Capitalists, in my experience, are often less than enthusiastic about competition. To be sure, they (and their speechwriters) know to praise the virtues of market forces. But the reality is that competition can be bad for business: all other things equal, it erodes profits, costs jobs, and drives firms to failure. It is always tempting to cooperate with the enemy.
How much cooperation to tolerate was one of the subjects of an unusual event today in Washington. The discussions at the first-ever joint meeting of shipping regulators from the United States, the European Union, and China were private, but it’s a good bet that a proposed collaboration among the world’s three largest container shipping lines was the major topic of conversation.
Between them, Maersk Line of Denmark, Swiss-based Mediterranean Shipping Company, and the French line CMA CGM control close to 40% of the world’s container shipping capacity. These companies have battled for market share for many years, to the benefit of freight shippers and consumers. But now, if the various governments agree, they would like to work together. They propose to create something called the P3 Network, through which the three companies would share space on up to 180 containerships sailing between East Asia and Europe, Europe and North America, and North America and East Asia. The companies would not share price information, and each would strike its own agreements with customers. But by working together, they could squeeze capacity out of the market, which might help prop up shipping rates.
The container shipping industry is awash in excess capacity, which is great for shippers but terrible for ship owners. A number of major carriers have been bringing very large vessels on line at a time when demand is growing slowly; the largest of these can carry more than 9,000 standard 40-foot containers. All this capacity has depressed rates and driven most ship lines into the red.
Given the economic importance of container shipping, cooperation among the three largest sip lines would be no small deal. Shippers could obviously face higher rates, but ports, stevedoring companies, railroads, and trucking companies might be even more severely affected. As part of their proposed agreement, Maersk, MSC, and CMA CGM would be able to consolidate the land side of their operations. This could mean that their vessels would stop serving some ports and expand at others. They would be able to bargain jointly with stevedores and land transportation companies, using their very large combined market share – the three companies jointly carry about 41% of container traffic between Europe and North America, for example – to demand lower prices. On the plus side, shippers might benefit from more frequent service between certain ports. Also, the three carriers may try to establish joint barge or feeder-ship services to move containers among U.S. ports, something none of them alone has enough traffic to do profitably.
As they weigh the P3 proposal, competition authorities and shipping regulators will be very much aware that it is not the only collaboration in the works. The six carriers in a competing group, the G6 Alliance, have shared vessels between Asia and the East Coast of North America since last May, and now they are seeking permission to cooperate on services between Asia and U.S. Pacific coast ports. Meanwhile, several container lines are rumored to be seeking merger partners.
All of this is very much in line with the history of the container shipping industry. Since its earliest days, it’s been a treacherous business; each time rates rise, shipping lines order new vessels, overcapacity returns, and the most troubled companies exit. That’s the way capitalism is meant to work, but it’s a tough way to make a profit.