[MarEx Exclusive] The P3 Alliance: Will It Pass Muster With EU Regulators?

By Matthew Hall, Esq.

Whenever a big transaction between competitors is announced, the phrase “antitrust risk” inevitably arises. Which antitrust regulators will look at this deal? Will it pass? The proposed P3 Alliance in container shipping is no exception.

Concerns have been raised about the deal ever since its announcement by Maersk, CMA CGM and MSC in June 2013, with opponents making public comments and lobbying the regulators. It also has its supporters, of course, and they have been active as well. The analysis in the EU will be a key part of the regulatory response since, according to the parties, the Alliance will enjoy a relatively high share of traffic (around 42 percent) on both the Asia-Europe and trans-Atlantic routes (24 percent on trans-Pacific).

In the EU, the deal is reportedly being investigated by three regulators – the European Commission (EC) under general EU competition law, and German and Polish regulators under their respective merger control laws.

Staking Out a Position

Opponents and supporters have no doubt been approaching all three of these regulators, but what will they be saying and how should they say it? They need to bear in mind several general points. First, be consistent. The EC and German and Polish regulators each operate under different legislation and have different substantive tests (and timetables).  However, they will be sharing information and aligning their analysis as much as possible.  An inconsistent message will not help your position.

Second, clearly indicate the “theory of harm” (what will the Alliance do that is problematic?) and provide evidence that this will, in fact, be the case. Regulators work on the basis of facts (and always have an eye on possible appeals of their decisions), so general assertions unsupported by evidence won’t take a third-party complainant or supporter very far. 

Third, the regulators need you! Third-party comments, positive or negative, and particularly from customers, are very important. Maersk, CMA CGM and MSC will have their “story” prepared and will push it hard. Regulators are suspicious but sometimes find it difficult to identify the real issues. Other parties active in the markets in question are the best source of information, which either supports or disproves the story.

“Theories of Harm”

So what “theories of harm” will regulators in the EU be looking at? There are several, since the Alliance could impact competitors, customers and suppliers. One could argue, for example, that the whole rationale of the Alliance (lowering costs and improving efficiency by using larger, fuller ships on coordinated schedules) would inevitably facilitate output limitation and reduce competition. The joint purchasing arrangements included in it could arguably leave suppliers such as terminal operators vulnerable to the market power of the Alliance. There may also be foreclosure issues for competing terminal operators if the parties use their own terminals.

Before the EC, the key initial issue will be whether the structural factors on the Europe-Asia and trans-Atlantic trades, in particular, would result in the Alliance causing appreciable negative market effects. Several factors are relevant to this analysis, and complainants (in particular) will need to discuss these. Similar arguments would need to be made in Germany and Poland.   

Market concentration and the position and number of competitors are important structural factors. What are or will be the market shares of the Alliance? Complainants will want to show that the parties will have high market shares, higher than the claimed 42 percent on both trades. Also relevant will be the stability of market shares over time: Are the market(s) stagnant or dynamic? The latter is preferable from the parties’ point of view. Complainants will want to show the opposite.        

Who are the competitors and what are their reactions likely to be? Complainants might want to argue that small carriers will be forced out of the market since their vessels will be too inefficient to compete against the Alliance’s mega-vessels. Evidence to support this would be needed. Supporters could demonstrate the strength of remaining competitors and their likely aggressive response. 

Further, the issue of market-entry barriers and the likelihood of entry are important concerns. A good “entry” story can remove doubts about even the most concentrative transaction. Complainants will want to show that there are high entry barriers (such as lack of suitable port slots) and that entry is unlikely (what is the history in this regard?). Supporters could usefully show that entry has happened regularly and could happen again.

Another key issue will be the countervailing buying power of transport users, the shippers themselves. Do they have such power? How exactly could they use it and would the choice be there for them to do so? Complainants will want to show that there is limited or no buying power or that, even if big customers can “protect themselves,” certain types of customers will be vulnerable.

Collusion

Another issue which complainants could raise is that the Alliance, although in principle allowing for independent sales, marketing and pricing, would nevertheless be likely to lead to collusion between the parties. Here, two basic arguments would traditionally be made. First, the parties’ commonality of variable costs would be high, and commercialization costs constitute a large proportion of the variable costs. This is probably not relevant in this industry.

Nevertheless, the exchange of information within P3, or the risk of it, could arguably also give rise to a risk of collusion. The part of the agreement relating to the trans-Pacific and trans-Atlantic trades is available from the U.S. Federal Maritime Commission website. Regulators will want to be clear that clause 5.6 (and its equivalent in the Asia-Europe agreement) and the related protections concerning confidential information will operate adequately. Complainants can point out potential specific concerns and should precisely explain what the concern is, how it will have a negative market effect, and how it gives rise to the risk of collusion.

Impact of G6 Alliance

An important part of the overall analysis – maybe even the most important part – will be the likely impact of the recent announcement by the G6 Alliance (which combines carriers NYK, Hapag-Lloyd, OOCL, APL, HMM and MOL) of its expansion plans. The G6 announced in December 2013 that it will expand its trans-Atlantic and trans-Pacific trade lanes. Hapag-Lloyd, one of the G6 members, has reportedly said that the G6 would then have around 40 percent of the trans-Atlantic trades. 

The combined share of the P3 and G6 Alliances would therefore be some 82 percent on trans-Atlantic route, which is a very concentrated situation. An argument could be made that the P3 and G6 would give rise to a duopolistic market structure conducive to parallel behavior (which need not be on price only). In other words, the characteristics of the two alliances are such that they would align their behavior (implicitly, without the need for express coordination) rather than compete on route choice and other aspects.

This issue is also likely to be relevant at the second stage of the EC’s analysis, where (assuming it finds that there would be appreciable negative market effects) it will in essence need to look at potential efficiency gains and whether a fair share of these will be passed on to customers. If the restrictive effects are fairly limited and the efficiencies (particularly cost-savings) substantial, it is likely that a fair share will be passed on.  If, however, the restrictive effects are substantial and the cost-savings relatively small, it’s unlikely the EC will consider that sufficient gains will be passed on.

The potential duopolistic structure may be key here as it is relevant to the issue of whether the joint venture would be faced with effective competition such that customers could be expected to benefit from cost-savings.

Focusing on Specifics

A final factor the EC would need to consider is whether all restrictions included in the agreement are indispensable in order to achieve its benefits. This allows third parties to focus on specific provisions in the agreement itself, such as the information exchange already mentioned. This is often a useful focus. Even if the authorities are willing to approve the deal as a whole, there is often much scope to amend certain features that are troublesome. The argument would be that the provision in question goes beyond what is needed to put the deal in place and is not necessary. If the provision is restrictive on this test, then it should not be allowed as part of the overall deal.

So there are a lot of issues that third-party opponents and supporters can consider. They do not need to cover them all, but what they do cover will be taken seriously by the regulator, particularly if supported by good evidence. Remember, there should be a clearly-stated concern (theory of harm), and this must be supported by evidence. Evidence can take a number of forms, but regulators cannot act on pure assertions. – MarEx     

Matthew Hall is a partner in the Brussels office of McGuireWoods LLP. His practice includes all areas of EU and UK competition law.