The European Shippers’ Council has joined the Global Shippers’ Forum to promote the findings of new research and analysis commissioned by GSF into the impacts of new ‘alliances’ being formed by container shipping lines and the growing use of so-called mega-ships (those with more than 18,000 teu capacity). The paper analyses the impacts for shippers, the customers of container ship operators, and in particular the wider supply chain implications of mega-ships and the potential impacts on competition between competitors and their shipper customers.
Shippers fear that the contraction of the shipping market into a very small number of tightly knit alliances, and the use of much larger vessels will reduce their choice of carrier and the quality of the services delivered as carriers operating within such arrangements cannot compete amongst themselves with regard to the agreed capacity, sailing frequency, transit times, ports of call and service level.
GSF has issued paper – The Implications of Mega-Ships and Alliances for Competition and Total Supply Chain Efficiency: An Economic Perspective – which makes a series of recommendations to competition authorities and regulatory bodies around the world to mitigate the possible implications for competition in key liner trades arising from a reduced pool of competing carriers.
The key findings, conclusions, and recommendations for carriers, regulators and competition authorities, and shippers are summarised below:
Economic issues
- Mega-ships and the associated commercial practices of strategic alliances and mergers are driving consolidation in the container shipping sector. This is harmful to shippers because mega-ships and strategic alliances reduce supply chain efficiency and rivalry on important parameters of competition, including capacity, sailing frequency, transit times, ports of call and associated service quality
- The higher economies of scale associated with mega-ships mean that fewer ships can operate in a market of a given size. Higher barriers to entry are likely to reinforce the trend towards fewer independent operators, with smaller operators being driven out of the major trades into niche markets. Faced with a trend towards consolidation and cooperation due to mega-vessels, it is unlikely competition problems associated with consolidation and megaships will be solved by new entrants into liner shipping
- The report asks whether the time is right to question the received wisdom that shipping alliances and consortia are preferable to consolidation between carriers because shipping lines operating common capacity cannot compete amongst themselves with regards to the consortium’s agreed capacity, sailing frequency, transit times, ports of call and associated service quality
- Vertical integration between shippers and shipping companies may be an alternative means of better aligning incentives between both parties, although the Global Shippers’ Forum (GSF) recognises a detailed analysis of the potential costs, impacts on competition as well as potential benefits of vertical integration are required
- A deeper analysis of the costs and benefits of alliances relative to a counterfactual of all out mergers between alliance partners would be helpful. Such an analysis of all the resultant costs should take into account all the resultant benefits to shippers through the supply chain, and not just whether a merger would affect rates, which are just one component of the supply chain costs experienced by shippers
- Moreover, should the market become consolidated to 6-10 major operators controlling the main trade lanes, it would seem inevitable that the market share thresholds for alliances and consortia agreements would have to be so low that they would be ruled out on competition grounds, with carriers having to compete head-to-head
- A key recommendation of this paper is that due to the complexity of the issues confronting the industry and the desirability of better aligning the interests of shippers and carriers that there should be an active debate in an ongoing industry forum to discuss a sustainable future business model for the container shipping industry
Competition issues
- The growth of global strategic alliances has produced barriers to entry for new entrants and made it almost impossible for independent carriers to compete on global trades. Absent independent shipping lines in genuine competition with alliances and consortia, effective competition will be eliminated or seriously compromised through the new market structure dependent on strategic alliances and exchange of information between their members
- The growth of mega-ships has been a major driver for the development of the four main strategic alliances and concentration of the container shipping market. Strategic alliances should therefore be the main area of focus for competition authorities (such as the European Commission) and maritime regulators worldwide
- There should accordingly be sufficient independent competition to strategic alliances on key trade routes
- In line with the economic conclusions above, consideration of the treatment of mergers by, for example, the European Commission leads to the question as to whether consolidation through mergers is a preferred market structure to global strategic alliances, because of the impact not only on economies of scale but also of service and geographic scope
- Consequently, in line with the European Commission’s investigations into liner shipping mergers it may be time for competition authorities and maritime regulators to focus on the merger criteria when assessing alliances in the future
- In concentrated markets, the sharing of information on a regular and frequent basis reveals commercially sensitive elements of competitors’ strategies in the market, including price, capacity or cost information is more likely to raise competition concerns. GSF therefore reiterates its call for competition authorities and regulators to remove, where possible, shipping line exemptions for price agreements and other forms of agreement that facilitate exchanges of information on costs and rates, including general rate increase guidelines
- While GSF favours the repeal of unique shipping industry exemptions, effective oversight and monitoring of consortia and strategic alliances (including direct interventions) may be equally effective in dealing with the competition and efficiency issues detailed in this paper and by International Transport Forum ITF/ OECD. The new market structures and trend towards consolidation may require new competition and regulatory approaches
- Regarding the European Commission, one such approach could be the reintroduction of the notification process under the EU Consortia Block Exemption Regulation, but at much lower market share thresholds below the current 30 per cent. Additionally, the EC could also follow the example of the US Federal Maritime Commission (FMC) with more direct monitoring of alliances. And similarly regarding the US FMC, would its remit to protect US shippers and commerce be enhanced by a return to the pre-1984 Shipping Act requirement of prior approval of alliance agreements with the onus of proof placed on carriers to demonstrate the benefits to shippers and carriers?
- These are some of the leading questions raised by this paper, and in particular whether competition authorities and maritime regulators need to review their existing regulatory powers to deal with the new competition issues raised by consolidation and strategic alliances, including the adaptation of past regulatory approaches to these new challenges
GSF Chairman Bob Ballantyne said:
“I am delighted that ESC has joined GSF in order to promote and defend shippers’ interests at global level. GSF has made the voice of shippers heard in the UN agencies responsible for the regulation of the maritime sector and supported many of its member associations in advancing more transparent regulation of the container shipping industry in their home markets.
“ESC, with its network of contacts in the European institutions, will bring further pressure to bear in the key European liner markets. I very much look forward to working with Denis Choumert and ESC members in the future pursuit of our common goals of safe operations, open markets and environmentally responsible transport.”
ESC Chairman Denis Choumert said:
“ESC is pleased to be working with GSF on this critical issue of the necessary evolution of the structure and regulation of global container shipping. As a member of GSF, we will use our contacts and networks in Europe and elsewhere in the world to promote the report’s findings and demonstrate the value that joint working can have in advancing shippers’ interests more generally.”
Both chairmen call for shippers to respond to these threats and opportunities in a co-ordinated way and hope that shippers’ associations around the world will be able to use the findings and the analysis of this paper in their representations to their own governments on behalf of their members.
Explore more by reading the paper below
Source: GFS
