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July 07, 2014

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TRADING PLACES 70 THE JOURNAL OF COMMERCE JULY 7.2014 Peter Tirschwell POST P3: A NEW WORLD ORDER W I T H T H E S T RO K E of a pen on June 17, China transformed itself from a non-player among regula- tors of container shipping to the most important one. In the process, it belatedly took on a role com- mensurate with its stature as the world's largest container market, accounting for some 25 percent of global liftings. With its stunning rejection of a proposed alliance of unprecedented size composed of the world's top three carriers, China laid down new terms to the industry. It said no carriers would be allowed to accumulate t he ma rket power envisioned by the P3. And, because no carrier can ignore the China market, the decision effectively laid down a new global standard. As a result of the decision by China's Ministry of Commerce, future car- rier alliances will be more limited in scope, won't have integrated vessel operations centers, a nd won't pose existential threats to its competitors. Many saw the P3 as reflecting an attempt by an underperform- ing industry to achieve adequate returns by achieving greater effi- ciencies. The cost base of the P3 carriers — Maersk Line, CMA CGM and Mediterranean Shipping Co. — would decline as a result of their sharing of the largest, lowest-cost f leet of ships. Because the three carriers would still compete on price, customers would benefit from the lower costs carriers would pass along in the form of lower prices. In disallowing the P3 carriers to realize such efficiencies, the MOFCOM decision was, the think- ing goes, not in the interests of customers but rather should be seen as an industrial policy in favor of carriers that would have to com- pete against the P3, most notably its own state-owned carriers, Cosco and China Shipping. "The country that is respon- sible for driving down ship prices and subsidizing its shipping carri- ers the most among all countries, is actually the deal breaker on behalf of companies it seeks to bail out even further, despite all the evidence of their continued failings," shipping analyst Charles De Trenck wrote on LinkedIn. Th at 's one p oi nt of v iew. Another is despite the P3 being generally accepted and that the risk of the three carriers colluding on price was almost nonexistent, they still would have achieved dominant market power because of their low cost base relative to competitors. It would have allowed them to withstand overcapacity, rate vola- tility and possibly given them the opportunity to drive weaker com- petitors — of which there are several — out of the market by initiating predatory pricing actions. The result would be fewer competitors, more market concen- tration and higher prices. MOFCOM alluded to this in saying, in a transla- tion posted on, that the P3 would force competitors to stay "at a disadvantageous position in further competition." That's why some shipper groups that had seen the P3 as a threat to competitive balance hailed the decision. The U.K.-based Global Shippers' Forum previously called on international regulators to inves- tigate the P3's impact on price and service, and had asked for appro- priate changes to ease competition concerns, stating how the alliance would "fundamentally change the structure of container shipping markets." In response to the MOFCOM decision, it said, "The unprecedented size and scale that the proposed P3 global alliance was going to pose competition regulators was a concern." Certainly, the Chinese car- riers aren't taking the decision for g ra nted. "This decision of MOFCOM is based on their own professional judgment. No mat - ter what MOFCOM's stance is on the P3, what Cosco has to do remains the same. We only focus on ourselves, focus on our own capabilities and improving our managerial and operational level," Cosco Group President Li Yunpeng told the JOC. The decision, coming after the Federal Maritime Commission had approved the alliance, exposed a bias in U.S. policy toward carriers — a bias that may be outdated. The U.S. is no longer a presence among major container lines, but it has a huge presence in the industry, nev- ertheless — through shippers. The large U.S. retailers, manufactur- ers and other shippers control tens of millions of TEUs of cargo mov- ing on container lines and would suffer as a result of less competi- tion. It was not obvious at all that a decision in support of the P3 was a decision supporting those companies. FMC Commissioner Richard Lidinsky, the sole commissioner to oppose the P3, told JOC Senior Editor Mark Szakonyi: "I think the lesson learned for the commission is that maybe our experts and ana- lysts missed some of the things the Chinese saw, not in terms of ana- lyzing China trade … but the bigger and broader question of the impact of the alliance. If the alliance is global, we need to take a global view of it." JOC Contact Peter Tirschwell at and follow him on Twitter: @petertirschwell.

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