions in the U.S. and Europe. Accordingly, please continue efforts to reduce costs by thoroughly eliminating *Muda, Mura, and Muri; fully leverage the superior environmental and operational performance characteristics of our aircraft; and work persistently to expand business in charter flight services and overseas markets.
 
Bulk Shipping Business
 
Next, in the bulk shipping business, first half fiscal year results are expected to be solid for the car carrier division, supported by a recovery in exports from Japan and Thailand and by strong cargo movements which do not touch Japan. However, there are concerns that European demand for freight transport could decline even further during the second half of the fiscal year accompanying the deterioration of the regional economy. The impact of poor performance on Asia-Europe routes with long ton-miles is large. Because future prospects for increases in seaborne cargo volumes look dim, we will also have to step up cost reduction measures focused mainly on fuel costs and efficiently deploying the fleet to ensure there is no waste in this business as well. On the other hand, because automotive sales have been steadily increasing in Asia and the emerging nations, we need to focus more resources on expanding our auto logistics business in these regions which is also the scope of “More Than Shipping”, including businesses such as RORO (roll-on roll-off) terminals, PDI (pre-delivery inspection) facilities and inland transport.
 
In the tanker division, conditions in the crude oil and petroleum products market are very difficult, as the demand has decreased in Europe and Japan while full-scale shale gas production is being launched in the U.S., which historically has been the largest consumer of these products. However, the outlook is not entirely pessimistic. Increasingly stringent safety standards required by oil majors will encourage the retreat of small and medium-sized operators, which will in turn provide an opportunity for our high quality standards in the scope of “More Than Shipping” to be re-evaluated.
 
In the LNG division, we decided to participate in the Wheatstone LNG project in June 2012. This project was promoted by the U.S.-based Chevron Corporation in Australia together with Tokyo Electric Power Company and Mitsubishi Corporation. This marked the first time a Japanese shipping company acquired equity interests in an upstream project in the LNG value chain. In addition to potential cargo shipping opportunities we may gain, participation in this project is significant, enabling the Group to assist the stable supply of energy to Japan. This is also a case of “More Than Shipping”. Global demand for natural gas continues to rise, but as the LNG shipping business gains more attention in the industry as a growing field, oversupply of tonnage is a concern. We must carefully consider what we can do to create more added value and gain the good appraisal of our customers in the LNG shipping business.
 
The offshore business, another growing field, that encompasses vessels such as shuttle tankers and drillships, requires advanced technologies. For such reason, we believe that this is a promising field for the Company to exploit its strengths. We need to steadily expand our business lines by continuing to gain long-term contracts.
 
Disastrous circumstances prevail in the dry bulk carrier division. As there has been a rush of completions of capesize bulkcarriers ordered prior to the global economic recession, supply pressure is at its peak and spot charter rates are insufficient to cover ship operating costs. The majority of capesize bulkcarriers newly constructed by the Company were built on the assumption of gaining long-term contracts. However, due to a drastic decline in cargo movements, the number of new vessels and medium-term chartered vessels without such contracts has increased. We must quickly return to the favorable situation where committed cargo volume exceeds the size of committed vessel fleet, by both streamlining fleets through scrapping or laying up vessels, and steadily work towards obtaining long-to-medium-term cargo shipping contracts. In our case, vessels chartered at high rates are sequentially approaching redelivery dates. These vessels, chartered at a time when the charter market sky-rocketed, were taken for the purpose of acquiring long-to-medium-term contracts. The capesize division will return to being the profitable business it once was, if we have a positive gap between committed cargo volume and fleet size. To reach such a favorable situation, new customer acquisition is essential. As we cannot expect much opportunity within the Japanese market, which is no longer expanding, we also need to strengthen sales overseas including NYK Bulkship (Asia) Pte. Ltd. and NYK Bulkship (Atlantic) N.V.
 
Cruise Business
 
In the cruise business, in fiscal 2011 Crystal Cruises recorded a loss for the third fiscal year in a row, reflecting the difficult state the business is in. It is essential to change our traditional product-oriented approach in order to create products capable of promptly and flexibly addressing the needs of customers. We need to remember that the core competence of our cruise business is to provide top-level hospitality based on cost performance made possible through the thorough elimination of *Muda, Mura, and Muri.
 
Technology, Safety, and Environmental Issues
 
We have decided to introduce an onboard broadband communication system on all vessels under our management. Installation of such a system is a required initiative in pursuit of optimizing economic ship operations as represented by the IBIS project for containerships. The system will make a significant contribution in cutting fuel consumption, allowing simultaneous large volume data sharing between land and ships, including amongst others weather and sea-current forecast information, and ship performance data.
 
The construction of Soyo, a coal carrier, was completed in July 2012. She is equipped with the world’s first under-hull air-lubrication system which is reliant on the main engine scavenging air bypass, a system which the Company helped develop. “More Than Shipping” is correctly embodied in all of these projects. Additional important issues we need to face include environmental measures such as CO2, SOX, NOX emissions, and ballast water treatment, as well as sky-rocketing bunker oil prices. Please also always keep in mind that our ability to respond to these challenges and our technical capabilities are the qualities that will allow us to differentiate ourselves from competitors.
 
Corporate Affairs
 
We are currently implementing the 3M project throughout the Company aimed at the elimination of *Muda, Mura, and Muri. Reforms in the corporate division will be of particular importance in this project. Such reforms will take place in accounting, ship-owning SPC management, governance, outsourcing administrative services, and IT. In this shipping industry where differentiation in tangible aspects, such as vessels, is extremely difficult, the competitiveness of the corporate division is likely to have a large impact on the competitiveness of NYK as a whole.
 
In addition, compliance is an extremely important management issue. There is a very high price to pay for companies that commit compliance violations. Non-compliance with Antitrust Laws in particular, can have a crucial impact on the fate of a company. In some cases violating companies are forced out of the market. As I mentioned at the beginning of this speech, I would like to remind each and every employee to do their utmost to remain aware of Antitrust Laws and ensure compliance.
 
Conclusion
 
I have provided an outline of the conditions in each business segment and issues that need to be addressed. In order to resolve these issues, we have to fully leverage the NYK Group’s DNA composed of integrity, innovation, and intensity while steadily striving to provide “More Than Shipping” to our customers. In addition, as I am sure that you are already fully aware, in order to expand the Group’s business, it is extremely important that we develop international markets in response to the growing Asian economy. Now more than ever, we have to hurry to secure and train staff capable of performing on the global level. I am confident that we are definitely proceeding in the right direction and that we will be able to overcome the current difficulties with all of your cooperation.
 
Please let me conclude this speech by offering my sincere wishes for the health and prosperity of your families.
 
 
* Muda: non-value adding activities
 Mura: unevenness in production or work activities
 Muri: excessive burdens on employees
 
The three M’s can be considered wastes that negatively impact costs and thus freeing the Group of these wastes would be considered an effective way to increase profitability.
 
** SPC: special purpose company
 
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