J Lines’ Merger is All About Scale and Survival
The announcement that three Japanese shipping groups will merge their liner shipping businesses is further evidence of survival M&A sweeping the industry according to global shipping consultancy Drewry.
This morning Kawasaki Kisen Kaisha Ltd. (K-Line), Mitsui OSK Lines (MOL), and Nippon Yusen Kabushiki Kaisha (NYK) announced their agreement, subject to resolution by the board of directors of each company and shareholder/regulatory approval, to establish a new joint-venture company and to integrate their container shipping operations.
We had envisaged this happening in an update published in June 2016, (Drewry Maritime Equity Research: ‘Container shipping recovery further away as industry re-alignment continues’) and whilst we consider it another important step towards making container shipping an industry that can sustain profitability, the process of integration will be challenging. (Drewry White Paper: Consolidation in the Liner Industry March 2016).
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.
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, 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.
However, this current merger still does not address the industry’s structural oversupply. The end result of this industry restructuring must be sensible commercial pricing and an emphasis on revenue improvement. Cost savings are finite and all the good work from synergies and economies of scale must not be undone by the weak commercial strategies of the past. Once the current M&A activity is played out, a few remaining lines in the top 12 will start to question their ability to survive the new era.
“Today’s announcement is another positive step for the industry but the transition will take time,” said Drewry’s director of container research Neil Dekker. “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.”
