Dr Rawindaran Nair* * Cardiff Business School;

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1 Title: Study of container shipping response to regulatory restrictions following the rejection of P3 Alliance proposal on the Asia Europe Trade route: Evolution of Concentration in industry structure. Dr Rawindaran Nair* * Cardiff Business School; ABSTRACT The global developments in the regulatory regimes as seen in decisions on proposed alliances in the arterial routes such as on the Asia Far East and related routes has been followed by realignment in the container shipping companies operational strategies. These include formation of new alliances as well as mergers and acquisitions, which point towards greater concentration in the industry. Such structural transformation predicted in economic theories of market structure suggest responses to hostile regulatory environment facing the industry. This study explores current trends in the industry to transformation and based on analysis of market data indicate that these trends are likely to continue. The prediction is that fewer companies would dominate the industry and this will realign the nature of the industry for the future. Author: Rawindaran Nair. Cardiff Business School; Key words: Economic regulation; theories of pricing; structural changes Background Liner shipping companies provide scheduled services for the transport of cargoes over a specified geographic range of ports within an established time schedule including pre-determined regularity and frequencies. A consequence of providing such schedules was the need to balance supply and demand at ports served by these scheduled services and to meet the latent demand for such services by small shippers (Sturmey, 1975). The shipping lines had to face the prospect of not being able to fill their ships or to fill only at rates that were below their average costs. In view of that shipping lines began to enter into cooperation agreements with lines that were serving the same port along a similar trade route. These agreements, reported to have started in 1875 in the UK/Calcutta trade, evolved into what are referred to as liner conferences. These conferences were agreements to self-regulate the supply of services and became an important feature of liner shipping services. A typical feature of the conference agreement was to establish a fixed or common price among all participating lines and also to regulate the deployment of ships along the route that was served by the conference members. As a result, the competition was limited and lines were not forced to face the prospect of calling at ports and competing for cargoes from a large number of other competing shipping companies. 1

2 The operations of such conferences however became subject to policy criticisms from the view of antitrust policies such as in the United States and later in the European Union. While these forms of cooperation in conferences are no longer the norm currently, new forms of cooperation have evolved to increase operational efficiency such as alliances and container consortia for the management of container assets in the service globally. Although these forms of collaboration among liner shipping companies continues in their services, there are restrictions that have been introduced such as by the removal of the exemptions by the European Union of Council Regulation 4056/86 since October Arising from recent changes in the law, they are no longer operating on services to European Union ports, but their presence in other trades continues to exert influences on levels of service (Nair, 2015). According to earlier research, the interpretation of the scope of the global regulatory regimes emerged in context in a case, which explored the relevance of competing economic regulations in June This was the P3 alliance, which provided an opportunity to explore the approach of three major jurisdictions on the same set of facts with regard to the interpretation of the meaning of an acceptable alliance as a form of horizontal collaboration, which was proposed for the three main arterial services (Lloyd s List, 2014; FMC, 2014; European Commission, 2014). The top three shipping companies in the industry, i.e. MSC, CMA-CGM and Maersk had, in early 2013 declared their intention to form an operating alliance called the P3 Service Network. The proposed alliance had made applications to seek approval or clarification with regard to compliance with the competition laws in a number of jurisdictions, which would covered by the alliance. The jurisdictions relevant here included the US Federal Maritime Commission, the European Commission and the Ministry of Commerce of China (Nair, 2015). Following the rejection of the P3 alliance the industry has seen various realignments taking place, in the form of other alliances, as well as mergers and acquisitions all designed to provide scheduled services based on horizontal collaboration among leading container-shipping companies. An explanation for the strategies adopted can be located in the early theoretical models of pricing in this industry, which have been the basis for exploring foundations for policies in the industry. The relevance of these policies and the predictions that they offered are examined, including exploring the empirical evidence of structural changes taking place in the industry in present times. Theoretical models of pricing There are several theories that have attempted to provide an explanation for the structure of freight rates offered by ocean liner shipping companies for their services. The tariff structures of these companies that offer scheduled services are complex in that they are not only based on description of the 2

3 commodity but also on their weight and measurement. The tariff of liner shipping companies comprises many hundreds of items that are carried under different rates (FMC, 1989). This discriminatory price structure has led to a debate as to whether it is the outcome of carriers operating in horizontal agreements are exercising monopoly power or the product of a competitive market environment. The issues and principles that underlie the rate setting behaviour of liner conferences were discussed in the FMC report published in This report published the findings of the study undertaken by the FMC that was mandated under Section 18 of the United States Shipping Act of The report outlined the debate on the basic questions that were raised by various economic models and included a literature review of research regarding their applications in the industry (FMC, 1989). The perspective of what is an appropriate model to explain the discriminatory pricing behaviour of liner shipping companies is central to decisions on policy for the sector. The practices of liner conferences granted antitrust immunity under the US Shipping Act of 1984 continue under the amendments to the Act introduced by the US Ocean Shipping Reform Act of In the European Union, however, the exemptions that were contained in the provisions under European Union Council Regulation 4056/86 are repealed with effect from October 2008 (Nair, 2015). When explaining the approach of regulatory authorities, economists suggest that the discriminatory pricing structure in liner shipping fall into two main approaches with the first being anti-conference, since it argues that the pricing structure is symptomatic of the monopoly power that conferences possess and consequently is the result of market failure. The second approach tends to be pro-conference, since it argues that liner trades are contestable and thus not subject to market failure. This paper will examine the debate regarding the rationale of these economic models and their relevance for policies regarding regulations of anti-competitive practices in the liner shipping industry. The analysis will indicate the differences in views among the advocates of economic models as well as the lack of consensus regarding the most satisfactory model to explain the price structure between the proponents of the models and the regulatory authorities. It will also state the extent to which these theories have been reflected as basis by regulatory authorities in the United States and the European Union. This will provide an understanding of the rationale of the actions of regulatory authorities when considering or applying policies for the industry. Anti - conference approach According to the FMC report (1989) economists have traditionally attempted to explain the differential pricing in ocean shipping in terms of the standard textbook model of a price discriminating monopoly model. This monopoly model suggests that discriminating tariffs indicate that conferences as cartels 3

4 have monopoly power and thus have discretion over price (Devanny et al, 1975). As a result of this power they can subdivide the market for their services by differentiating between shippers according to the commodities they ship. It then sets prices that are higher than competitive price and at a level of output below the competitive level and this results in a misallocation of resources. One view is that these discriminatory or differential prices are the outcome of the exercise of monopoly power by liner shipping companies acting as cartels, and are thus to the detriment of consumers of shipping services. One of the principal proponents of the view that these liner shipping conferences or cartels possess monopoly power is the United States Department of Justice (DOJ) (1977: 244). The evidence taken from case studies in this paper argues that the European Commission in its decision on the Trans-Atlantic Conference Agreement (TACA) had taken a similar view in regarding the discriminatory pricing structure as reflecting the exercise of monopoly power by the cartel (EC, 1998). This view, however, has been criticised by those who advocate that policies providing antitrust immunity to these cartel agreements in the industry should be allowed to continue. The holders of this alternative view include the FMC (1989) argue that the discriminating rate structure is the competitive outcome of the economic characteristics of the industry, given the technology and the cost structure of scheduled services (Gardner, 1986; Sletmo and Williams, 1981). Although a number of economists argue that the textbook monopoly model is not appropriate, there does not seem to be a consensus among them regarding which alternative model would best explain the discriminatory rate structure. Despite the wide criticism of the model (Meyrick, 1999; UWIST, 1978; FMC, 1992; Brazil, 1993) arising from its inconsistency with the empirical evidence, it is still the basis for the US Department of Justice s attitude towards regulating the industry. In the 1977 study, the DOJ strongly criticised the rationale of Congress in adopting the US Shipping Act of 1916, which was the first legislation that granted antitrust immunity to liner conference agreements. Although the DOJ does not now recommend the removal of the immunity, it does suggest that the question of the immunity should be revisited to ensure that conferences are not given unlimited rights to self-regulate, since it considers their ability to act as monopolies remains (DOJ, 2000). The FMC, however, has not only criticised the model in its report (1989: 409), but has continued to argue that the economic characteristics of the industry are unique such as to justify the continuation of the antitrust immunity that the industry has enjoyed since the passing of the US Shipping Act of 1916 (Creel, 1998; 1999; 2000). Pro-conference approach The pro-conference approach rejects the view that conferences have monopoly power and argues that the discriminatory pricing is due to the cost structure in scheduled services and the pressure of market 4

5 forces on shipping lines. Further the approach suggests that the unit of production is taken to be the system that is established to provide a viable level of weekly service that includes a fleet of ships and other factor inputs (Gilman, 1983; Sletmo and Williams, 1981: 169). The implications arising from these aspects of the industry have led to a different explanation for the discriminatory price structure in liner shipping as given by the contestable market theory. Contestable Market Theory Contestable market theory has been put forward as an explanation of the determination of the structure of rates in liner shipping by Davies (1986) and Zerby (1988). According to this theory although the basis of tariffs is the value of service, the resultant differential structure is efficient because of the economic characteristics of the liner shipping sector. Differential tariff structures have long been regarded as efficient by economists in some circumstances as observed by Frank (1983; p 239). Elizabeth Bailey first formally stated the term contestability in a paper in 1981 (Meyrick, 1999:20). A comprehensive statement of the theory was published by Baumol et al, in 1982 and then applied to liner shipping by Zerby and Davies (Veenstra, 1999). Baumol et al. (1982) defines a perfectly contestable market as one that has two key properties: (i) (ii) potential entrants can, without restriction, serve the same market demands and use the same productive techniques as those available to the incumbent firms; and potential entrants evaluate the profitability of entry at the incumbent firm s preentry prices. That is, in working out whether or not it is worthwhile entering the industry, new entrants assume that their entry will have no impact on the pricing behaviour of the incumbent firms. An important requirement for contestability is that entry should be costless, that is there should be no sunk costs. Thus potential entrants when they see an opportunity for profitable entry should be able to grasp this opportunity and then leave the market before incumbents can react. Consequently if markets are contestable there can be no market failure. With this efficient outcome, the advocates of the theory argue that liner shipping companies, operating in horizontal collaborative agreements such as conferences should be allowed to regulate themselves. This should be in preference to regulatory intervention to preserve competition. This theory has been criticised by the FMC in its Section 18 report (1989) where it has mentioned that the weaknesses of the theory s ability to explain the discriminatory rate structure is that it suggests natural monopoly conditions are prevalent in the industry. The FMC however states that although this weakness exists, the model provides an explanation for the pricing structure. In relation to these views, 5

6 it is also relevant to point to a number of factors have been attributed to explain the rate structure, and the first is that lines transport a variety of cargo types, often of different consignment sizes, with different handling and stowage characteristics, thereby imposing different unit direct cost on carriers, at least in the carriage of break bulk cargoes. Then physical properties of cargoes may differ and require different locations to avoid tainting or to provide stability, while others may require special refrigerated compartments. These factors will impose different unit direct costs on carriers and will also tend to make the opportunity costs different. Then there are factors linked to the vessel, such as the nature of a vessel s capacity limitations which when incorporated into a pricing policy also bring about a differential rate structure. This is because ships maximum carrying capacity may be determined either by weight or volume. If all cargo consignments are dense, it would be full (i.e. down to the Plimsoll line) long before its cubic capacity was exhausted and therefore in order to ensure that total costs were covered, cargo would be charged on a weight basis. The advent of containerisation has also changed the cost structure within the industry and has altered the mix of cargoes carried (FMC, 1989: 415). This has led to the controversy over the charging of different rates for different cargoes although they generate similar direct costs (Davies, 1980: 223). Even with containerisation, Evans argument that certain cargoes are required for ship stability as a factor remains valid. This is because ship stability considerations are still important in containerised trades, and would explain why some cargoes are low rated. Furthermore, there are special needs even with containers for example; refrigerated and hazardous commodities that require special care and service and containers containing such commodities would be high rated. The general conclusions drawn from the above analysis by the FMC report are: the desire to exploit economies in ships size is sufficient to create a differential rate structure, even if other cost related factors are absent; if entry barriers are low in the industry, rates will tend to be determined by the minimum rate at which efficient carriers are willing to supply cargo space in the long run rather than the maximum rate a commodity can bear, although short-run competitive pressures may cause actual rates to deviate from these desired level on occasions; in trades where the traffic density is sufficient to support a number of competitive services, efforts by carriers to expand their capacity by introducing progressively larger ships will eventually result in some narrowing of the rate differential between the highest- and lowest-rated commodities; 6

7 such efforts will result in a reduction in the number of services offered, unless there is a commensurate increase in the volume of trade. From the perspective of the European Union, the models of pricing in liner shipping are stated thus: The economic analysis of liner transport is thus a complex area of study. The present discussion leads to the conclusion that arrangements between shipping lines on rates (conferences) or capacity (consortia), or in cartels which are even more restrictive of competition, in particular those which combine price fixing with capacity management, cannot be analysed solely and simplistically on the basis of the core theory or the contestable market theory (FMC, 1989). This rejection of the pro conference models by the EC shows that it is not prepared to accept the explanations offered by them and thus the policy strategy of removing the application of exemptions granted under Regulation 4056/86 since October Perhaps this is not surprising, given the lack of a consensus among academic economists on the most appropriate model to explain the structure of tariffs in liner trades. It is also seen that: subsequent developments, particularly in the years since the removal of Regulation 4056/86 in October 2008; the emerging developments in decisions in the US regulations, as well as those from China, particularly in regard to the P3 alliance: reveal a move towards either a hostile or a largely difficult to understand economic regulatory framework in this industry and the empirical evidence in the industry is explored in the context of the explanations offered by these theories. Choice of model for analysis The discussion on the theories of pricing in the liner shipping industry shows that there is no unanimity on the best choice of model to explain the structure of pricing in the industry (Veenstra, 1999; FMC; 1989; Meyrick, 1999). This lack of consensus has been made more difficult to resolve by the results of a number of regression studies that have examined the factors that determine liner shipping tariffs (Wei, 1985; Deakin, 1973; Talley and Pope, 1985; Zerby and Conlon, 1983; FMC, 1992; Meyrick, 1999; Brazil, 1993). These results of these studies revealed that not only unit value, but also stowage factor as a cost related factor were significant in explaining the rate structure. 7

8 Major Economic Regulations An overview of the economic regulatory framework of the United States (US) and the European Union (EU) will be presented here to enable the understanding of the research in context. US POSITION Basically, the US continues to allow price fixing and supply regulations agreements although these have been severely restricted in their content following the major revisions introduced by OSRA in These regulatory restrictions under the US rules allow for a greater degree of internal competition which can be seen through the following provisions: Carriers are allowed to use of independent and confidential service contracts when providing services to their shippers. These contracts introduce a greater level of internal competition among members of these conference type agreements and allow greater level of independent actions on the part of member lines operating in any joint agreement. Carrier discussion agreements (CDA) are allowed, that basically enable the joint sharing of information among carriers so long as the outcome is not in the form of a price commitment among those sharing the information. Operational efficiency agreements are encouraged, such as multinational alliances and container consortia, both of which are designed to enhance utilisation of ships deployed without including any element of price fixing within the operation. Intermodal authority that allow intermodal prices at the level of the agreement has been put in place in the US since the Shipping Act of It is evident from the range of provisions that the US regime recognizes the importance of a wider spectrum of collaboration arrangements, including price fixing and supply regulation as essential to sustain a stable maritime scheduled service option. EU POSITION In the EU, the regulatory regime was moving towards a more restrictive approach in terms of the scope of agreements that were deemed to be in compliance with the EC Regulation 4056/86, which were contained in the decisions of the European Commission in the mid-1990s. These decisions were with regard to several conference agreements serving the trade such as, among others, the Trans Atlantic Agreement (TAA) and the Trans Atlantic Conference Agreement (TACA). 8

9 It was evident that by 2000, the regulatory regime had become fairly hostile to conference agreements and one aspect was the post TACA (Trans Atlantic Conference Agreement) decision of the European Commission which led to the revised TACA. This conference agreement was: substantially smaller, less influential, and had lost the ability to regulate its diminished membership s pricing activities. Beyond publishing conference tariff rates, TACA s only method for affecting rates was its authority to publish a model contract and a set of rate matrices that member lines could reference or adopt when negotiating their own individual, confidential contracts. The model contract and proposed rate matrices amounted, in effect, to a European equivalent of the voluntary service contract guidelines that were allowed under OSRA. Thus, while TACA remained a traditional liner conference in name, in practice it appears to have operated much as what in US trades is known as a discussion agreement. The EC Council Regulation (EC) No 1419/2006 of 25 September repealed Regulation (EC) No 4056/86, with effect from 18 October This is a regulation from the European Union that has direct effect among its member states. The effect of this Regulation is to remove the immunity granted to liner shipping conferences serving EU ports since July The repeal has altered the framework of global economic regulation for liner shipping with the EU taking a unilateral action in this matter. Further, to ensure that the period after October 2008 is rendered clearer for liner shipping companies, the European Commission has issued advice on the implementation that is contained in guidelines on the application of Article 81 of the EC Treaty to maritime transport services (2008/C245/02). Following this, in the EU, while removing altogether the immunity provided under EC Regulation No. 4056/86 for price fixing since October 2008, there still remain some questions on the format of other ancillary agreements that could be entered into on a joint basis by operating companies. There are three key components here: Firstly, the information sharing format although allowed, was not altogether similar to carrier discussion agreements under the US jurisdiction. In the case of the EU, this topic had been subject to intense debate, with a guideline on information exchange issued by the European Commission on information sharing among competing carriers. Secondly, although service contracts are not provided in the rules of the EU, they are applied as instruments in the trade by liner shipping companies when dealing with their shipper customers. The scope of these contracts is similar to those under US jurisdiction, allowing use of confidential service contracts. 9

10 Thirdly, there is cooperation in strategic transnational alliances liner shipping companies and their relevance, is to widen operative borders of a single firm. It is recognised that these alliances are able to achieve scale that is suitable to compete in global markets and to be able to enter new markets sharing the resources of partners in the alliance. Finally, a comparative analysis on a global basis with regard to the US and the EU regimes is shown in the table 1 below. Table 1 European Union and United States economic regulatory framework Agreement Format Transatlantic Transpacific Europe Far East Conferences: Price fixing and supply regulation EU rules prevail US regime applies EU rules apply Alliances EU/US regimes EU/US regimes EU/US regimes Consortia EU/US regimes EU/US regimes EU/US regimes Carrier Discussion Agreement EU rules prevail US regime applies EU rules apply Information Exchange EU rules prevail US regime applies EU rules apply (Source: author compiled from various sources) The tables above show the application of the jurisdictions of the EU and the US on selected trade routes with regard to the agreements that are applied by shipping companies providing scheduled services. It is evident that there are key differences although under both regimes the minimum is to allow some form of horizontal collaboration with the cut-off being only for price and supply based agreements. This paper examines developments after the P3 decisions to explore the hypotheses that the industry, is likely to face greater concentration in the future, and thus confirming the predictions offered in the proconference theories. Discussion and Analysis This study, based on exploring data from published sources, particularly specialist industry literature as well as on relevant academic studies examines evidence of the structural changes that are taking place in the industry. The approach will be to explore changes in: position of leading carriers in the supply side; and alliances and mergers and acquisitions 10

11 In order to examine the data the sequence will be firstly by presenting an overview of the position of the leading carriers in the industry and this is followed by examining the changing nature of alliances, mergers and acquisitions in the industry. Industry Structural Changes An overview of the structure of the industry from 1984 to 1999 is as shown in table 2 below which shows the share of top 20 container shipping companies in the world fleet as follows: In 2000, the world s Top 20 liner operators controlled approximately 76% or 3.5 million TEU of the global cellular fleet, up from just under 70% in In terms of the orderbook, the current top flight carriers also account for just over 1 million TEU of the more than 1.5 million TEUs contractually confirmed for delivery over the next two years, with several options close to being declared (Fossey, 2000). The top 10 in the industry and their fleet deployment in 2000 is as shown in table 2 below: Table 2 Top 10 container-operating companies Vessels deployed in teu capacity November 2000 Rank 2000 Carrier Shipboard capacity teu 1 Sea-Land/Maersk 580,450 2 Evergreen/Uniglory 336,994 3 P&O Nedlloyd 275,108 4 MSC 242,096 5 NOL/APL 214,814 6 Hanjin 214,105 7 Cosco Container Line 194,891 8 NYK Line 152,477 9 Zim Israel 139, CMA CGM 138,840 Total 3,786,562 World capacity 6,556,842 Proportion/world 57% Source: Containerisation International

12 In order to provide a historical perspective of the transformation of the top 20 carriers over the capacity in the industry, the data from 1984 is shown in table 3 below. Table 3 Cellular capacity owned or controlled by Top 20 carriers (1984 to 2000) Capacity: TEUs Year Top 20 World % Share ,200 2,058, ,461 2,643, ,037,147 3,168, ,349,200 3,373, ,452,284 3,743, ,886,920 4,102, ,058,863 4,407, ,669,210 5,265, ,113,455 5,878, ,345,200 6,021, ,727,400 6,556, Source: Containerisation International, various issues; compiled by author The location of these top companies is now examined in their moves towards horizontal collaboration and emerging structural transformation in the operational strategies which are explored from the following aspects: Alliances; and Mergers and Acquisitions 12

13 Alliances The first alliance called the Global Alliance was formed in September, 1994 (Gardiner, 1997) with the established transpacific partners announcing a partnership comprising Nedlloyd and Mitsui OSK Lines (MOL), Orient Overseas Container Line (OOCL), American President Line (APL) and Malaysian International Shipping Corporation (MISC). It was essentially a limited east-west supergroup as the transatlantic was excluded while none of the north-south interests of any of the carriers was included. The second alliance, which followed this segmentation, has been the Grand Alliance (Drewry, 1996). This comprised P&O Containers, Hapag Lloyd, NYK and Neptune Orient Lines. Maersk and Sea- Land, two carriers that were already working together formed a third alliance. Finally, in June 1995, the fourth arrived with DSR-Senator, Cho Yang and Hanjin Shipping announcing their plans for a global alliance that was in place by mid At the same time as these alliances were being formed, mergers and acquisitions were also taking place such as that between NOL and APL, and that between P&O and Nedlloyd. These developments led to readjustments in the membership of the competing alliances by merged entities (Damas, 1995; Cullinane et al, 1999). A new pattern of worldwide strategic alliances emerged as a result and these were reported in industry journales, as follows: The Grand Alliance made up of Hapag-Lloyd, MISC, NYK, OOCL and P&O Nedlloyd. The New World Alliance comprising HMM, MOL and NOL/APL Maersk and Sea-Land (now a merged entity) The Hanjin Group (United Alliance) consisting of Hanjin/DSR Senator and Cho Yang The K-Line/COSCO Group made up of COSCO, K-Line and Yangming Mergers and Acquisitions The trend towards consolidation through mergers and acquisitions in the liner-shipping sector became significant in September 1996 when it was announced that P&O Containers (UK) and Nedlloyd Lines of the Netherlands would merge and form a new company called P&O Nedlloyd Container Line. This was regarded as the first merger between international container liner shipping companies and it resulted in a combined turnover of US$4 billion. It was estimated that rationalisation through merger would save over US$200 million per annum in costs by However, some 1400 staff worldwide would lose their jobs as a consequence of these changes taking place. The merger produced a fleet of 112 container ships with a total capacity of 240,000 TEU and total container fleet of 540,000 TEUs and made the new company the largest operator at that time (Crichton, 1996; Boyes, 1997). 13

14 The next major consolidation was when Neptune Orient Lines acquired American President Lines in April 1997 for US$825 million. On combining, there was a container fleet with 200,000 TEUs shipboard capacity (American Shipper, May 1997; Boyes, 1998). It was reported that this acquisition would result in both companies realising cost savings of at least US$130 million annually from the consolidation of certain operations and improved efficiencies. Some of the acquisitions that have taken place since 1995, include not only the larger carriers, but also the smaller carriers in the industry are as shown in the table 4 below. Table 4: Acquisitions ( ) Acquiring Carrier Target Carriers CP Ships Cast ( 95) CMA CGM ( 96) P&O Containers ANL ( 96) Hamburg-Sud(Germany) Alianca( 98); South Seas Steamship( 98)l South Pacific Container Line (July 99) CP (Canada) Lykes ( 97); Contship ( 97); Ivaran ( 98); Australia-N Zealand Direct Line ( 98) Maersk Line (Denmark) Safmarine Container Lines/CMB Transport(Feb. 99); Sea-Land Service ( 99) CSAV(Chile) P&O Nedlloyd (Anglo-Dutch) Neptune Orient Lines (Singapore) Libra Navegacao (March 99); and Montemar/Pan-American Line(June 99) Blue Star Line ( 98); and Tasman Express Line (Jan. 99) APL( 97) Hanjin (South Korea) DSR-Senator ( 97) Evergreen (Taiwan) Lloyd Triestino ( 98) CMA-CGM (France) Australian National Line ( 98) D Amico (Italy) Italia ( 98) Source: American Shipper, September, 1999; Fossey, J (1998); Ryoo (1999) Historically these developments could be responses to the constraining framework of the regulatory regimes of the major jurisdictions such as the European Union, and thus the ability of container shipping companies to collaborate horizontally on price and output in the transatlantic and Europe Far East trades. Thus, following several decisions as well as changes in the economic regulatory policies announced by the European Union, the United States as well as the Republic of China, there continues to be evidence on structural changes taking place in the liner shipping industry (Nair, 2015). These strategies of liner shipping companies in the recent decade are in the next section. 14

15 Recent Strategies for Companies Two broad strategies or patterns are emerging in recent times, firstly there continues to be mergers and acquisitions that are ongoing and secondly there continues to be the forming of alliances, especially when these refer to the transatlantic and Europe Far East trade routes. This focus on EU port calls, could be to comply with the strict regime of the European Union in these routes and therefore the difference with the less hostile US regime under the US Shipping Act of From the perspective of mergers, several interesting cases recently of the structural changes have emerged as a reflection of strategic behavior among participants in the industry. One of these was in the takeover of the container business by COSCO of China Shipping. (Waters, 2015). The indications are that this will lead to be merged entity to become one of the top four container-shipping giants with a fleet of 288 ships of which 84 would be more than 8,000 TEU capacity of a total capacity of 1.6 million TEU. There is then the combination of CMA CGM and APL, which would become the largest operator on the transpacific trades, pushing Evergreen into second place, but its lead position may be short-lived. According to Lloyd s List, CMA CGM, which is in exclusive talks to acquire the Singapore-based liner operations of NOL, is a comparatively small player on the transpacific trades. Its 27,600 teu of weekly capacity deployed gives it a 6.9% share of the market, placing it in fifth place alongside Hong Kong s Orient Overseas Container Line, according to data from Lloyd s List Intelligence. Predictions are that the impact of these mergers on the alliance partnerships on the transpacific trades will be even more significant. The CKYHE alliance is the largest operating on transpacific trades, with a weekly capacity of nearly 150,000 teu, or 50% more than its nearest rival, the G6. The G6 has nearly twice as much capacity as 2M and Ocean. The G6, on the other hand, would lose nearly 20% of its weekly capacity, falling to 81,850 teu (Walters, 2015). The view of analysts, such as Drewry is that the mergers and acquisitions of CMA CGM with APL and Cosco with CSCL will reduce the gap on Maersk Line and Mediterranean Shipping Co at the top of the ranking. This will in turn mean that the top five largest carriers in terms of capacity will control as much as 55% of the active fleet. Then there is the news that Hapag-Lloyd and United Arab Shipping Co announced a possible merger. These developments are widely expected to trigger changes in the existing alliances covering the east- 15

16 west trades, namely the G6, Ocean Three and CKYHE. According to this report, HMM would stay in the G6 Alliance until March 2017, when its membership ends with the group, which also comprises Mitsui OSK Lines, NYK Line, APL, Hapag-Lloyd and OOCL (Porter, 2016; Walters, 2016). Following on this development with shipping alliance strategies, it has also been reported that Hanjin Shipping "is in discussions with some of the shipping companies", although there are no more details. Hanjin is a member of CKYHE, which includes Cosco, K Line, Yang Ming Marine and Evergreen. Hanjin Shipping has a 3% share of the world's container line fleet while HMM has 2%, according to the latest data from Alphaliner (Espina, 2016). These mergers follow closely the strategic operations of these companies to work under alliances, such as the announcement of the formation of the New Ocean Alliance. (Walters, 2016). According to the report: Four of the world s leading container shipping lines have formed a new alliance that will see them cooperating in the deployment of their combined fleet of more than 350 containerships across the world s main container trades (Espina, 2016). Further, CMA CGM, COSCO Container Lines, Evergreen Line and Orient Overseas Container Line today signed a Memorandum of Understanding to form the OCEAN Alliance. This collaboration, according to the group would offer shippers access to the largest number of sailings and port rotations connecting markets in Asia, Europe and the US, along with a comprehensive service networks covering the Asia-Europe, Asia-Mediterranean, Asia-Red Sea, Asia-Middle East, Trans-Pacific, Asia- North America East Coast, and Trans-Atlantic trades. In a joint statement, the member carriers said: This new partnership will allow each of its members to bring significantly improved services to its respective customers. Shippers will have an attractive selection of frequent departures and direct calls to meet their supply chain needs, including access to a vast network with the largest number of sailings and port rotations connecting markets in Asia, Europe and the United States (Espina, 2016). They claimed the alliance would also bring service reliability and the most efficient integration of the latest vessels in a fleet of over 350 containerships. Initially, the deployment will cover more than 40 services globally, mostly connected with Asia, including about 20 services each in the US- and Europerelated trades. 16

17 Subject to regulatory approvals of competent authorities, the new alliance plans to begin operations in April 2017 and operate for an initial period of five years. These developments indicate that on these two routes with destinations in European Union ports, the regulatory regimes of the European Union apply; driven by the reflections of the hostility in their interpretation of the allowed horizontal collaboration for scheduled services, post October The view therefore that emerges is that these carriers continue to explore horizontal collaboration, although these are in less restrictive arrangements compared to price and output restrictive formats such as existed in conference type agreements. It is also evident that regulatory authorities recognize the need for such collaboration in order to provide the effective scheduled service which is the operational framework of these liner shipping companies, although economic models such as the contestability theory suggests that self-regulation with greater freedom in price and output would be the preferred outcome for an efficient level of service provision. Operational scenario of leading carriers Following upon the evidence of structural changes taking place in the industry, it would be appropriate to take a snapshot of the most recent position of leading carriers. It is evident that there is also the emergence of a small number of operators that are dominating the supply side of the container shipping industry, which as late as 2015 shown in table 5 below. Table 5 Top 5 Container Lines Nov 2015 Rank Operator Total (Teu) Ships 1 APM-Maersk 2,977, MSC 2,720, CMA-CGM 1,793, Evergreen Line 940, Hapag Lloyd 937, Total 5 9, %3/%5 80% 81% %/World 47% 37% Rest 10,497, World Total 19,865, Source: Alphaliner (modified by authors) As is evident from the table above the top 3 carriers have up to 80% of TEU capacity over the top 5 and 81% of ship numbers over top 5. Further, these top 5 have up to 47% of TEU and 37% of ship numbers. The suggestions are that these are trends towards structural changes with a larger share of both TEU 17

18 and ship numbers within the capacity of the top ranking carriers. The consequence of this structure is that these carriers are likely to influence the change in industry supply scenario and this could be explained by the economic regulatory regime that is global and complex and possibly hostile in terms of approach to these carriers. A brief reflection to the US regulatory framework is relevant here to place the overall analysis of this paper in context and this is provided in the next section, before the conclusion is presented in the study. Developments in US trade In order to place the regulatory framework of the EU and the USA in context it would be useful to refer to a recent case related to the US trades, without any calls on EU ports. In a recent development, the Transpacific Stabilization Agreement has recommended that the participating carriers apply short-term minimum rates to be applied in view of cost pressures (Brett, 2015). In this case, the TSA as a carrier group has recommended that its five members implement a minimum rate for Asia-US west coast shipments via Californian ports. Further, this will also include rate minimum per feu for west coast shipments to Pacific Northwest ports and for east coast and gulf coast cargo. This collaborative approach cited by the TSA suggests that: While most cargo in the trade continues to move under contract, more customers use the short-term market as a hedge for certain commodities and types of shipments. Given current cost pressures, it is essential that carriers address both market segments simultaneously for the coming year (Brett, 2015). This announcement from the US based agreement for the transpacific suggests that this route is clearly not under the same regulatory framework as the European Union post October 2008, since collaborative price signals could operate. Evidently this approach in the transpacific trade, without any calls in EU ports, is not the same as in the transatlantic and the Europe Far East route. Therefore, following the announcement of the rejection of the P3, it would be appropriate to place the above analysis in context in order to examine the structural changes taking place in the industry. This time the analysis would be as discussed above within the context of the economic regulatory framework of the principal EU regime and their variation such as the US regime. Conclusion As is evident the dynamics of the industry is changing towards greater restructuring developments and it remains to assess whether this will contribute towards greater concentration, which will be the main theme of this paper. The questions for research will be which alliance and with bigger ships and 18

19 larger companies and dominating main trades are likely as the outcome, from all these developments. These arguments are built on the premise that the regulatory regime for horizontal collaboration is becoming increasingly hostile from its international and confusing global context with overarching regulations and interests operating in attempts to define the ideal context of competition and the most efficient outcome in the allocation of resource on a global scale. The theoretical perspectives offered by the contestable market model suggested that the nature of scheduled services with the differential rate structure would be ideal for self-regulation without excessive hostile oversight by economic regulation. It is seen however, that developments in the regulatory framework continues to generate unclear signals especially after the rejection of the P3 alliance and this is seen in recent times with major moves especially in the trades linked to EU ports of linkages in mergers, and alliances. The predictions offered by the contestable theory appears to be emerging and the strategies of lines are likely to continue. It is expected that the industry will be an exciting stage fostered by hostile public sector regulatory policies, more that operational efficiency decisions driven by the need to secure an outcome that is best for the provision of global scheduled services by these companies; a truly undesirable outcome with state intervention. 19

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