The game of musical chairs in the container shipping industry continues: Several players have agreed to form shipping alliances to combat the confluence of a 30% oversupply of ships and weaker consumer demand amid a faltering global economy.
This dance among global container-ship operators is now heating up with three main partnerships projected to dominate the industry. The groups now include 2M, Ocean Alliance, and the recently-announced team up called THE Alliance.
A Look Back
In 2014, Maersk, Mediterranean Shipping Company (MSC), and CGM CMA – the world’s top three container operators by capacity – agreed to form an alliance called the P3 Network. Chinese regulators, however, rejected the partnership. Following the dismissal, Maersk and MSC decided to form another alliance under a 10-year agreement. The new partnership, called 2M, controls roughly 34% of the lucrative Asia-Europe trade route, with a fleet of 185 ships and a capacity of around 2.1 million twenty-foot equivalent units (TEU).
In April 2016, global container operators CMA CGM, COSCO Container Lines, Hong Kong’s Orient Overseas Container Line (OOCL) and Taipei-based Evergreen Marine signed a memorandum of understanding to form a new mega-alliance. Dubbed the Ocean Alliance, the partnership would have a combined fleet of more than 350 ships across all ocean routes covering over 40 services. It is estimated to take up 26% market share in the Asia-Europe voyages. This alliance, which would operate around 2.78 million TEU, is still subject to regulatory approvals and is expected to begin operations in April 2017.
These two alliances are predicted to cause a major shake-up in the industry as other top 20 carriers are scrambling to compete in the Asia-Europe and transpacific markets. According to latest reports, six other carriers have recently decided to team up as the game of alliance musical chairs continues.
Another vessel-sharing agreement covering the east-west trade lanes has recently been announced, with six major container shipping lines set to co-operate under a five-year contract. Germany’s Hapag-Lloyd, South Korea’s Hanjin Shipping, Taiwan’s Yang Ming Marine Transport Corp., along with the Japanese trio of Nippon Yusen K.K. (NYK), Kawasaki Kisen Kaisha Ltd. and Mitsui O.S.K Lines (MOL) will form a new partnership called THE Alliance.
THE Alliance will build one of the leading networks in the container shipping industry, by combining around 3.5 million teu or 18% of the global container fleet. It will deploy over 620 ships in total, covering all east-west trade routes including Asia-Europe, trans-Pacific, trans-Atlantic and Asia-Middle East/Persian Gulf/Red Sea. It would control about 22% of the Asia-Europe voyages. The agreement, which will also take effect in April 2017, is still subject to approvals by U.S., Chinese, and European maritime regulators.
Why Form Alliances?
As the global shipping industry continues to be beset by challenges amid slowing volumes and overcapacity, analysts and industry players have noted that entering into alliances will greatly benefit carriers. Through alliances, container-ship operators will be able to cut operational costs and boost efficiencies via vessel sharing arrangements. Compared to individual operators, partners in alliances will have the capacity to offer better service through combined networks. This, in turn, would allow more frequent sailings at the best price. Alliances could also allow direct coverage in the market, high reliability, as well as very attractive transit times for all shippers. In addition, such moves will prompt further consolidations or a new round of deals, including reshuffling and realignment in the industry.
While vessel-sharing agreements in the shipping industry could provide gains for carriers, customers have raised concerns that partnerships make handling shipments at ports more complicated and costly. As such, regulators have studied recent consolidation efforts and other alliances to prevent individual players or small groups from dominating particular trade routes. In terms of logistics network within ports, analysts are also calling for a more thorough review of these alliances to ensure that they will not add more truck trips and congestion to an already overloaded port infrastructure.
Meanwhile, other major players in container shipping have yet to announce consolidation plans. South Korea’s Hyundai Merchant Marine Co. (HMM) is currently undergoing restructuring. The firm’s creditor have already expressed interest in speeding up the restructuring processes to give them the best chance to participate in alliance talks. On the other hand, United Arab Shipping Company (UASC) is in separate merger talks with Hapag-Lloyd. Both UASC and HMM are discussing entry into THE Alliance following completion of their reorganization.
Aside from these global firms, small and midsize companies will also need to reconsider their strategies as competition grows stronger. A chief executive of a major shipping line noted that smaller companies will have to either consolidate in an alliance and provide the best possible offer to customers or concentrate on very few long-haul routes and local regional activities.