Reed Smith Client Alerts

On 27 February 2018, the European Commission (the Commission) published its decision in relation to the acquisition of Orient Overseas (International) Limited (including its subsidiary Orient Overseas Container Line (OOCL)) by COSCO Shipping (COSCO). The merger was cleared by the Commission on 5 December 2017 and the full text can be found here.

Authors: Marjorie C. Holmes Emma Jones Alexander S. Mackay Vaibhav Adlakha

Type: Client Alerts

Relevant markets

The main competitive overlap between the parties is in relation to deep-sea container liner shipping services and as expected the Commission has followed its previous decisions in relation to this market – that the product market is the provision of regular, scheduled services for the carriage of cargo by container and the market is geographically defined as the range of ports which are served at both ends of the service by leg of trade (for instance, a geographic market would be Northern Europe – Far East eastbound).

The Commission did consider whether the trade between Northern Europe and Montreal via the St Lawrence Seaway could be differentiated from the Northern Europe – North America trade. The Commission noted that from the supply side there are differences between the trade to Montreal and the trade to the rest of North America (such as ship sizes and ice conditions); however, from the demand side this was not the case. From the Commission’s market investigation, customers who responded gave the opinion that services to the Port of Montreal are at least substitutable for the services to the ports of North-East America (e.g., Philadelphia and New York). Therefore, the Commission considered the Northern Europe – North America trade was correct as the relevant trade.

Other markets where the parties had a less significant overlap were container terminal services and freight forwarding. These market definitions were left open as the transaction did not raise serious doubts as to compatibility with the internal market under any plausible definition.

Competitive assessment of deep-sea container liner shipping services

The Commission adopted its previous practice of including parties’ alliances and consortia when assessing their market shares. Both OOCL and COSCO are members of the same alliance, the Ocean Alliance.

The Commission considers that the part of the market over which the parties have no influence, i.e., corresponding to carriers that are not members of any of the parties’ alliances and consortia, is viewed as fully competing with the parties in the respective trade – the ‘free market’.

The Commission’s approach to the reefer market (where lines carry refrigerated containers) also remained consistent with its other decisions, and so market shares are only taken into account on those legs of trade where the share of transport in reefer containers is more than 10 per cent of the total leg of trade.

The Commission found that when attributing the parties’ alliances and consortia, their market shares would exceed 20 per cent on eight legs of trade. The affected trades were for both the eastbound and westbound legs of: Northern Europe – North America; Northern Europe – Far East; Mediterranean – Middle East (including the Mediterranean – Middle East eastbound leg, reefer only); and Mediterranean – Far East.

Except for the Northern Europe – North America trades, the ‘free market’ was above 60 per cent (meaning that the parties, along with their alliances and consortia, had market shares below 40 per cent) and the transaction did not raise any competitive concerns, especially as the parties were already members of the same alliance.

For Northern Europe – North America the shares of the parties, along with their alliances and consortia, were [60-70] per cent for each leg of the trade, leaving a ‘free market’ of less than 40 per cent. However, the Commission was able to clear the transaction without any commitments as it considered that the merger did not raise any competitive concerns for the following reasons:

(i)COSCO would be able to access the capacity of OOCL’s consortia on the trade and the transaction would not lead to a completely new link between previously fully independent consortia, as OOCL was already a member of the SLCS consortium and the Ocean Alliance prior to the transaction. As a result, the parties’ alliances and consortia are already interconnected on this trade and the only change brought about by the transaction would be the increment added by COSCO (which is of [0-5] per cent).

(ii)The parties were not close competitors – OOCL provides a service to Canada and the U.S. Midwest via the Port of Montreal, whereas COSCO does not. In the Commission’s market investigation, when respondents were asked to rank the closest competitors to COSCO in relation to this trade, respondents indicated CMA CGM, followed by Evergreen and Hapag-Lloyd. CMA CGM was also identified as the closest competitor to OOCL by the majority of respondents.

(iii)There would still be sufficient competition post-merger as independent competitors account for [30-40] per cent on the eastbound leg of the trade and [30-40] per cent on the westbound leg, and include the world number one carrier, Maersk. The Commission also acknowledged that there exists some price competition within the alliances and consortia.

(iv)Finally, the Commission found from its questionnaire that both customers and competitors consider that there will be sufficient competition to prevent the merged entity from raising prices post-transaction.

Conclusion

In other recent mergers in this market (Hapag-Lloyd and UASC, Maersk and Hamburg Sud) commitments were given to compensate for high market shares. In this case the Commission has looked beyond market shares and analysed other factors affecting competition in the liner shipping market.  

Reed Smith’s Competition team acted for OOCL on this transaction.

Client Alert 2018-050