Against industry expectations the proposed alliance between the world’s three largest container shipping lines, Maersk, MSC and CMA-CGM, was blocked by the Chinese Ministry of Commerce (MofCom) on 17 June. MofCom’s decision means that the P3 alliance will not go ahead and has led to further restructuring in the container shipping market. Maersk and MSC have since entered into an exclusive Vessel Sharing Agreement (VSA) – dubbed the ‘2M’ – on east-west trades, whilst CMA-CGM have been left to assess their options, which include the establishment of a new global VSA with carriers that are not currently a member of a global alliance, such as UASC and CSCL.

Why was P3 rejected?

P3 had already received regulatory approval from the Federal Maritime Commission (the FMC) in the USA. In addition the European Commission (the Commission), which does not have a formal clearance procedure for VSAs which fall short of a full-function joint venture, had indicated that it would not open proceedings against P3 when it started operations. However, both regulators stated that they would closely monitor P3 to ensure that its impact over time did not lead to a restriction of competition, which might be evidenced by higher prices or less choice for consumers.

Unlike the regulators in the EU or the USA, MofCom required P3 to obtain merger clearance. MofCom had not required this clearance for the G6 or CKYHE alliances. In making the decision to reject P3 MofCom drew a distinction between what it termed as ‘traditional’ VSAs, which it would not treat as a ‘merger’ and ‘non-traditional’ VSAs between container lines.

MofCom reasoned that in a ‘traditional’ VSA individual members retain the ability to have an impact on the decision making of the alliance, as operational decisions are taken by a committee that involves all the members to the agreement. In contrast, P3’s day-to-day operational decisions would have been taken by a dedicated arms-length network service centre. In this regard, MofCom was especially concerned that the proposal of P3 to pool costs through the network service centre would have reduced the ability of P3’s members to compete effectively on price. It was also concerned that P3’s market share, which it said was 47% on the Asia – Europe trades, may have given P3 the power to control prices in a concentrated market with barriers to entry.

MofCom’s decision indicates that competition authorities are prepared to place limits on the level of integration VSAs can achieve if those authorities feel that increased integration would have a negative impact on customers such as shippers, freight forwarders and terminal operators.

2M

2M has structured itself as a ‘traditional’ VSA in response to MofCom’s P3 decision. It has said that there will be no joint service centre, and that Maersk and MSC will each be responsible for their own bunker costs and will enter into separate service contracts.

However, 2M may still face difficulties from regulatory authorities. Shippers’ forums in a number of jurisdictions, including China, have expressed concerns about 2M’s market share, which, although smaller than P3’s, could, according to press reports, still be as high as 42% on transatlantic trades and 35% on Asia – Europe trades. These market shares would mean that 2M would be unable to benefit from the EU block exemption for liner consortia permitting co-operation between carriers short of price fixing and market allocation where market shares do not exceed 30%1. Instead, like P3, it will have to ‘self-assess’ its agreement to ensure compliance with EU competition law. Whilst it is unlikely that the Commission will stop 2M from starting operations, it could place its operations under significant scrutiny in the future if freight rates were to rise.

In addition, whilst 2M may not be viewed as a merger by MofCom, the Chinese Ministry of Transport may investigate a VSA for anti-competitive practices if it carries more than 30% of the volume carried through Chinese ports on any trade route in a particular year. We understand that the Chinese Ministry of Transport may order a VSA to be amended or limited if it finds that the VSA is detrimental to fair competition2.

Conclusion

MofCom’s decision to reject P3 and the regulatory difficulties 2M may face highlights the legal uncertainty that competition law presents for those companies that have operations in a number of different jurisdictions, as different competition authorities have different procedures and may take differing approaches to the same transaction. The establishment of a single global set of competition rules for the container shipping industry might be desirable, but for now the liner companies will have to continue to seek competition law advice in separate jurisdictions when entering into VSAs or mergers.

MofCom’s decision certainly does not signal the end of the global VSA system, but it does indicate the wide variety of factors at play and the need for due diligence when structuring transactions and VSAs to comply with competition law.