Maersk and MSC have scaled down their ambition and walked the Chinese regulatory line. tcly/Shutterstock.com
Scaled-down ambition of Maersk and MSC means Beijing’s rejection would be unprecedented, but not unthinkable
THE world’s three largest container carriers were about to form something never seen before in modern shipping history from a size perspective: a gigantic network that could control more than one-third of main deepsea trades and save billion dollars in operating costs.
Having received approvals from US and European Union competition officials, the P3 alliance was waiting to hear a positive response in China. A final nod was widely expected by local industry officials.
After the ruling, Maersk Line and Mediterranean Shipping Co didn’t request an administrative review, launch administrative proceedings or revise the original proposal, which they were entitled to do. Instead, P3 was immediately terminated, and the top two players formed
the 2M alliance in early July after dropping CMA CGM.
“We did everything we could to get P3 approved until the last day. After the MofCom decision, we regrouped with our partners,” Maersk spokesman Michael Storgaard told Lloyd’s List. “MSC had come to the same conclusion we had in terms of possible alternatives, and we agreed to proceed on that basis.”
In the new network, Maersk and MSC have scaled down their ambition and walked the Chinese regulatory line to the point where rejection would be an unprecedented ruling in the country.
MofCom stated it prohibited P3 because the network’s market share in Asia-Europe trade at 46.7% would simply be too strong, and also because the three lines’ co-operation was much tighter than traditional alliances as they would jointly set up a limited liabilities partnership as an independent network operator.
The new proposal directly addresses MofCom’s two main concerns. The new network will consist of 185 ships totalling 2.1m teu on 21 strings, significantly smaller than P3’s 255 vessels with 2.6m teu on 29 loops. The two carriers also scrap the joint network operator idea and opt for a more traditional co-ordination committee to monitor 2M’s daily operation.
The Anti-Monopoly Law
Maersk has described 2M as a standard vessel sharing agreement, without the jointly-owned LLP. The spokesman said that “2M will allow us to realise cost savings while addressing regulatory concerns”.
The two carriers have submitted the 2M proposal only to the Ministry of Transport in China
this time, having reckoned the agreement does not fall under the scope of the Anti-Monopoly Law.
“Maersk and MSC believe that 2M is not a ‘merger’ for anti-monopoly purposes,” commented Clyde & Co’s Shanghai-based partner Michael Cripps, an expert in China’s corporate laws.
Under the Chinese anti-competition regulatory regime, MofCom deals with mergers, the National Development and Reform Commission focuses on cartel behaviour, and the State Administration for Industry & Commerce looks into government-initiated monopoly.
On the other hand, the MoT only asks carriers to put all types of operational agreements — like P3 and 2M — into the ministry’s registry, based on China’s Regulations on International Maritime Transportation.
In practice, the MoT has sometimes questioned VSA participants on rates and operational matters during the so-called “Bei-An” procedure but never rejected them outright.
“If the MoT halts the Bei-An process of any VSA, that VSA won’t come into effect. It has not done so since the regulations are in place, though,” China Shipowners’ Association vice-chairman Zhang Shouguo said.
A successful Bei-An without much noise from the MoT would give a great boost to 2M, which aims to come onstream from early 2015 for 10 years.
“The Chinese authorities have so far not had any issues with VSAs,” said Norton Rose Fulbright’s Hong Kong-based partner Marc Waha, a specialist in antitrust regulations. “It will be difficult for them to intervene since they have never intervened against VSAs.”
The ministry still has some power to rein in monopoly under the regulations. It can launch joint investigations with other regulatory bodies upon seeing possible detriment to competition, particularly when a carrier or an alliance has a market share above 30% on any trade route linked to a Chinese port for over a year.
“The MoT is not an anti-competition body itself, so it will need to co-ordinate with the NDRC and the SAIC to carry out the probe,” said Lucas Feng, an associate of Chinese law firm Wang Jing & Co.
Possible complainers
When finding any behaviour harmful to fair competition during the investigation, the ministry can terminate the alliance or order it to revise its operation.
This competition clause, while never invoked, allows the MoT to probe on its own initiative or requests of interested parties.
Among possible complainers,
China Shippers’ Association — which opposed P3 — has called on regulators to put the new alliance under heavy scrutiny. Chinese shipowners have adopted a wait-and-see attitude.
“Based on what we know now, essentially 2M doesn’t seem much different from other alliances,” Mr Zhang said.
“But we will see whether the joint network operating firm is really scrapped, as the three members already invested large resources in it earlier; and whether 2M carriers have any other additional agreements among themselves [that could affect market shares].”
According to Lloyd’s List Intelligence data, 2M’s market share in Asia-Europe trade still reaches 36%. But the alliance only carries 12% of total volumes in transpacific trade, much lower than market-leading network G6’s 35%.
Stated political goal
However, China’s Anti-Monopoly Law has a stated political goal of promoting “social public interest” and “a healthy development of the socialist market economy,” which could prompt the MoT to hand out an unprecedented ruling regardless of actual figures.
European Maritime Law Organisation secretary-general August Braakman pointed out that Beijing takes into consideration the financial difficulties state-owned carriers are in when forming its attitudes towards competition cases, as it views competition regulations as a tool for conducting industrial policy.
On many trading routes, Cosco Group and China Shipping Group — the two Chinese state conglomerates — participate in VSAs that directly compete with 2M for cargoes.
“I have little doubt that these considerations... have played a role in the rejection of P3 and will play a role in the assessment of 2M,”
Mr Braakman said. “This attitude may induce them to conclude that also 2M is contrary to Chinese industrial policy.”
If 2M is rejected, Maersk and MSC might serve themselves better by launching a public relations war, instead of arguing about differentiated treatments in courts.
“Logically speaking, it’s not reasonable to use others’ illegal behaviour, if there is any, to justify one’s own illegal behavior,” Mr Feng said. “But if such differentiated treatments are widely reported and in particular, compared with how Chinese firms are treated, the authorities may feel some pressure and that might benefit defendants.”
That said, any escalation of the case by Maersk and MSC to foreign courts or the World Trade Organisation is unlikely, as both carriers see China as an essential market.
“I just cannot see them raise it far up and turn very aggressive,” Mr Waha said.
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