Commentary: The rejection heard 'round the shipping world
It’s hard to overstate just how unexpected — how utterly shocking — it was for the shipping world to find out that China’s Ministry of Commerce had blocked a proposal by the world’s three biggest liner carriers to jointly operate service on the world’s three biggest container trades.
Shock, awe, and a good dose of head-scratching. After a few hours to digest the decision, it’s hard to think of a situation where so little has changed, and yet so much has changed.
First, let’s be clear — what Chinese regulators did was keep things as they are. Maersk Line, Mediterranean Shipping Co. and CMA CGM have been operating independently on the Asia-Europe trade for decades. MSC and CMA CGM have a relatively new alliance on that trade that is unaffected by Tuesday’s announcement. The three lines already operate a vessel-sharing agreement on the transpacific.
But so many chess pieces had started to move into place to support the P3 — from the initial press blitz, to the three lines setting up an operational center in London (including moving key personnel to set up and run the joint network), to other lines responding in kind with their own mega-alliance formations, to shippers and NVOs bracing themselves for the impacts of a new liner world order.
In one stroke, China’s Ministry of Commerce has wiped all that away. Wiped away a year’s worth of planning from the three lines (more if you include the talks that occurred before the P3 plan was announced). Wiped away the chance to see if fewer operational decision-making factions might lead to some more rational decisions on capacity ordering and deployment. Wiped away the chance to see if a massive alliance might actually provide shippers with more opportunities through broader port coverage for each individual line.
The ironic thing is that this alliance has been thoroughly dissected for a solid year — in the trade press, by analysts, by shippers, NVOs, 3PLs, U.S. and EU regulatory bodies, and lawyers — and no one had a big enough gripe to submarine the plan. China’s worries reportedly centered around the alliance potentially marginalizing smaller carriers in Asia, a situation that could eventually present shippers with a dearth of competition if those carriers were swallowed up by larger, more powerful lines. In one sense, it’s hard to argue against that logic. The P3 carriers are already the biggest lines in the world in terms of fleet capacity, volume carried, and revenue earned, and they made no bones about the fact that joining together operationally would make them stronger.
I’ll admit my initial reaction to the mooted alliance a year ago was a nearly identical form of shock as I experienced this week. It was like Hilton, Marriott and Westin joining forces to redefine the hotel industry. Or like LeBron James, Dwayne Wade and Chris Bosh joining forces on the Miami Heat to redefine basketball.
Gradually, however, I came to the conclusion that something must be so structurally unsound with the industry that it would take something this drastic — three carriers that had fiercely competed with one another laying down arms and joining hands — to correct course. It was almost a plea that carriers needed help because they couldn’t help themselves. The motivation to keep ordering bigger, more-efficient ships was one that could never really be quelled if they all were left to make independent decisions.
When the U.S. Federal Maritime Commission and EU’s competition commission both rubber-stamped the alliance, its existence seemed a foregone conclusion. The carriers, and the rest of the industry, acted as if it was. And let’s not kid ourselves, though this was a momentous grouping of power, it’s not like the liner shipping industry has ever been governed by the same rules as any other industry. On the contrary, throughout its history, it has been governed by a separate set of rules deemed to be necessary to protect naval might and sovereignty, and then later, commercial access. Somewhere along the line, it also became about protecting ego and national projections of power.
China’s decision has smacked the industry square in the face simply because it runs so deeply against what we’ve come to expect in terms of how liner carriers are regulated. Even the significance of the EU ending antitrust exemption for carriers serving European trades was diluted by the fact that the decision was expected by the end. Tuesday’s decision? Not so much.
So where does this leave us? Well, in the absence of any clear explanation for China’s decision, I’ll read my own tea leaves. There are two clear indications that China is prioritizing its export and import volumes over the health of the liner carrier industry carrying those volumes. For one, it continues to persist in operating two state-owned ocean carriers that have both lost stacks of money since 2008 (a collective $3.2 billion, including nearly $580 million in losses in 2013, according to forthcoming data compiled by American Shipper). Mind you, those are liner losses alone. Second, its move to block the P3 removes the ability of those three carriers, and by domino effect, the ability of other carriers, to manage capacity and vessel ordering more effectively.
I can’t say this is definitely being done in the name of preserving competition for shippers because the Ministry of Commerce has not explained its decision. That silence, even if only for a day, can lead to speculation, such as: Are these moves being taken to provide greater competition, or to ensure China’s ports have more potential carriers from which to draw business? If that seems a cynical stance, remember that China has a glut of modern port capacity to fill up and down its coastline, and thinning the roster of carriers doesn’t exactly suit the needs of those terminals.
Now, is it up to China to enable an industry that is having trouble sustaining itself financially, as its counterparts in the United States and the EU did? Maybe not. But they have struck a fierce shot across the bow of a hopeful group of carriers, a group that was counting on a drastic measure still something short of outright consolidation to save their day. Now, it is “as you were.” And “as you were” wasn’t doing too well.