Strategic Alliances in Liner Shipping Industry: An analysis of the Vessel

Shipping Agreement Exemption from Competition Laws

Author:

Mamta

4th Year, Manipal University Jaipur

Ph: 7073861125

mamtabisht104@gmail.com
Strategic Alliances in Liner Shipping Industry: An analysis of the Vessel

Shipping Agreement Exemption from Competition Laws

Abstract

Strategic Alliances have emerged in past few decades as one of the most preferred means of coalition by
corporations in a variety of sectors including airlines, insurance, etc. This type of collaborative venture
has been especially embraced by the liner shipping industry. Due to the high investment- return risks and
under-development of port infrastructure, especially in developing countries like India, Shipping
companies have preferred to get indulged in strategic alliances. In fact, the present time is witnessing a
new era of strategic alliances in the shipping industry with major players looking to regroup to acquire
greater market share.

Even though these alliances are perceived as anti- competitive, alliances in the liner shipping industry
generally enjoy immunity from the competition law, especially the Vessel Sharing Agreements (VSAs).
Major jurisdictions across the world including India, USA, European Union, Japan, and Singapore have
exempted VSAs from the applicability of domestic competition law. However, the scope and applicability
of this exemption differs. This essay describes strategic alliances in Liner Shipping Industry, especially
Vessel Shipping Agreements and the impact that they have on competition in the relevant market. This
essay would also seek to enlist the objective and future of the VSAs exemption from the competition laws
in the Indian scenario.
 INTRODUCTION
Liner shipping or ocean shipping industry has often been referred to as the backbone of global
economy. It accounts for 60% of world sea-borne trade annually, amounting to US$ 4 trillion of
goods.1 Liner shipping industry is indispensible to the economic growth, both internationally as
well as domestically. Currently, the international liner shipping industry is dominated by Danish
giants “Mersk” which accounted for a total 15% of share2 all over the world in 2016.
The market structure of Liner Shipping industry relies heavily upon strategic alliances. A total of
83% of the annual share in world trade comes from 4 major alliances. In fact recently, 2 new
alliances- 2M (between Maersk Line and Mediterranean Shipping Co) and O3 (between CMA
CGM, China Shipping Container Lines Co. and United Arab Shipping Co) are expected to
takeover more than 70% of the total world share3. These alliances are often suspected of
violating competition law and adopting trade restrictive practices.

BACKGROUND OF ALLIANCES IN THE LINER SHIPPING INDUSTRY

Strategic alliances generally mean the cooperation or collaboration between firms which pursue
for a synergy that each member hopes the benefits from the alliances would be much more than
those from individual efforts.4 An alliance, with reference to shipping industry, can be termed as
an agreement between two or more carriers where a shipping liner commits to collaborate with
the other operators when operating ships, rationalizing capacity through joint-scheduling, slot-
chartering, terminal and equipment sharing, and designing operational networks, and other
relevant functions.
These alliances have been a pivotal part of this industry since years. Initially, these alliances
were earlier in the form of conferences. The United Nations Convention on a Code of Conduct
for Liner Conferences, 1974, defines liner conferences as: “A group of two or more vessel-
operating carriers which provides international liner services for the carriage of cargo on a
particular route or routes within specified geographical limits and which has an agreement or

1
UN Business, Intl. Maritime Org. File Statistics, 2018.
2
Jonathan Saul, Maersk Battles to Stay on Top as Container Shipping Downturn Deepens, REUTERS, (Jun. 21.
2016, 2:05 AM) https://www.reuters.com/article/shipping-maersk-idUSL8N19D441.
3
Supra note 1.
4
Sheng Teng Huang & Shigeru Yoshida, Analysis of Key Factors for Formation of Strategic Alliances in Liner
Shipping Company: Service Quality Perspective on Asia/Europe Route after Global Economic Crisis, 1414, Intl. J.
Econ. & Mgmt. Eng., 1414-1415 (2013).
arrangement, whatever its nature, within the framework of which they operate under uniform or
common freight rates and any other agreed conditions with respect to the provision of liner
services”.
The Calcutta Conference, formed in 1875 consisting of five carriers, is the first modern
conference in the shipping industry. Following the Calcutta Conference, conferences were
formed in most major trade routes, e.g. Transatlantic Conference Agreement, Far East Freight
Conference etc. There were over 150 conferences in effect as of 2001. The significance of these
conferences steadily declined in the following years. As of today, only 18% of existing
conferences involve major international routes. 5
However, after the emergence of containerization, they have instead taken the form of consortia,
vessel sharing agreements, global alliances, capacity stabilization agreements and
discussion/talking agreements.

VESSEL SHIPPING AGREEMENTS (VSAs)

The strategic alliances in liner shipping industries generally enjoy immunity from antitrust laws
across all major jurisdictions. However, the scope and extent of the immunity differs between
different countries. While national laws differ on the applicability of the immunity in case of
consortia, global alliances, capacity stabilization agreements and discussion/talking agreements;
VSAs enjoy immunity under almost every domestic law.
VSAs are agreements between two or more shipping companies whereby one company agree to
allow the other shipping company to use the free space on its vessel for shipping that other
company’s goods, on promise of reciprocity or a price paid, or promised. Their aim is to
maintain a commercial presence on a specified loop or maritime route, whilst withdrawing a ship
and redeploying it by reserving space on the vessel of a partner company, the partner in turn
proceeding in the same way on another loop.6 Many of the largest carriers are involved in some
type of vessel-sharing agreement. These agreements are of huge advantage to these shipping
companies as through these, the companies able to pool resources to avoid wastages, generate
extra revenue and further they provide them with greater mobility in accepting more dynamic

5
Sjostorm William, Ocean Shipping Cartels: A Survey, 107, R. Net. Econ J., 109,111(2004).
6
Anila Premti, Liner Shipping: Is There A Way For More Competition, United Nations Conference on Trade and
Development, 3 (2006), http://unctad.org/en/PublicationsLibrary/osgdp2016d1_en.pdf.
orders. Often, these agreements result in cost saving and provides greater confidence to the
investors.
Moreover, the VSAs also have the pro- environment factor and help in the prevention of marine
and air pollution. As a result of such agreements, lesser vessels enter the oceans and sea routes,
due to which lesser pollutants are released into the air, as well as the water bodies.
They can help promote competition by facilitating market entry for carriers that do not have a
sufficient volume of cargo to operate an independent vessel, in order for them to compete with
other carriers on the same routes. Such agreements may benefit in particular smaller carriers or
carriers that wish to enter new markets.7 In addition, liner shipping carriers need cooperation
agreements to ensure the continuity of service in the long term. The ability to easily enter into
and exit agreements and adjust agreements to market changes, as well as the legal certainty
provided by sector-specific regulations or exemptions, provide carriers the flexibility and ability
to adjust services to changes in market conditions, with limited service disruption.

VSAs EXEMPTION FROM COMPETITION LAW

The objective of competition law, all around the world is to restrict and disallow those practices
whose negative impact on competition is overshadowed by the positive impact which it intends
to have. And in light of the same, VSAs have been granted a blanket exemption from section 3
of the Indian Competition Act since 2012. The Ministry of Corporate Affairs through a
notification dated September 19, 2012 (“Shipping Notification”) exempted Vessel Sharing
Agreements from being anti-competitive, for a period of one year. By virtue of this notification,
shipping liners would be free to enter into VSA and VDA within the sector, including the foreign
companies operating in India. Other countries including Singapore, USA, EU, etc have followed
the similar trend. It might be appropriate to mention here that this is a slight aberration from the
world community’s general stance on granting blanket exemption, as governments are very
hesitant of providing a blanket exemption to any particular sector from competition laws. This
exemption was renewed annually till 30th April’17, when the exemption was extended for 3 more
months i.e. till 29th June’17, when again it was renewed for another year. However, no
communication has been made on part of the Ministry with regards to the renewal after the
expiry of the last notification’s term, which casts clouds of uncertainty over the same.

7
Id.
It would be pertinent to note that he shipping industry, as a whole is highly capital intensive and
sharing containers space on liner ship provides greater efficiencies in relation to connectivity and
frequency of ships between any given origin and destination port pairs- which is why the
exemption was introduced at the first place. Further, many economists have argued that the VSA
exemptions result in increased participation by small and medium shipping companies which,
ultimately, leads to increased competition in the industry.
This non- renewal of this exemption for this year, till now, might be due to the pressure put on
the government by the Shippers (i.e. importers and exporters availing these shipping services).
There has been strong opposition for VSAs by the shippers across the world fear such
agreements could restrict competition and lead to unfair trade practices.8 As such global liners
are inducting large vessels and resorting to practices such as “slow steaming.” These cost cutting
measures, shippers say, affect their shipment schedules. These lines also go for exclusive tie-ups
with terminal operators which again restrict the shippers’ freedom to select ports of their choice.
At the same time, it has to be mentioned that the shipping industry over-capacity which is the
reason why it has to go through low freight rates and underutilization of its capacity. Therefore,
resource pooling will help them in providing better services and increasing the frequencies.
Furthermore, Professor Federico Quartieri of University of Naples, based on mathematical
calculations has argued that the Vessel Sharing Agreements are in fact pro-competitive and
increase the competition in the market9. In his study, Prof Federico examined the effects of the
formation and enlargement of vessel-sharing agreements on equilibrium prices, equilibrium
aggregate quantities and consumer welfare showed that on a given commercially active route, the
formation and enlargement of such agreements increased shipper welfare (consumer surplus) and
the volume of cargo transported (equilibrium aggregate quantity) and lowered freight rates, and
concluded that vessel sharing agreements had pro-competitive effects.

LINER SHIPPING COMPETITION REGULATORY FRAMEWORK IN INDIA

At the international level, there is no globally endorsed, legally binding multilateral instrument
on competition in liner shipping. A number of instruments related to liner shipping have been
adopted under the auspices of international organizations such as United Nations Conference on

8
NK Kurup, Why should shipping alliances be exempt from competition laws?, THE HINDU, Nov. 4, 2017 AT 9.
9
Quartieri, Federico, Are Vessel Sharing Agreements Pro-Competitive?, 111 (April, 2017),
https://ssrn.com/abstract=2955304 or http://dx.doi.org/10.2139/ssrn.2955304.
Trade And Development (UNCTAD), including the Convention on a Code of Conduct for Liner
Conferences, which entered into force in 1983 and had 76 States parties as at 15 January 2018,
and the guidelines for its application, developed in 1986, but these agreements are silent on
VSAs. Therefore, regulation of competition in Liner Shipping Industry is wholly left for the
states in their domestic jurisdictions.
The shipping liners in India are subjected to the provisions of the Merchant Shipping Act, 1958
(“MS Act”) which deals with the Indian ships and their registration amongst other guidelines for
sailing in the Indian waters, but this statute does not create any regulations or conditions
addressing the business aspect. The power to regulate and supervise shipping in India rests with
the DG Shipping at the top level and is further delegated to various Captain of Ports (“CoP”) and
Mercantile Marine Departments (“MMD”) at various coastal states. The state wise delegation
helps DG Shipping in addressing the problems and issues of coastal states and liners across the
country. DG Shipping along with various CoPs and the MMD draft and discuss rules and
guidelines which are then implemented for the shipping industry. It is interesting to note that,
CoP and MMD are responsible for granting permissions of various kinds, as prescribed in the
MS Act, further the overall monitoring is done by the DG Shipping and in certain cases, approval
from the DG Shipping is mandatory.
The chief regulatory body for competition in India is the Competition Commission of India,
which is responsible for regulating competition in shipping industry too. CCI is the regulatory
body with respect to application of the Indian Competition Act, 2002, in the recent past it has
come forward as a stringent regulator, with an aim to provide the ultimate benefit to the
customers by fostering healthy competition throughout all business sectors. CCI in the recent
past has taken an active stand against anti-competitive agreements and imposed heavy penalty on
defaulting entities; this has had a significant impact on the business community and the economy
as a whole.
Recently, many experts have risen their regarding not having a separate competition regulatory
body for shipping in India, given the huge economic significance of the industry and the special
knowledge and expertise which it requires, especially now when the government is considering
removing this exception. In USA, the Federal Maritime Commission is the independent
regulatory agency responsible for the regulation of seaborne transportation in the foreign
commerce of the United States for the benefit of United States exporters, importers and the
United States consumer. Its mission is to ensure competitive and efficient maritime
transportation services for shippers, by monitoring agreements among carriers and service
contracts with regard to their effects on prices and services.

CONCLUSION
Modern container liner shipping industry is characterized by high volume of investment that
requires various forms of collaboration between liner operators. The recent development of the
market collaboration has shown that alliances formation is the most viable form of market
concentration. The application of Vessel Sharing Agreements among the members of the
alliances where members enter into joint operation of liner services via slot exchanges. The latter
is based on cost estimation against contributed capacities. The existence and implementation of
such agreements aims at achieving higher operational efficiency and higher economies of scale.10
It is indeed astonishing to note that the Indian government has yet not released any notification
communicating its intention to continue or discontinue the VSA exemption from the section 3 of
the Competition Act. In such circumstances, a dispute between the shippers and the shipping
companies seems imminent. While there would be a strong lobby from the shippers, as well as
free trade advocates, the government will have to consider the desperate state of liner shipping
industry in India and the potential impact it can pose due to removal of this exemption.
There is an intrinsic link between liner shipping and global trade; one cannot exist or grow
without the other. The liner shipping industry is capital intensive and often faces an imbalance
between supply and demand. Given these characteristics, liner shipping carriers need cooperative
arrangements such as vessel-sharing agreements, to deploy their assets and provide their services
more efficiently and in a more sustainable and reliable manner. Such agreements can have pro-
competitive effects and are necessary to ensure the viability of carriers along with the reliability
and sustainability of services provided to shippers.
Given the high level of market concentration, it may be worthwhile to consider examining
alliances under merger control regimes. This would provide an opportunity to fully analyze their
impact on competition, service quality and efficiency and to impose appropriately designed
remedies related to any concerns. Another option would be to impose reporting requirements on

10
Anneta Varbenova, Evaluation of Vessel Shipping Agreements on Containers Line Transport Efficiency, 66, I.S.J.
SBS, 96 (2018).
alliances, such as those imposed on the P3 alliance initiative by the Federal Maritime
Commission of the United States. In analyzing mergers and alliances, competition authorities
need to look at not only price-related competition effects, but also at the variety and quality of
services provided to shippers. Competition authorities need to consider the effects on the range
and quality of services, frequency of ships, range of ports serviced, reliability of schedules and
efficiency, among others. Such deeper analysis requires competition authorities to strengthen
their merger review skills and capacities.