MOC monopoly ruling a relief to Chinese shipping companies

China's top commerce watchdog recently rejected a tie-up between the world's three top shipping companies by container vessel capacity.

The ruling came as a disappointment to the firms, which had hoped to cut costs, tackle overcapacity, and improve service by sharing vessels on major East-West trade routes, but may provide a temporary respite for competing local shippers.

The alliance, dubbed the "P3 Network," was proposed by Copenhagen-based Maersk Line, Geneva-based MSC Mediterranean Shipping Company SA and France's CMA CGM in June 2013. The network was scheduled to start operation in the third quarter of this year following regulatory approval from US, EU and Asian economies.

In a surprise ruling, however, China's Ministry of Commerce (MOC) nixed the proposed merger on anti-monopoly grounds.

China's disapproval comes in the wake of a March approval by the US Federal Maritime Commission (FMC), and the European Commission's conclusion of its anti-trust investigation earlier this month.

In a statement posted on its website, the MOC explained that China sees the proposed alliance being likely to "restrict competition" on the busiest Asia-to-Europe routes, as the combined capacity would give the network control of 47 percent of the market

Domestic analysts supported the ministry's decision, calling it well-grounded and noting that it will likely relieve pressure on China's shipping companies, already struggling with overcapacity and low charter rates.

'Surprising' rejection

Maersk Line acknowledged that the Chinese ministry's decision came as "a surprise" to the company, as the P3 partners had worked painstakingly to address regulators' concerns.

Michael Storgaard, senior press officer at Maersk Line, told the Global Times Friday in an e-mail that three remedy proposals were submitted to the MOC, covering both structural and behavioral solutions.

Diego Aponte, vice president with MSC, even considered the decision a disappointment in a press release issued on June 17.

"We could have achieved these efficiencies much faster through P3," said Aponte.

The members of the proposed network were not the only group surprised by the ruling. In an interview with the Global Times, Wu Minghua, a Shanghai-based independent analyst in the shipping industry, commented that shippers and port runners throughout the US and the EU seemed to be caught off-guard by the MOC decision. It was their feeling, Wu said, that the power of the proposed network to drive down costs would benefit their operations.

In contrast, Wu supported the MOC's decision, noting that it hewed closely to the country's existing anti-trust laws.

The combined entity would be run by a center jointly set up by the three carriers, generating the potential for the alliance to dominate vessel competition and rate setting, said Wu.

Different from other existing alliances, namely G6 and CKYHE, Richard Lidinsky, the only commissioner with the FMC who rejected the P3 Network, believes that the alliance is mainly controlled by Maersk.

In contrast, G6, a group of six leading international carriers including Hong Kong-based Orient Overseas Container Line, has a diverse membership and rotating chairmen, Lidinsky said in a report posted on FMC's official website.

A temporary relief

Although the rejection comes as a disappointment to the P3 partners, it comes as a relief to domestic companies, said Zhang Yongfeng, an expert with the Shanghai International Shipping Institute (SISI).

Chinese cargo carriers have long been under pressure from fierce competition with foreign shipping companies. If the proposed partnership went through, the P3 Network would have become the most powerful rival to Chinese shipping companies, which would have found their market position and bargaining power in the sector further weakened by Maersk and its partners, said Wu.

The P3 Network would have had a fleet of 255 vessels on 29 service loops covering three main corridors - Asia-Europe, trans-Pacific and trans-Atlantic - with total capacity of 2.6 million twenty-foot equivalent units, far outstripping other shipping alliances.

In comparison, CKYHE, a group of five carriers that includes the COSCO Group, China's largest shipping company, operates six service loops between Asia and Northern Europe and four loops on Asia-Mediterranean trade.

Wu noted that the rejection of the mammoth P3 Network should prove only a short-term relief to domestic carriers, and is unlikely to reverse their persistent loss-making.

Data from SISI's first-quarter China shipping index fell to 88.19 from 106.43 in previous quarter. A reading below 100 indicates weak performance while a reading above 100 indicates an upturn.

Both Wu and Zhang believe that lowering costs, either through investment in more fuel-efficient vessels, further industry consolidation, or through vessel-sharing arrangements, is currently the domestic shipping industry's top priority.

China Shipping Co (CSC), one of China's leading container ship operators, sees deepening cooperation with industry counterparts as the likely future direction of the domestic shipping industry.

"We have rolled out partnerships [such as vessel-sharing] with different shipping companies in some industries, but have no intention of joining any alliance yet," a PR representative with CSC told the Global Times Friday.

Wu believes that CKYHE has already approached CSC several times about a possible alliance, and that the State-backed company is considering the option. According to Wu, CSC may be hesitant due to a belief that its rival and fellow State-owned firm COSCO has already gained a degree of preeminence within the alliance.

A path forward

Following the MOC ruling, the erstwhile P3 partners have agreed to end work on the P3 Network, expressing their disappointment and surprise at the result.

"The decision is final and we respect that," said Storgaard at Maersk.

In the absence of the P3 Network, Maersk, MSC and CMA are now considering other ways of increasing profitability.

According to Storgaard, "there is no plan B" after the P3 Network's demise, but that the company will continue to explore ways to increase profitability along East-West trade routes, adding that "vessel sharing agreements will continue to be something we do."

Some analysts said that, instead of a merger, the three parties may seek to cooperate by sharing vessels on some routes, an approach which has the potential to realize some of the gains of the P3 Network while avoiding the risk of anti-trust investigation. If true, it seems that China's shippers may yet have something to worry about.