The alliance shuffle and consolidation: Implications for shippers

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Over many years, container lines have formed and re-formed alliances and gradually consolidated through mergers. Over the past year, however, they have not only reshuffled these alliances on a larger scale than ever before but also consolidated in an unprecedented flurry of deals. In this article, we look at the needs of the lines’ customers—the shippers—and whether alliances and consolidation help the industry to meet their needs.

During the past few years, container lines have invested together in new large ships. Shippers have benefited from the resulting oversupply and lower freight rates—to the tune of a staggering $23 billion from 2010 to 2015. Still, in our extensive engagement with shippers over the past year, we found a remarkable amount of dissatisfaction. In fact, many shippers we interviewed lamented the problems that seem to accompany those lower rates.

Shippers see a widening gap between the service they’d like to receive from container lines and the service they actually get. They also tell us that the new operating environment, complicated by the alliance shifts, has adversely affected their supply chains. One notes, “There is simply no sense of predictability anymore, which affects our planning and inventories.” Others express frustration with what one shipper called “communication gaps and inefficient coordination among shippers, terminals, ocean carriers, and land-transport companies in the scheduling and movement of containers in and out of the ports.”1

The shippers told us they want more—more accurate and timely information on arrival times and the availability of berthing and containers, a more predictable choice of terminals, more reliable transit times, and more visibility into the status of containers. Some also say they would pay more for quality and service, but all bemoan the “wild swings in rate” they currently see. They want transparency, the right services, reliability, a choice of lines and products to meet their specific needs, and competitive but stable pricing. That’s hardly rocket science.

The impact of the alliance shuffle on shippers

Let’s consider how and whether the alliances help container lines to meet their customers’ wants. Alliances have long been important, and the recent shuffle wasn’t the first by any means: many in the industry can remember the Grand Alliance, the New World Alliance, the Global Alliance, and the ACE Consortium (Exhibit 1). But the latest shuffles are more radical than their predecessors. Alliance partners, luckily for shippers, have remained fierce competitors and cannot coordinate their pricing. Although some disagree, alliances promote competition by helping smaller lines survive and thus keeping prices low.

Alliance shuffles are nothing new, but the most recent consolidation is the industry’s largest.

Alongside the alliance shifts, we have seen a failure of rational industry-level behavior, destructive rate competition, pricing below marginal costs, and orders for new ships. We don’t blame the shipping lines, which face a kind of prisoner’s dilemma: when all the companies around you order new ships, you must order them, too. Once overcapacity comes into play, pricing downward to marginal costs is necessary as well. In fact, this actually shows that the alliances haven’t stabilized the industry (Exhibit 2). Shippers can’t be blamed, either: if someone offers you lower rates and all of your competitors take them, what choice do you have?

Alliances have hardly stabilized the industry.

Many argue that the alliances are bad for the industry because they help smaller lines stay in business. It’s true that without alliances, companies would probably have consolidated or exited earlier. Arguably, however, the biggest impact has been to commoditize services—bad for both shipping lines and shippers, but an inevitable by-product of alliances. When shippers don’t know which vessel and operator their boxes will end up on, lines find it very hard to differentiate themselves on service. They can’t offer faster service than their alliance partners do. They can’t have a more reliable service. And they can’t speed up inland transfers, since the boxes are all mixed up at terminals.

Commoditization has been bad for the lines, since it means that competition is truly based on price. It’s also bad for the shippers, which have less choice even if they are willing to pay for quality, at a time when shifting supply chains and rising costs in Asia make it more important than ever to have both fast and slow options. Nonetheless, alliances are clearly here to stay. The three new alliances cover more of the capacity afloat than ever before—now over about 87 percent of it.

Will the new alliances have a bigger effect than previous ones? Mostly, no. Alliance partners are still fierce competitors, and rates will remain low so long as the oversupply continues. Will alliances have a moderating effect on orders for new vessels? Probably not. No one is in a rush for further ship orders anyway, and stability was elusive in the past.

If the new alliances have any impact, it could be to increase complexity. Larger alliances create hardships for both lines and shippers: the new Ocean Alliance, for example, could mean that a shipper’s box gets delivered to any one of seven terminals in the Los Angeles–Long Beach area. The need to organize trucks and separate chassis to meet them complicates life for lines and shippers alike.

Both to reduce this operational complexity and to bring the cost base closer to those of the industry leaders, McKinsey encourages lines and alliances to collaborate more closely in their operations. Some previous alliances—notably the G6—took tentative steps to work together on procurement, but this effort came to little. We think alliances must become more ambitious by integrating their terminal and landside operations. For both them and the shippers, that offers the benefits of reliability and simplification. For the lines, it would reduce complexity and costs.


Container shipping: The untapped value of customer engagement

To sum up, alliances help to increase breadth of service but don’t make operations more transparent or less complex. What’s more, they do reduce the choice of product for shippers. The silver lining is that they promote competition, so prices remain low.

Implications of industry consolidation for shippers

Now, let’s turn to consolidation, which has recently spurted: CSAV–Hapag, APL–CMA, China Shipping–COSCO, and UASC–Hapag-Lloyd, all within the last two years. The failure of Hanjin will also have the same effect as other companies pick up its ships.

This isn’t the first time the industry has consolidated: Hapag-Lloyd bought CP Ships and Maersk Line bought P&O Nedlloyd in 2005, for example. In fact, the industry has been gradually concentrating for many years. Despite all the recent talk about rapid consolidation, there was actually more of it from 2000 to 2008 than there has been since (Exhibit 3).

The industry has been concentrating for many years.

Why do shipping lines consolidate? Recently, because of their losses. If we look at returns on capital, the industry has managed to destroy an eye-watering $84 billion in value over the past four years (Exhibit 4). Not all lines can continue to destroy value and still receive funding and cash—hence, the recent spate of mergers and one bankruptcy, in the case of Hanjin. Further exits, bankruptcies, and mergers are needed. Rumors abound.

The industry has experienced massive value destruction during the past four years.

Consolidation, though, can improve the industry’s performance. First, larger lines earn higher margins, which hold up over time (Exhibit 5). Second, previous container mergers have actually delivered significant synergies (2 to 6 percent) by combining the cost base. In an industry with profitability close to zero, 2 to 6 percent is worth a lot. Third, the evidence suggests that more concentrated industries can achieve higher margins (Exhibit 6).

Larger lines earn higher margins.
Market concentration is correlated with profitability.

Greater consolidation is inevitable, but not all of the top ten lines can acquire. No matter how great it may feel to shape mergers, some container lines will be bought up—which is not a defeat and may even be a victory. Share-price data from the past 15 years show that, on average, mergers add more than 10 percent to the acquired company’s stock but subtract 4 percent from the acquirer’s. The energy of container lines may best be spent improving themselves to get a great price.

Is consolidation good for shippers? It does have some clear benefits. Larger lines offer more extensive services. They can—and do—invest more in technology. They achieve economies of scale and higher levels of efficiency, which can be passed on to shippers in the form of lower pricing. Consolidation also creates a more stable industry, with less wild rate swings and greater predictability. The risk is that it will go so far that shipping lines can exert market power, constrain supply, and raise prices. But in our view, the industry is currently a long way from there, and regulators will be watching closely to protect competition.

Shifting alliances have had little impact on shippers, but the effects, if any, have been negative: operational complexity and commoditized products and services. Meanwhile, consolidation will probably continue. Shippers should cautiously welcome the stability it brings.

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