The 2008 financial crisis put the global container industry in turmoil. Since then, the road to recovery has been long and difficult. Even A.P. Moeller-Maersk, the biggest shipping company in the world, has cut costs and adjusted its operations accordingly. Around the world, several ocean carrier mergers have occurred in order to keep companies in business. Now, three major Japanese ocean carriers have decided to merge for the same reason.
Overcapacity in the Ocean Carrier Industry
Most companies that need to ship large quantities of goods overseas turn to ocean carriers. Shipping by ocean carrier tends to be much less expensive than shipping by air, but most ocean carriers have struggled with profits since 2008. There are several factors at work, but overcapacity is one of the biggest reasons that the ocean carrier industry has faced a challenging recovery.
Before the 2008 economic downturn, the industry experienced an influx of new container ships. Ocean carriers built massive new ships that could carry more containers than ever before. When the world market crashed, however, ocean carriers couldn’t fill their ships or recoup their expansion costs. This caused rates to plummet and profits to dwindle. As a result, several ocean carriers have had to merge to survive.
Japan’s Ocean Carrier Merge
Nippon Yusen KK, Kawasaki Kisen Kaisha Ltd, and Mitsui OSK Lines Ltd plan to merge in July 2017. The new entity will form one of Asia’s biggest box carriers and make up 7 percent of the global market container volume. The complete merger will take some time, but operations are expected to begin by April 2018 with approximately 256 vessels.
The new company will be worth 300 billion yen ($2.9 billion). Kawasaki Kisen and Mitsui OSK will both own 31 percent of the new company, and Nippon Yusen will own 38 percent. CNBC.com reports that by merging, the ocean carriers expect to save 110 billion yen per year.
Implications of the Merger
Regulators around the world have heavily scrutinized the Japanese ocean carrier merger because it means the nation will no longer have any domestic shipping competition. This could lead to higher shipping rates for customers throughout the country.
President of Nippon Yusen, Tadaaki Naito, acknowledged that the merger would reduce competition but that it is necessary for global competition. He said, “If we don’t want the number of Japanese shipping companies to be zero, we need to create one strong, splendid company.”
Japan intends to remain competitive in the global shipping industry through this oligopoly. Even though all three companies are forecasting a loss in 2016, shares in the companies jumped nearly 10 percent after the three-way merger announcement. Kawasaki Kisen rose 8.5 percent, Mitsui OSK rose 9.2 percent, and Nippon Yusen rose 9.9 percent.
Without a merger, all three Japanese shipping companies could face the same fate as South Korea’s Hanjin Shipping Co Ltd., which collapsed in August 2016. Container shipping companies are scrambling to grab a bigger share of the market, and more mergers may follow.