Liner shipping alliances and their impact on shipping connectivity in Southeast Asia

1. Introduction

The liner shipping industry underwent a major round of shuffle between 2014 and 2017. The period saw the dissolution of the G6 Alliance and CHKYE Alliance as a result of the bankruptcy of Hanjin as well as mergers and acquisitions involving container shipping lines Maersk, CMA CGM, COSCO, China Shipping, OOCL, APL, Hamburg-Süd, CSAV, CCNI and UASC. The result was the formation of three shipping alliances which are the 2M alliance, Ocean Alliance and The Alliance. These developments affected more than 80 per cent of the global container fleet capacity with fourteen out of the top fifteen container shipping lines belonging to an alliance. The concentration ratio of the top ten carriers increased further from 64 per cent in 2013 to reach 82 per cent by 2017 (Alphaliner, 2013, 2017a). A list of events detailing container shipping lines affected is shown in Table I.

The Asia–Europe trade is a major east–west container trade. Container traffic on the trade route is estimated at 23 million TEUs in 2017 (UNCTAD, 2017). The trade route connects major load centers of East Asia with that of Europe and the Mediterranean region. Shipping lines that ply along the trade route also call at key ports in Southeast Asia, South Asia and the Middle East. It is worth noting that the eighteen busiest container ports in the world are located along the Asia–Europe trade route. Of these, the ports of Singapore, Port Klang and Tanjung Pelepas were ranked 2nd, 12th and 18th, respectively, in 2015 where they accounted for almost 100 per cent of Southeast Asia’s transshipment throughput (Lam and Yap, 2008). The Asia–Europe trade is also an important market for transshipment traffic for the ports of Singapore, Port Klang and Tanjung Pelepas (Yap and Notteboom, 2011). In 2015, the three ports handled 51.6 million TEUs of containers (American Association of Port Authorities, 2017). Of this amount, 80.6 per cent or 41.6 million TEUs consisted of transshipment containers thereby presenting the region as one of the largest container transshipment markets in the world.

Southeast Asia is a major transshipment market in the world with all three shipping alliances having well-developed shipping service connectivity in the ports of Singapore, Port Klang and Tanjung Pelepas (Lam and Yap, 2008). However, the literature has not adequately addressed the issue of connectivity from the perspective of relationships between two ports. This will require investigation into the direction of ship routing as well as frequency of calls for the set of ports involved. Furthermore, network reorganization as a result of consolidation and changes in alliance memberships will trigger new dynamics in the container shipping scene. In view of the aforementioned events which took place in the liner industry, they warrant investigation into the impact these developments have on the container shipping and port landscape. As such, the paper aims to examine the impact of recent developments in alliance membership over the period from 2013 to 2017 on liner connectivity for each of these major container hubs for the Asia–Europe trade route. The paper is organized as follows. In the next section, we cover research efforts devoted to this subject. Section three presents the research methodology. In section four, we discuss the results of our analysis and implications from the managerial and policy perspectives. Section five concludes with recommendations for future research.

2. Literature review

Shipping lines engage in alliances to reap perceived strategic, commercial and operational objectives in a bid to gain an advantage over rival companies. Ryoo and Lee (2002) suggested that cooperative behavior could enhance network reach and frequency of connections compared to competing carriers. The capital intensive and highly competitive nature of container shipping line operations has resulted in a few shipping lines dominating the market (Chao, 2017). Lam (2013) observed from a supply chain perspective that shipping lines integrate their fleet capacity to realize economies linked to a larger cargo volume and lower unit cost of operation. The benefits of shipping alliances also included enhanced operational synergy and efficiency through the form of slot sharing and joint services (Evangelista and Morvillo, 1999; Ryoo and Thanopoulou, 1999), and Slack et al. (2002) noted that wider markets could be accessed through shipping alliances. Wen (2012) also observed that collaborative arrangements served to boost logistics capability and competitive advantage of shipping lines.

Nonetheless, container shipping alliances were found to be inherently unstable having seen structural changes over the years (Das, 2011). Rau and Spinler (2017) observed that the intensity of competition, cost of complexity of the alliance and volatility in freight rate led to alliance instability. Ferrari et al. (2008) highlighted that optimizing shipping networks could aid the success of shipping alliances, and Midoro and Pitto (2000) pointed out that stability and efficiency of shipping alliances could be strengthened with fewer partners with clear differentiating of roles and contributions, and through coordinating marketing and sales. Yang et al. (2011) also observed that the strategy of jointly using mega ships focusing on lowering unit costs for members would aid alliance stability.

On the issue of connectivity, shipping networks offer a practical avenue to determine, quantify and evaluate connectivity based on their origin–destination pairings of specific port nodes. A formal approach to capture parameters associated with connectivity was developed by Tang et al. (2011) which included trade volume, cargo traffic, port calls, port draft, port charges, turnaround time, operating hours and the factor of intermodal transport. Calatayud et al. (2017) emphasized that connectivity should be investigated and measured in relation to alternative routings that are deemed relevant in view of the dynamic nature of global trade movements and the way of response by shipping lines. These effects would determine the position of a port in the context of shipping networks and thereby reveal its connectivity. However, Lam and Yap (2011) found that establishing the presence of connectivity between two ports is not sufficient because it does not reveal the relationship between these ports. The relationship could be one of intense competition or complementarity depending on the nature of the trade network where the ports are intended to serve. Yap and Lam (2013) further highlighted that shipping connectivity is an important issue for countries that rely on shipping networks for direct market access to international trade. Toward this purpose, container ports that serve these countries would be required to have the necessary facilities to accommodate the shipping networks and associated shipping capacity.

The latest developments in the container shipping industry are unprecedented in their scales which affected all the major container trades involving more than 80 per cent of global container fleet capacity (Alphaliner, 2017a). The impact on connectivity as a result of these developments has not been addressed in the literature. As such, this paper attempts to investigate the impact of these developments in the context of the Asia–Europe trade route with a focus on the three container transshipment hubs in Southeast Asia. The investigation will also research into the dynamics of port competition and port complementarity between these ports through developments in shipping connectivity that are provided by shipping networks. The research will also attempt to shed light on important implications from the perspective of contestability, terminal investments and capacity development for port managers and policy makers.

3. Research methodology

The focus of the research is on the Asia–Europe container trade and the geographical region of Southeast Asia. Container ports selected for our research are the ports of Port Klang, Singapore and Tanjung Pelepas. We begin from the perspective that container shipping services that operate on the Asia–Europe trade route might be deployed to call at different ports, have different order of calls among the three ports and be alliance or non-alliance members. We use kz,q m to distinguish container shipping services with these different characteristics, where z determines if service k operates under the aegis of any shipping alliances, q denotes the order of calls by service k and m denotes the arrangements of the port-calls by service k. m, q and z values are determined as follows:

For instance, if service k is not an alliance member, on the Eastbound only, and calls at only Singapore port among these three ports, the notation will be k0,2 1. Empirical analysis of the results shall be made using the Venn diagram depicted in Figure 1. The triple helix distinguishes between the nature of those services identified that called at the selected ports including the port-of-rotation involved in the network as well as whether these were operated by shipping alliances or otherwise.

The proposed research framework is summarized in Figure 2. The research approach considered five differentiating factors to identify those sets of relevant services. The first differentiating factor is to identify those services that are plying on the Asia–Europe trade route. These services are distinguished by their port-of-calls to include a set of ports that are located in East Asia and another set of ports that are located in Europe. Container shipping services that ply on the Asia–Europe trade would include both sets of ports in the same service loop. The second differentiating factor is to determine if those services, that have been identified to operate on the Asia–Europe trade route, have been called at either of the three ports specified in our research. This step is necessary, as there could be shipping services that bypass all of the three ports for the trade route. Our interest is to identify those shipping services that are calling either at Singapore, Port Klang or Tanjung Pelepas. Having identified the relevant data set for the analysis, the third step is to determine the nature of service calls made. These are differentiated by those that consist of exclusive calls, which is for m = 1, 2 or 3 or those that consist of parallel calls made at two or more of the selected ports where m = 4, 5, 6 or 7. Analysis into the nature of the port call is important for revealing the dynamics of relationships between the three selected ports. Calls that were made solely at one port and not at any of the other two ports in relation to the shipping network operated by the carrier or members of a shipping alliance could be an indication of hub status for the former. In the case for parallel calls, ports which are included in the port-of-rotation would indicate higher priority in the service network. This information can be obtained by analyzing the ports of rotation for each service.

Having determined the nature of the service call, the fourth differentiating factor is to distinguish whether calls were made on an eastbound journey or a westbound journey or being made on both the head haul and back haul legs of the service. Head haul traffic would involve calls made on a westbound voyage (i.e. Asia–Europe) whereas eastbound voyages (i.e. Europe–Asia) would indicate back haul traffic in view of the location of the three container ports with respect to the flow of international trade on the route trade. Looking within the trade, the focus is on the head haul traffic which totaled 15.5 million TEUs in 2017 (UNCTAD, 2017, p. 12). This volume is twice that of the back haul traffic on the eastbound voyage at 7.6 million TEUs. Hence, a port which receives calls for only the westbound voyage could indicate higher priority in the shipping service network compared to a port which receives calls for only the eastbound voyage. Calls that were made on both legs of the service loop are denoted by q taking the value of “3” and could likely indicate hub status for the port with respect to the organization of the line’s shipping network. Names of the shipping services and shipping lines involved can be determined in the subsequent step. The services can also be differentiated into those that are operated as part of an alliance network which is denoted by z taking the value of “1” as opposed to those services that are operated independent of alliances which is denoted by z taking value of “0”. The results are analyzed in the final step which takes into consideration the characteristics of the shipping services identified in the research. Information for container shipping services was sourced from Containerisation International Yearbook 2013 (Informa plc, 2013) and Alphaliner (2017b). The analysis focused on the period lasting from year 2013 to 2017 to capture the recent developments that took place in the liner shipping industry with respect to alliance reshuffles and mergers and acquisitions.

4. Findings and implications

5. Conclusion and recommendations for future research

This is the first research effort to consider the impact from the recent round of alliance reshuffle which comprised a series of events that took place from year 2014 to 2017. In place of the G6 Alliance and CHKYE Alliance are three new shipping alliances which are the 2M Alliance, Ocean Alliance and The Alliance. The research methodology uses information for shipping services that are deployed on the Asia–Europe trade route and focused on the three major container transshipment hubs in Southeast Asia which are Singapore, Port Klang and Tanjung Pelepas. Results from the shipping scene in 2017 revealed that Singapore continued to be the main port of call. However, the number of dedicated calls at Port Klang and Tanjung Pelepas was significantly reduced. The dynamics of network design was also changed to one where Singapore was paired either with Tanjung Pelepas or Port Klang.

The research highlighted four implications from the managerial and policy perspectives. First, there was significant rationalization of shipping capacity. Should overcapacity persist, emphasis on commercial bottom lines and pursuit of operational efficiencies could see further rationalization. This development could be aided by structural instabilities especially for The Alliance which lagged considerably behind the 2M and Ocean Alliance in terms of fleet capacity and potentially higher coordination costs among member lines. As a result, the industry could evolve toward being dominated by two mega alliances with consequential rationalization of shipping service networks to one or two locations in Southeast Asia that offer the best financials and economics. Behavior of shipping lines in the new operating landscape also suggested that participation in an alliance arrangement could be an important strategy to compete successfully on the Asia–Europe trade route. Although majority of shipping services deployed on the Asia–Europe trade in 2013 that called at the three ports did not belong to any specific alliances, the situation in 2017 saw a reverse with 27 out of 31 services belonging to an alliance. Including two shipping services operated separately by different members of the Ocean Alliance would bring the total number of alliance-related services to 29. Hence, evidence from the research seemed to point toward alliance strategy as the way forward for container shipping lines to survive on the intensely competitive Asia–Europe trade route.

The results also revealed that terminal operators and port authorities will need to cater to the needs of the alliance and their associated subsidiary regional and feeder lines unlike the strategy of targeting specific lines or shipping service to anchor at the port. Hence, retaining the hub status would necessitate being useful especially to key members of an alliance to entrench the entities’ network in the port. This is made even more critical with most shipping lines and services operating under the aegis of shipping alliances. As a result, there will be implications for port managers and terminal operators in their berth allocation policies, policies for priority berthing and even policies involving selection of partners to enter into joint ventures. In the case for Singapore, its status as a hub for Ocean Alliance was strengthened by CMA CGM jointly investing with PSA to operate four container berths with an annual capacity of 4 million TEUs at the new Pasir Panjang Terminal (Woo, 2017). CMA CGM which used to hub at Port Klang, announced its commitment to hub at Singapore with more service calls following the acquisition of APL (Woo, 2015). In addition, PSA and COSCO announced a new joint venture agreement to replace the original two berths at Pasir Panjang Terminal 1 with three larger berths at the new Pasir Panjang Terminal 5 (The Straits Times, 2017b). The three berths will have an annual capacity of 3 million TEUs. More significantly, both joint venture terminals by PSA with CMA CGM and COSCO are located at the same terminal which is Pasir Panjang Terminal 5. By doing so, PSA could better cater to the needs of two key players of the Ocean Alliance and capitalize on efficiencies afforded by terminal operations in a single location. Similarly, while Maersk continued to call at its hub in Southeast Asia which is located at Tanjung Pelepas, the carrier dedicated a significant proportion of its calls in the region to include Singapore together with its alliance partner MSC. As such, there is the need to not only cater to the needs of MSC which has a joint venture terminal in Pasir Panjang Terminal 2 but also being able to handle services that are operated by the shipping line’s alliance partner Maersk. The analysis further notes that catering to the needs of mega alliances will require appropriate responses from the supply side and that the container-handling business is just one aspect the port needs to accommodate. There is competing usage demand from other sectors in the port industry. As such, the situation might necessitate redesign and relocation of container-handling facilities to account for the abovementioned developments. As a result, there will be implications for port managers and terminal operators in their berth allocation policies, policies for priority berthing and even policies involving selection of partners to enter into joint ventures.

The research addresses the gap in literature concerning the recent alliance reshuffle and its impact on the state of shipping connectivity using the case of the Asia–Europe trade route pertaining to key transshipment hubs in Southeast Asia. Because the research approach adopted considered the supply perspective through shipping services deployed at the various ports, future research could address perspectives drawn from other key trade routes and geographical regions as well as supply chain effects to provide a comprehensive understanding on the network dynamics in the new shipping landscape.