From American Shipper
The joint container venture between Japan’s ‘Big 3’ will have a fleet capacity of 1.38 million TEUs, making it the sixth largest in the world, and when their 23 new ships are delivered, the merged operation will become the fifth largest carrier. On Oct. 31, the three largest ocean carriers in Japan – Nippon Yusen Kabushiki Kaisha (NYK Line), Mitsui O.S.K. Lines Ltd. (MOL), and Kawasaki Kisen Kaisha, Ltd. (“K” Line) – announced they would form a joint venture to integrate their container shipping businesses, including their terminal operations outside of Japan. NYK and MOL have cooperated since 2012 as members of the same space sharing partnership, the G6 Alliance, and next April all three carriers will be part of the new “THE Alliance” along with Germany’s Hapag-Lloyd and Yang Ming of Taiwan.
A senior container shipping executive familiar with the Japanese carriers said the new joint venture will be an advancement in consolidation beyond THE Alliance. “Common fleets, common management, common pricing will be far superior to alliances, which are too loose to really help stabilize the international marketplace, which is essential for international businesses,” he said. “It is about time. This has been discussed for years.”
Jim Blaeser, vice president in the maritime practice at AlixPartners, said “they needed to do something – with all the other M&A activity, this probably became the most predictable. They had to do something. “I would commend the management of the Japanese lines for doing this in a rather thoughtful manner,” he added. While it may be overdue and a reaction, at least in part, to the insolvency of Hanjin Shipping, he said it was better to act now, rather than wait until the “11th hour.” “I think they are doing the right thing and getting ahead of it,” said Blaeser.
The so-called “Big 3” Japanese carriers said their joint container venture will have a fleet with a carrying capacity of 1,382,000 TEUs, making it the sixth largest in the world behind Maersk Line, Mediterranean Shipping Co. (MSC), CMA CGM, COSCO Container Line, and Hapag-Lloyd. When the 23 new containerships the three carriers have on order from various yards are delivered – they have aggregate capacity of about 360,000 TEUs – the merged operation will become the fifth largest carrier, according to the London-based consultant Drewry.
The combination of the container businesses of the three Japanese carriers caps an eventful year for the liner industry, one in which CMA CGM acquired Neptune Orient Line and its APL business, COSCO merged with China Shipping Container Lines (CSCL), Hapag-Lloyd announced it was acquiring United Arab Shipping Co. (UASC), and Hanjin filed for bankruptcy protection. A South Korean bankruptcy court has already put Hanjin’s assets in the Asia-U.S. trade up for sale, and as this issue was going to press, fellow Korean shipping company Korea Lines, which until now has not been a player in container shipping, instead operating dry bulk ships, tankers, and gas carriers, appeared to be the leading bidder.
Blaeser also noted that consolidation is nothing new for the Japanese shipping industry. A corporate genealogy of the current three carriers published by industry analyst Alphaliner showed how 12 Japanese carriers were merged into six companies in the 1960s, and then further whittled down to the current three during the 1980s and 1990s. The fleets of all three carriers “are weighted toward sub-8,000 TEU size,” Blaeser said. “In today’s market, you are not going to make any money with those size ships in the major east-west trades.” By using larger vessels, “collectively they now have the ability to make very competitive loops on the major trades,” he said. “If they are smart, they will start to wean out the smaller vessels, those on charter they can get rid of easily, and focus on making competitive loops.” He said an initial assessment by AlixPartners found that with their combined fleets, the three Japanese carriers will be able to offer two “competitive” Asia-Europe strings, a “very competitive” loop between Asia and the U.S. East Coast, and five “truly competitive” transpacific loops with ships with more than 10,000 TEUs in capacity. Of course, as members of THE Alliance, they will have access to many other large ships owned by their vessel sharing agreement partners.
Shared Value. The initial announcement from the carriers was sparse on details, but the three companies said the joint venture will officially be formed on July 1, 2017 and commence business on April 1, 2018. Given the fact that Japanese carriers have shown a willingness to give up or fuse existing brand names – Mitsui O.S.K. Lines, for example, can trace its roots to the merger of Mitsui Senpaku K.K. and Osaka Shosen Kaisha in 1964 – Blaeser said he has no reason to believe they will not use a single “brand” when the merged company begins operating. The three carriers said they expect to “realize integration effect of approximately 110 billion Japanese yen (close to $1.1 billion) annually and seek swiftly financial performance stabilization. “The merger effect of JPY 110 billion is based on items that are for certain. We expect the actual amount to be even greater,” they added.
A study by an unnamed third-party organization leads the carriers to believe the biggest synergy gain will be in the area of purchasing. “The liner business of the current three companies will merge to become one large company, and taking advantage of its merits of scale negotiations/contracts with the vendors should become much more favorable,” the carriers said. It is not exactly clear how the joint venture will work, but the three carriers said NYK will make a “contribution” of 38 percent and hold a like percent of shares. MOL and “K” Line each will make a contribution of 31 percent and likewise each hold a 31 percent share in the joint venture. “The contribution ratio was decided based on a study by a third-party organization taking into consideration the asset value, profitability and vessel fleet of each company,” they said. “Although the contribution ratio is different, the three companies are in an agreement to manage the new joint venture on an equal-footing.” According to the joint statement, the total contribution will be valued at 300 billion yen (U.S. $2.8 billion), which will include fleets and terminal operating businesses outside of Japan.
The companies did not detail those values, or respond to queries from American Shipper.
Curiously, U.K.-based VesselsValue gives a much higher valuation of their combined fleet at $5.2 billion. VesselsValue gave the following estimate of the value of the companies’ “non-chartered in” fleets:
- NYK: 68 ships with 507,046 TEUs capacity with a value of $2.3 billion;
- MOL: 35 ships with 307,449 TEUs capacity with a value of $1.7 billion;
- “K” Line: 31 ships with 240,440 TEUs capacity with a value of $1.2 billion.
The deal does not include terminals in Japan, nor the many other businesses the three companies are involved in – bulk, heavylift and roll-on/roll-off, ferries and offshore energy, engineering and procurement, logistics, air cargo, and real estate, to name a few. As of Nov. 9, Alphaliner’s Top 100 fleet list ranked the existing container fleets of the three companies as follows:
- NYK: 11th largest with 97 ships with 505,969 TEUs capacity (267,544 TEUs on 45 owned ships and 238,425 TEUs on 52 chartered ships);
- MOL: 12th largest with 81 ships with 505,372 TEUs capacity (151,316 TEUs on 22 owned ships and 354,056 TEUs on 59 chartered ships);
- “K” Line: 15th largest with 60 ships with 352,230 TEUs capacity (80,150 TEUs on 12 owned ships and 272,080 TEUs on 48 chartered ships).
In addition, NYK has orders for 12 ships with a combined capacity of 168,182 TEUs, MOL has six ships on order with 120,900 TEUs of capacity, and “K” Line has an order book of five ships with a combined 69,350 TEUs of capacity, according to Alphaliner.
Joint ventures are nothing new to Japanese carriers, but it’s worth noting this deal will include three firms that come from different “keiretsu,” or Japanese business groups. The Oxford Handbook of Business Groups indicates that in the mid-1990s all three were affiliates of one of the six major keiretsu groups in Japan – MOL was part of the Mitsui Group, NYK part of the Mitsubishi Group, and “K” Line part of the DKB Group. But one of the editors of that book, James R. Lincoln, Mitsubishi chair in international business and finance emeritus at the Haas School of Business at the University of California, Berkeley, said keiretsu group affiliations “don’t matter much anymore.” “There’s been a lot of cross-group alliancing since the early 2000’s,” he said. “The Mitsubishi Group was something of a holdout. It’s remained pretty cohesive while the others have mostly broken up. But the joint venture between Nissan and Mitsubishi Motors, in which Nissan owns a controlling share of Mitsubishi Motors, signaled that even there things have changed.”
Rising Tide. Drewry said in its Container Insight Weekly newsletter the joint venture is “in keeping with the current wave of M&A activity that is driven by survival instincts and potential cost savings from greater scale economies.” “An amalgamation of the Japanese lines has been a fixture of industry speculation for decades, and was considered,” the firm wrote. “For it to finally happen shows the heavy pressure the three carriers were under. Container revenues for the companies have been steadily decreasing and the collective loss since 2012 amounts to approximately $1.5 billion,” adding that “this sum is only indicative, as the segments contain some non-container income and the accounting methods differ slightly between carriers.
“Not wanting to repeat the error made in Korea that saw Hanjin Shipping fail by not merging with HMM, the Japanese managers decided to follow the model used in China with COSCO and CSCL,” said Drewry. “The current wave of M&A among container lines does not directly solve industry-wide overcapacity – only their ability to survive,” it added. “A second, smaller wave of M&A involving medium-sized carriers is a high probability, driven by the need to stop the cost competitive advantage of the bigger lines growing. The industry is moving towards fewer but stronger (and in time more stable) carriers.” Industry analysts do not believe regulators will try to block the deal due to its scale, relative to other recent M&A activity in the sector. “Given that the combined size of the Japanese carrier is much smaller than the biggest carriers, I cannot see how the regulators could have a problem with it,” Lars Jensen, chief executive officer of SeaIntelligence Consulting, told American Shipper in a recent interview. “I have previously pointed out that we had a range of carriers of ‘mid-size’ that on one hand was global, but not big enough to compete on true scale, yet too big to be niche players. This is a move by the Japanese to get the required scale,” he said. “It increases pressure on the remaining mid-sized global carriers like Hamburg Süd, OOCL, Yang Ming and Hyundai, though.”
Dirk Visser, senior shipping consultant at Dynamar and managing editor of its DynaLiners newsletter told American Shipper that he saw the deal as a “necessary, but defensive move.” “Unless regulators would be living under a stone, they will (should) agree upon this particular joint venture, typically one between (largely) culturally compatible parties,” he wrote in an email. “The fact alone that the three largest Japanese container operators’ 1.4 million-TEU combined fleet (exactly half of that of MSC or just 44 percent that of Maersk) would only rank sixth today shows that their continued standalone existence would ultimately not be a viable proposition,” said Visser. “The latter would anyway not be in the interest of the Japanese shippers/consignees tending to support their home lines.”
Still, Don Pisano, chairman of the Ocean Transportation Committee of the National Industrial Transportation League, the country’s largest shipper organization, said the Federal Maritime Commission needs to remain vigilant. “It appears that the carriers have created a situation for themselves in which consolidation and participation in vessel sharing agreements may be an actual requirement in order to survive in the Asia to North America and Asia to Europe markets, which are saturated with overcapacity,” he said. “Our NIT League members want to work with strong and reliable partners focused on service and competitive rate structures. These developments underscore the continuing need for the Federal Maritime Commission to play its vital role in ensuring that any mergers or VSA participation continues to support a competitive market and adequate carrier choices for American shippers.” “I believe many expected consolidation in the container shipping industry to continue,” said Jonathan Gold, vice president of supply chain and customs policy at the National Retail Federation. “Our hope is that the merger will help the overall container industry become more cost effective and efficient. “It is too early to judge what kind of an impact this will have on NRF members or the rest of the industry,” he said. “However, we believe it will be positive and hopefully improve the health of the overall industry. It is critical that the carriers communicate throughout this merger process with cargo owners, so that there is full visibility into how the new entity will operate beginning in 2018.”
THE Alliance. Rolf Habben Jansen, chief executive officer of Hapag-Lloyd – the fifth largest carrier worldwide and other very large member of THE Alliance once its acquisition of UASC is completed – said of the deal, “Consolidation is continuing, which is needed and will help the industry to recover and become more sustainable. The merged company will be a very strong and powerful partner in THE Alliance and we are very much looking forward to working together with them for many years to come.” THE Alliance will compete with two other major groupings of carriers – the OCEAN Alliance of CMA CGM, COSCO Container Lines, Evergreen, and OOCL, and the 2M Alliance of Maersk and MSC. South Korea’s Hyundai Merchant Marine, who was also a bidder in the sale of compatriot line Hanjin’s transpacific network, has signed a memorandum of understanding to join the 2M, but negotiations have yet to be finalized. Jensen said he believes that all things being equal, the joint venture “should make it easier for THE Alliance to function…It’s very clear to me that the priority of the Japanese carriers is to get the alliance network up and running, which is why they won’t do the joint venture until mid-2017 anyway and then look at a joint venture network from beginning of 2018, because otherwise they would delay the implementation of THE Alliance. That takes overarching priority.”
About a week after the Big 3 announced their intentions, THE Alliance released information about its planned service network. The carriers plan to offer 31 services in the major east-west trades, including 16 loops in the transpacific trade, six in the transatlantic, five between Asia and North Europe, three between Asia and the Mediterranean, and one between Asia and the Middle East. The trade between Asia and the U.S. and Canada seems to be a particular area of concentration: 11 of the transpacific loops will call at ports in the Pacific Southwest, three to the Pacific Northwest, and five to the East Coast – with three loops transiting the Panama Canal and two using the Suez Canal.
Jensen noted that in contrast to the OCEAN Alliance, which laid out its port rotations in a very detailed way, THE Alliance had many “placeholder” calls when it made its announcement. Instead of stating a ship would stop at Seattle-Tacoma, Vancouver or Prince Rupert, for example, it said “Pacific Northwest.” Similarly, the tentative rotations were peppered with calls like “West Med hub” or “South East Asia Hub.” “That tells me they are not completely done yet,” said Jensen. “They have the skeleton, the framework, in place but they are not quite done yet. But given that the OCEAN Alliance came out with their network, they had no choice but to go public ASAP because some shippers are beginning contract negotiations already.”
More M&A To Come? There is speculation among industry analysts that there could be further merger and acquisition activity or changes in alliances yet to come. Drewry noted there is a “clear divide that is emerging with the leading seven carriers (Maersk, MSC, CMA CGM, COSCO, the three Japanese carriers, Hapag-Lloyd and Evergreen) breaking away from the likes of OOCL, Yang Ming, Hamburg Süd, HMM and ZIM. “All, bar Evergreen, of the Top 7 will be at least twice the size of the next rung of carriers when all the new orders are delivered,” it said.
Visser believes there is a chance HMM could still end up being part of THE Alliance, despite the memorandum of understanding with the 2M Alliance. In regards to consolidation between Taiwanese carriers Yang Ming and Evergreen, Visser said, “I don’t think that under the present circumstances, the 33.3 percent government share in Yang Ming would represent a problem, but yet, to my feeling, Evergreen/Wan Hai would be closer to each other than Evergreen to Yang Ming.” An article in the Journal of Commerce in November quoted Bronson Hsieh, the chairman of Yang Ming, as firmly refuting the notion that his firm might merge with Evergreen.
Visser also said it’s worth keeping an eye on Hamburg Süd, especially in the wake of the forthcoming UASC merger into Hapag-Lloyd, noting the carrier’s cooperative slot sharing agreements with UASC. “Since a while, Hamburg Süd and UASC are rendering each other access to the east-west and north-south trades, respectively, and joining Hapag-Lloyd, at last, would be the only means for Hamburg Süd to keep this,” he said.
However, others say that Hapag-Lloyd’s acquisition of Chile’s CSAV – like Hamburg Süd, a powerhouse in the Latin America trade – has made such a merger unnecessary. They also say a merger between Hapag-Lloyd and Hamburg Süd might run afoul of regulators because it would be too dominant in the South American market.