May 2016 Editorial – Full Speed Ahead

The Competition Ordinance – Hong Kong’s anti-trust, or anti-monopoly, law which came into effect in December of last year – signifies an era of progressive policy targeting commercial behavior that “prevents, restricts or distorts competition” in a fashion similar to that of other developed economies around the world. As a matter of principle, it is long overdue, and competition is a critical component of driving a free and open economy forward.

The new law applies to nearly every business sector across the board and is good for Hong Kong overall in the sense that consumers will have a larger “say” in terms of choices and prices in a full range of products and services. And the rules should be enforced in the context of the regional or global circumstances – and it can be a tricky proposition because the law is locally confined but MNCs operate largely in the intertwined world of global business.

Essentially, it is a balancing act between the application of competition principles and the feasibility of Hong Kong’s industries that are largely tied to the global or regional operating environment. Take Hong Kong’s international trading and logistics industry, and in particular the liner shipping sector as an example – their common practice of Vessel Sharing Agreements (VSAs) and Voluntary Discussion Agreements (VDAs) would be deemed “anti-competitive” and a “contravention” of the Competition Ordinance.

VSAs (agreements between carriers for joint operation of vessels similar to code-sharing of airlines) and VDAs (exchange and review of market data and forecasts among carriers) are considered necessary to accomplish connectivity, frequency and efficiency in a cost-effective and stable manner for the world of global trade. They are a form of providing supply in just the right amount by pooling the overall demand for a sweet-spot of driving commerce and reducing the carbon footprint simultaneously.

The shipping industry is known to have relatively high fixed and operating costs, but it is less commonly known for a very slim margin of profits – and sometimes even financial losses. That’s because vessels in the liner shipping industry are required to sail a particular route whether or not there are a full load of cargo. The industry often depends on scale of economies in order to function properly and, more importantly, to keep services uninterruptedly – an enormous challenge in the highly volatile business environment of the past decade.

VSAs and VDAs are therefore crucial in allowing for operational sharing of slots on vessels and enabling carriers to provide fixed-day sailing on a regular schedule without subjecting charging rates to severe fluctuation. And only by granting an exemption known as a Bock Exemption Order under the Competition Ordinance for VSAs can Hong Kong sustain the liner shipping industry.

While different jurisdictions have taken different approaches to the issue of VDAs because of its contentious nature, whether the Competition Commission decides to include VDAs in the block exemption is a decision which needs to take into account the industry as a whole. Block exemptions for VSAs and VDAs can be found in jurisdictions across the Pacific Rim, including Singapore which has recently extended an exemption to 2020.

The industry has evolved over time and transshipment now represents the largest source of business for the industry as a whole, however transshipment activities can be easily relocated. The decision on the exemption order must therefore include serious consideration of whether relocation of transshipment activities to other transshipment hubs is a potential consequence.

Without VSAs, it is highly likely that transshipment cargo through Hong Kong will move quickly to alternative ports, thereby reducing the number of vessel calls in local ports and possibly replacing Hong Kong’s role as a shipping and transshipment hub to a large extent. This means Hong Kong would no longer be able to compete in one of the pillar industries – a pillar industry which accounts for nearly a quarter of Hong Kong’s GDP and is directly linked to the livelihood of 88,000 local families.

An exemption order for VSAs is critical in enabling trade and is an urgent matter supporting Hong Kong’s status of being a world-class port and an international maritime logistics hub. It will enhance the overall economic efficiency without compromising competition, benefit customers simply because of more service options and greater carrier choices, and uphold the viability of an industry which has made Hong Kong so proud.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s