No Big Bang on the High Seas

Maritime transport is dominated by shipping line consortia and alliances that are exempt from European competition rules. The EU wants to keep it that way, but its case does not look too strong.

By Olaf Merk

On 20 November, the European Commission released its proposal on the “Consortia Block Exemption Regulation” for shipping lines. What sounds like some obscure bureaucratic rule of little interest managed to upset almost everyone in the maritime logistics chain – from shippers to freight forwarders and the towage sector to port terminal operators. The latter qualified the proposal as “alarming and bewildering” and even threatened court action.

What is the fuss about?

Liner shipping has traditionally been organised in so-called “shipping conferences”, de-facto cartels. Within the European Union, conferences are no longer allowed. But shipping companies can co-operate in the form of consortia, or in bundles of consortia called alliances.

The difference between a cartel and a consortium is that cartel participants collude to improve their profits and dominate the market. Consortia, on the other hand, are tools for co-operation in practical matter, for instance for sharing ship capacity.

The EU’s Consortia Block Exemption Regulation (BER) for liner shipping sets the rules for such co-operation. It exists since 1995 and was revised in 2010. Since then, it has been renewed, without modifications, every five years. The Commission’s proposal that created such a storm is to once more renew the BER without modifications.

Cartels in disguise?

So what caused the backlash now, when in the past the extension of the BER was a mere formality?  At the heart of the controversy is the fear that a cartel-like constellation might be re-emerging under the guise of the current regime. For consortia could, in practice, act like cartels if they effectively co-ordinated not just schedules and other practicalities of operation between competitors, but also the price or the available capacity.

And indeed the cost calculation models in the three global shipping alliances allow carriers of the respective alliance “to develop a fine sense of the costs of other carriers”, according to a recent ITF study on liner shipping alliances. And the European Commission raised concerns that carriers might have engaged in price signalling via their announcements of general rate increases.

Joint capacity planning for “adjustments in response to fluctuations in supply and demand” is allowed by the BER. But there is evidence that carriers might have co-ordinated orders for new mega-ships as well as the timing of ship dismantling within alliances.

Also, most of the so-called blank sailings – the cancellation of a scheduled weekly service – are done simultaneously by different consortia and alliances, as shown in Figure 1. While some interpret this as joint “capacity adjustments in response to fluctuations in supply and demand”, others might suspect concerted action to influence freight rates. Because the different shipping consortia and alliances are heavily intertwined (Figure 2) even detailed co-ordination between them is not particularly difficult.

Figure 1: Blank sailings per month per alliance (2012-2019)

Figure 2: Overlapping consortia links between carriers (for trades to/from Europe)

Will there really be legal certainty?

For many observers, renewing the BER without modifications in this context raises three major questions. The first relates to legal certainty, which the BER is said provide for carriers. Without the BER, consortia would need to carry out self-assessments to ensure they meet the EU’s general competition regulation.

Yet an unmodified BER may not provide this legal certainty, because it is unclear which consortia are still covered by it: it applies only to consortia with a market share below 30%, which is difficult to monitor in practice. The reason is that the Commission uses the “combined market share”, which takes the cross-linkages between consortia into account (illustrated in Figure 2).

That is the right benchmark to look at in principle, but also creates uncertainty as to which consortia fall below and above the ceiling (Figure 3). The Commission recognises that it does not have the data. Collecting it would help to provide legal certainty, but that does not seem to be on the cards.  

Other updates would also provide added legal certainty. It is not quite clear whether alliances are still covered by the BER, for instance. And the definition of “relevant markets” no longer reflects the reality of today’s port competition.

Figure 3: Ranges of uncertainty on combined market shares on consortia covering Europe

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A matter of market share

The second question is about economic concentration. Consortia were invented as tools to allow smaller shipping lines to achieve scale and compete. Since then, consolidation in the shipping sector has surpassed any previous expectations. The market share of Danish shipping giant Maersk alone was 19% in 2018, larger than the share any alliance had until 2012. So consortia have not been the alternative for market consolidation, they have in fact come on top of consolidation and provided an additional tool for an increasingly consolidated sector to benefit from scale.

The result is that a few alliances have huge buying power and can play off their service providers, such as ports, against each other. For the alliances’ customers the result is reduced choice to transport their goods, because the ocean transport offers are mostly similar.

These aspects are mostly absent from the considerations by the European Commission, which concludes that service quality has remained stable. But the number of direct port-to-port connections has fallen, as have weekly service frequencies. The Commission paper also finds no indications for market power of carriers vis-à-vis ports, yet several examples are documented, including the ports of Malaga, Taranto, Gioia Tauro, Zeebrugge or Genoa.

The politics of liner shipping

The third question being asked is about the transparency of the process leading to the decision to extend the BER. The Commission’s stakeholder consultation ended in December 2018 but the document was not released until almost a year later, in November 2019. This was only days before a new Commission took office. Some might think the continuation of the BER will protect European liner shipping companies. But in fact the BER has arguably done the opposite, by helping the emergence of Chinese liners. Asian liner companies have ordered large numbers of mega-ships recently (see Figure 4) and to fill that capacity they will need the alliances and consortia more than the Europeans. Interestingly, the Chinese liner company COSCO submitted a document to the European Commission arguing for extending the BER.

Figure 4: Mega-ship deliveries for Asian and European carriers (2013-2022)

The BER might benefit global liner shipping companies, a few of which are headquartered in Europe. It will do less for European shipping companies operating exclusively in Europe, such as feeder companies and tonnage providers (i.e. ship owners who charter out their vessels to liner companies).

Evolution or Big Bang?

The agenda of the new European Commission that took office in December 2019 emphasises industrial policy, geopolitics and a European Green Deal. How the extension of the current BER aligns with these priorities is not so clear. But if it is deemed essential to keep a shipping-specific exemption from EU competition rules, maybe this is the time to re-imagine its conditions.

One could think of a block exemption that only applies to liner companies that pre-dominantly operate in EU waters, or only for consortia on intra-EU routes, or for types of ships (“Europe class” vessels) that meet certain criteria, for instance with regard to energy efficiency, shares of EU seafarers and use of EU-approved ship recycling facilities. Not exactly a Big Bang, but at least some steps that could help implement the agenda of the new Commission, as exemplified by the Green Deal, and give the blanket exemption a new legitimacy that is currently in some doubt.

Olaf Merk is ports and shipping expert at the International Transport Forum. He is the author of Container Shipping in Europe: Data for the Evaluation of the EU Consortia Block Exemption Regulation (ITF, 2019). This article draws on research for this report. It does not necessarily represent the views of ITF members

China: Explaining Ride-Hailing’s Rapid Rise

Shared Mobility in Practice

How ride-hailing has gone from nonexistence to a mammoth industry in the space of a few years in the People’s Republic of China

By Emma Latham-Jones and Will Duncan

Along the Champs-Élysées of Shanghai, Huaihai Road, a woman is hovering on the pavement’s edge with her smartphone in hand, as she glances from her screen to the road and back again. Suddenly an anonymous car pulls up. A name is shouted out from the driver’s seat, which is received with a nod and a smile. The passenger seat door opens and closes again, and the car seamlessly continues on its journey.

Only a decade ago, no one had heard of app-based ride services. Today, ride-hailing is valued at USD 61.3 billion globally. By 2025, that number is expected to almost quadruple. So what’s causing this explosive growth in shared mobility?

The place to start looking for an answer is the giant of Asia, China. A stunning 62% of Chinese regularly hail a ride with their smartphone, according to a recent survey by Bain & Co (PDF). China’s operator DiDi alone carried out 10 billion rides with 550 million users in 2018.

No surprise, then, that the People’s Republic is the world’s largest ride-hailing market. Valued at USD 23 billion, its market is bigger than those of the rest of the world combined. America’s Uber counted a comparatively modest 95 million users worldwide in 2018 and is valued at just over USD 40 billion – DiDi’s global operations are now worth roughly USD 58 billion.

So what is it about China that makes it such fertile ground for app-based ride-hailing?

Firstly, Chinese city dwellers are rapidly changing their attitude to cars. Once thought of as a status symbol, less than half of China’s urban residents now see owning a car as a form of social progress, according to the Bain & Co survey.

China still has comparatively few cars. Only 118 cars per 1 000 inhabitants were registered in 2016. With car penetration in China at roughly 12%, compared to 74% in North America, or 53% in Europe, China has not developed the same culture of private car ownership as in the West.

The taxi features more heavily in the transport systems of big Chinese cities than in most Western agglomerations, making empty passenger seats less common. Car occupancy is significantly higher in China than in Europe: On average, 2.3 Chinese share a car ride, while the figure is only 1.6 in Europe (and as low as 1.2 passengers in some Western cities).

“China already had a culture of carpooling. With higher than average occupancy rates and lower vehicle ownership, Chinese users are more open to ride-hailing services or car sharing,” explains Jari Kauppila, Head of Quantitative Policy Analysis and Foresight at the International Transport Forum.

Incomes in China have risen steadily over the past decades. The emerging middle class is adaptable and very open to new services and products – which helped ride-hailing to quickly become mainstream.

The wild popularity of app-based payments also helped. WeChat Pay, a service offered by China’s internet giant Tencent is used by a striking 900 million people each month – a different league from Apple Pay’s 127 million users worldwide. Growth in e-hailing is, therefore, part of a broader trend across China’s cities.

A third factor is the cost of a private car in China. From taxes and insurance to parking fees, owning a car in China has become increasingly expensive, putting off many of China’s urban residents from buying their own vehicle.

Critically, the authorities have put a cap on the number of new cars that can hit the streets of Shanghai, Beijing and other cities. To own a car, you need a license. These are allocated via auctions, putting a heavy price tag even on the right to ownership.

“Car ownership in many Chinese cities is very restrictive”, explains Wei-Shiuen Ng, Advisor for Sustainable Transport and Global Outreach at the International Transport Forum.

“The price and quota associated with getting a license to own a car have quite significantly reduced vehicle growth and congestion levels, especially in the short term.”

Nevertheless, ten Chinese cities make the list of the 25 most congested cities in the world, according to the 2017 TomTom Traffic Index. Many Chinese urbanites can think of better ways to spend time than waste it in traffic jams. Hence the car is rarely their first choice for running errands and commuting to work. Instead, they order a car when conditions make that a good choice and let someone else do the actual driving, look after maintenance and bear the fixed costs.

A further element is the changing landscape for investments. China’s mobility market is strikingly dynamic. It’s full to the brim of eager-eyed competitors looking to experiment with new ride-hailing ventures: from delivery app, Meituan Dianping, and mapping service, Gaode, to traditional carmakers, such as GAC. During the three years from 2014 to 2017, this market was powered by an astounding USD 50 billion in investments. It didn’t take long for DiDi, China’s biggest ride-hailing company, to raise staggering amounts of money: indeed, in just six years DiDi has managed to raise a total of USD 20.6 billion in funding over 17 rounds.

Everyone wants a piece of the pie. Manufacturers in particular are looking to find new revenue models as car sales decline. They are setting their sights on the emerging high-end ride-hailing market, which is not yet as crowded as mainstream ride-hailing. In December 2017, BMW launched its ReachNow service in Chengdu showing that it is ready to take on the Premium ride-hailing service segment.

But European car manufacturers have Shenzhou, Shouqi, and DiDi Premium to compete with. Western companies battling it out in China’s tier-one cities somewhat resembles the Uber versus DiDi struggle of 2016, which ended in DiDi acquiring Uber China in August 2016 in a USD 35 billion deal.

“Part of DiDi’s success was that it was so familiar with the domestic market, the culture and local consumer preferences,” explains Wei-Shiuen Ng.

This article is part of a series on Shared Mobility in Practice, which looks at how cities around the world are incorporating innovative transport solutions in real life, today. See also: Los Angeles: Harnessing Data for Transport Innovation, and: Paris: Managing the Shared Mobility Révolution. Shared mobility is one of the transport disruptions explored in the 2019 ITF Transport Outlook.