On 17 June 2014, the Ministry of Commerce (MOFCOM) blocked the proposed P3 Network shipping alliance between Denmark's AP Maller-Maersk. A/S (Maersk), Switzerland's Mediterranean Shipping Company (MSC) and France's CMA CGM (CMA CGM, together the Parties) (the Transaction).
This is MOFCOM's second prohibition decision since the entry into force of China's Anti-monopoly Law (AMI.) nearly six years ago, and the first time that MOFCOM has blocked a global foreign-to-foreign deal. The decision highlights MOFCOM's confidence in charting its own course, and willingness to diverge from positions taken by other major jurisdictions such as the EU and US.
Maersk, MSC and CMA CGM are the three largest container shipping lines in the world, and each has significant activities in China. On 13 June 2013, the parties announced their decision to establish a long-term operational alliance, P3. In October 2013, the parties entered into an agreement to form a Network Centre in England and Wales, responsible for the operational affairs of the parties' international liner shipping business on certain international trade routes. Besides China, the Transaction also required regulatory approvals elsewhere including from the U.S. Federal Maritime Commission (FMC).
The Transaction was notified on 18 September 2013 and blocked after a 9-month review. MOFCOM accepted the notification on 19 December 2013, and initiated a Phase II review on 18 January 2014. On 18 April 2014, MOFCOM commenced an Extended Phase II review. Following multiple rounds of unsuccessful negotiations on remedies. MOFCOM adapted its second prohibition. This follows the first prohibition decision, Coca Cola/Huiyuan, in 2009.
MOFCOM focused on the following three groupings of international trade routes in its review of the Transaction:
- Asia-Europe Trade: the Far East-Northern Europe and the Far East Mediterranean trades;
- Transpacific Trade: the Far East-North America West Coast. the Far East-North America East Coast and the Far East-United States/Gulf of Mexico trades; and
- Transatlantic Trade: the Northern Europe-United States East Coast. the Mediterranean-United States East Coast, the Europe-Canada and the Europe-United States West Coast trades.
Since Transatlantic Trade does not involve ports in China, and given that the international container liner shipping market on the Transpacific Trade is relatively fragmented with competitors with comparatively high market shares, MOFCOM focused its review on the on the Asia-Europe Trade routes.
MOFCOM analysed the competitive impact of the Transaction in terms of, (i) the degree and scope of cooperation resulting from the alliance, (ii) market shares, (iii) market concentration level (HHI index), (iv) barriers to entry, and (v) the impact of the Transaction on competitors and the industry, and concluded that the Transaction may eliminate or restrict competition. The five factors set out by MOFCOM leading to its prohibition decision are considered in turn below.
- A more integrated form of cooneration: the Transaction will result in a "tight consortium" that is materially different from the traditional "loose" shipping alliances. MOFCOM took the view that what it described as "traditional alliances" between container liners are based on vessel-sharing and slot exchange agreements. Each member of such an alliance will typically operate independently and members 'loosely"cooperate with each other. In contrast, the P3 alliance envisaged a tighter and more integrated form of cooperation allowing the members to consolidate certain activities on the Asia-Europe Trade routes, the Transpacific Trade routes and the Transatlantic Trade routes by means of the Network Centre. MOFCOM found that the degree and scope of cooperation under the P3 alliance was materially different to that encountered in the context of what it considers tobe "traditional" shipping alliances.
- Significant market share: the combined market shares after the Transaction will significantly enhance the market power of the Parties in the relevant market. MOFCOM found that share of capacity is an important indication of a company's market power in the container liner shipping industry. As at 1 January 2014, the shares of capacity ofMaersk, MSC and CMA CGM in the Asia-Europe container liner shipping market were 20.6%, 15.2% and 10.996, respectively and MOFCOM found that they were, the three largest players in the relevant market with far higher shares than those of other competitors. MOFCOM found that post-Transaction, the Parties' combined share of capacity would have been significantly strengthened and together would have commanded a combined market share of 46.7%.
- Significant increase in market concentration level. The pre-Transaction HHI was found to be approximately 890. Post-Transaction, with the Parties' "tight" consortium, MOFCOM considered that the number of key players would fall by a considerable number, and the HHI would increase to 2240, with an increase of 1350. As such, MOFCOM concluded that the Transaction would materially increase the level of market concentration on the Asia-Europe trade routes. It seems that MOFCOM may have assumed that the market shares of each of the three parties to the alliance should be attributed to a single entity - this is likely to come as a surprise to the industry and other observers.
- Increased barriers to entry. International container liner shipping is a capital intensive industry and is characterized by economies of scale. MOFCOM concluded that the Transaction would integrate the Parties' operations and activities to a significant degree, thereby eliminating effective competition in the relevant market. MOFCOM thus concluded that the Transaction would increase barriers to entry in international container liner shipping.
- Adverse impact on competitors and other industry players. MOFCOM considered that by integrating operations and activities to a significant degree, the Parties would have further increased their market power and "squeezed the growth potentials of other competitors and place them at greater disadvantage in future competition". The Transaction may also have placed shippers (i.e. China-base customers) in a worse position given what MOFCOM considered to be their weak buyer power. The Transaction would also have enhanced the Parties' bargaining power against port terminal operators, as MOFCOM believed they would have been made to accept lower service charges in order to attract vessels operated by the Parties.
Although MOFCOM discussed potential remedies for its concerns with the parties it was not satisfied with the remedies offered. No public details were provided of the remedies that were under discussion or of MOFCOM's reasons for finding them unacceptable.
The P3 decision is significant since this is only the second time that MOFCOM has blocked a transaction. This is, however, the first time that MOFCOM has blocked a global foreign-to-foreign deal. Its first prohibition decision, Coca Cola/Huiyuan, involved the acquisition of a domestic Chinese company.
The Transaction was approved by a majority vote of the FMC on 24 March 2014, and in June 2014 the European Commission reportedly informed the P3 partners that it had decided not to open an antitrust investigation into P3. While its is not wholly surprising that an alliance involving th e world's three largest container shipping lines on the important Asia-Europe Trade- a strategic and lucrative trade route both for China's exporters and container shipping lines- in a sector facing overcapacity issues and rising costs would invariably face close and careful scrutiny by MOFCOM the decision to prohibit the transaction outright nonetheless comes as a major surprise to many in the container liner shipping community, asboth the EU and the US had given P3 the green light.
While MOFCOM's rationale for prohibiting P3 is not set out in full, the decision does provide some insight into MOFCOM's analysis and the approach it may take on future deals.
The decision provides insight into MOFCOM's analytical approach •••
First, the case highlights MOFCOM's sharp focus on market shares and market concentration levels as primary grounds on which to oppose a transaction or require remedies from merging parties (see also MOFCOM's recent decision in the Thermo Fisher case ). The decision itself does not refer to a particular theory of harm nor does it offer an explanation as to why high shares of capacity and high concentration levels per se would harm competition in an industry characterised by the presence of similar or comparable alliances and independent rivals, including Chinese and international container shipping liners. That said, the combination of the parties involved in P3, the structural issues facing the global liner shipping indusry (and China's container liners and ports) together with a vocal domestic shipping lobby in China presented the necessary ingredients for a difficult regulatory process.
Second, the decision suggests that MOFCOM may consider efficiencies in cases that result in high post-merger market shares and high HHI numbers and raise substantive competition concerns. It is worth noting in this context that Article 28 of the AML enables MOFCOM to approve a transaction with perceived anti-eompetitive effects if it generates efficiencies and is in the public interest. However, it is striking that the parties claim that the significant cost savings and other efficiences the transaction would have created are not discussed in MOFCOM's decision. Given the capacity utilization issues faced by the liner shipping industry and the US FMC's express finding that P3 would create significant efficiencies for the benefit of consumers there are inevitable concerns that MOFCOM paid insufficient attention to this issue.
Third, MOFCOM consulted widely during its lengthy review, including reportedly the Ministry of Transportation and the National Development and Reform Commission, as well as competitors, other market players, and local trade associations. China's shipping industry voiced opposition to the planned P3 Network. The decision highlights the importance of engaging early with MOFCOM, identifying possible concerns early and addressing them early in the review process, and managing the review process effectively. Further, the decision emphasises the need for merging parties to assess carefully the impact of their global deals on China, and to work closely with MOFCOMtoframe remedies, where required and acceptable to the parties concerned, that address the concerns raised.
Lastly, MOFCOM relied on external consultants to assist with its review of the Transaction reflecting its willingness to consider expert advice in complex cases that require in-depth analysis. It remains unclear whether the parties had the opportunity to engage with the external consultants- parties thus far have generally not had this opportunity which is unfortunate .
•••but remains silent on some important points
While the decision does provide helpful insights, it remains silent on a number of points and may create some uncertainty for companies.
In particular, in referring to a "tight consortium" and comparing this to "loose" alliances it is unclear whether MOFCOM is assessing the jurisdictional basis for its intervention in this case or whether it is, in fact, expressing concerns in relation to the perceived competitive harm arising from the Transaction. Insofar as MOFCOM is explaining the jurisdictional grounds for its review, it creates uncertainty astowhen a consortium or other forms of cooperation between parties might give rise to a reviewable transaction. The absence in the decision of the criteria relied upon by MOFCOM to justify its review of the Transaction means it may be difficult for companies to conclude definitively that no MOFCOM filing is required in at least some cases. MOFCOM recently published the revised Guidance for the Notification of Concentrations of Undertakings which sets out, inter alia, the factors it will consider when determining whether a transaction resultsin "control" or "decisive influ ence" within the meaning of the AML (triggering a duty to file if the applicable turnover thresholds are met). In this context, MOFCOM notes that it will consider, inter alia, whether there are significant commercial relationships, cooperation agreements, etc. between the merging parties to establish jurisdiction.
Likewise, there is no discussion of the significance of the parties' Network Centre expressly not having the ability to coordinate the P3 shipping lines activities in pricing, marketing or sales and that firewalls were to be put in place to prevent the passing of sensitive commercial information to the parent lines. These factors would have been relevant to the substantive analysis.
In addition, it is unfortunate that the decision is silent on the efficiencies, if any, that might have been considered but were ultimately rejected. Nor does the decision provide any insight into how any claimed efficiencies, accepted by other antitrust authorities, were evaluated by MOFCOM.
Similarly, the decision does not explain why the Transaction would increase barriers to entry and/or why expansion is unlikely, would be untimely or insufficient to offset any anti-competitive effects arising from the Transaction. Further, the decision simply states, but does not clarify, why customers would have insufficient bargaining power.
Nonetheless, the liner shipping industry globally remains subject to pressure to consolidate further and the decision provides a roadmap for other container liners contemplating similar or comparable alliances with a different fact pattern: the transaction is less likely to raise issues absent high combined shares of capacity, market concentration levels, and a perceived detrimental impact on the local container shipping liner industry.
In addition, MOFCOM may have a more favourable view of alliances structured in a way it considers to be "traditional" rather than "tight" cooperation that it considered would be put in place under the P3 Network Centre. Furthermore, given the undoubted commercial benefits and potential efficiencies available, the decision leaves open the possibility that the P3 parties may now wish to seek to restructure their cooperation insofar as it extends to China in order to fit within MOFCOM's requirements for ''loose" vessel sharing-type arrangements.
In conclusion, the decision confirms the importance of market shares and market concentration levels in MOFCOM'sanalyses. It also confirms that MOFCOM has the confidence to diverge from the positions taken elsewhere, including in other major jurisdictions such as the EU and the US. The uncertainties created by the decision mean that companies must remain alert to the specific requirements of China's merger control regime. The decision is a reminder that concerns raised by Chinese stakeholders can play an important role in the review and decision-making process. Early engagement with MOFCOM and effective process management remain key to navigating China's evolving merger control regime.