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Focus: Global Supply Chain and Logistics

Our Weekly Feature Article on Topics Related to Global Supply Chain & Logistics
 

From SCDigest's On-Target e-Magazine

- Aug. 18, 2015 -

 

Global Supply Chain News: After Blocking P3 Alliance, China Announces Merger of State Owned China Cosco and CSCL, the 6th and 7th Largest Container Carriers


Deal Likely to Set Off a Series of Other Carrier Mergers, Drewry Says

 

SCDigest Editorial Staff

 

In June of last year, Chinese regulators blocked plans for the creation of the "P3 Network," a vessel-pooling consortium between Maersk Lines, Mediterranean Shipping Co., and CMA CGM, saying the move would "restrict competition" on the busiest Asia-Europe container routes.

The "closely coordinated joint operations" proposed in P3 would also have been substantially different from the "loose cooperation" that characterizes other current alliances, a Chinese ministry added.

SCDigest Says:

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If China Cosco and CSCL do merge as expected, that is likely to be the catalyst for a series of chess moves that result in even more consolidation in the industry.

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That after the plan had received regulatory approvals from US and European authorities.

The three P3 carriers subsequently abandoned the plan, with Maersk and MSC later creating a two-carrier alliance dubbed P2.

Now a bit more than a year after the Chinese veto, Chinese state owned ocean container carriers China Cosco and CSCL, the sixth and seventh largest carriers respectively in the rankings of carriers by operated fleet size. Assuming the merger goes through, the combined entity would comfortably move into fourth place with a total fleet in excess of 1.5 million TEU, giving the new company a global market share of around 8%.

There are few details thus far, but it seems Cosco and CSCL are part of a much broader effort to consolidate China's state-owned enterprises that was announced earlier this year. The companies are said to be working on a plan for the merged operations that will be released before the end of the year.

The analysts at Drewry Shipping say that the concern about the alliances - which involve vessel sharing but maintain each carrier's sales, marketing and pricing independence - is largely misplaces versus the competitive risk from mergers and acquisitions.

"Operational alliances, which arguably maintain competition and help reduce costs, are the subject of misdirected criticism by some regulators and some shipper groups," Drewry said last week. "A more serious competition risk - the reduction in the number of carrier competitors (APL is also up for sale) - seems to be encouraged by governments."

Drewry adds that "The rationale for a merger is entirely sound from a financial viewpoint and calls into question why China has persisted with the two-carrier strategy for so long. It makes little sense to have two national carriers competing fiercely against one another and against non-Chinese carriers in the same markets." The usual cost synergies could certainly help bolster the bottom line of a combined company.

A key question is how this merger will impact the existing alliance structure as has emerged over the past 2-3 years. Cosco is a member of the CKYHE Alliance with K Line (Japan), Yang Ming (Taiwan), Hanjin (South Korea) and Evergreen (Taiwan). CSCL is a part of the Ocean Three consortium with CMA CGM (France) and UASC (Qatar) that was created at the start of this year.

Drewry says that "A merger of the Ocean Three and CKHYE alliances would mean a combined market share above 40% and [therefore] unlikely to be approved by regulators. Instead, both the CKYHE and Ocean Three will be faced with a major void to fill were they to lose either Cosco or CSCL to the other carrier group. "

Based on the deployed vessels in the East-West container trades (Asia-Europe, Transpacific and Transatlantic) as of July, both Chinese carriers contributed approximately one-quarter of each alliance's fleet in terms of TEU.


(Global Supply Chain Article Continued Below)

 
CATEGORY SPONSOR: SOFTEON

 
 

With only three carriers, the Ocean Three group would obviously have its viability called into question if CSCL were to abandon partners CMA CGM and UASC.

The stakes are high. Depending on which alliance wins or loses its Chinese member, the Ocean Three alliance and the CKYHE alliance will decline to a market share of just 13% or rise to a market share of 28%.

Drewry believes the Chinese merger will likely cause privately held carriers based in other Asian countries to also consider combining. It notes, for example, that over the last 5 years the Big 3 Japanese lines (MOL, NYK and K Line) have lost approximately $550 million, while the South Koreans (Hanjin and HMM) have lost nearly $400 million. At some point soom, a merger to staunch the red ink may make sense, and the Chinese carrier merger may be the catalyst that triggers new combinations as the container shipping industry continues to be plagued by overcapacity, slow volume growth and rock bottom pricing.

So, if China Cosco and CSCL do merge as expected, that is likely to be the catalyst for a series of chess moves that result in even more consolidation in the industry.

Drewry says that UASC is now considered the front-runner in the speculated sale of APL, by the way.

Do you see the merger of the Chinese carriers triggering more industry consolidation? Will this be good or bad for shippers? Let us know your thoughts at the Feedback button (email) or section (web form) below.


 

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