On 19 May 2017, the Commission received notification of a proposed concentration pursuant to Article 4 of Council Regulation (EC) No. 139/2004 by which Nippon Yusen Kabushiki Kaisha (NYK), Mitsui O.S.K. Lines (MOL) and Kawasaki Kisen Kaisha (K Line), all from Japan (the Parties), would acquire, within the meaning of Articles 3(1)(b) and 3(4) of Council Regulation (EC) No. 139/2004 on the control of concentrations between undertakings (the Merger Regulation), joint control of a joint venture (the JV) by way of a purchase of shares in a newly created company (the Transaction).
The Commission decision published on 20 June 2017, in which the Commission gives its approval to the JV, provides further evidence of a fundamental trend in the market gearing towards consolidation between lines of the same nationality. We have recently seen this trend with two Chinese shipping lines going down the same route of consolidation as the three Japanese shipping lines that are the subject of the Commission's current decision. The Japanese lines have indeed obtained swift approval for their proposed merger, which is due to begin operations in April 2018.
In fact, in its assessment of the Transaction, the Commission highlighted that the container liner shipping sector is undergoing a wave of consolidation. Furthermore, since April 2017, there has also been a major reshuffling of the global alliances in this sector (which have been reduced from four to three), together with the development of regional and trade-specific alliances.
The Parties and the nature of the JV
NYK is a Japanese logistics provider that specialises in, among other things, international marine transportation, cruises, terminal and other shipping-related services. The activities of the NYK group can be broadly classified under the following areas of operation: (i) global logistics; (ii) bulk shipping; (iii) cruise lines; and (iv) real estate business.
MOL is a Japanese multi-modal transport group specialising in ocean shipping. The services offered by the MOL group worldwide can be broadly classified into the following: (i) dry bulk transport; (ii) tanker transport; (iii) LNG carriers; (iv) crude oil and LNG offshore production; (v) car carriers; (vi) containerships; (vii) terminal services; (viii) logistics; (ix) cruise lines; and (x) ferries and coastal liners.
K Line is a Japanese shipping company operating a diverse fleet of ships to cater to a variety of marine transport needs. The services offered by K Line worldwide can be broadly classified into the following areas: (i) containership services; (ii) dry bulk transport; (iii) car carriers; (iv) LNG carriers; (v) liquid bulk transport; (vi) energy development services; (vii) heavy lifters; (viii) terminal operations; and (ix) logistics.
The JV includes the global container liner shipping business and container terminal business (excluding terminals in Japan) of each of NYK, MOL and K Line. Through the Transaction, each of the lines will contribute container liner shipping activities worldwide as well as its shareholdings in all container terminal operators outside of Japan, including Rotterdam (NYK and MOL), Duisburg (NYK) and Antwerp (K Line).
The structure of the JV
Pursuant to a Business Integration Agreement concluded between the Parties on 31 October 2016, NYK will establish a wholly owned subsidiary in Japan as the holding company (HoldCo), HoldCo will establish a wholly owned subsidiary in Singapore as the operating company (OpCo). HoldCo and OpCo will together constitute the JV.
On 30 June 2017, the Parties contributed funds to HoldCo in exchange for shares, leading to a shareholding in HoldCo of 38 per cent for NYK, 31 per cent for MOL, and 31 per cent for K Line. The Parties will also invest funds into OpCo in exchange for non-voting preferred stock with the same allocation.
HoldCo will remain the sole voting shareholder in OpCo, a company that will aim to start providing container liner shipping services as from 1 April 2018. By this date, the Parties will further contribute certain assets to OpCo.
The issue of joint control
Despite their varying shareholdings in the JV, it was established that the Parties had joint control of the activities of the JV. This is because of a strong commonality of interests and, specifically, due to the fact that the JV will rely on funds invested by the Parties, seconded key personnel, and key assets, such as terminals and large and mid-size container vessels which the parents will (sub)charter to the JV. Hence, it was held acknowledged that the JV will only be able to successfully operate with the agreement of each of its parents on strategic decisions in order to prevent disruption through:
- The possible withdrawal of vessels
- Delay in renewing lease agreements
- Loss of key seconded employees that are difficult to replace
Furthermore, the common goal of the JV is to reduce fixed and operational costs and become more competitive on a sustainable basis, thereby highlighting the mutual benefit at stake and solidifying the commonality of the Parties' interests relating to the JV.
It is clear from the turnover of each of the Parties that the JV would have an EU dimension given that the worldwide turnover of the combined entities would be more than €5,000 million (NYK: €17,441 million; MOL: €11,985 million; K Line: €8,707 million) and the EU-wide turnover for each of the undertakings would be greater than €250 million.
In addition, each of the undertakings does not achieve more than two-thirds of its aggregate EU-wide turnover within one and the same EU member state. The notified operation, therefore, has an EU dimension pursuant to Article 1(2) of the Merger Regulation.
According to the information submitted by the Parties, the Transaction gives rise to horizontally affected markets in deep-sea container liner shipping only when considering the consortium/alliance market share. The Transaction also gives rise to vertically affected markets between deep-sea container liner shipping and (i) container terminal services, (ii) inland transportation, and (iii) freight forwarding.
Market definition and analysis
Deep-sea container liner shipping services
With regard to the market definition in this context, the Commission highlighted the characteristics it takes into account when differentiating between container liner shipping, non-liner shipping (tramp specialised transport) and non-containerised transport, such as bulk cargo. It also highlighted the possibility of a narrower market definition taking into account reefer containers only or including transport in conventional reefer vessels. In prior decisions, while leaving the market definition open, the Commission looked separately at reefer and non-refrigerated (warm or dry) containers only in the legs of trade with a share of reefer containers in relation to all containerised cargo of 10 per cent or more in both directions.
As to the geographical scope, the Commission concluded, in its most recent practice, that container liner shipping services are geographically defined on the basis of the legs of trade (e.g., ‘Northern Europe – North America’, ‘Eastbound’).
The relevant legs of trade for the Commission's assessment of the Transaction for the market of deep-sea container liner shipping services are those to and from Northern Europe and the Mediterranean.
Assessment for the deep-sea container market – horizontal overlap
The Parties are members of the same global alliance, The Alliance. But the Commission and the Parties had different opinions on how the Transaction should be assessed.
The Parties are of the view that the Transaction should be assessed without taking into account their participation in The Alliance. Furthermore, membership in a consortium generates efficiencies and each carrier remains independent from its consortium partners and in competition with them on essential parameters of competition. However, the decision in Hapag Lloyd and UASC1 has well established that the Commission will take into account consortium/alliance shares when determining possible anti-competitive effects of a potential merger between shipping lines. Therefore, in line with current practice and in the context of the present decision, the Commission believes that it is not appropriate to assess the effects of a concentration only on the basis of the Parties' individual market shares. This is because, even when carrying limited volumes, a consortium member can have a significant influence on operational decisions determining service characteristics, in particular, capacity and sailing schedule, over a much larger part of the market. This, according to the Commission, would have a damaging effect on the competition within The Alliance on the respective legs of trade and reflect the more limited competitive constraints that consortium partners would exert on the JV. Thus, affected markets may arise when market shares of consortium partners are added to determine the market shares of The Alliance on the particular leg of trade.
In the case of the JV, although the Commission highlighted the affected routes, it also concluded that the Parties did not have more than 30 per cent market shares in any legs of trade except North America to North Europe and North Europe to North America (both 30-40 per cent). However, in all cases the Commission concluded that there would be no effect on competition. This is because the Parties had been part of The Alliance prior to the establishment of the JV. Therefore, there is no new link brought about by the Transaction or a change with regard to the market shares as a consequence of the Commission's established approach. In any event, on all the affected legs of trade the 'free market' exceeds 60 per cent which indicates sufficient independent competition not linked to the Parties, via a consortium or Alliance, on the affected legs of trade.
Container terminal services
The Commission has defined the product market of container terminal services by terminal operators as a separate market involving loading, unloading, storage, and land-side handling for inland transportation of containerised cargo. The Commission has established, through prior decisions, that the relevant geographical market for container terminal services in deep-sea ports is the catchment area the container terminal generally serves. While in the particular case the definition was left open, the Commission has established that the geographical market for stevedoring services to be Northern Europe in the broadest sense for transhipment traffic. On a narrower consideration, the market would include the range Hamburg–Antwerp for hinterland traffic. Furthermore, on an even narrower consideration, the market would include German ports only.
Assessment for the container terminal market – vertical overlap
The Commission did conclude that there is a vertical overlap in the market of terminal services, inland transportation and freight forwarding. However, it also highlighted that the Parties were found not to have more than a 30 per cent market share under any plausible market definition especially for container terminal services outside Japan that will be part of the JV arrangement.
Therefore, even with a 30- 40 per cent market share on an Alliance basis on the trade legs, North America to North Europe and North Europe to North America, the market share for both the upstream market for terminal services and the downstream market for container shipping liner services would not be significant enough for the Parties to be in a position to engage in anti-competitive practices, such as foreclosing the market, that would impact effective competition. Hence, no constraints were found from a competition perspective as a result of the JV.
The decision given by the Commission is a short one. Yet it demonstrates two trends that significantly characterise the market. Firstly, it is clear that there has been great consolidation and reshuffling within global alliances. In this context the clearance given to the Maersk-Hamburg Sud merger in April 20172 is a significant occurrence. Although the decision is still outstanding, we expect this may be a longer and more analysed decision given the status of Maersk as the world's largest container shipping line.
Secondly, the Commission's current decision also brings into prominence the use of full notifications rather than short form COs in the shipping sector. Finally, the decision is also fundamental in order to understand how the Commission may go about defining the market and the factors it may take into account in assessing the impact of a merger or consolidation from a competitive constraint perspective.
Client Alert 2017-296