The container shipping consolidation claimed another mid-size player and, if approved, will catapult the buyer into the small group of the largest container lines in the world. While the gossip of OOCL being on the market has been around the industry for a good 12 months, the price paid by the buyer was a sheer surprise. Even with the rates inching up, it takes a lot of guts to offer 38% premium over OOIL’s closing price for a mere 3.2% of global market share, of which about 30% is already overlapping existing Cosco services. Could unnamed “other” assets of OOIL add up to the deal price?
Only time will tell. In the meantime, let’s consider the aftermath of this venture.
There will be an unquestionable impact on OOCL’s workforce. In one of the statements, the buyer implied that all employees of OOCL will keep their jobs and their benefits. That is a brave announcement to make. Using the most recent history of the integration performed by Cosco and China Shipping, expect rapid removal of overlapping roles and functions, followed by departures of people across the whole spectrum of senior managerial layers down to junior roles. A premium of 38% will not pay for itself. It will require sacrifices and cutting the office-bound headcount is one of the easiest decisions to console lenders and investors. The processes and assets will come under pressure as well. Cost rationalisation will become the order of the day. Any downsized asset or process change leads to reduction in headcount, and it is the buyer who determines whose headcount will be cut.
The ports in China and around the world will have to scramble to execute their own defensive moves in light of the fact that Shanghai International Ports will bear 9.9% of the buyout cost. Many Chinese ports have already experienced decreasing container volumes exacerbated by the earlier decision by Maersk to reduce or eliminate many services to secondary Chinese ports. From now on, any port where Cosco or SIPG has a stake can breathe a sigh of relief, as the combined entity will be strict about channeling their cargo flows and port calls.
International ports, especially those specialising in transhipments and without the equity stake of Cosco and /or SIPG will be hit equally hard. If it doesn’t hit them in terms of volumes, it will 100% hit them in terms of profitability. Consolidated Cosco/OOCL will be able to extract much higher concessions in terms of price and productivity from any port. Any brave pre-emptive announcements to the contrary put up by analysts or interested port authorities could be safely ignored at this time.
Competitors will also suffer. Yes, there will be dancing in the aisles at the sign of progressing consolidations, but the consequence of the 38% premium will be in Cosco driving maximum volumes their way out of every dominant origin/destination port in China. With the focus on the revenue side, expect the rates game played by Cosco to ensure that any other international carrier servicing China will see their rates dip. The rate pressure will not be unformed. Where Cosco will have a dominant position, the rates will go up without fear of losing out to weaker international competitors. At non-dominant ports of origins/destinations, expect the rates to dip to make the competitors fold.
This is no different from the revenue and yield optimisation game played by dominant airline carriers. It will be easy to apply the same game principles in the consolidating shipping world and China represents the linchpin of any global shipping strategy in such a new world. And don’t expect an outright war. This price optimisation strategy can be played at so many levels, that Cosco’s competitors won’t have good options to react or to complain of discrimination.
The assessment of impacts should help you and your business to prepare well, but time is of the essence. According to senior executives at OOCL, the deal would take around six months to be approved by global regulators and implementation of strategies and cuts will play out over another 12 months after that. It means you have about one year to fortify your position or expand your sphere of influence at the cost of a competitor. Once the combined entity settles its footing, it will be much harder to upset its dominant positions.