Container Shipping: Will New Alliance Structures Help Stabilize The Market?

maersk line idle containerships anchor
Containerships sit idle in 2012, image (c) Maersk Line

By Sam Whelan (TheLoadstar) After the supply chain havoc caused by Hanjin Shipping’s collapse, and with an alliance reshuffle on the horizon, should shippers be hoping for further carrier consolidation?

Or will the new alliance structure create more stability?

Next April, the four major container shipping alliances – the 2M, Ocean Three, CKYHE and G6 – will become three, in the shape of the 2M (or 3M), Ocean Alliance and THE Alliance.

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However, according to McKinsey & Co Shanghai partner Steve Saxon, more consolidation, rather than new alliances, would provide greater benefit to shippers.

 “Shifting alliances have not had much impact for shippers and, if anything, has been negative as the alliances have complicated their operations and commoditised product which has led to service decline,” he said at TPM Asia in Shenzhen this month.

“Whereas consolidation has the potential to benefit lines, the industry, and shippers. Although there are some risks too,” he added.

Outlining an argument based on what shippers want versus what they currently receive from carriers, Mr Saxon said common complaints included “problems from lower freight rates; a widening gap between services expected and received; more complicated operating environments; service unpredictability; more complicated inventory planning; communication gaps; and cost cutbacks”.

But Mr Saxon added: “However, many argue that dissatisfaction from shippers is somewhat churlish – because if you look at how much they and their customers have benefited from the industry competition and lower freight rates, it’s arguably a staggering $23bn between 2010 and 2015.”

On the other hand, he said, shippers wanted transparency, reliability, a decent choice of carrier, product and service and stable prices, instead of wild swings in rates.

Had previous alliances assisted with this outcome?

“Well, not with rates. Alliance partners happily remained fierce competitors and were prevented from cooperating commercially. We’ve therefore seen wild rate swings with the oversupply in capacity.

“Arguably, the biggest negative of alliances has been commoditisation of services, which has led to competition based only on price.

“When you’re sharing capacity and launching common services, it’s incredibly hard to differentiate that service; you can’t be faster or more reliable, and you can’t have quicker inland transfers because your boxes start turning up at all sorts of other terminals,” said Mr Saxon.

He argued that, instead of the new alliances leading to more stability, larger groupings would in fact create more operational complexity.

However, he also claimed that carrier consolidation via M&A activity and corporate exits led to better carrier performance, as bigger carriers achieve higher margins through larger economies of scale. Larger carriers can provide shippers with better price savings, more choice in services, and a more stable industry with fewer wild rate swings and more predictability.

He added: “There are also synergies in container line mergers. Publicly announced synergies from recent mergers have been anywhere between 2-6% of the cost base of the line’s density.

“This is pretty substantial for an industry with zero or negative margins. So the cost savings achievable through synergies has been, and continues to be, a large driver for consolidation.”

Carriers targeted for acquisition should not feel defeated, Mr Saxon said. “In many cases it’s a victory. If you look at the stock market performance of the acquirers versus the acquirees over the past 15 years, mergers have added 10% to the acquired company’s stock but subtracted 4% from the acquirer’s stock.

“So I would say to any carrier ‘you don’t have to be going for glory and shaping this industry, you can be delivering higher value to your shareholders by readying the company for a great sale’.”

However, Mr Saxon cautioned that further consolidation would need to be monitored in terms of carriers adopting monopolistic practices.

“But we’re a long way away from that, and competition authorities will be watching closely,” he said.