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The shipping industry turns to megamergers to stay afloat

Cosco deal is the latest move spurred by deteriorating business conditions

TOKYO Less than a year after South Korea's Hanjin Shipping went bankrupt, consolidation among Asian marine shippers is gathering pace as business conditions continue to deteriorate.

On July 9, Cosco Shipping Holdings, parent of the world's fourth-largest container line, announced that it will acquire Hong Kong's Orient Overseas International, or OOIL, for 49.2 billion Hong Kong dollars ($6.3 billion). The deal will create the world's third-largest line, overtaking CMA CGM of France.

"By leveraging the strengths of each company and achieving synergies, the businesses will enhance their operating efficiencies and competitive positions to achieve sustainable growth in the long term," Cosco said in a statement. OOIL, which owns Orient Overseas Container Line, and Cosco have more than 400 vessels combined, according to the latter.

Cosco itself was formed last year through the merger of two Chinese state-owned players. Its appetite for further expansion is reflected in the premium it is paying for OOIL: The purchase price per share is 31% higher than the Hong Kong company's closing price the week before the deal was announced. CMA CGM and Evergreen Marine of Taiwan were apparently also interested in buying OOIL.

STRENGTH IN NUMBERS The Cosco deal is just one of several recent consolidations to hit the industry as it faces two trade-denting headwinds: the slowdown in China and a rise in digital commerce. The benchmark China Containerized Freight Index has remained below 1,000 since 2015. Last year, CMA CGM purchased Singapore's Neptune Orient Lines, while A.P. Moller-Maersk of Denmark purchased Germany's Hamburg Sud Group earlier this year. The industry slump is also what sent Hanjin Shipping into bankruptcy last August.

News of the latest consolidation came just a day before Japan's three container lines -- Nippon Yusen KK, Mitsui O.S.K. Lines and Kawasaki Kisen Kaisha -- held a press conference in Tokyo to unveil a joint business created by a merger of their container units under an agreement reached last October.

Ocean Network Express, or ONE, as the new company is called, was established on July 7 with initial capital of $200 million. It is headquartered in Singapore, with its holding company located in Japan. ONE will start service next April with some 240 ships. It is likely that most of the three companies' 10,000 employees will retain their jobs, though management did not elaborate on the possibility of staff cuts.

ONE is "big enough to survive, but small enough to care for its customers," said CEO Jeremy Nixon, formerly the head of Nippon Yusen's global container unit.

Based on data from Alphaliner, ONE's total capacity is about 1.42 million 20-foot equivalent units, or TEUs, making it the world's sixth-largest container line, with a roughly 7% share of the market. That is still less than half the size of the two largest companies -- Maersk and Mediterranean Shipping Co. of Switzerland.

The Japanese trio decided to merge their container units in hopes of operating more efficiently. Slashing costs is an urgent necessity: Nippon Yusen and Kawasaki Kisen logged net losses of 265 billion yen and 139 billion yen, respectively, for the year ended in March. The three companies expect their merger to save them a total of 110 billion yen ($976 million) a year.

Greater efficiency, however, is only part of the solution. To succeed, a company also needs a growth strategy that sets it apart from rivals. ONE had few details to offer on this front, providing no target numbers or financial goals at the press conference. All the company said was that it intends to distinguish itself through certain core strategies, such as offering IT-backed services, high levels of safety and environmentally friendly operations.

After the two latest deals, there are now seven megacarrier groups worldwide, each with over 1 million TEUs and collectively controlling some 75% of the global market.

Company executives at the Tokyo press conference sounded a cautious note. "The business environment will remain difficult for the container shipping industry," said one, while another described the market as "very competitive."

If their assessments prove accurate, the industry may soon see the emergence of mega-megacarriers as shipping lines -- lacking clear blueprints for growth -- continue to rely on consolidation to survive.

Nikkei staff writer Daisuke Harashima in Dalian contributed to this report.

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