Transcript No Slide Title

SvitzerWijsmuller A/S and Adsteam Marine Ltd
Julie Bon
Adam Land
ACE conference
November 2007
Personal views,
not those of CC
Outline of talk
• Background
• Market definition
• Entry conditions
• Theories of harm
• Outcome and issues for discussion
The parties to the merger
• Global merger: UK only country where the two
companies’ activities overlap.
• Svitzer: 41 tugs in 7 UK ports. Owned by
APMM, the world’s largest shipping operator.
• Adsteam: 42 tugs in 6 UK ports. Significant
activities in Australia and Far East.
The parties’ UK harbour towage activities
Svitzer
Adsteam
Avonmouth
Belfast
Felixstowe
Greenock
Humber
Liverpool
Liverpool
Newport
Medway
Tees
Southampton
Tyneside
Thames Estuary
Outline of talk
• Background
• Market definition and market structure
• Entry conditions
• Theories of harm
• Outcome and issues for discussion
Geographic market definition
Demand side substitution?
• Costly to switch ports (eg fixed infrastructure)
• Harbour towage a small share of port-calling costs
• Changes in relative prices did not induce switching
Supply-side substitution?
• Costly (time and money) to move tugs between ports
• Parties’ ports not located close to each other
=> Each port is a separate economic market
Market structure
• Liverpool – Svitzer vs Adsteam
• Humber – Adsteam vs SMS
• All other ports – single operator only
Outline of talk
• Background
• Market definition and market structure
• Entry conditions
• Theories of harm
• Outcome and issues for discussion
History of entry in UK ports in last 15 years
• West Coast Towing. Entered Newport in 1993.
Financial problems. Acquired by Svitzer in 2001.
• BI tugs. Entered Medway in 1996. Exited in 1998.
• Murray Tugs. Entered Medway in 1999. Exited in
2000.
• SMS. Entered Humber in 2003. Vigorous response
from Adsteam. Still going.
Cost structure of harbour towage
• A minimum number of tugs is needed to
operate in each port
• High fixed costs per tug
• Labour as a quasi-fixed cost
• High legacy costs of incumbents
Steps needed to enter harbour towage market
1.
2.
3.
4.
Acquire a fleet of tugboats
Hire people to operate tugboats
Obtain permission to operate in port
Develop a customer base
 1–3 were not significant barriers
 We looked at entry models to see how
many customers were needed to enter.
Total costs and total revenue
Svitzer / RBB entry model: version 1.0
Fixed
costs
Total revenue at
current prices
More on this
from Andrea
Lofaro!
Profits
Total costs
for low-cost
operator
Losses
Break-even
point
Number of tug jobs
Market
size
Assessment of entry conditions
• Entry is possible but not easy
• Need to obtain and maintain substantial market
share in face of vigorous response
• Sustained inefficiencies of incumbents was
itself evidence of entry barriers
• Entry relatively more likely in larger UK ports
Outline of talk
• Background
• Market definition and market structure
• Entry conditions
• Theories of harm
• Outcome and issues for discussion
Theories of harm
• Loss of direct competition in Liverpool
• Loss of potential competition between the
parties outside Liverpool
• Raising barriers to entry
– Increased threat of retaliation in other UK ports
– Increased threat of retaliation in overseas ports
– Inability to attract APMM (“Maersk”) as a customer
• Maersk would receive preferential treatment in
Adsteam ports
Loss of direct competition in Liverpool (2 to 1)
Parties argued: threat of entry would keep prices down.
We found:
• Tariff rises generally lower in Liverpool than elsewhere
• Parties granted more discounts and generally higher
discounts from tariff in Liverpool than in other ports
• Entry in Medway and Humber had lowered prices.
=>Direct competition a stronger constraint on
prices than threat of entry. SLC in Liverpool.
TABLE 11 Results of the regression of Svitzer discounts over all ports
Discount
Coefficient
Standard
error
t-stat
Year (relative to year 2000)
Year 2001
Year 2002
Year 2003
Year 2004
Year 2005
Port (relative to Avonmouth)
Belfast
Forth
Greenock
Liverpool
SE Wales
Tees
Tyne
P>t
95% confidence
interval
Sorry
about
that!

Type of ship
Container ship
Number of ports used by customer
Number of tug jobs by the customer in
that port and year
Total number of tugs by the customer in
all Svitzer ports in that year
Relative importance of customer in terms
of number of tug jobs in the port*
Constant
Source: CC, based on Svitzer data.
*For each customer, port and year, this is equal to:
(number of tug jobs by the customer in that port) / (total number of tug jobs in the port) * 100
Notes: Number of observations: 985. Method of regression: OLS. R-square: 0.52. Statistically significant effects (at the 5 per
cent level) are given in bold. In Avonmouth and SE Wales, volumes are accounted for differently than in other ports and we
discounted these by one-third to make them comparable.
The other theories of harm
• Loss of potential competition between the
parties outside Liverpool?
Svitzer and Adsteam not most likely entrants. No SLC
• Raising barriers to entry
No material impact of merger on entry barriers.
Incentive or ability to foreclose missing. No SLC.
• Maersk would receive preferential treatment in
“Adsteam ports”.
Harbour master, not tug owner, calls the shots. No SLC.
Outline of talk
• Background
• Market definition and market structure
• Entry conditions
• Theories of harm
• Outcome and issues for discussion
Outcome
• Report published 9 Feb 2007.
• Svitzer required to divest either Adsteam or
Svitzer operations in Liverpool.
• CC could appoint divestiture trustee.
• But this was not necessary. Adsteam Liverpool
operations sold in March 2003.
Talking points
Theory of harm methodology
CC ended up at the ‘obvious’ answer, but had
worked through all the angles.
Analysis of potential competition
We found actual competition was stronger
constraint than threat of entry.
Entry models – and dialogue with advisers –
helped inform CC assessment of entry conditions.