On 7 November 2017, China's Ministry of Commerce (MOFCOM) published its conditional approval of the proposed takeover of Hamburg Südamerikanische Dampfschifffahrts -Gesellschaft KG (Hamburg Sud) by Maersk Line A/S (Maersk), which closely mirrors a decision of the European Commission (EC) in relation to the same transaction. In this bulletin, we examine this decision and other competition law updates in the liner shipping sector in China and Hong Kong.
The Maersk/Hamburg Sud decision
In its investigation of this proposed concentration, MOFCOM found that Maersk and Hamburg Sud overlap horizontally in: (1) the provision of container liner shipping services; (2) the provision of refrigerated container liner shipping services; and (3) the provision of oil tanker transport services. Maersk is also active in the upstream market of the production of containers, and a separate independent product market of ocean freight-forwarding services. Hamburg Sud is not active in either of these two markets. As regards the overlapping activities, MOFCOM found that in most cases, the parties did not have sufficient market share and/or there was sufficient competition such that the concentration did not give rise to any anticompetitive impact or foreclosure effect.
However, with respect to two of the 11 overlapping trade routes in the parties' container liner shipping and refrigerated container liner shipping activities, MOFCOM concluded that the concentration could give rise to anticompetitive effects. This conclusion was based on the fact that Hamburg Sud (but not Maersk) was party to four different Vessel Sharing Agreements (VSAs) in relation to these two trade routes.
A VSA is an agreement among liner shippers on the same trade route to share (among other things) vessel times, vessel capacity, and other operating costs. VSAs that cover multiple trade routes between parties are also sometimes known as "alliances" or "consortia".
MOFCOM found that, when the market share of Maersk, Hamburg Sud, and the other parties to the relevant VSA were aggregated, the aggregate total market share on certain market segments in relation to these two trade routes would be as high as 75-80%. By aggregating the market shares of the transacting parties and all members in the VSA, MOFCOM took an approach that mirrors that adopted by the EC and which is set out most recently in the case of M.8472 – Nippon Yusen Kabushiki Kaisha / Mitsui OSK Lines / Kawasaki Kisen Kaisha / JV.
The EC's approach is based on the view that looking only to the aggregated market shares of the transacting parties' does not adequately reflect market dynamics where alliances or consortia are involved. For example, it fails to take into account the possibility that a consortium member, even when carrying limited volumes, can have a significant influence on operational decisions determining service characteristics - in particular capacity - over a much larger part of the market. This influence as a result of alliance or consortia membership can have a dampening effect on competition on those trade routes served by the consortium in question.
Here, the increases in market concentration as a result of the Maersk/Hamburg Sud concentration, together with the high barriers to entry in the relevant market, lead MOFCOM to the conclusion that the concentration could result in the elimination or restriction of competition. MOFCOM therefore imposed various conditions on the transacting parties, including ordering Hamburg Sud's withdrawal from 1 of the 4 VSA arrangements identified, and prohibiting Hamburg Sud from renewing the remaining VSA arrangements upon their expiry.
This is a similar conclusion to that reached by the EC in April this year in relation to the same concentration. There, the EC ordered Hamburg Sud's withdrawal in 5 consortia arrangements as conditions to clearance.
Substantive analysis of VSAs and VDAs
The effects on competition of VSAs were recently considered in considerable depth by the Competition Commission of Hong Kong (the HKCC), in its assessment of an application for a block exemption order for VSAs.
In its Statement of Reasons for granting a block exemption for VSAs, the HKCC argued that VSAs are agreements that could potentially harm competition (such as through the sharing of competitively sensitive information between competitors, or by facilitating restriction of capacity in the market), but are generally unlikely to result in significant harm to competition unless the parties to the VSA enjoys some degree of market power. In addition, VSAs were considered likely to bring sufficient objective efficiencies so as to trigger the efficiency exclusion under the Competition Ordinance (which is broadly couched in terms similar to corresponding exclusions in other regimes, such as the EU), thereby justifying the granting of a block exemption order.
On the other hand, the application to the HKCC for a block exemption order for VSAs also included a closely related type of agreement, commonly referred to as Voluntary Discussion Agreements (VDAs). Unlike VSAs, which relate to operational cooperation between liner shippers, VDAs relate to agreements for the sharing of information between competitors, and in this case contemplated the sharing of information relating to pricing (although Hong Kong-specific pricing discussions and voluntary agreements were later carved out of the application in a supplemental submission).
The HKCC considered that the sharing of competitively sensitive information as contemplated by the block exemption order application (regardless of whether or not the supplemental carve out applied) could give rise to competition concerns. Such concerns centred on the potential reduction of uncertainty in the market (thereby reducing the incentive of liner shipper carriers to compete for customers), and the facilitation of coordinated behaviour. The HKCC further concluded that the application had failed to adequately substantiate the objective efficiencies that would be achieved through entering into VDAs. VDAs were therefore not included within the scope of the HKCC's block exemption order that was ultimately granted by the HKCC, which currently applies only to VSAs where the aggregated market shares of the participants does not exceed 40% on a particular trade route.
Based on MOFCOM's decision in the Maersk/Hamburg Sud case and the Statement of Reasons for the granting of a block exemption order for VSAs published by HKCC, the approach of MOFCOM and the HKCC appear to be aligned on this issue.
This position is also broadly in line with that of the EC. Officials from the EC have often spoken about the difficulty in balancing the undeniable efficiencies that arise from alliances/consortia, with the need to prevent harm to competition to the detriment of customers. In 2016, the EC accepted commitments from 14 container liner shippers to cease the practice of making "General Rate Increase" announcements after the banning of conferences in the EU (essentially rate-fixing agreements that were commonplace in between shipping lines). The announcements were viewed as a potential form of price signalling.
However, there is in fact divergence in views across other jurisdictions. Notable examples (which were also considered by the HKCC) are Singapore and Malaysia, which have both granted block exemption orders covering both VSAs and VDAs.