Japan Catches Up With Shipping Consolidation

Japan Catches Up With Shipping Consolidation
Costas Paris and Chieko Tsuneoka May 11, 2018 https://www.wsj.com/articles/japan-catches-up-with-shipping-consolidatio...

MOL, K-Line and NYK Line pump $3 billion into Ocean Network Express, which is now world’s sixth-largest container operator

TOKYO—Japan has caught up with a wave of consolidation sweeping the shipping industry, with its three biggest carriers merging their container operations to compete with bigger rivals in Asia and Europe.

Mitsui O.S.K. Lines (MOL), Kawasaki Kisen Kaisha Ltd. 9107 1.20% , (K-Line) and Nippon Yusen Kabushiki Kaisha NPNYY -0.23% (NYK Line) pumped $3 billion into the merged company called Ocean Network Express (ONE) that kicked off operations last month as the world’s sixth largest container operator, with a combined fleet of 230 vessels.

“A large company buys a small company and grows bigger, such deals have been repeated in the past, but this is the first time (in shipping) that three companies jointly start a new business on an equal footing,” Junichiro Ikeda, MOL’s chief executive, said in an interview.

MOL is the leading partner in ONE.

ONE controls close to 7% of global container market, well below the double-figure shares of the top three carriers, Denmark’s Maersk Line, Switzerland’s Mediterranean Shipping Co. and France’s CMA CGM SA.

Container shipping moves roughly $4 trillion worth of manufactured goods annually, from designer dresses to electronics, food and heavy machinery.

But a glut of tonnage in the water and vicious price wars have pushed freight rates well below break-even levels over the past few years, sinking most operators deeply into the red and pushing some out of business.

The crisis pushed the fragmented industry to consolidate, with the world’s 20 biggest operators shrinking to seven over the past three years that control about three-quarters of total container capacity.

It also triggered a reckoning among policy makers in many countries, from Germany to Japan, that have seen commercial shipping as a key strategic asset for their economies. The failure of South Korea’s Hanjin Shipping in 2016 sent shock waves around the world and particularly in Seoul, where the world’s eighth-largest container line was considered an important cog in the country’s export-driven economy.

People involved in the ONE merger told The Wall Street Journal it was seen as a must, as carriers with a 3% share or below are expected to go out of business or swallowed up by bigger players.

Although still small in global terms, ONE is dominant in intra-Asia trade lanes and is the biggest player in moving Asian exports to the U.S. across the Pacific, with a 16% market share, according to maritime data provider IHS Markit . It also controls 37% of container capacity in and out of Japan, the world’s third-largest economy.

“I think future trade will grow mainly in these regions, and the market share (that) ONE holds is never small,” MOL’s Mr. Ikeda said.

He declined to comment on the impact of possible trade tariffs in talks between the U.S. and China.

Consolidation gives shippers fewer carriers to choose from and some may move away from ONE to other operators, but Mr. Ikeda insists he isn’t worried.

“If you focus on the services that come to and go from Japan, our competitors are totally incomparable with us,” he said. “In terms of frequency…. ONE is superior. Therefore, even if customers seek choice desperately, they don’t have much of a choice.”

ONE, which set up its headquarters in Singapore, launched operations April 1 to a rocky start. Brokers and freight forwarders said shippers in the first 20 days of operation faced problems booking cargo slots and communicating with the carrier.

The carrier said the problems were the result of setting up a new IT system and difficulties moving staff from the three partners to new offices around the world.

“It was surprising and disappointing, given the high efficiency records of the three carriers before they became ONE, but the situation is slowly improving,” a Singapore broker said.

Mr. Ikeda said it would take time for the former rivals to fully integrate.

“Although all of them are Japanese companies, there are differences in doing things among them,” he said. “Their mutual understanding has deepened during the preparatory period, but I consider it to be a big challenge to unify the way to conduct business in a real sense.”

The operators have a deep reach into global trade, from consumer goods to raw industrial commodities.

MOL on its own is the world’s biggest natural gas carrier, operating 76 ships out of a total global fleet of 440 vessels, and plans to add another 19 LNG carriers to its fleet over the next few years.

In container trade, ONE is part of THE Alliance, one of three major shipping groups that also includes Germany’s Hapag-Lloyd AG and Taiwan’s Yang Ming Marine Transport Corp.

Alliance members share networks, ships and port calls, saving billions of dollars each year in fuel, port handling and other expenses. They are using giant ships that can move more than 20,000 containers.

THE Alliance already has six such vessels and plans to order six more by the end of this year, despite concerns that the behemoths may exacerbate overcapacity and add pressure to freight rates.

Mr. Ikeda doesn’t expect a flood of new orders because carriers expect only moderate growth in shipping demand, and “everyone understands the situation that way.”