There is no doubt that the shipping industry is headed for a major shake-up as new alliances begin to emerge. Amalgamation and consolidation are in the air. The likes of CMA CGM, OOCL, Evergreen and China Cosco have turned to consolidation as the most efficient way of recovering from the upheavals of 2016. The latest alliance is what is known as the COSCO-OOCL Merger, a business concept that will not only be revolutionary; but has the potential to significantly improve the prospects of all the partners that are involved. The East-West coalition falls firmly within the category of mega alliances that seem set to dominate the shipping industry.
Shippers have had a hard time in 2016. These new alliances offer new hope but they also write the story of further pressure on individual shippers. They are operating in an environment where independence and unilateral action are positively discouraged. The big mergers take such large shares of the market that it seems it is inconceivable that there will be any left for the other players. This article takes you through the dynamics of the COSCO-OOCL Merger and how it is destined to significantly affect the industry.
News: A Challenge to Other Alliances and Mergers
It is thought that the COSCO-OOCL Merger was designed with the specific purpose of challenging the hegemony of Maersk and MSC 2M which had entered into vessel-sharing agreements in order to position themselves as the stalwarts of the industry. The plans for this high-level coalition have been discussed by industry insiders as far back as May 2017. One of the core components of the agreement was to alter the landscape of the industry so that the big four did not take up all the lucrative business. Ironically, this also had the effect of squeezing the smaller ships even more so that they had no realistic prospect for dominating the industry unless they aligned themselves with the big players.
Already OOCL is part of the G6 group while the CKYHE consortium has incorporated Evergreen and Cosco. The O3 group includes CMA CGM and CSCL. These are huge amalgamations that take up significant capacity within the industry. We know for example that the 2M alliance alone is capable of gobbling up 2.1 million TEU worth of capacity. It has spread its tentacles across the three principal East-to-West trades. Not far behind, is the equally formidable CKYHE group which hovers over 2 million TEU. The next big player is the G6 with 1.8million TEU. Finally, we have the equally impressive 1.5 million TEU that are recorded by O3.
COSCO is the 4th largest container company in the world whilst OOCL is the 7th largest firm. Their merger would create the 2nd largest carrier in the USA. The deal could cost about $26 billion which is expected to come from the Chinese Development Bank. COSCO posted profits of $39 million in the first quarter of 2017. This was a far cry from the $1.4 billion loss of 2016. The merger is expected to bring in even more rewards.
Effect on Shippers: New Plans and New Intentions
The news means that most of the major shipping companies are now held under a few alliances (three to be precise). In turn, this might limit the choices that are available to shippers. The resultant monopolies or oligopolies might actually negatively affect the level of competition in the industry. That translates into increased costs. The good news is that the smaller shippers can still fight back by either doing mergers of their own or providing unique services that are attractive and convenient to their supply chains.
Recently news emerged that CMA CGM wanted to get APL right out of the G6 alliance. This could occur once the acquisition of NOL was completed. The industry experts predicted that the move would be done by the second part of 2017. Given the prevailing financial woes of two major carriers (Hanjin and Hyundai); such moves were not entirely unexpected. The two were reabsorbed into the CKYHE alliance. It would appear that the strongest players in the industry are looking to drive home their competitive advantage, even amidst the new regime of mergers and coalitions. Of course, there is the added advantage of not allowing the 2M partners to remain completely dominant in the game.
Good News for Shippers: How to Fight Back
The limitations that are placed on the options that are available for the smaller shippers mean that they will need to seek their competitive advantage from elsewhere. This is a seller’s market and therefore it is important to come up with incentives that can re-attract those that had left. One of the options that might be available is to make use of freight forwarders by establishing close relationships with them. They could then work with landing sites, ports and even other carriers in order to share and mitigate the increased costs of shipping. With less emphasis being placed on old routines, it is possible to use the freed up time to develop the other parts of the business that may be still lacking. For example, it is possible to tackle mid-transit bottlenecks.
There is a lot of hope for the CCEO alliance of CMA CGM, Cosco, Evergreen and OOCL. For a start, it might benefit from a capacity that is equal to or even larger than that of 2M. That could lead to new challenges for a number of partnerships including the UASC (O3); NYK; Hapag-Lloyd and MOL (G6). Another alliance that could potentially be affected is that of the K-Line and Yang Ming under the CKYHE umbrella. These alliances may now struggle to find appropriate and capable partners to engage with under the new era of amalgamations. It seems that the only way to compete in these times is to fully ensure that you have a good alliance to back you up.
There is some uncertainty about the processes as well as the various elements of the mergers. That is what keeps industry watchers on their toes. According to Alphaliner:
“Various partnership scenarios are being contemplated and, given the prevailing uncertainties, the carriers are keeping all options open at this stage” …
Perhaps one of the areas that will be most affected is that of the networking protocols. The capacity will increase, but the demands of the consumer or clients will increase too. Without the right strategic planning, it might be likely that there will be a backlog of contracts that need to be fulfilled. Over the past few months, some of the alliances have faced internal friction, precisely because of the incidental pressures that arose unexpectedly. Indeed, even the financial reports are not as optimistic as anticipated. Some shareholders are already calling for some drastic changes that might improve the outlooks of the various alliances that are grabbing the industry headlines.
The Key Readjustments
Everybody will have to make adjustments of some sort in order to cope with the difficulties that are raised by the current uncertainty. The CSCO-OOCL merger represents a glimpse into what the feature might be. This is an alliance that is built out of convenience but eventually creates competitive advantages that were previously unthinkable. The era of the small shipping line may be coming to an end. We may end up having to witness significant changes in the approach that is taken when entering and maintain a position in the shipping industry.
The interim adjustments following the CSCO-OOCL merger are nothing more than that. They are not going to prevent the industry from moving on or taking steps towards achieving economies of scale. Instead, they will represent an incremental change that looks to break down the old systems which were riddled with duplication and parochial thinking. No serious shipper is going to be thinking about national territories. They are all likely to be firmly focused on the big picture which includes global trades and new routes.
Already China and Russia are talking about an ice road which will be dominated and populated by large multinational ships. This is happening despite the occasional reports of overcapacity or changes in the US trade policy that are bound to reflect on the rest of the market. The CSCO-OOCL merger provides a template as well as a cautionary tale. It indicates that both the quality of the corporate partner and the quality of the relationship between the parties is critical for gaining competitive advantage. The fear of the likes of the Hanjin saga has forced shippers to review their business strategies and inevitably come up with something that is infinitely better than before.
There are two critical aspects that will be key to survival in this challenging market. First of all; the shippers might select the right time to engage in new deals. They must schedule accordingly in order to ensure that customer expectations are not disappointed by the reality of an industry that is still in transition. The relationships between freight forwarders, shippers and ports will be critical. These are the mainstay of the industry and working in concert will make their efforts that much more effective. It is imperative that anyone that is involved in the shipping industry (regardless of whether it is a large, medium or small venture); pays attention to the industry trends so that they can make the right decisions at the right time.