Ocean carrier Hyundai Merchant Marine joining the 2M Alliance – comprised of Maersk Line and MSC – has fueled speculation about Maersk’s ultimate motives, but the short term impact is a larger share on the transpacific trade, especially from Korea.
They’ll likely have to come up with a different name to avoid being confused with the Post-it manufacturer 3M, but the 2M ocean carrier alliance of Maersk Line and Mediterranean Shipping Co. (MSC) will soon become three. Struggling South Korean carrier Hyundai Merchant Marine (HMM) announced yesterday it signed a memorandum of understanding with the other two lines to join the 2M Alliance, which operates joint container services in the major east-west trades.
HMM, South Korea’s second largest shipping conglomerate, has been struggling to turn a profit in recent years and has amassed considerable debts in the process. The company earlier this year began a “self-rescue” plan that has included asset sales, debt restructuring, and negotiating a 20 percent charter rate reduction with containership owners in order to stay afloat.
The latest news came as a bit of a surprise, not only because HMM is currently a member of the G6 Alliance, but also because it expressed a strong interest in following fellow South Korean carrier Hanjin Shipping into the recently announced THE Alliance vessel sharing agreement.
As a result of the latest wave of consolidation among carriers – CMA CGM’s purchase of APL parent Neptune Orient Lines, the merger of COSCO and China Shipping (CSCL), and the potential combination of Hapag-Lloyd and United Arab Shipping Co. (UASC) – three of the four current major east-west VSA’s will no longer exist come next year. The G6 Alliance, CKYHE Alliance and Ocean3 Alliance agreements will all run their course by the end of first quarter 2017 and be replaced with new groupings called THE Alliance, which will include will include current G6 members Hapag-Lloyd, MOL and NYK and CKYHE members “K” Line, Yang Ming and Hanjin; and the OCEAN Alliance, comprised of CMA CGM and CSCL from the Ocean3, COSCO and Evergreen from the CKYHE, and APL and OOCL from the G6.
London-based maritime consultant Drewry, among other analysts, has speculated that the 2M agreement was merely a smokescreen on the part of Maersk, and that its real intention was to either merge with or acquire HMM outright. These rumors were promptly denied by both carriers, but there is a certain logic to them given Maersk’s history, specifically its acquisitions of Sea-Land and P&O Nedlloyd, both of which it approached about cooperating before eventually buying them instead.
Leaving baseless speculation aside for the moment, the addition of HMM to the 2M Alliance may not seem to make a whole lot of sense at face value. HMM is the smaller of the two South Korean lines, and despite its recent efforts toward normalization, it still has a long way to go before it can be considered a healthy company. Maersk and MSC, on the other hand, are the industry leaders and both seem to do well even in a down market, although as a privately held company, MSC does not publish its earnings for the public. In terms of market share, HMM would contribute most to 2M in the transpacific trade between Asia and North America.
The charts below, built with data from BlueWater Reporting’s Trade Route Deployment Report, compares the current combined weekly deployed capacity of each of the three projected major carrier alliance groups and non-alliance lines in the transpacific and Asia to North Europe trades. With HMM joining the 2M Alliance, currently a distant third to the G6 and CKYHE alliances in the trade, the three carriers will still control just 18 percent of the overall market by capacity with a combined 69,956 weekly TEUs, well short of the projected 35 percent share for THE Alliance (137,198 TEUs), assuming UASC’s tonnage is absorbed into that of Hapag-Lloyd, and 40 percent for OCEAN (153,622 TEUs). In the cutthroat Asia-Europe trade, HMM would only contribute 3,524 TEUs per week, bringing the 2M market share up to 34 percent (87,857 TEUs), compared with 35 percent for OCEAN (89,473 TEUs) and 31 percent for THE Alliance (78,990 TEUs).
Source: BlueWater Reporting
Source: BlueWater Reporting
Cooperation with the 2M carriers would allow HMM to cut costs and strengthen its service competitiveness, but the benefits for Maersk and MSC are less obvious. One factor that could have played a part in the 2M’s decision is that a vast majority of Korean cargoes are still carried on either HMM or Hanjin ships and several Korean automobile and parts suppliers, including Hyundai Motors and Kia, have manufacturing plants in the Mobile, Ala. area. The 2M in May launched a new Asia-U.S. Gulf service that calls the APM Terminals, Maersk’s port operator subsidiary, facility in Mobile. The loop, which Maersk calls TP18 and MSC calls the “Lone Star Express,” currently operates with 10 ships – five from each carrier – with an average capacity of 4,417 TEUs, but with HMM in the fold, the alliance could deploy its vessels instead in an attempt to capture Korean cargo heading for the Mobile area.
And despite the fact that there is still no credible evidence of any M&A discussions with Maersk, it’s still possible the Danish giant has an ulterior motive here. In addition to its routes in the transpacific, Maersk could also be interested in HMM’s newer 8,000-TEU to 10,000-TEU ships as a way to replace its aging fleet of S-Class vessels, built in the 1990s, without adding newbuilds to a market already bloated with excess capacity. As with any M&A activity, however, the success or failure of such a tie-up would rely heavily on Maersk’s ability to convert existing HMM customers, which is hardly a given.
The assets of another carrier alone will rarely be enticing enough to purchase the entire company, so a large portion of its valuation lies in its book of business. Companies engaging in M&A on this scale must also be aware of the costs of integrating potentially disparate technologies and corporate cultures, as well as staffing and operational redundancies. These factors can all add significantly to the initial purchase price if the integration is not properly planned and executed. Indeed, it has been reported over the years that Maersk has been gun-shy about acquisitions since its somewhat arduous absorption of P&O a decade ago.
On a cultural level, procurement consultant Chas Deller, a former longtime forwarding executive, said Maersk and HMM mesh well because they both often go after an “up-market client base,” while adding HMM enhances their TP presences without having to physically add ships.
Ben Meyer is Managing Editor of American Shipper and Research Analyst with BlueWater Reporting. He can be reached by email at bmeyer@shippers.com.