The decision by China earlier this week to turn disallow the P3 Network planned by Maersk, MSC and CMA CGM should not be an obstacle to the operation of other vessel-sharing agreements, said Commissioner Richard Lidinsky of the Federal Maritime Commission.
Asked if the decision spelled trouble for the G6 alliance, Lidinsky said “absolutely not,” adding that “G6 can become the model for alliances if that is going to become the way we are going to continue to operate these large carrier groupings.
“It was very easy to see the difference between P3 and G6,” he said, referring to media reports that the operations center the three carriers were creating in London would employ many more people than, for example, the G6 operations center in Singapore.
“From the get-go, it was a very transparent attempt to create a super shipping line or a merged bigger ship operation, whatever you want to call it. And there was no intention to operate a vessel-sharing arrangement — very loosely carved out rules, people not really in charge. From the beginning, this was clearly Maersk saying, ‘I’m in charge, you two lines are going to do what I say, put your ships in the pot, and we will run things.' It is further from what G6 has done in terms of the operations and the personnel they have put into it.”
An analysis of the decision by the law firm Skadden
reported that China’s Ministry of Commerce found five factors to be particularly significant when they considered the P3 alliance:
- The fact that “the proposed alliance went beyond such loose associations and instead created a tight, jointly operated concentration in which only the technical management of individual vessels remained independent from an operations perspective.”
- “The transaction would ‘significantly enhance’ the market power of the parties, given that the combined post-transaction capacity share of the P3 Network would be 46.7 percent of Asia-Europe container liner shipping.” The Chinese said individual shares of carriers were: Maersk, 20.6 percent; MSC, 15.2 percent; and CMA CGM, 10.9 percent.
- “The degree of concentration in the market would increase significantly, calculating an increase of 1,350 in the Herfindahl-Hirschman Index, from approximately 890 pre-transaction to 2,240 post-transaction.” Skadden said, “Pursuant to the U.S. Horizontal Merger Guidelines, U.S. antitrust regulators would consider an HHI of 2,240 to indicate a level of ‘moderate concentration’.”
- “The proposed transaction would increase barriers to entry in the market, “although Skadden said the ministry did not support this finding with detailed analysis.
- P3 would enhance the market power of the lines and, thereby, “squeeze development” for other competitors.
Lidinsky said that in discussions with the FMC last December, Chinese regulators “laid out how they would handle this thing, and they handled it exactly ‘to the T’ of how they laid it out.
“I don’t think these voices that say, 'well, it was a fix;' 'the Chinese government wouldn’t give it a go;' 'it was a done deal; 'Cosco and China Shipping put the kibosh on it' — this is all Monday morning quarterbacking. P3 was created. P3 shot itself in the foot.”
He continued, “This is (China’s) law. I think the Chinese stuck to the letter of their law, the letter of their process. They conducted this analysis just as they said they would. If you like the result as a shipper or you don’t like it as a carrier, you can’t knock them for not following what they said they were going to go forward."
Richard Gluck, an attorney with Garvey Schubert Barer, said the Ministry of Commerce decision indicates “a lot of attention being paid to ‘market control.’ Remember, China's growth, up to now, has been manufacturing-export driven, and its economy is still sensitive to fluctuations in sales volumes in that sector. I think the PRC Government may be concerned that the impact of allowing foreign carriers to control rates and service to this extent could have ripple effects throughout the Chinese economy by adversely affecting Chinese exporters' ability to competitively access foreign markets.”
Skadden also said in its analysis that “it's clear that national economic concerns played an important role — however, they did not play the only role. Although some of China’s largest shipping companies such as China COSCO Holdings Inc. and China Shipping Container Lines were reportedly ambivalent about the P3 Network (perhaps due to their own participation in various shipping alliances), the relevant trade association for domestic competitors, the China Shipowners’ Association, worked actively to block the deal.
Skadden said, “MOFCOM also would have needed to consult with the Ministry of Transportation and National Development and Reform Commission in coming to a final view on the alliance.”
Gluck noted that the NDRC is the former State Planning Council, an arm of the State Council, China's highest political decision making body, responsible for overseeing and implementing national economic policy as reflected in the successive five year plans.
Skadden added that a trip by the director general of the MOFCOM to the Yangshan deepwater port in Shanghai to "better understand the industry before making a decision" shows proper due diligence and proves the decision "was not motivated by industrial policy concerns alone.”
Lidinsky said Maersk, MSC and CMA CGM will have to “carefully review” existing space sharing agreements. “The Chinese language is pretty firm and strong about what they don’t want to see come out of China, and they may have to look at their rotations and all the other factors that go into how they are deploying their ships at the moment," he said.
Michael Storgaard, senior press officer for Maersk, said, “It is really too early to comment on network changes, deployment plans, changes to existing VSAs, and so on. We will continue to explore ways to increase our profitability in the east-west trades. The tool box we have available is the same as always. And vessel sharing agreements will continue to be something we do.”
Lidinsky said that the P3 decision is a "poster child" for the need for a review of shipping regulation in the U.S. as the 30th anniversary of the Shipping Act of 1984 approaches.
"If you have a combination of the one, two and three carriers in the container world, and it doesn’t raise any concerns by staff, something’s amiss because you have to take a more serious view of these combination," he said.
"There are two ways to deal with this," he continued. "One is to review the '84 act, possibly change some provisions of the '84 act on how this thing works. Or internally, we’re about to begin in the fall a review of all the procedures involved with agreements, and this would be at the top of the list. ... There are there are threads in this thing that could have set off an alarm for us and it didn’t do it."