Vertical Integration in the Maritime Industry: Container Shipping Line Investment in Ports and Terminals

Abstract

The container liner shipping industry is experiencing a very challenging phase. The market has not ever recovered from the Financial Crisis of 2008 and further stuck by the new fuel requirements, trade friction and pandemic in 2020. Shipping lines, confronting the market downturn, are expanding their service coverage via vertical integration to get involved in terminal operation industry. Motivated by these empirical insights and the lack of conclusive evidence in the literature, this thesis is targeted to investigate the impacts of vertical integration in the context of container liner shipping industry between shipping lines and terminal operators. Based on an extensive literature review, it is found that vertical integration usually is beneficial to the integrated company. At the same time, its impacts on the end customers and the whole market is ambiguous. To safeguard the interests of different stakeholders, it is necessary to discuss how vertical integration would influence on the social welfare and competition, considering the features of container liner shipping industry. The thesis' contribution to this research field is threefold. Firstly, the thesis develops an analytical economic model that incorporates port authority, terminal operator and shipping lines. The analysis suggests that vertical integration between the terminal operator and a shipping line leads to a higher port capacity, port charge, market output, consumer surplus and social welfare. It could also alleviate the congestion in ports. Secondly, the thesis uses collected data to compare vertically integrated ports with non-integrated ports. With the world top 100 ports data, a series of statistical tests are conducted to prove that vertical integration indeed has positive correlations with port throughput and size. Then, it is found that vertically integrated ports' efficiency is inferior to not integrated ports. The comparative bigger capacity and lower efficiency could be attributed to the aggravated overcapacity problem introduced by the lumpy investment in the port industry. Thirdly, the thesis investigates how would vertical integration impacts business decisions from the perspective of shipping lines. By collecting shipping lines' routes serving East Asia, it is confirmed that shipping lines prefer to call at affiliated ports that are directly integrated by themselves or indirectly via their alliance partners. In addition to the impacts of vertical integration, shipping lines' spatial entry pattern in the East Asia market is studied