Merger of giants in shipping lines

In an effort to shore up the struggling global shipping economy, several of the major international shipping and logistics players are forming strategic alliances with one another. 

The Wall Street Journal announced recently that Chinese container operators China Ocean Shipping Co. (COSCO) and China Shipping Group Co. have recently merged and are currently in the process of getting approval from the European Union and U.S. regulators to operate internationally. 

With China’s economic slowdown a potentially unsettling global indicator, many within the world of shipping and logistics have turned their attention to consolidation amongst the major players. With the approval of the merger, the new shipping entity may soon join China Shipping Group in the Ocean Three alliance, which also includes Dubai-based United Arab Shipping Co. 

The group as it stands is already a powerful force, controlling a nearly 22 percent market share of all cargo moved between Asia and Europe. By integrating the new entity, the shipping line could rival or even exceed the 34 percent market share of the powerful 2M alliance comprised of Denmark-based A.P. Moller-Maersk A/S and Geneva-based Mediterranean Shipping Co. 

In this regard, the mergers and acquisitions involving the major players in international shipping may turn out to be something of a chaotic shuffling of the deck, as the different companies change hands and alliances are formed and broken. 

This leads some industry experts to wonder how long it will be before we start seeing the major alliances themselves consolidated — with smaller carriers finding themselves picking up the scraps. 

Growth of mega-ships 

The growth of mega-ships across many liner shipping routes has wide ranging implications for competition for shippers, between shipping lines and total supply chain efficiency. 

Accordingly, it is appropriate to assess the extent to which shippers and end consumers have benefitted from mega-ships, including the associated growth in merger activity and shipping alliances as mega-ships reduce the number of carriers that can operate efficiently on a route. 

In particular, shippers have expressed concern that the fundamental industry movement towards increasingly large ships, a movement that impacts shippers as well as industries that facilitate shipping (eg port and terminal facilities, port and terminal handling), has typically been carried out without consultation1. 

 This is an issue as mega-ships, and the associated commercial practices which they promote (such as the growth of global alliances and mergers), may also harm users of the shipping industry, including ultimately end consumers, by reducing supply chain efficiency by: 

● Driving consolidation and alliances across shipping lines, given the challenges posed by the commercial need for shipping lines to keep capacity highly utilised. However, this has implications for rivalry. In particular, members of a shipping alliance composed of lines operating common mega-ships capacity cannot compete with each other as regards the alliance’s commonly agreed capacity, sailing frequency, transit times, ports of call and associated service quality 

● Reducing the frequency of sailings (as multiple ships are replaced with one mega-ship) and promoting commercial practices such as ‘slow steaming’, whereby spare capacity and fuel costs are reduced by running ships at slow speeds2. 

● Making shippers dependent on a smaller number of vessels, which also make fewer and slower sailings. This raises issues as to the reliability, predictability and security of the supply chain. Just-intime production by goods manufacturers – with all the efficiencies that this offers in terms of enabling them to rapidly respond to customer demand and reduce the high costs of holding stock across the supply chain – depends on a reliable, flexible and fast transportation supply chain 

● Putting the reliability, predictability and security of a shipper’s supply chain in the hands of shipping alliance members other than the shipping company. 

Shipping Lines can use Mergers to Succeed 

Lines need to carefully consider their future strategies, which must include a view on mergers and consolidation. Although some shipping liners will acquire other companies, it is highly unlikely that all of the top ten liners can be acquirers. This does not mean that those who are acquired will be any worse off; in many cases, selling delivers higher returns to shareholders than acquiring. Share-price data from the past 15 years shows that, on average, the acquired company’s stock increases by more than 10 percent in a merger while the acquirer’s loses 3 percent. In negotiations, the acquired company may also be able to win a more significant share of the combined entity or a higher acquisition price if it strategically positions its value. Given these findings, it may make more sense for some shipping lines to focus on improving their company so they will maximize their sale price (as well as current performance). Liners need not fear mergers, although they do need to approach them strategically and with an eye toward best practices. Over the past decade, many container lines have learned to tread carefully, based on previous visible, bad outcomes .

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