A Survival Plan

A Survival Plan

Two Japanese semiconductor makers, Elpida Memory and Renesas Electronics, were created through mergers of divisions spun off by other Japanese entities. Japan’s largest mobile phone retailer was created through a merger of subsidiaries and affiliates of three Japanese trading houses, Mitsubishi, Mitsui and Sumitomo.

Those examples, says Janet Lewis, head of shipping research at Macquarie Capital Securities, show there is precedent for a possible merger of the three Japanese liner shipping companies — NYK Line, “K” Line and MOL — which she believes is necessary for them to be competitive in the current, mega-ship saturated container business.

“There are examples in Japan where industries in distress were spun off in order to achieve the scale needed to complete globally,” she said.

The idea may not be as farfetched as it once seemed. As an island nation with limited natural resources, Japan views shipping as an economic and trade lifeline, so the idea of a combination of its liner operators has always seemed remote. But in just the past year, the environment changed a great deal.

This year saw the mega-ship arms race kick into high gear with Maersk’s order for 20 18,000-TEU ships, followed by a string of orders by other carriers for mega-ships that are almost as large. The Japanese lines, troubled by the industry’s quick snap-back to financial woes and then hit by the natural disasters in March that sent Japan’s economy reeling, have been on the sidelines.

And as the euphoric container rebound of 2010 faded into what many now believe could be a long, painful slog of overcapacity in the Asia-Europe and trans-Pacific markets, the contrast between carriers well-positioned for the long haul and everyone else has never been greater. MOL, NYK and “K” Line are ranked 10th, 13th and 16th, respectively, on Alphaliner’s Top 100 Container Ship Fleet Operators and have seen their combined market share drop from 8.7 percent in 2008 to 7.5 percent currently.

They are far from being in the top tier of the industry and, because they are not reinvesting in the equipment needed to get them there, will fall further in the rankings in time. They appear hesitant to throw good money after bad: The container units have consistently underperformed financially, Alphaliner says, reporting only three profitable quarters in more than three years.

So it was significant when MOL’s president in late November said a merger of the Japanese container lines, “could be an option,” but denied that talks were under way.

Given the prospects for long-term overcapacity in Asia-Europe lanes, combined with the goal of Maersk Line, the largest carrier, to encourage smaller lines to exit that market, the idea makes increasing sense, analysts say. “When we look ahead, it’s hard to see how they make money next year or possibly the year after, and it’s hard to see how they compete without ultra-large container ships,” Lewis said.

Her conclusion in a recent report: “We see merger as the only long-term option,” referring specifically to a liner merger rather than a full company merger among the three shipping companies. Alphaliner agrees, noting, “A merger would make economic sense and strategic logic as the container shipping business continues to drag down the overall earnings of all three Japanese carriers, while their market shares have fallen steadily throughout the last decade.”

Liners stand out, and not in a good way, among Japanese shipping company portfolios. The market shares of the Japanese liner businesses range from 2.2 to 2.8 percent, according to Alphaliner, but they are dominant players in liquid bulk, dry bulk and car carriers. In dry bulk, MOL and NYK vie with Cosco for the top rank globally. MOL, NYK and “K” Line control some 43 percent of the world’s car carrier capacity. MOL is the world’s largest tanker operator.

The carriers’ dominant positions in other shipping sectors stand in marked contrast to liners. Referring to non-container sectors, Lewis said, “we believe together these activities represent a core business for them all, that they can successfully grow in the future.”

The implications of a merger would affect many operations. Given that NYK participates in the Grand Alliance, MOL in the New World Alliance and “K” Line in the CKYH agreement, a merger would disrupt the current alliance structure and probably force a global realignment. For customers, above and beyond the impact on vessel deployments, carrier mergers are never seamless affairs. IT systems and cultural integration often take years to sort through and leave customers disillusioned.

But the result would be a carrier seemingly well positioned among the global elite. A combination would create the world’s fourth-largest container line globally, with a market share of 7.5 percent; of capacity and position, it would be the third-largest line in Asia-Europe, and the second-largest in the Asia-South America and Oceania markets. “Japan Line,” some believe, would be a formidable entity well positioned in the current mega-carrier environment.

This may not be the last we hear of this idea.

Peter Tirschwell is senior vice president of strategy at UBM Global Trade. Contact him at ptirschwell@joc.com, and follow him at twitter.com/PeterTirschwell.