Antitrust Lawyer Blog
On June 17, 2014, the Ministry of Commerce (“MOFCOM”) blocked the proposed P3 Network shipping alliance between Denmark’s AP Maller-Maersk (“Maersk”), Switzerland’s Mediterranean Shipping Company (“MSC”), and France’s CMA CGM (“CMA CGM”).
This is MOFCOM’s second block since it started conducting merger reviews approximately six years ago. This is the first time that MOFCOM blocked a transaction between foreign firms.
Background
Maersk, MSC and CMA CGM are three large global shipping companies. On June 13, 2013, the parties announced their decision to establish a long-term operational alliance or a joint venture whereby they would combine 250 ships in order to more efficiently utilize their capacity and reduce costs. In October 2013, the parties entered into an agreement to form a Network Center in England and Wales, responsible for the operational affairs of the parties’ international liner shipping business on certain international trade routes. The structure of the joint venture was for efficiency purposes as each individual shipping company was to independently price, sell and market.
The P3 Alliance vessels would have been operated independently by a structurally separate network operating center. The three shipping companies would have continued to have fully independent pricing, sales, marketing and customer service functions. The stated goal of the arrangement would have permitted the shipping companies to cut billions of dollars in annual costs by using each other’s ships and port facilities. The agreement included firewalls for the joint venture, which were designed to protect against the flow of competitively sensitive information between the individual shippers.
Both the U.S. Federal Maritime Commission (“FMC”) and the EC approved the joint venture. The FMC approved the transaction because of its benefits to U.S. consumers and efficiencies claimed by the parties. The FMC recognized that monitoring of the P3 Alliance was necessary because of the potential to reduce services and raise rates in the future. The FMC directed its staff to issue reporting requirements so the FMC could monitor the P3 Alliance going forward. The EC cleared the P3 Alliance without any conditions.
MOFCOM’s Review
On September 18, 2013, the transaction was notified. On December 19, 2013, MOFCOM accepted the notification. On January 18, 2014, MOFCOM initiated a Phase II review. On April 18, 2014, MOFCOM began its Phase II review. MOFCOM blocked the deal on the 180th day after failed negotiations for a remedy.
As is common practice, MOFCOM consulted the Ministry of Transportation and the National Development and Reform Commission, as well as competitors, other market players, and local trade associations, to conduct its review. China’s shipping industry voiced opposition to the planned P3 Alliance. This led to tough negotiations. In the past, parties pulled their filing and re-filed to get another 180 days. This time, however, the P3 Alliance chose not take advantage of this strategy.
MOFCOM’s Competition Analysis
Because of Chinese law, MOFCOM treated the joint venture as a de facto merger despite the parties’ effort to separate pricing, marketing, and sales from the alliance. MOFCOM examined three international trade routes in its review:
(1) Asia-Europe Trade: the Far East-Northern Europe and the Far East Mediterranean trades;
(2) Transpacific Trade: the Far East-North America West Coast. the Far East-North America East Coast and the Far East-United States/Gulf of Mexico trades; and
(3) Transatlantic Trade: the Northern Europe-United States East Coast.
MOFCOM, however, focused its review on the on the Asia-Europe Trade routes. MOFCOM analyzed the competitive impact of the transaction in terms of, (i) the degree and scope of cooperation resulting from the alliance, (ii) market shares, (iii) market concentration level, (iv) barriers to entry, and (v) the impact of the alliance on competitors and the industry. MOFCOM concluded that the alliance would eliminate or restrict competition. There were several reasons why MOFCOM finally blocked the combination.
First, MOFCOM was concerned that the alliance would result in a tighter and more integrated form of cooperation, which would have been much different from the traditional alliances between container liners, which are based on vessel-sharing and slot exchange agreements. In contrast, the P3 Alliance would have allowed the members to consolidate certain activities on the Asia-Europe Trade routes, the Transpacific Trade routes and the Transatlantic Trade routes.
Second, MOFCOM was concerned about market concentration. MOFCOM determined that the combination of the market shares of Maersk (20%), MSC (15%) and CMA CGM (11%) in the Asia-Europe container liner shipping market would have resulted in an anticompetitive effect. Basically, the alliance would have had approximately 46% of the market and there would have been no strong second player in the market. Given the market concentration level, MOFCOM presumed that the market would be harmed. In addition, MOFCOM found that barriers to entry are high because international container liner shipping is a capital intensive industry and is characterized by economies of scale.
Third, MOFCOM determined that the alliance would harm competitors, other industry players, and customers (shippers). Indeed, MOFCOM found that the alliance would have placed smaller Chinese shippers at a greater disadvantage and even the larger Chinese shippers would have lost bargaining power.
MOFCOM’s decision did not explain why the procompetitive cost savings and synergies did not outweigh the anticompetitive concerns. Similarly, the MOFCOM decision does not address the parties’ efforts to structure a joint venture which, while it integrated capacity, left marketing, sales, and pricing decisions to the three entities acting independently. The decision simply states characterizes the market as concentrated and that the P3 Alliance was not in the public interest.
Some Chinese experts speculate that the decision to block the P3 Alliance was predictable because the shipping industry is of national strategic importance to China. China is the world’s largest goods trader so it needs to protect its own shipping industry in an effort to keep prices low. Besides keeping its shipping industry competitive, some commentators believe MOFCOM was also protecting its national security interests.
Lessons Learned
MOFCOM’s decision to block the transaction is noteworthy because this was the first time that MOFCOM blocked a multi-national transaction between foreign parties that was approved without conditions by the U.S. and European regulatory authorities. There are a few lessons to be learned.
First, MOFCOM is not influenced by U.S. or European regulatory authorities. MOFCOM focuses on Chinese competition concerns. The P3 Alliance raised separate issues in the United States, Europe, and China. The differing outcomes resulted from each authority analyzing only the effects of the deal relating to its respective market. The FMC did not analyze Asia-Europe routes since it has no jurisdiction over it and, conversely, MOFCOM did not analyze Europe-North America routes. For example, the P3 Alliance would raise more concerns among Asian regulators than U.S. regulators because several Asian nations have container fleets, while the United States does not. This decision clearly demonstrates that MOFCOM attaches more weight to the Chinese market in its merger reviews. China is a major manufacturing and export hub as well as a massive consumer, giving those industries and related government agencies added heft in antitrust discussions. China’s approach reflects fundamental differences in its economy versus those in the United States and Europe.
Second, MOFCOM scrutinized a joint venture as a de facto merger despite the parties’ effort to separate pricing, marketing, and sales from the “network operating center.” This was done because Chinese law allows MOFCOM to consider a joint venture as a de facto merger. By treating it as a merger, MOFCOM found that the P3 Alliance would raise horizontal concerns. Here, the P3 Alliance involved the world’s three largest container shipping lines on the Asia-Europe Trade, a strategic and lucrative trade route both for China’s exporters and container shipping lines. MOFCOM found that the alliance would have resulted in significant market concentration and that entry barriers were high.
Third, MOFCOM’s analysis was based on its reliance on external consultants. MOFCOM is understaffed with only 20 case handlers and 30 individuals reviewing competition matters. Therefore, MOFCOM is willing to consider expert advice in complex cases.
Fourth, Chinese law allows MOFCOM to look more widely at the industrial consequences. MOFCOM is particularly sensitive to the opinions of the Chinese stakeholder. The P3 Alliance would have transformed the Chinese shipping industry harming Chinese shipping companies. As the world’s largest trading nation, China has an interest in making sure that shipping costs remain low and MOFCOM believed that the P3 Alliance would lead to higher prices. It is natural that China may have different interests than other jurisdictions.
Fifth, MOFCOM considered this concentration of undertakings would have raised the groups’ control of the vital Asia-Europe routes to levels that would stifle competition and harm the public interest.
Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com
Shane Wu
(202) 589-1834
swu@dbmlawgroup.com