zoomImage Courtesy: NYK Line

The latest merger of liner shipping businesses, revealed by Japan’s Big Three shipping companies yesterday, is further evidence of survival mergers and acquisitions sweeping the industry, according to shipping consultancy Drewry.

Namely, the agreement between Kawasaki Kisen Kaisha (K Line), Mitsui O.S.K. Lines (MOL), and Nippon Yusen Kabushiki Kaisha (NYK Line), subject to resolution by the board of directors of each company and shareholder/regulatory approval, would form a new joint-venture company which would operate a fleet totaling 1.4 million TEUs. The company is planned to be established on July 1, 2017.

Drewry said that, while this is considered to be an important step towards making container shipping an industry that can sustain profitability, the process of integration will be challenging.

“Whilst the consolidation that took place in container shipping pre-2008 was driven by a desire for growth, the current wave of M&A activity is more about survival and the need to address structural industry issues by strengthening balance sheets, addressing poor investor returns and adapting to the low growth environment,” Drewry said.

At the time of acquisitions pre-2008, growth or scale was the primary strategic imperative behind M&A. The industry was still in growth phase fuelled by globalisation and manufacturers shifting sourcing to Asia.

However, Drewry noted that recent acquisitions have been driven by necessity and the promise of synergies from cost saving, economies of scale, improved competitive positioning and better protection from the prevailing weak industry fundamentals.

“Alliances, along with M&A, have been a response to the low-growth environment, where a significant number of carriers have not made money in the recent past. We anticipate further consolidation activity but the industry may need to wait until the earnings impact of the consolidation become tangible,” said Drewry’s director of container research Neil Dekker.