Maritime Engineering and Ports II, C.A. Brebbia & J ... · Dipartimento di Economia e Metodi Quantitativi University of Genoa - Italy ... depending on equity holding. The main and

Co-operation in maritime and port industry

and its effects on markets structure

E. Musso, C. Ferrari, M. Benacchio

Dipartimento di Economia e Metodi QuantitativiUniversity of Genoa - Italy

Abstract

Co-operation has always marked out the liner sector, even in a variety of forms.Nowadays it arouses a wide interest as a consequence of (i) the increase inships' size, (11) the falling down of liner freight rates, and (Hi) the lesser role ofConference agreements. The privatisation of port terminals enhanced co-operation also in this industry.The paper aims at analysing the different economic background of both marketframeworks, liners and ports. In the latter, actually, co-operation is strictlydepending on equity holding.The main and evident effect of co-operation is concentration (in terms of slotsupply, on the liner side, and boxes handled, on terminal side). The workfocuses on the increase in market concentration, not necessarily affectingcompetition among players, and of vertical integration leading to multimodaltransport operators (MTO).Finally, a possible scenario of the Italian market structure, characterised by apoor liner fleet and by the so-called "colonisation" of port terminal by foreignoperators, is drawn.

1. Firms co-operation as a competition tool

The phase of rapid transformation which is characterising the world-wideindustrial sector and the structure of production (globalisation, marketliberalisation and increase of spatial interactions), as well as the distribution andtransport industry, is clearly stressing that not only competition, but also co-operation, are critical factors affecting firms efficiency [1],

The phenomenon of co-operation among firms is certainly not new, butnowadays this concept is experiencing a "new life", partly due to the different

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92 Maritime Engineering and Ports II

weight and size of the players involved, and, mainly, to the changed final aim ofthe many recent ventures.

Nowadays, in fact, switching from a competitive and aggressive behaviourto a co-operative one does not mean automatically - and this is the main change- a collusive move, which is prejudicial to the customer's surplus [2],

Which are the relevant elements that make it possible to state that co-operative agreements are not anti competition, and often allow achieving abetter competitive climate and enlarging the competition field? Ryoo-Tanopoulou [3] identify some of these factors: when the aim of co-operation is(/) to widen operative borders of a single firm, (»') to achieve the scale useful tocompete in global markets, (Hi) to quickly enter new markets maximising thereturn (output) of each partner's resources (input).

Therefore the dynamic (and competitive) co-operation scheme, defined byBuckley (1992) [4] as "inter-firm collaboration over a given economic spaceand time for the attainment of mutually defined goals", can be added to thewell-known mergers and buy-out frames.

The increasing adoption of the latter tools and their limited steadiness intime, clearly experienced during the last years, are examples of an industrywhere the core is actually "empty" [5, 6] and equilibrium is not stable.

The integrated logistic industry is probably the field where the outlined trendis currently reaching a faster and more intensive development. Logisticactivities, in fact, need high level of minimum scale size and efficient, effectiveand reliable information flows (especially as outsourcing is increasing). Thewideness and the key role of information flows on one hand, and the growingneed to manage widespread territorial services (and, as a consequence, greatertransport networks), on the other hand, oblige logistic players to co-operate, inhorizontal and vertical schemes, in order to achieve a better market positioning.

This paper pays attention only to the main segment of the logistic cycle -maritime transport and port operations of cargoes - and leaves aside agreementsbetween different Port Authorities concerning port marketing, training of humanresources, and so on.

After a section devoted to a panoramic insight of co-operation in the linersector, an analysis of present trend of globalisation in the container stevedoringsector follows. Finally, some conclusion is drawn concerning future extensionsof co-operation agreements from operators taken into consideration by the paperand operators actually involved in the land leg of "door-to-door" voyages.

2. Co-operation in liner shipping

Co-operation in liner shipping has always been existing. Since 1875 - the yearof birth of the Calcutta Conference - several kinds of agreement have beenmutually connecting liners. Nevertheless, major changes occurred in the reasonsthat cause operators to adopt a co-operative behaviour even in a competitivemarket.

In the "pre-containerisation era" the only forms of agreement between linerswere the Conference agreements and the stabilisation agreement aimed atreducing competitive downwards pressures on prices. Due to the (almost)


Maritime Engineering and Ports II 93

always sloping down of the ships' average costs, those pressures lead liners totariff at the short run marginal cost, what eventually means a loss, and, in thelong run, a lower number of operators in the market. Ultimately, that processrepresents a threat to the significance of liner service and this is the basic reasonwhy these agreements are tolerated by anti-trust authorities [7].

With the era of containerisation, consortia and slot agreements gained famedue to the urgency of operating new, specialised, ships reducing at the sametime the investment cost and the simultaneous uncertainty about the future ofcontainerisation.

In recent years, strategic alliances are the most recurrent form of co-operation agreement among liners. They mainly differ from the previous kindsof agreements as they may be drawn up even by liners belonging to differentConferences (multi-trade alliances). Moreover, they proved to be unstable asthey imply only a feeble link among partners, but they allow them to obtainsome advantages; namely [8]:• The possibility to consolidate pre-existing market position;• The opportunity to obtain strategic advantages through differentiation of

products (economies of scope);• The possibility to enter in new, unfamiliar, markets with a relatively low

level of risk;• The option for a more rationale scheduling of services.

Nowadays, almost all liners belong to a strategic alliance as shown in Table1.

Table 1: Strategic Alliances in liner shipping

Alliance

Grand Alliance

Maersk Sea-LandNew WorldAllianceUnited Alliance

Liners

P&O Nedlloyd, HapajOOCL, MISCMaersk Sea-Land

NOL/APL, Hyunday,

Hanjin, DSR-Senator,United Arab

S-Lloyd, NYK,

Mitsui

Cho Yang,

Supplied capacity(Teus)

620.000

534.310

445.255

328.643

Industrial economics put on evidence advantages of co-operation behaviour,yet this is not sufficient to explain the liner shipping market structure. Generaleconomic theory has developed a useful tool: the Theory of the Core [9]. Insummary, if a market allocation - i.e. the combined possessions of agents -cannot be improved by a coalition of agents, then that allocation is said to lie inthe core of the market. Pirrong and Sjostrom [5, 6] proved that liner marketcore is actually empty due to the following conditions: entry inefficiency,demand divisibility and marginal cost indivisibility. Among others, the coretheory supports the idea of agreements feeble over time; in fact an empty coremeans that stable liner systems cannot exist for long.



In the same years in which co-operation is enlarging its boundaries,competitiveness did not disappeared. In the last four years, for example, overthan 30 mergers among liners occurred; of these the most famous were betweenHanjin and DSR-Senator; NOL and APL; Maersk and Sea-Land.

These trends - increasing co-operation and competition liner shipping market- seem to be strictly linked and not conflicting with each other. In fact, co-operation agreements probably represent only the first stage that firm have tofollow in order to become strong enough (i.e. strengthening its market share,structure of supply and scale/scope economies) to face competition and marketglobalisation.

3. The stevedoring industry

The current trend of wide consolidation in the container stevedoring industryand the emergence of global terminal operators can be seen as the result of twofactors mutually dependent:

Table 2: Big Five's terminals in the world (Sources: Cont. Int., Drewry)

Operator

Hutchinson

Ports

P&O Ports

<%

Stevedoring

Services of

America

1 2 2sii'M~ g § s *UHW

Asia/Australia/America

Hong Kong, Shanghai, Yantian,Jiuzhou, Nanhai, Shantou, Jiangmen,Gaolan, Xiamen (China); Freeport(Bahamas); Balboa, Cristobal(Panama); Yangon (Myanmar)

Freemantle, Melbourne, Sydney,Brisbane (Australia); Vostochny(Russia); Shekou (China); Bangkok,Laem Chabang (Thailand); Manila(Philippines); Colombo (Sri Lanka);Port Qasim (Pakistan); Nahava Sheva(India); Buenos Aires (Argentina);Maputo (Monzambico)

Singapore; Dalian, Nantong, Fuzhou(China); Taicang, Aden (Yemen);Cigadin, Tuticortin (India)

Seattle, Portland, Tacoma, Oakland,San Francisco, Long Beach, LosAngeles, Mobile, Charleston,Savannah, Jacksonville (USA);Manzanillo, Bangsue (Panama);Manzanillo (Mexico)Projects 2000-2005:Vietnam; Indonesia

Manila, Cebu (Philippines); BuenosAires, Rosario (Argentina); VeraCruz, Ensenada (Mexico), Kanachi(Pakistan), Damman (South Arabia)

EuropeFelixtowe, Thamesport, Harwich(UK)

Projects 2000-2005:Rotterdam (NL)

Lame, Southampton, Tilbury (UK);Genoa, Naples (ITA)

Projects 2000-2005:Zeebrugge, Antwerp (BE); Derince(Turkey); Cagliari (ITA)

Genoa- Voltri, Venice, Leghorn,Civitavecchia (ITA)Projects 2000-2005:Sines (PT)

-

-



Globalisation, which sets the ground for a high competitive environment;Privatisation (or the more limited contracting out of certain port functions),which, acting as a catalyst for globalisation, offers the private sector theopportunity to take active part in port development and profits.The main outcome of such a scenario, which can be considered as the best

route for enhancing port efficiency, has been the involvement of private bigcompanies (quite often multinationals) in the stevedoring sector. Highlydynamic activities and ownership structures, with buy-outs and mergershappening regularly to take advantage of the opportunities for growth,characterise the so-called "global players".

According to Drewry [10], there is a general consensus on the fact that onlyfive companies presently warrant the title of global operators in the stevedoringsector: Hutchinson Ports, P&O Ports, International Container Terminal ServicesInc., Stevedoring Services of America and Port of Singapore Authority.

They all started from American, Australian and Asian markets, but it isimportant to stress the extent to which, since 1997-1998, the main internationalport operators turned their attentions to Europe. Table 2 provides a comparativeindication of the current port portfolio of each company, with indication of themain investment projects.

Nevertheless emergent "regional" (European) specialists are growing as canbe shown in Table 3 (in which 1998 throughput data in million of TEU arereported).

Table 3: EU Terminal operators 1998 (Sources: Cont. Int., Drewry)

Operator

Eurogate(6 M Teus)

EuropeanCombinedTerminals(4,5 M Teus)

Hessenatie(2,2 M Teus)

Maersk Espana(1,8 M Teus)HHLA(1,6 M Teus)Hanno(1,3 M Teus)Kaoten Natie(0,7 M Teus)Noord Natie(0,7 M Teus)Mar. Valencianna(0,7 M Teus)

North EuropeBremen, Hambourgh (DE),Klaipeda (Lithuania)

Inland terminals:Dortmund (DE)

Rotterdam (NL), Trieste (IT)Tallin (EST)Inland terminals:Venlo, Moerdijk (NL); Duisbourg(DE); Villebroek (BE)Antwerp, Zeebrugge (BE)Projects 2000-2005:Flessingue (BE)

Hamburg (DE)

Rotterdam (NL)

Antwerp, Zeebrugge (BE)

Antwerp (BE)

-

South EuropeLisbon (PT); La Spezia, GioiaTauro, Salerno (1TA)Inland terminals:Modena, Milan (IT A), Vienna(AU)

-

Algeciras (ES)

-

-

-

-

Valence (ES)



Despite the difficulties in order to draw picture as up-to-dated as possible ofa highly dynamic situation, the aim of the present section is rather to start to setthe ground for an analysis of the main reasons and strategies of the ownershipconsolidation. Despite the economic significance of the current trend, there areseveral consultancy reports and some article on reviews [11, 12], but there is alack of academic literature on the topic.

What can be considered as the relevant rationale of such an evident growthpath, with new ventures continuously launched and negotiations commenced onnew projects? Within a basic economic framework of analysis, several pointscan be outlined.

Table 4: European market shares 1998 (sources: Cont. International, Drewry)

*H

NorthEur.SouthEur.Total

I

13%

-

8%

O2

5%

4%

4%

2

-

11%

4%

i =a

11%

-

7%

r

8%

-

5%

B

21%

1%

13%

tW

13%

25%

18%

% .§ %

4%

-

2%

i*3 =

4%

-

2%

i*

-

5%

2%

35

78%

41%

64%

3.1 Importance of scale and costs savingsEntry barriers (namely capital requirements and sunk costs) clearly outline

the huge scale of investments in terminal operations, which only big companiescan bear.

Moreover scale effects determine an enhancing purchasing power forterminal operators, also through broader experience, greater know how and,above all, cost economies.

There is an open debate on the extent of economies of scale in terminaloperations. Literature [13] always stressed the importance of economies of scalein port production. Looking at a single plant unit (terminal), according toDrewry estimation [10, 14], where a 600.000 teu terminal is compared to a210.000 teu one, the operating economies per teu are assessed around 20%.Data breakdown show clearly that relevant economies of scale are achievable ininfrastructures (land, civil works, building and pre-operating costs) and in laborand organization costs, while they are not significant in equipment costs.

But global terminal operators also benefit from scale economies consistentto a merger strategy: they acquire additional plants and take advantage of anyavailable economies of multiplant operation:

huge investments in technology, promotion or research and development(e.g. in new operational or informational systems) can be carried out onlyby big companies who can then apply results and new schemes to severalterminals;Multi terminal operators can be able (i) to enforce lower prices (quantitydiscount) for the inputs they buy and (ii) to manage sovra-structures (e.g.cranes, stackers, etc.) as a pool of resources to be allocated partially freelyamong the terminals.



3.2 Geographic and product diversificationInternational projects offer stevedoring companies the scope to expand

outside their domestic markets, and increase their revenue generatingcapabilities. In many cases these companies (e.g. HPH) have reached the limitsof possible expansion in their own countries and overseas development is theonly way to continue growing. It is quite evident that expansion overseas helpsterminal operators not to be over-dependent on the performance of a single port(e.g. during Asian economic crisis, with downturns in profitability at Asianterminals being offset by improved results in other regions). A well-balancedinternational portfolio can thus be considered as a successful risk poolingapproach against exposure to particular markets, if separate markets areindependent (mainly from an economical and political point of view). Someoperators (PSA, P&O, HPH) started concentrating on emerging markets, withdevelopment of businesses in Asia, India, South America, Africa and formerSoviet Union. More recently they have been balanced by expansion in moredeveloped markets, such as Europe and USA Gulf Coast, aiming at achieving abalance between developed (reasonably long term sustainable profit) andemerging regions (greatest opportunity for growth, with a high level of risk).

Moreover, in order to face the increase of competition among ports, bigterminal operators try to implement a product differentiation, which more andmore goes from mere handling activities towards inland services and logisticnetworks, quite often located in strategic position far from the port. It is quiteclear that investments in inland terminals give terminal operators theopportunity to relieve congestion in the storage areas of terminals and to play animportant role in the global transport chain.

3.3 Shareholders interestsGlobal players' shareholders consider port activities like any other industrial

investments in the holding's portfolio: they make pressure for high rates ofreturn. They expect companies to invest in new projects, considering thecapacity of expansion of terminal operators, as a proxi of their profit increases(and the main cause of potential capital gains in the case of quotation in thestock exchange market).

3.4 Response to current trend in maritime industryOwnership consolidation can be finally considered as a response of terminal

operators to the co-operation process in the maritime industry. Strategicalliances and slot pooling tools, in fact, have an impact on ports selection,causing cargo concentration in a limited number of major ports. This impliesstrong pressures for increasing port efficiency and, as a consequence, the needfor huge investments that only large scale operators can afford (and by this waythey become the preferred partners of Authority for their being one of the mainlevers for strengthening port's competitiveness). Moreover, there are relevantcompetitive forces from shipping lines and alliances, constantly under pressureto contain costs, focused on tariffs and charges. This threatens the profitabilityof the whole stevedoring sector and only big operators, achieving economies ofscale, could have better rates of return.



However, any remarks attempting to explain the increasing trend inconcentration should not avoid the main question concerning the potentialprofitability of the sector. Industrial economics theory argues that, if thestevedoring sector could be considered as a price-setting (differentiated) market,mergers can increase efficiency and market power (leading to higher profits)[15]. It should be stressed that this process is too recent to allow clear empiricalevidence. At the moment, what can be pointed out is just that, despite barriers toentry into the terminal operation and management business are high, theperceived profitability of the sector is attracting interest from big investors, thusleading increasing competition for projects. The need for future empiricalsurvey and monitoring is therefore quite evident.

4. Relationships between shipping lines and terminal

operators: the emergence of dedicated terminals

One of the major recent developments that synthesise the relationshipsbetween the outlined trends of horizontal co-operation in the maritime and portindustry in the container sector, is the emergence of dedicated terminals for linercompanies [16]. Dedicated terminals can be generally considered as adevelopment of vertical agreement between lines and ports, as well as adiscrimination within a container terminal between users. This evolution ismainly a consequence of the requirement from shippers of a higher geographiccoverage and a better "supply chain management".

A dedicated terminal can refer to a geographic location, the use of facilitiesfor a defined part of a terminal, and/or to a temporal exclusivity in usingterminal facilities. In a sense, the use of "time-windows" for containershipalready represents a time-limited dedicated terminal.

The development of dedicated terminals can be therefore generally presentas the consequence of a higher shipowners' (organised in strategic alliances)pressure on port It can be stressed that for the shipowners who aim atminimising the ship time cost, the use of a dedicated terminal can be a way tocontrol the previously exogenous factors that play on the time in port for theships. Dedicated terminal gives the shipowners the opportunity to reduce theexpected impact of ships time in port, to minimise the impact of a delay in thearrival of its vessels, to plan in a more efficient way its schedule, and notably toco-ordinate mother and feeder vessels. The willingness for shipowners to"secured" space and time within a terminal can not solely be motivated byphysical aspects. The fear for example of information sharing and the need toprotect confidentiality could also lead to a demand for dedicated terminals.

From the port's point of view, if the main goal is to maximise the occupationrate, conflicts exist between port operators and port users, but the chance ofdedicated terminals can also be seen as an attractive factor of competitionamong smaller ports for attracting lines and cargo, because of the possibility tocreate dedicated terminals in those ports rather than in ports close to fullcapacity. Dedicated terminals could be seen also as a way for ports to keep,through differentiation of service and price, all their clients without expansion incapacity. In a general context of worldwide investments in new capacities and



disengagement of public funding, port authorities also play an important role inthe emergence of dedicated terminals. In order to secure investments, the newconcession tenders take into account the possibility from potential operators tobring goodwill and are also encouraging stevedoring companies to choose fordedicated terminals.

5. Conclusions

1. Relevant strategies of co-operation occur both in liner shipping and instevedoring industry; whilst for liners this trend represents the evolution ofancient and consolidated forms of co-operation (starting since XIX century withconference agreements), for stevedoring industry it appears a quite recent trend,mainly due to growing scale/scope economies.

2. Liners and stevedores seem to adopt quite different co-operationstrategies: liners' strategies are based on operational agreements aiming at agreater efficiency, yet they allow a high degree of competition among operators;stevedores tend to promote horizontal integration through mergers and buyouts.However, both industries move towards output differentiation and riskdiversification, although with quite different tools.

3. Co-operation in liner and in stevedores industry are mutually relatedthrough the link between the economies of scale of the ship and the economiesof scale of terminals, since the former push for bigger terminals, overallovercapacity and even forms of vertical integration between terminals and liners(dedicated terminals),

4. A major role in parallel co-operation strategies is performed by the marketstructure of port services, with the stevedores on the supply side and the linerson the demand side: on the different market power of the two players dependsthe final distribution between producer's and consumer's surpluses. As portsbecome more mutually replaceable, due to lower transport costs and morehomogeneous services (both for quality and price), the market power of linersseems to prevail. This could explain such consequences as:

time-saving and capital-intensive as well as land-intensive innovations inport industry, as containerisation grows (ship-costs are replaced by port-costs);vertical concentration carried out by liners and MTOs through investmentsin dedicated terminals.5. As a consequence of previous point, co-operation between stevedores may

be, to some extent, a reaction to co-operation between liners. Yet, at the sametime a more and more relevant role seems to be played by vertical concentrationand buyout of terminals by major liners. This could be explained by adisequilibrium in market power, with a consequent appropriation of stevedoringindustry rent by the shipowner.

Is this disequilibrium really occurring, and is it possibly leading to a generalloss of efficiency? In this case, should these industries need rules aiming toprevent negative effects of non-competitive market in port industry? Moreevidences are needed to attain a satisfactory answer. However, we should keepin mind that the key point in order to maximise the overall efficiency and



effectiveness is that the consumer's surplus should be maximised, not only inthe stevedoring market, but in all markets occurring in the wholetransport/logistic chain, downward to the shipper and even to the final buyer ofgoods being transported. Only through this way the higher efficiency of thechain turns into lower final prices, higher international competition on finalgoods markets, and usual benefits of globalisation.

Thus, it is crucial to maintain the highest level of competition in both linershipping and stevedoring industries, in order to avoid suppliers' surpluses andextra-profits. This means that co-operation processes are welcome and shouldbe enhanced so far that they allow increases in efficiency but do not turn intolower levels of competition.

References

[1] Beamish, P.W. Strategic Alliances, Edward Elgar: Cheltenham andNorthampton, 1998

[2] Buckley, PJ. & Michie, J. Firms, Organizations and Contracts, OxfordUniversity Press: Oxford, 1996

[3] Ryoo, O.K. & Tanopoulou, H.A. Liner alliances in the globalization era: astrategic tool for Asia container carriers. Maritime Policy & Management,26(4), pp. 349-367, 1999

[4] Buckley, P.J. Studies in International Business, Macmillan: London 1992[5] Pirrong. S.C An application of core theory to the analysis of ocean shipping

markets. Journal of Law and Economics, 36, pp. 327-335, 1992[6] Sjostrom, W. Collusion in ocean shipping: a test of monopoly and empty

core models. Journal of Political Economy, 97, pp. 1160-79, 1989[7] Marchese, U. Lineamenti e problemi di Economia del Trasporti, ECIG:

Geneva, 1996[8] Harrigan, K.R. Strategies for joint ventures, Lexington Books: Lexington

1985[9] Telser, L.G. Economic Theory and the Core, University of Chicago Press:

Chicago, 1978[10]Drewry Shipping Consultants World Container Terminals, Global Growth

and Private Profit, London, 1998[ll]Containerisation International, Global Players, March 1999, 97-101[12]Containerisation International, Big Bucks, March 1999, 97-101[13]Bennathan, E. & Walters, A.A. Port Pricing and Investment Policy for

Developing Countries, World Bank, Oxford, Oxford University Press, 1979[14]Drewry Shipping Consultants North European container ports, London,

1999[15] Martin, S. Industrial economics: economic analysis and public policy,

Macmillan: New York, 1994[16]Benacchio M., Cariou P. & Haralambides H. Dedicated container

terminals: costs and benefits from a port perspective, forthcoming on NAV2000 Proceedings, Venice

§§ 1, 2 are by C. Ferrari, §§ 3,4 are by M. Benacchio and § 5 is by E. Musso.


Documents

Maritime Engineering and Ports II, C.A. Brebbia & J ... · Dipartimento di Economia e Metodi Quantitativi University of Genoa - Italy ... depending on equity holding. The main and