The consolidation in ocean freight shipping continued on Monday with the joining of three Japanese carriers.
Kawasaki Kisen Kaisha Ltd., Mitsui OSK Lines Ltd. and Nippon Yusen Kabushiki Kaisha have agreed to establish a new joint-venture company to integrate the container shipping businesses, including worldwide terminal operating businesses excluding Japan, of all three companies and to sign a business integration contract and a shareholders agreement.
Each company is contributing about 300 billion Japanese yen, or $2.85 billion, to the new joint venture, which is planned to be established by July 1 and begin operations on April 1, 2018.
The companies said that the container shipping industry, although growing modestly, has struggled in recent years due to a decline in the container growth rate and the rapid influx of newly built vessels. These two factors have contributed to an imbalance of supply and demand that has destabilized the industry and has created an environment that is adverse to container line profitability.
The U.S. Federal Maritime Commission this month approved the creation of the Ocean Alliance, comprised of China’s Cosco Shipping, France’s CMA CGM, Taiwan’s Fra Evergreen Marine and Hong Kong’s Orient Overseas Container Line Ltd.
The FMC said agreement members are now permitted to share vessels, charter and exchange space on each other’s ships and enter into cooperative working arrangements in international trade lanes between the U.S. and ports in Asia, Northern Europe, the Mediterranean, the Middle East, Canada, Central America and the Caribbean.
In order to combat these factors, industry participants have sought to gain benefits of scale through mergers and acquisitions and consequently the structure of the industry is changing through consolidation. Under these circumstances, the three companies have now decided to integrate their respective container shipping on an equal footing to ensure future stable, efficient and competitive business operations.
The new joint-venture company is expected to create a synergy effect by utilizing the best practices of the three companies and by taking advantage of the size of its vessel fleet totaling 1.4 million TEUs, or 20-foot equivalent units, realize integration effect of about 110 billion Japanese yen, or $1.05 billion, annually, and seek swiftly financial performance stabilization.
By strengthening the global organization and enhancing the liner network, the new joint-venture company aims to provide higher quality and more competitive services.
The three companies have been cooperating in some products through vessel-sharing agreements and alliance agreements. They noted that they are similar in size, have common corporate cultures and believe the joint venture can leverage the strength of each individual company to create a stronger competitor overall.
They said the decision was prompted by low oil prices, sluggish cargo demand and oversupply of trade capacity that has resulted in container freight rates to be at historic lows and hurting profitability.
The three companies said they have made efforts to cut costs and restructure their business, but financial pressures continued, leading to the agreement.
Container shipping will remain a core activity of all three companies. However the business in this segment will be reshaped through consolidation into a new joint venture as an equity-method affiliate.
The parent companies will inject cash and in-kind contribution of vessels and terminal companies stocks into to the entity, with agreed share to establish an operating company to manage container shipping and container terminal outside of Japan. The holding company will supervise the operating company as a shareholder.
They noted that the deal is subject to regulatory approval.