The Global Shippers’ Forum and the World Shipping Council square off on whether regulation of the container industry needs to be tightened.
A leading shipper organization is raising the alarm about the headlong rush by container carriers into the use of mega-ships, strategic alliances and mergers.
“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,” according to a report issued this week by the Global Shippers’ Forum (GSF), a London-based organization that counts the National Industrial Transportation League in the U.S. and the Freight Management Association of Canada among its members.
“It has been clear for some time that the existing business model isn’t working for either carriers or their customers. There is a widening gulf between customers’ expectations and quality of service as carriers focus almost exclusively on operational arrangements and alliance structures,” said Chris Welsh, the secretary general of the GSF. “We urgently need a new ‘commercial contract’ where the needs and incentives between shippers and carriers are better aligned.”
The report, The Implications of Mega-Ships and Alliances for Competition and Total Supply Chain Efficiency: An Economic Perspective, contends, “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.”
Just because increased ship size has lowered costs
for carriers does not necessarily mean that shippers’ costs have
decreased to the same extent or as rapidly, or that total supply chain
costs have declined, according to the GSF. The organization also said that shippers may see increases in
the costs of holding inventory and from unexpected supply disturbances if
shipping carriers do not meet scheduled delivery times.
“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 said.
The report questions whether shipping alliances and consortia are actually preferable to consolidation, noting how “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.”
GSF said it favors the repeal of unique treatment of shipping companies by competition authorities, effective oversight and monitoring of consortia, and strategic alliances. “The new market structures and trend towards consolidation may require new competition and regulatory approaches,” the organization said.
“While consortia agreements may encourage efficiencies through operational cooperation, they also may take advantage of the excessive scope for competition restrictions in key areas of competition such as capacity, sailing schedules and ports of call permitted under the relevant regulation applicable worldwide, including the toleration of discussion agreements in the U.S. trades and the permissive European Union (EU) consortia block exemption. It is for this reason why shippers believe the EU consortia regulation should be repealed or substantially modified as suggested in this paper and toleration of discussion agreements should be terminated.”
The World Shipping Council (WSC), the primary trade organization for the liner industry, was swift to issue a response to the GSF report, calling it “largely a repackaging of a longer paper that the OECD published last year” and suggested some of the trends it notes are being overtaken by events.
“Much of the GSF paper is dedicated to asking whether consolidation in the shipping industry would be preferable to alliances from a shipper perspective,” the WSC said. “It is no criticism of the GSF paper that events are moving so quickly that the question has largely been rendered moot – clearly we will have both consolidation and alliances.”
The past year has seen CMA CGM’s acquisition of Neptune Orient Lines and its APL subsidiary, the merger of COSCO Container Lines and China Shipping Container Lines, the agreement of Hapag-Lloyd to acquire United Arab Shipping, and last month’s announcement that the three largest Japanese shipping companies – NYK, MOL and “K” Line – plan to merge their container businesses.
“Whatever one perceives as the primary drivers of the current condition of the liner shipping market, the facts are that demand is down and capacity is up. That translates into exceedingly low freight rates, leaving cost-cutting as the only avenue to better returns for shipping lines,” the WSC said. “That means burning less fuel per container moved, and that in turn has meant bigger ships where they can be used effectively, and also alliances where those arrangements add efficiency.”
Meanwhile, the GSF said, “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 it would be ruled out on competition grounds with carriers having to compete head-to-head.”
The WSC said it disagrees, noting how, “This GSF suggestion of what would be ‘inevitable’ in terms of competition analysis is both unexplained and incorrect under well-established market concentration measures” such as the Herfindahl-Hirschman Index.
The WSC also takes issues with a suggestion by the GSF that consideration be given to modifying the way that governments regulate consortia.
The GSF noted that when monitoring space sharing agreements among carriers, the FMC’s “remit is restricted by the onus of proof on the FMC to block an agreement by recourse to injunctions in a U.S. court. The FMC’s remit to protect US shippers and commerce may be enhanced by a return to the pre-1984 Shipping Act requirement of prior approval of alliance agreements with the onus of proof on carriers to demonstrate the benefits to shippers and consumers.”
In addition, the GSF has suggested consideration should be given in the European Union to reintroduce a notification process for consortia agreements, “at much lower market share thresholds below the current 30 percent.”
The WSC said, “Such approaches would be counter-productive, because the delays and uncertainties associated with such procedures – which were retired for good reason – would reduce competition rather than protect it. If alliances are subject to open-ended affirmative approval processes, then parties would be less inclined to make changes to those alliances in response to changing market conditions. That disincentive to market adaptation would negate some of the very efficiencies that consortia and alliances can bring.”
Welsh also said that, “Certain shippers believe that a degree of vertical integration between shippers and shipping companies is a potential method to increase the alignment of incentives between shippers and shipping lines. The nature of such integration, and the extent to which it might alleviate the problems felt by shippers, would of course need to be explored.”
“Forums in which shippers and shipping companies exchange ideas and jointly develop innovative products may also help shipping companies to better meet the needs of shippers today and in the future,” the GSF said.
Shipper group questions benefits of mega-ships, liner consortia
