What Makes a Business Bad?

I’ve been reading a lot on Charlie Munger and mental models lately and was thinking about one in particular: Invert, always invert. When I’m researching businesses that I might want to invest in, I’m usually thinking about why an industry is quite profitable or what kind of competitive advantages a business might have. Applying the inversion principle to the question, “What makes a business great,” I decided to ask the question, “What makes a business bad?” Lucky for me, I work on a port that moves shipping containers and cars. I see container ships everyday. Why is shipping a bad business? I would like to throw out there that I do think the 3rd party logistics business is a great business model, but that’s also because it is very asset light.

The major disadvantage that I see with the container shipping business is that it’s very asset heavy. It requires very large, expensive ships and they just keep getting larger. With larger ships most likely comes lower fixed costs per unit. The problem is that the shipping companies will ship a container at its marginal cost because because each unit helps cover the high fixed costs. An unfilled spot on a ship is quite expensive, so companies are willing to fill the spots at, or maybe even below, their fixed costs.

Shipping companies will continue to build larger ships. They will continue to find ways to be more cost effective, e.g., run ships on liquid natural gas (LNG) instead of diesel. The problem is, shippers will always take additional containers near marginal cost to fill up a ship and any savings will ultimately go to the company that needs to ship goods, not the company that physically ships the goods. Seems extremely similar to the airline industry.

There may be some exceptions to what I’ve stated above. For instance, if a company dominates a trade route or has little competition on a trade route, they could have a competitive advantage, especially if there are restrictions on which shippers can use the route.