China's MOFCOM Rejects Maersk's P3 Alliance
This article looks at the recent decision by MOFCOM regarding Maersk's P3 Alliance, being only the second case ever where MOFCOM has refused approval. The implications of this decision need to be kept in mind by parties with large market shares, looking at entering into M&A transactions or cooperative ventures, affecting China.
On June 17, 2014, the Ministry of Commerce of the People’s Republic of China (“MOFCOM”) announced that it had refused approval of the container-shipping alliance between Denmark’s A.P. Møller - Maersk A/S (“Maersk”), Switzerland based MSC Mediterranean Shipping Company S.A. (“MSC”) and France’s CMA CGM S.A.(“CMA CGM”) (“P3 Alliance” or “the Counterparties”) under the consideration that it tends to form a compact association and may have the effect of restricting competition in the market of Asia - Europe routes container liner shipping services. It is the second rejections from MOFCOM on anti-monopoly review.
Maersk is the world's largest container shipping company, having offices in 142 countries and regions worldwide. It is engaged in container liner shipping services and related businesses in the major ports in China. MSC is the world's second largest container shipping company. It is engaged in container liner shipping and auxiliary services in China. CMA CGM is the world's third largest container shipping company. In China, it is mainly engaged in container liner shipping business and a small logistics business, agency business and so on. In October 2013, the P3 Alliance signed an agreement intended to establish a limited liability partnership network center in England and Wales, unified responsibility for container liner operators’ affairs of the Counterparties in Asia-Europe, transatlantic and inter-Pacific routes.
Although it was cleared in both the EU and USA without any conditions, the concentration was rejected by China’s MOFCOM after six months, as MOFCOM thought that it would it have negative impact on competition in the container liner shipping services market in the Asia-Europe trade route.
The concentration was filed with MOFCOM on September 18, 2013. But it wasn’t accepted by MOFCOM at the beginning due to incomplete filing information – it was then accepted on December 19, 2013. On January 18, 2014, MOFCOM decided to start a phase II review which was extended further on April 18, 2014. About 2 months later, MOFCOM announced its decision.
MOFCOM found that the relevant product/services market was the market of international container liner shipping services which refers to a freight transportation service according to which the container liner enterprises provide standardized and repeated container cargo transportation services for non-fixed shippers between fixed ports of international fixed routes as per previously developed schedules and predetermined operation rules, and calculation and payment of freight according to Units TEUs (TEU) tariffs.
MOFCOM reviewed the concentration by assessing the relevant market share, control of the market, market concentration, market access, and other factors that impact on consumers and other operators of the Counterparties and the proposed network center, and found that it may eliminate or restrict competition in the market of container liner shipping services of the Asian-European trade route for the following reasons:
1. The transaction formed a close-association
MOFCOM believed that the transaction would form a close association since the proposed network center integrates the full capacity of the global east-west route of the Counterparties, is responsible for daily management of all ships in the cooperative routes of the Counterparties and operations in accordance with pre-agreed procedures, unifies billing costs and shares the ship operation costs, uniformly coordinates and handles those unused containers and directly determine the issues of stopping shipping. By contrast, the traditional existing shipping alliances are looser in cooperation.
2. The transaction significantly enhances the market power of the Counterparties
As of January 1, 2014, the capacity shares of Maersk, MSC, and CMA CGM on the Asia-European route was 20.6%, 15.2% and 10.9% respectively. MOFCOM believes their control ability of the market will be increased significantly after the concentration as it thinks that capacity share is an important indicator of market forces in the container liner shipping market.
3. The transaction will significantly increase the degree of concentration in the market
MOFCOM considers that the market will be highly concentrated after the transaction as the number of the major competitors in the market will be decreased.
4. The transaction will further push up the entry barriers of the market
MOFCOM thinks that the entry barriers will become tougher as the market will involve in few big players only and the P3 Alliance will be able to eliminate the competition in the market.
5. Other impacts of the transaction
Since the further enhancement of the power of the P3 Alliance in the market after the transaction, MOFCOM believes the development of other competitors may be squeezed, and the interests of the cargo owners may be damaged as well. The current bargaining power of the owners is weak; the transaction may make it worse. In addition, the bargaining power of the Counterparties on ports may be increased further as the ports may be forced to accept lower prices for port services in order to get more ships of the Counterparties docked.
Negotiations over the Remedies
MOFCOM had pointed out that the transaction may have eliminated or restrict competition affects, and conducted negotiation with the Counterparties on how to solve the competition problems. And the counterparties had submitted several rounds of relief programs. However, these relief programs were all rejected by MOFCOM as it believes they cannot resolve the problems since they lack legal basis and convincing evidence to support. Therefore, MOFCOM decided to refuse approval for this concentration in the end.
It is the second “no” from MOFCOM with respect to an anti-monopoly review. The first one was for the acquisition of a Chinese juice-maker Huiyuan by Coca-Cola in 2009. In that case, MOFCOM considered the transaction may affect competition in the Chinese juice market as Coca-Cola’s dominance position in carbonated soft drinks market may be transmitted to the juice beverage market, and Coca-Cola may significantly enhance its power in the juice market by controlling the well-known brands of juice owned by Huiyuan.
However, both two decisions are denied by MOFCOM based not only on competition policy but also on industrial policy. In the Coca-Cola’s case, MOFCOM sunk it as it believes the transaction would damage the interests of small and medium-size enterprises in China's juice market.
In this case, the considerations of MOFCOM are involved in the interests of its domestic enterprises such as COSCO and China Shipping. Although China's total foreign trade volume ranked first in the world, but its fleet only lists the fourth in the world. Both COSCO and China Shipping are at significantly lower wind in competition with foreign companies. In the first quarter of this year, COSCO losses of 1.88 billion Yuan, but Maersk is profitable about 2.8 billion Yuan. We can imagine what a disaster P3 Alliance is for Chinese carriers.
Moreover, its impact on Chinese goods exports and imports trading is also a great consideration of MOFCOM. Most of China's export of goods implements of FOB price, and most of its import of goods executes CIF price. It leads to a huge amount of services trade deficit as the transportation initiative is not in the hands of domestic enterprises. In order to keep Chinese global trade stay cheap, it seems necessary to kill the deal.
However, the denial of the P3 Alliance cannot improve the poor situation of Chinese carriers significantly. It is thought that if Chinese shipping companies want out of the woods, on the one hand, they need to strengthen their ability to innovate business continuity, to minimize operating costs through horizontal and vertical cooperation as well as change management system, on the other hand, the government also needs to optimize the external environment, including administrative services, finance, human resources, taxes and others.
Personally, I feel MOFCOM believes the transaction could be approved with respect of anti-monopoly issues as it reviewed it for nine months including negotiation over imposition of restrictive conditions with the Counterparties, but its final decision is affected by other competent authority, namely the Ministry of Transport of the People’s Republic of China, for other relevant issues.
Obviously, MOFOM implements anti-monopoly review under the PRC Anti-monopoly Law with the consideration of competition issues and others relevant issues such as industrial policy, public interests and so on. In other words, the purpose of the anti-monopoly review of MOFCOM is to maintain competition, but more or less with a characteristic of trade protectionism as it is a developing country with such a huge market.
ABOUT THE AUTHOR: Xia Yu
Xia Yu is an Associate in MMLC's Beijing office.
Copyright MMLC Group
More information about MMLC Group
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.