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July 07, 2014

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BENEATH THE SURFACE 22 THE JOURNAL OF COMMERCE JULY 7.2014 Gary Ferrulli WHY THE P3 GOT BUSTED MAYBE YOU'VE HEARD about China's rejection of the P3 Network. In all seriousness, I'm hesitant to cover an issue such as this because of the overwhelming analysis and obser- vation that has come before me. But I have strong feelings about why China refused to allow it and a lot of questions about the real outcome. Let's start with the "why." I think the single most relevant issue is protectionism, the recognition that the existing Chinese container carriers aren't able to compete com- mercially or financially with Maersk Line, Mediterranean Shipping Co. or CMA CGM, the three carriers that would have made up the P3, let alone the three of them combined. One must simply read the financial results of the two Chinese shipping entities to recognize there are seri- ous problems in their being able to be commercially viable without significant support, directly or indi- rectly, from the government. They aren't typical business entities designed to produce profits to sustain themselves, as the mem- bers of the P3 are. In essence, the Chinese carriers are an arm of the government designed to support varied objectives of the country. China isn't alone in how it deals with containerized ocean transport. Many other countries (Singapore, South Korea, Taiwan, Japan, among others) also help their container car- riers directly or indirectly. So what's the outcome? Who benefits and who doesn't? In the short term, cargo interests who move large volumes of goods will benefit because the chaotic rate conditions of the past year-plus will continue. This creates pressure on carriers to continue to try to pre- serve volumes even at rates lower than costs and affords the large shippers — beneficial cargo owners and non-vessel-operating common carriers — lower rates than the mar- ket in general. For large BCOs, it supports their bottom-line objectives, provided service quality doesn't deteriorate as it did when slow-steaming and super-slow-steaming were intro - duced to curb the impact of rapidly rising fuel costs. I can't envision anything that dramatic happening, not for a year or two. For the large NVO, it's maybe a double-edged sword: lower rates than the market in general but also narrowing of margins. Simply put, making 10 percent on $2,000 is better than making 10 percent on $1,000. It's certainly more complex than that, evidenced by the recent JOC Cover Story ("NVOs Right the Ship," June 9) indicating that the volumes of the Top 20 NVOs seem to bounce up and down. But their situation is different than the ves - sel operators because they offer a variety of services under a variety of names that extend well beyond what most ocean carriers even attempt. That gives them some maneuverabil- ity in terms of where their revenue and profitability comes from. For smaller shippers and NVOs, it may seem OK when rates drift downward for a period and supply- demand imbalances provide for the continuation of unstable rates, but they don't get the same benefits as their larger counterparts, and that has to have a negative impact on them over time. To me, the P3 offered an oppor- tunity for three carriers to combine 40 to 45 percent of their operations in specific markets so as to take advantage of economies of scale and reduce costs, a key factor in ongoing profitability while providing rela- tively high levels of services in those markets. It gave them the opportu- nity to become more efficient and not exacerbate the supply-demand imbalances, reducing the pressure to change rates virtually every week. It also would have given those in the G6 and other alliances a little breathing room, possibly extending the business life of some. Again, in time, these f luctua- tions will have an adverse effect on many because it will likely hasten the decisions some will have to face in remaining a global service provider. I've written previously that in the next six to eight years the Top 10 container carriers will move 90 per- cent of global containerized trade. China's P3 decision could acceler- ate that time frame. The Chinese government, indeed virtually any government, will take whatever actions it deems in its best interest when it comes to shipping or any number of other issues. In this case, it appears China Ocean Shipping Co. and China Shipping will benefit from not having to become more efficient and more commercially viable, and that doesn't sound like a formula for enhancing Chinese or global trade goals. I'll also note that the official document turning down the request to operate under the P3 umbrella referred to shippers having to pay higher rates. That ignores the fact that today's rates are at about the same level as 25 years ago, and in the intervening years, the cost of fuel and assets has risen signifi - cantly. Chinese regulators also were concerned with the three entities colluding on pricing, but you don't need to form an alliance to do that, and forming an alliance doesn't make it easier. Global trade shouldn't be a forum or platform of protection- ism. The benefits of global trade are best accomplished when those involved are encouraged to become more efficient and to keep costs at reasonable levels for the good of all involved. JOC Gary Ferrulli, a 40-year shipping industry veteran, is president of Global Logistics and Transport Consulting in Chandler, Arizona. Contact him at

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