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China Route Is a Big Bet for Small Shipping Line

Matson Navigation hopes its nimble ships can thrive in an industry dominated by giants.

September 02, 2006|Ronald D. White | Times Staff Writer

For 124 years, Matson Navigation Co. has dominated the waters between the West Coast and Hawaii.

Matson has ferried automobiles, pineapples and even people on its way to capturing 60% of the cargo business between the mainland and the islands. Now, one of the last of the U.S. shipping lines is hoping to boost its fortunes in an unusual way -- with a fast boat from China.

Using five fuel-efficient ships that are almost petite by transpacific standards, Matson has launched weekly service from Shanghai to Long Beach that shaves a few days off the usual trip. It's placing a $365-million bet on the most competitive shipping market on the planet, hoping that speed sells.

The China route represents a significant risk for a company that has thrived on lucrative contracts protected for eight decades by federal law from foreign competition.

"For us, the question has always been this: How does a niche company survive in the land of the giants?" said Matt Cox, Matson's chief operating officer. "Well, you don't retreat into greatness. We want to be part of the China business."

Oakland-based Matson has entered the China trade at what some analysts regard as a difficult time. The industry is flooded with more ships than it needs, and the U.S. economy is showing signs of cooling.

It is competing by using fewer than half its tiny fleet of 12 containerships. And Matson is up against the likes of Danish shipping giant A.P. Moller-Maersk, which has a fleet of 250 ships operating around the world.

"The China business could turn out badly," Goldman Sachs Group analysts Jonathan B. Habermann and Carey Callaghan wrote in a report to investors on Matson's plans. "No U.S.-flagged carrier is currently in this 'retail' end of the market in China, and the concern is that the business could have a slow gestation period."

Jason Kremer, an analyst at the San Francisco office of Caris & Co., agreed: "Right now, the pricing on freight is just too competitive."

Five months after the start of the China service, there are some positive signs. Matson, a subsidiary of Honolulu-based Alexander & Baldwin Inc., has signed 138 customers and during the second quarter moved 7,500 containers -- both ahead of projections, the company said.

But Matson was hurt by lower-than-expected freight rates and high fuel costs. Those pressures, plus the operation's start-up costs, cut second-quarter operating income from ocean transportation to $24.4 million from $38.7 million a year earlier.

Difficulties were anticipated, Matson's Cox said, adding that its trade route has unique strengths.

Matson's ships make a 35-day round-trip voyage. After departing from Long Beach, they stop in Hawaii and Guam before heading to two Chinese cities -- Ningbo and Shanghai -- and then return directly to Long Beach. Although other carriers send their ships to China carrying a substantial number of empty containers, Cox said, Matson's are full, at least for the leg to Hawaii.

"Our tolerance for low freight rates is probably higher than those who rely on that China-to-the-West Coast leg for their entire profit," Cox said.

The company's ships are less than a third the size of the behemoths favored by international shipping lines for their cost-effective ability to carry 8,000 to 9,000 20-foot-equivalent containers in a single trip. But that makes Matson's vessels more nimble, completing the Shanghai-to-Long Beach leg in 11 days, which beats the other lines by one to three days, Matson said.

On top of that, customers can gain an extra day or two because Matson's Long Beach terminal is slightly inland from Terminal Island, which avoids the long delays that port truckers often face in picking up merchandise, the company says. In addition, importers don't have to pay the extra fees charged by port terminals for containers picked up during peak weekday hours.

"We can [unload] the entire ship when it arrives on Sunday night, have the containers put on wheeled chassis and taken to our off-port facility," said Ron Forest, Matson's senior vice president for operations. "Customers can come and pick it up, and it's already on wheels and they won't even have to enter the port."

Some experts believe that Matson will find a number of interested importers.

"If you're a customer with a goal of obtaining frequent, small deliveries, where the offloading and uploading is quick, it makes eminent good sense," said Simon Croom, executive director of the Supply Chain Management Institute at the University of San Diego.

Crystal Art Gallery of Vernon is one of them.

Weary of dealing with multiple shipping lines for the roughly 1,000 containers of artwork and mirrors the company imports a year, management looked at several carriers to find one that they could give most of their business to, said Jim Ehren, Crystal Art Gallery's chief financial officer. The company selected Matson.

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