Recent plans to increase cooperation in the liner shipping sector in the form of the proposed P3 and 2M shipping alliances have struggled to get off the ground because they raised concerns with some – but not all – competition authorities. The lack of uniform treatment has been driven largely by the different regulatory regimes that apply worldwide. These cases demonstrate the importance for dealmakers to undertake a detailed antitrust risk assessment at an early stage.
The P3 alliance – between Maersk, MSC and CMA CGM – was abandoned in June when China’s competition authority, the Ministry of Commerce (MOFCOM), blocked the arrangement on competition grounds. This was despite P3 having already been cleared by both the European Commission (Commission) and the US shipping regulator, the Federal Maritime Commission (FMC), albeit with the FMC imposing certain supply restrictions.
Some industry players criticised MOFCOM’s decision to prohibit the alliance alleging it was based not so much on competition concerns as on a desire to protect and preserve the market position of the Chinese state-owned shipping lines. Such criticism must be viewed in the context that this is the first time that MOFCOM has blocked a global foreign-to-foreign deal. MOFCOM identified its main competition concern as being that the combined share of capacity of the three parties on the Asia-Europe trade (46.7 per cent) would significantly exceed their rivals and substantially increase their control of the market, with the next largest competitor having less than 10.9 per cent. Also key for MOFCOM was that P3 involved much closer co-operation than traditional shipping alliances, with collaboration on operational procedures, slot sales and service suspension decisions, as well as cost-sharing.
In fact, the differing outcomes for P3 in the EU and US compared to China are largely explained by differences in the relevant regulatory regimes or geographic markets considered in each review. In the US the FMC looked at US trades, where P3’s market share and strength was expected to be much lower than the Asia-Europe trades that raised concerns for MOFCOM.
The merger control rules in most jurisdictions – including the Commission’s overarching regime for the EU – only require notification and formal approvals for “structural” joint ventures akin to a merger (so-called “full-function” joint ventures). This means looser forms of cooperation, like P3, fall to be self-assessed by parties for compliance with the general competition rules in most jurisdictions. China is one of the exceptions to the rule as even looser types of joint ventures can require merger approvals under China’s rules.
This difference in procedure was a significant factor in the EU and Chinese decisions, both of which focused on the competitive impact on Asia-Europe trades. The Commission’s “clearance” was not a formal once-and-for-all approval, but simply a decision that the proposed P3 alliance did not raise any immediate competition concerns. In contrast, because P3 was caught by China's merger control rules, MOFCOM had to reach a formal decision on whether to clear or prohibit P3 within a defined time period. Given these circumstances, it is perhaps not unsurprising that MOFCOM should have adopted a more cautious approach and taken the decision to prohibit the alliance.
MOFCOM’s decision had also raised suspicions because the parties were not able to offer any remedies that alleviated MOFCOM’s concerns, suggesting a prohibition decision was inevitable. Within a matter of weeks of P3 being blocked, Maersk and MSC had jettisoned CMA CGM and launched a more traditional vessel-pooling arrangement, 2M.
Having not intervened against P3, it appears unlikely the FMC or Commission would seek to prohibit the less integrated 2M with its smaller market presence. However, recent reports suggest that the parties are currently seeking to dissuade the FMC from “stopping-the-clock” on its review while it awaits further information from them, potentially jeopardising 2M’s launch date. There have also been suggestions that the FMC is keen to discuss the deal with Chinese regulators.
While China’s regulators might also be expected to have fewer concerns than before, this is not a certainty. Interestingly, although China’s merger rules can capture looser joint ventures, Maersk and MSC are confident that 2M is a sufficiently informal arrangement to fall outside Chinese merger control, having cast adrift P3’s proposed jointly-owned LLP.
However, even if not subject to MOFCOM’s jurisdiction for merger review, 2M has had to be filed with China’s Ministry of Transport (CMoT) – which is the approach that has been adopted by previous “traditional” vessel sharing arrangements. No such vessel sharing arrangement has been prohibited by China’s authorities to date, which might be read as suggesting that 2M should be cleared unless the details of the proposal raise any novel issues.
However, 2M is not guaranteed to escape a Chinese competition review as CMoT has the ability to investigate whether certain shipping alliances harm competition. Significantly, 2M’s share on the Asia-Europe trade is reportedly 36 per cent – and therefore above the 30 per cent threshold at which CMoT can investigate competition concerns, and higher than has been the case in previous arrangements that CMoT has considered.
While a 36 per cent share is not overly high from a standard antitrust analysis perspective, if CMoT were to launch such an investigation this may again fuel suspicions that Chinese regulatory decisions are being driven by Chinese protectionism. However, an investigation could be in sight given recent suggestions in China’s media that MOFCOM views 2M as a “monopoly” notwithstanding the absence of CMA CGM. Similarly, China’s state broadcaster has already suggested that 2M could pose “great challenges” to China’s state-owned shipping lines and raise prices for consumers.
Whatever the ultimate outcome for 2M, these cases demonstrate the importance of considering competition issues at an early stage in any proposed shipping cooperation arrangements. The latest proposed alliance – Ocean Three – between CMA CGM, China Shipping Container Lines and United Arab Shipping, will no doubt need to navigate the same regulatory obstacles. The uncertainty and complexity created by the differing procedural frameworks, timelines and legal tests in the multitude of potentially relevant jurisdictions creates challenges which need to be addressed head-on, and mean that competition reviews need to be factored into deal timelines and overall risk assessments.
There are over one hundred jurisdictions which now have competition laws to review transactions. For a necessarily international industry such as shipping – and one that is vital to enable world trade - many industry insiders have called for a single global regime to replace the current legal mishmash. While this may be desirable from a global policy perspective, it is highly unlikely in practice. The days of liner conferences, under which rate and capacity fixing agreements were permitted in order to ensure stability in the global liner fleet, have gone in the EU and many other jurisdictions, and the “special case” for shipping is not accepted by competition regulators (as shown by the EU withdrawing its sector-specific maritime guidelines). Moreover, while a single global regime may be highly attractive, and there are increasing levels of inter-authority cooperation, countries such as China will not cede jurisdiction to a supra-national regulator anytime soon. Thus, the current inefficiencies and uncertainties of multiple regulatory reviews are here to stay and need to be managed if global shipping alliances are to succeed.