TABLE OF CONTENTS Jul 2014 - 0 comments

Thinking long term

Why China's scuttling of the P3 Alliance may be better for the long run

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By: Lou Smyrlis
2014-07-01

Should shippers of marine transportation services be rejoicing or be upset about China’s surprise decision in June to wreck plans for a broad alliance among the world’s three largest container shipping companies? It’s not an easy question to answer.

The proposed P3 Global Alliance among Denmark's AP Møller-Mærsk A/S, France's CMA CGM SA and Switzerland-based Mediterranean Shipping Co. would have resulted in lower underlying costs and improved industry stability, according to the respected UK-based Drewry Maritime Research. Certainly the proposed alliance promised to lower costs for the shipping giants involved by allowing them to share ships and port facilities. In turn it was hoped this would result in lower freight rates. Even a major Europe-based rival conceded to the media that the alliance “threatened to eventually drive down freight rates that would be hard to match.”

The alliance had already won US and European approval and the three companies involved had already started to reorganize operations ahead of the expected approval of the deal. But China’s anti-trust regulatory body, which is flexing its global regulatory muscles in accordance with the country’s economic standing, felt the alliance would have given the three European-based shipping companies too much control of the globe’s trade routes. The P3 Alliance, expected to start operating this year, would have positioned the three shipping lines in a commanding role, controlling as much as 40% market share in the world's main liner trades, including over 46% market share in the Asia-Europe market.

The alliance was also fiercely opposed by smaller shipping companies and logistics suppliers. The Global Shippers Forum, of which our own Freight Management Association is a member, was also concerned stating that: "Shippers are rightly worried about the potential of the P3 to eliminate effective competition in the world's main liner trades.”

Once the European Commission agreed to the Alliance, the Global Shippers Forum (GSF) asked the Commission to “closely scrutinise the P3 to ensure the Agreement is in line with the general provisions of the EU competition guidelines.” At the same time the GSF wanted the P3 lines to “step up to the plate and deliver on their promises of improved services and lower costs.” The GSF wanted to see a wider range of services, enhanced service performance including improved service reliability and on time delivery, arguing that “above all, shippers expect to share in the benefit of more competitive freight rates through reduced costs."

Following China’s decision, the three lines involved announced that they have ceased preparatory work on the alliance. Will marine service buyers looking for competitive rates be the ultimate losers through this turn of events or did they just manage to avoid the longer-term issue of excessive market consolidation?

Most of the marine shipping industry’s major players have been aggressively forming alliances to shore up sagging freight rates, raise ROI, and reduce high-capital investments. As pointed out in the recent CSCMP Annual State of Logistics Report, the 20 largest carriers worldwide now control more than 80% of the total fleet capacity, up from just around 55% a few years ago.

The huge debt loads carried by so many of the globe’s major marine lines is well documented and a strong argument for the need for consolidation to boost efficiencies. But one has to wonder at what point consolidation goes too far. At what point do we start to see distinct signs of a reduction in service quality and the elimination of effective competition with not enough competition left in the marketplace to do anything about it?

The Chinese throughout their history have tended to favor the longer term view in their decisions. It wouldn’t be a big surprise if China’s blocking of the P3 Alliance was at least partially influenced by its need to protect its own shipping companies – both China Costco Holdings and China Shipping Container Lines have posted troubling results in recent years. But perhaps the Chinese regulators have done us a favor nonetheless by thinking long term once again with their decision to block the P3 Alliance.



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