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Feb.6, 2017

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BENEATH THE SURFACE 52 THE JOURNAL OF COMMERCE Gary Ferrulli FEBRUARY 6.2017 STRATEGIC MANEUVERS LINER SHAKE-UPS, MERGERS, buy- out s, a nd a fa i lu re shook t he maritime industry in 2016. New alliances and concomitant service changes this year and next could have just as much of an impact on container carriers and the shippers relying on them. Two announcements already this year have the industry abuzz, and one could be a game-changer. OOCL may be for sale, with pundits citing Cosco, Evergreen, China Mer- chants, and CMA CGM as possible buyers. What do OOCL executives in Hong Kong have to say about it? "It's all speculation" and we should take their word on that. It's not a denial nor a confirmation. To some, there is logic to the potential deal, from a pure business perspective. OOCL grew from a vir- tual tramp service in the 1970s to a high-level service provider that con- sistently made money in the 2000s, an era when most carriers were floundering, a tribute to the man- agement of the company headed by the venerable Tung family. But even with the success, the container line was in an awkward position as a member of the G6 Alliance, know- ing that mega-ships were required for the Asia-Europe markets yet get- ting little help from its G6 partners, except for MOL. In partnership with the latter, it ordered 12 20,000-TEU ships. The other four alliance members abstained. Then came the sale of APL, announcements of new alli - ances, and the planned merger of the three Japanese container lines. OOCL again finds itself in an awk- ward position as the fourth carrier in an alliance of four, because when all is said and done with delivery of what is on the order books, the carrier will have only 11 percent of Ocean Alli- ance capacity — and that's before the blockbuster announcement of what China is doing with Cosco. Some might look at this and say, "Aren't they lucky? They are in an alliance with CMA CGM and Cosco, which now have and will have more mega-ships for a low-cost operation and scale." But how will that play out for them with only an 11 per- cent share of that capacity now, and far less if Cosco expands (more on that in a minute). From an industry standpoint, after the delivery of the six new mega-vessels, they will have slightly more than 700,000 TEUs in capacity and be the eighth-largest carrier globally, but one-sixth the size of Maersk Line. That's not a comfortable position for a carrier that might want to be a global player. But China's announcement that it will invest $26 billion in Cosco over the next five years is the true game-changer. Cosco is far more than a container carrier, and China's view of the oceans is characterized by what it's doing in the South China Sea: trying to rule it. I'll speculate here and say China is doing the same with its "commercial navy:" looking for a dominant role on the global scene. Let me speculate further: China now has six of the top 10 ports in the world because of its manufac- turing power, and Cosco is fourth in the world in container capacity, about half the size of Maersk. The country will spend $5.2 billion a year on average over the next five years. Take half of that each year, $2.6 billion and divide by $150 mil- lion, the cost of a 20,000-TEU ship today. That would allow for 17 new mega-ships, and perhaps even more if the carrier received a discount from a Chinese yard for that large of a ship order. Maybe there could be 20 mega-ship orders, and that would equal 400,000 TEUs a year in additional capacity. The math boggles the mind of those who understand the implica- tions here. Cosco could vault into first place among the world's con- tainer carriers in five years, and it doesn't require making a dime from the operations or business. Is that China's goal? Who knows? I've watched China grow from an impoverished nation to a global f i n a ncia l a nd m a nu fac t u r i ng power in less than 40 years, taking 700 million to 800 million people from poverty to at least middle-class status. The country has a long way to go for the other 600 million, but it takes time and money. China had the time before, and now it has the money, so the time line will shorten, and I think dominance on the oceans is exactly what China wants to strengthen its overall influence in the world. Those container carriers on the cusp, struggling to hang on until global volumes catch up to capacity, may be in for a huge shock that could have them going the way of former US-flag carriers, South American carriers, and others. For those ship- pers wanting more options, it won't be a happy ending for you, either. JOC Gary Ferrulli is president-North America for Unicon Logistics. Contact him at I've watched China grow from an impoverished nation to a global financial and manufacturing power in less than 40 years.

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