Scholarly article on topic 'An Analysis of Market Concentration in the Korean Liner Shipping Industry'

An Analysis of Market Concentration in the Korean Liner Shipping Industry Academic research paper on "Social and economic geography"

CC BY-NC-ND
0
0
Share paper
Keywords
{"Korean Shipping Industry" / "Economies of Scale" / "Market Concentration Ratio (CR4)" / "the HH index"}

Abstract of research paper on Social and economic geography, author of scientific article — Yeong-seok Ha, Jung-soo Seo

Abstract Korean shipping companies have seriously contemplated on pursuing economies of scale in order to tap the potential that Korea can generate for the seaborne cargo volume and fleet capacity, despite of latent pros and cons associated with the economies of scale. This paper shows the concentration ratio of the top four liner shipping companies in Korea is well below that of the global counterpart. Additionally, the changes of CR4 between 1992 and 2004 indicate the Korean shipping market has become more competitive and less concentrated. The HH index that has been lowered over the same period also supports the same finding. In contrast, the global liner industry showed its market concentration ratio and the HH index increasing during the corresponding period.

Academic research paper on topic "An Analysis of Market Concentration in the Korean Liner Shipping Industry"

The Asian Journal of Shipping and Logistics «Volume 29 Number 2 August 2013 pp. 249-266 •

An Analysis of Market Concentration in the Korean Liner Shipping Industry*

Yeong-seokHA** • Jung-soo SEO***

Contents =■

I . Introduction III. Market Concentrations in the

II. Theoretical Backgrounds of Korean Liner Shipping Industry

Dynamics of Shipping Market IV. Concluding Remarks

Abstract

Korean shipping companies have seriously contemplated on pursuing economies of scale in order to tap the potential that Korea can generate for the seaborne cargo volume and fleet capacity, despite of latent pros and cons associated with the economies of scale. This paper shows the concentration ratio of the top four liner shipping companies in Korea is well below that of the global counterpart. Additionally, the changes of CR4 between 1992 and 2004 indicate the Korean shipping market has become more competitive and less concentrated. The HH index that has been lowered over the same period also supports the same finding. In contrast, the global liner industry showed its market concentration ratio and the HH index increasing during the corresponding period.

Key Words : Korean Shipping Industry, Economies of Scale, Market Concentration Ratio (CR4), the HH index

Copyright ©2013, The Korean Association of Shipping and Logistics, Inc. Production and hosting by Elsevier B.V.

All rights Reserved. Peer review under responsibility ofthe Korean Association of Shipping and Logistics, Inc.

* This paper is revised version of an earlier paper presented at ICASL 2013, Yeosu, Korea, on 9-10 July, 2012. The authors are gratelul for Professor Chin-san Liu and anonymous reviewers for their helplul comments.

** Professor at Department oflnternational Commerce, Keimyung University, Korea, Email: hysok@kmu.ac.kr

*** Assistant Professor at Department oflnternational Commerce, Keimyung University, Korea, Email: jsseo07@kmu.ac.kr (corresponding author)

I. Introduction

The recently unfold global financial crisis begun in the US and spread all over the world since September 2008 pulled the global economy into a deep recessionary trap. Although there has been heterogeneity in growth rates by the regions the global economy has contracted almost simultaneously. World GDP has shrunk by 1.9% in 2009, the first time since the Great Depression in the 1930s. However, more notable during this period was the collapse of trade due to over-reacting to the great recession of the global economy. In 2009, world trade recorded the sharpest decline in 70 years, creating the 'great trade collapse'.1} In fact, world's exports and imports have contracted in 2009 by 13.7% and 13.1%, respectively which was equivalent to 12.7% of the world output in 2007. The reasons behind the great trade collapse were arguably due to the effects of fragmentation and global outsourcing, i.e. offshoring, combined with the composition and the bullwhip effects.2)

Ups and downs of maritime industry critically hinge on the development of international trade and thus on world economic growth although there could be differences among regions and the types of cargo handling. Therefore, the great trade collapse has created an unprecedented difficulty for the global shipping industry,3) as well as for Korean shipping industry.4) Global maritime industry, especially shipping industry, has been experiencing a high level of competition partly because ofmuch progressed deregulation and liberalization of the industry and also because of the emerging overcapacity of the fleet, conspicuously in the container liner shipping. Shipping companies pursued economies of scale with a view to achieving efficiency and staying afloat, in terms of vessel size and firms' operation,5) as well as through mergers and acquisitions (M&As) as seen in the Japanese case study of NYK & Show Line and OSK & Navix Line.6)

The Korean shipping industry has already experienced twice the industry rationalization in the 1980s and restructuring during the 1997-1999 period of the Asian financial crisis due to weak competitiveness of Korean shipping companies. The relatively smaller scale of Korean shipping and logistic

1) WTO(2011); UNCTAD 2011a).

2) Orefice and Rocha(2011).

3)UNCTAD(2011b).

4)Ha(2012).

5) UNESCAP(1999); UNCTAD(2011b).

6) Choi and Yoshida(2013).

companies brought about weakening the competitive advantage.7) Therefore, it seems imperative for the Korean shipping and logistics companies to achieve economies of scale, equivalent to the potential that Korea can generate for its freight volume in the global market.8) Korea's logistics potentials are ranked high. For example, Korea's fleet capacity is within the world's top five in 2010 with 44.4 million DWT, accounting for 3.7% of the world fleet capacity. In terms of container cargo volume, Korea took the market share of 3.5% with 16.34 million TEU in the same year and ranked at the 6th position among the world total container volume of 470.63 million TEU.9) In the midst of the global financial crisis, therefore, the great trade collapse created the Korean shipping companies a big challenge associated with the depressed freight rate. Currently, BDI (Baltic Exchange Dry Index) hovers around 2000 - 4000 after plummeting it to 663 points in December 5, 2008 from its peak of 11, 793 points in May 20, 2008.

In general, realizing economies of scale for a firm in an industry has two aspects. The positive facet is the economies of scale being considered as one of bases for the firm's competitiveness in the industry (Porter, 1999), and it eventually lowers freight rate, thus benefiting exporters, importers and consumers.10) Whereas, the economies of scale is often considered to be a negative feature in the sense that it may create an inefficiency in the resource allocation embedded in a less than perfect market structure such as oligopolistic market structures.

There is a stock ofthe relevant literature available on the economies ofscale and the measures for the container liner shipping industry. The relationship between capacity and market share in liner shipping as well as its impact on liner shipping companies' performance was investigated by using an empirical data set covering 1997 to 2008.U) However, the research of Yip et al. (2012) remains to merely describing internal and external characteristics of large liner shipping companies as basic parameters ofthe S-curve. Achieving economies of scale and thus an expansion of firm size is one ofthe major forces which enable the liner shipping companies to remain competitive in a dynamic operating environment.12) It is because large sized operations facilitate cost

7) Ha and Seo(2011).

8) Kim(2012).

9) Ha and Seo(2011), p. 7

10)UNESCAP(1999).

11)Yipetal.(2012).

12)Lunetal.(2010).

efficiency over high production volume.13) A large scale of operation adds another form of potential competitive advantage by placing companies in a better position of deterring new entrants from entering into the market14) and thus effectively enables the companies to survive and prosper in the industry they are operating in. The market concentration in container liner shipping industry was also investigated by using the market concentration index k, i.e. Concentration Ratio (CR&) and the Hirshman-Herfindahl Index (HHI).15) It was found that the container liner industry was highly concentrated and that the industry revealed, at least in a soft sense, an oligopolistic market structure. These findings were attributed to the consolidation of the industry since 1995 through mergers and acquisitions (M&As). However, no efforts have ever been made to investigate at the market concentration ofKorea's liner shipping industry. Therefore, this paper will be the first attempt to calculate the market concentration of the industry and shed light on to it in comparison with the global concentration index for the liner shipping industry.

The remaining part of the paper is organized as following. Section II provides some theoretical backgrounds of the concept of economies of scale and highlights the dynamics of freight rate, entry and exit by assuming a minimum efficiency scale on the presumption that Korea's shipping industry is a contestable shipping market from the global market perspective. In fact, the Korean shipping industry faces a constant threat of market entry. In Section III, we use the Market Concentration Ratio (CR) and Hirshman-Herfindahl Index (HHI) to show the extent to which the market is concentrated in Korea's liner shipping industry. The derived index will be compared with those derived from the global (market) concentration index and the HHI to investigate if the Korean market is more or less concentrated than the global counterpart. Section IV concludes the paper with some policy implications.

II. Theoretical Backgrounds of Dynamics of Shipping Market

Korean shipping industry is laid under constant threats of market entrance by foreign shipping companies and also by domestic latent competitors, thus operating at the minimum average costs, in terms of its pricing, rather

13) Dobrev and Carroll(2003).

14)Porter(1999); Lai(2004).

15) Winter(2000); Sys(2008); Kim(2011).

than marginal cost pricing. Therefore, the Korean shipping market becomes a psewdo-contestable market in a sense. Furthermore, given such a market structure, shipping companies in Korea are assumed to be price takers, indicating that they are almost deprived of market power of setting their freight rates and thus that the freight rate is set almost externally, which could be higher or lower than the minimum of Korean companies' average costs for shipping.

It is also assumed that Korean shipping companies wish to operate at the minimum efficient scale which is set at the point generating the lowest average production cost, that is, S0 TEU as shown in the figure 1 below. It shows that the average cost curve falls at an initial stage until it reaches the minimum before it starts rising again when diseconomies of scale kicks in. The long run average cost (AC) curve is an envelope of a series of short run average cost curve whenever a new ship is added onto the existing capacity, thus shifting each time its short-run average cost curve, provided a sufficient demand.16)

<Figure 1> Average cost and freight rate in a contestable shipping market

When international freight rate (as marginal revenues per TEU) is set at f0, which precisely equals to the minimum of the average cost curve, the

16) Button(1993), pp. 69-70; Boyer(1997), p. 202; Yip et al.(2012).

company operating at the minimum efficiency scale, S0, earns zero profit, as long as the company remains in the industry and will wait for the global shipping industry booming again. In this case, total revenues that the shipping company earns should match with what it incurs in terms of the production costs.

During the boom time of the shipping industry, however, freight rate rises usually because the supply of vessels is fixed in the short run and the supply of new vessels by construction takes long, at least approximately two years of waiting time on the ship builders' order books, depending on the types of vessels. Therefore, booms in the global shipping industry set higher the freight rate at f^ The company still operating at the minimum efficiency scale S0 earns Rj (= fx *S0) of the revenues which exceeds the total production cost, Q (=ACi *S 0), making substantial positive profits.

Such positive profits triggers new entrants into the Korean shipping market and these new entrants have a much smaller scale of operation and therefore bear usually a higher average cost of production, with AC1 and MC1, than the incumbent companies in the market.

<Figure 2> An entry in the contestable Korean shipping market

The new entrants often start operating with one or only smaller number

of vessels. In case, the newly entered company produces at S4 capacity the company still make positive profits, and only when the production level reaches S5, then the total cost of production equals the total revenues, yielding zero profit.

These domestic entrants survive in the market usually during the booming period even though they operate vessels with a higher level of the average cost than the incumbent ones because of the freight rate set so high above the minimum average costs of production. Incumbent shipping companies do not want to get upset with these new entrants because they earn greater profits with a substantial market share. However, soon will they realize that the incumbent firms can't operate at their minimum efficient scale level of production, unless the volume of freight increases, pari passu. In this case, the incumbent shipping companies see or experience their profits falling subsequently because the AC is higher at the lower freight volume than at the minimum efficient scale volume.

The situation aggravates for at least three factors or for the combination of those factors. Firstly, international oil price rises dramatically, as recently observed, because bunker fuel and diesel are still predominant sources for vessels power, irrespective of numerous green and sustainable development efforts in international shipping and transportation industries. So, rising fuel cost will apparently raise the average cost of production for shipping companies in the world, not to mention in Korea, although the extent to which it exerts its influence on each individual shipping company may vary. Provided that the freight rate stays constant, rising fuel prices will exacerbate the companies' management conditions and subsequently their profits, driving many shipping companies into bankruptcy or an extreme financial difficulty to stay afloat. In fact, the shipping market fluctuates frequently such that liner shipping companies encounter a serious competition and under-utilization of fleet capacity, resulting in lower profits, and at other times a shortage of the supply of shipping capacity allow them to charge a higher freight rate, leading a higher profit.17)

Secondly, it is scale economies following an introduction of bigger scale vessels for liner shipping and tramp shipping purposes. The larger the operating vessel, the larger the minimum efficient scale of operation becomes. This scale economy effect drives down the global freight rate. As price takers in the shipping market, the Korean shipping companies cannot help but accept this freight rate, which worsens management conditions and lowers the profits for the Korean shipping company.

17)Lunetal.(2010).

Thirdly, if the volume of cargo shipment shrinks, following the contraction of global economic situation, as observed during the recent economic crises, global shipping companies will bid down the freight rate in order to secure their volume oftransportation freight. Those price takers like Korean shipping companies, incumbent and new, will encounter a tough time ahead.

It is believed that in the current global shipping market a combination of the above mentioned three factors are marching simultaneously, creating almost an unbearable pressure on many of the Korea shipping companies. In fact, in addition to those factors mentioned above also identified was that fleeing of investment fund from the forward freight agreement and a complex vessel charter and sub-chartering chain exacerbated the difficulties during the global financial period in Korea.18) While the first and third factors are completely external, the second factor may be plausibly addressed with a proper policy setting and industrial restructurings.

III. Market Concentrations in the Korean Liner Shipping Industry

Efforts for scaling up shipping companies have been pursued in two directions twice in Korean shipping industry. These efforts were the outcomes of voluntary and also government-led deliberate efforts to help ailing Korean shipping industries during the 1980s and also during the Asian financial crisis period of 1997 -1999.

The first direction taken was apparently scaling up of the vessels size, as seen in Table 1. For example, in 1981 Korea's total fleet amounted approximately to 6.1 million GT with 554 vessels. Out of these vessels 83 vessels with 1.4 million GT were of BBC/PO and purely Korean owned ones were 471 vessels with roughly 4.7 million GT, resulting in on average 17300 GT and 9900 GT, respectively. The fleet has rapidly grown such that as of 2010 there were 933 vessels in total with 27.8 million GT.

During this period the number of vessels has grown by 68% and the gross tonnage has more rapidly increased by 355%. Thus, the average vessel tonnage has expanded to 29,800 GT in 2010 from 11,000 GT in 1981. However, such a growth is unevenly distributed if we classify it into pure Korean owned versus BBC/PO vessels. In terms of the number of vessels the former has shown a growth to 600 vessels in 2010 from 471 vessels in 1981, thus representing a growth rate of roughly 27 % over the period. In terms of GT, it has grown by almost 135%, from 4.7 million GT to approximately 10.9

18)Ha(2012),pp. 6-7.

million GT between 1981 and 2010. These two contrasting pictures in the growth of the number of vessels and also of the gross tonnage indicate that the vessel's average size has grown over the years. In the case ofBBC/PO, the number of vessels has increased from 83 in 1981 to 333 in 2010, showing the growth of301% while the gross tonnage has expanded from 1.4 million GT in 1981 to 16.9 million GT in 2010 with the growth of over 1070% in the same period.

<Table 1> Trends ofthe fleet in Korea (1981-2010)

Year Total Fleet BBC/PO Fleet

Gross Tonnage No. of Vessels GT No. of Vessels

1981 6116 554 1439 83

1982 6757 562 1197 62

1983 7011 568 1003 59

1984 7303 547 1036 57

1985 7145 495 956 48

1986 7415 454 1517 59

1987 7512 434 1650 57

1988 8306 429 1730 49

1989 8280 426 1595 40

1990 9029 430 2404 47

1991 8905 417 2333 44

1992 8956 394 2912 64

1993 8874 373 3178 70

1994 9715 369 4027 85

1995 10537 372 5138 104

1996 11704 396 5359 111

1997 11533 393 6152 145

1998 11545 387 6439 139

1999 11128 396 7046 166

2000 11857 425 7977 187

2001 12184 429 7877 188

2002 11788 422 6318 150

2003 11174 420 7229 172

2004 12611 491 8159 192

2005 13717 546 9068 220

2006 15237 612 10156 245

2007 18038 718 10649 263

2008 22397 828 9960 221

2009 23737 861 12787 272

2010 27839 933 16901 333

Source : Korea Ship Owners Association, Maritime Yearbook, Various Issues & KMI, Maritime Statistical Yearbook, various issues. (Recited from Ha, 2012, p. 8).

<Figure 3> The share ofBBC/PO in the Korean fleet

Source : Authors' own calculation by using the data in <Table 1> above.

As a result, the share ofBBC/PO vessels out of Korea's total fleet increased continuously since 1985 till the Asian financial crisis period of 1997 both in gross tonnage and in vessel numbers (See Figure 1). The corresponding figures were 13.4% in 1985 to 67.3% in 1999 for the gross tonnage and 9.7% to 44.0% for the number ofvessels (Figure 3).

The second direction was rationalizing the industry such that financially ailing shipping companies have been rescued by government efforts and/ or amalgamated to form bigger shipping companies. In 1981, for example, 68 shipping companies were operating in Korea, putting a substantially downward pressure on the freight rate. Mushrooming shipping companies back then in Korea was closely related with the government's deliberate efforts to increase the performance of national fleet in carrying seaborne trade.19) In confronting a slowdown of the global maritime industry after the second oil price shock, coupled with the industry's insurmountable amount of debt of 2,774 billion won, the Korean government declared in December

1984 the Shipping Rationalization Plan and trimmed it down to 20 or so

companies.

Although the industry in Korea has recovered its viability a few years after the Shipping Rationalization Plan, the international shipping environment has turned further competitive due to the liberalization efforts and deregulations of the maritime industry overall. Subsequently, Korea's cargo preference system and designated cargo system were laid under the constant threat of

19) UNESCAP(1999), p. 85.

20)Ha(2012),p. 4.

abolishment in the midst of international trade liberalization efforts. In fact, the waiver system has been abolished for liner shipping in 1995 before Korea was admitted to OECD and the delayed designated cargo preference system for tramp shipping of crude oil, iron ore and LNG was also completely abolished by the end of 1998.21) With the onset of the Asian financial crisis Korean shipping companies were placed under another restructuring plan due to the fact that they used to purchase vessels with only 10 - 20% of own capital while for the remaining they relied on the borrowed foreign capital. This time, however, took the measures wherein the shipping companies sold their basic operational asset of vessels. In fact, 86 vessels in total were sold while initiating such other forms of various restructuring efforts as laying workers off, shutting down branch office, etc.22)

<Table 2> shows the market shares of Korean liner shipping companies in the total maritime revenues between 1992 and 2004. Hanjin Shipping occupied the top position in the respective period. And Hanjin's market share has slightly increased to 25.3% in 2004, from 24.5% in 1992. However, all other Korean liner shipping companies experienced lowering their market shares or completely exited from the industry, like Choyang Shipping. The second position was taken by Hyundai Merchant Marine with a marginal change in its' market share in this period: 21.1%in 1992 versus 20.9% in 2004.

<Table 2> Concentrations of Korean liner shipping companies

2004 Share Concentration Ratio 1992 Share Concentration Ratio

Hanjin 25.3% 50.3% Hanjin 24.5% 59.9%

Hyundai 20.9% Hyundai 21.1%

Heung-A 2.2% Choyang 11.1%

Korea 2.0% Heung-A 3.2%

Dongnama 1.8% 54.5% Dongnama 2.4% 63.7%

Sinokor 1.4% Namsung 0.6%

Nam Sung 0.7% Dong Young 0.3%

Dong Young 0.4% Chun Kyung 0.6%

Chun Kyung 0.4% Pan Continental 0.3%

Pan Continental 0.3%

HH Index 0.1089 0.1185

Source : Authors own calculation based on the original data of revenues, Consolidated Income Statement, 2004 & 1992, obtainedfromKoreaShipowners' Association.

21) UNESCAP(1999).

22) Lee(2009),pp. 129-150.

Also presented in the table are the Concentration Ratios (CR) of the top 4 liner

shipping companies in the respective year. CR4 is calculated as ^ (si ), where si

the market share of the top i-th company. Over the years, if the CR4 increases, it means lack ofcompetition, and vice versa. CR4 ofKorea in this period shows that market concentration has declined significantly, from almost 60% in 1992 to slightly more 50% in 2004, lowering it by 9.1%. Considering that none of the liner shipping companies in Korea has increased its market share, thus indicating competition among the Korean liner shipping companies has got severely intensified.

Unfortunately, no exactly comparable market concentration ratio is available calculated from using the liner shipping companies' revenues. However, presented below in <Table 3> is the market concentration ratios of world's top 4 container liner shipping companies measured in terms of the volume of freight handled by the industry during the period of 1996 to 2007 in which APM -Maersk, Mediterranean Shipping Co., CMA CGM Group, Evergreen Group and Hapag-Lloyd were the top 5 liner operators in 2007.23) According to the same table CR4 has increased substantially during the period presented: Out of the whole liner shipping companies, CR4 has enlarged from 28.41% in 2000 to 38.73% in 2007. The concentration becomes more distinctive when world's top 20 liner shipping companies are compared. For example, CR4 in 1996 was almost 35% which has dramatically increased to approximately 48% by 2007.

<Table 3> Concentration of Top 4 liner companies in the World

1996 2000 2005 2007

Liner Total 28.41% 30.92% 38.73%

Top 100 22.76% 30.37% 32.84% 40.91%

Top 25 31.99% 38.06% 38.03% 45.96%

Top 20 34.99% 41.36% 40.54% 47.66%

Source : Obtained from Sys (2009), from Table 2, p. 5

The contrasting development between Korea and the world of market concentration implies that the global liner shipping industry has been increasingly handled by an oligopolistic market structure. These top

23) Sys( 2009), Table 1,P.4.

performing companies got bigger and bigger over time in order to achieve its economies of scale. On the contrary the market structure in Korea has become more competitive and thus smaller in size, relative to the global shipping companies. In fact, the average revenues of Korea's top 2 shipping companies were U$ 5,692 million in 200724) while the average revenues of global top 4 companies in the same year amounted to U$15,999 million. The latter is over 2.8 times bigger than the Korean counterpart, and thus the Korean shipping companies were only slightly over 1/3 of the global shipping companies in terms of revenues. At the same time, it should be also noted that the relative size of top five Korean integrated logistics companies was mere 6.5% of the global top 5 counterparts with the average revenues of U$l,428 million versus U$22,138 million in 2007.25)

A similar effort has also been made by calculating the Hershman-Herfindahl Index (HHI) of the liner shipping companies in Korea for the respective year.

The HHI is the sum ofmarket shares ofeach company such that ^ sf , where

sz is the market share of the i-th company in the industry. According to Guidelines for Horizontal Mergers issued by the US Department of Justice and the Federal Trade Commission, the HHI lying below 0.15 indicates the market is unconcentrated, i.e. a competitive market structure, if between 0.15 and 0.25, it being moderately concentrated. Should the HHI exceed 0.25, the industry is considered to be highly concentrated.

In the respective years of 1992 and 2004, Korean liner shipping industry had the HHI of 0.1185 and 0.1089. Not only does it indicate that the industry in Korea was an unconcentrated and competitive market, the competition has in fact increased in the market. In a similar vein, the HHI for the global container liner shipping industry were obtained from Sys (2009) and presented below in <Table 4>. Clearly observable in the table is that the HHI has increased between 1996 and 2007. The HHI in 2000 for the total container liner shipping companies were 0.0363, and it has increased to 0.0579 in 2007. The HHI for the top 25 container liner shipping companies showed higher index values over the period: 0.0512 in 1996, 0.0640 in 2000, which has increased to 0.0813 by 2007. Despite the trend of the HHI increase, the global container liner shipping industry is believed to be unconcentrated and

24)HaandSeo(2011).

25) HaandSeo(2011),p.5.

thus demonstrates a highly competitive market structure, similar to what has also been observed for Korea.

<Table 4> HHI of World container liner shipping industry

1996 2000 2005 2007

Liner Total 0.0363 0.0420 0.0579

Top 100 0.0274 0.0415 0.0474 0.0646

Top 25 0.0512 0.0640 0.0631 0.0813

Source : Obtained from Sys (2009), Table 6, p. 9

A comparison of the HHI for Korea with that of the global container liner shipping industry suggests for two interesting findings. The first is that the Korean liner shipping industry showed a higher value of the HHI than the global industry situation. The other is the HHI in Korea has declined over the years while the HHI for the global liner shipping industry has increased, thus the two having moved an opposite direction. That is, the Korean liner shipping market has become more competitive while the global market has become less competitive although the overall market characteristics remained unconcentrated and competitive.

<Table 5> Performance ofnational fleet in container cargo handling in Korea

Year Excluding Transshipment Total

Foreign Flag National Flag Foreign Flag National Flag

2000 82.2% 17.8% 82.2% 17.8%

2001 81.6% 18.4% 81.4% 18.6%

2002 80.7% 19.3% 80.2% 19.8%

2003 82.2% 17.8% 81.6% 18.4%

2004 82.6% 17.4% 82.5% 17.5%

2005 81.6% 18.4% 81.3% 18.7%

2006 81.9% 18.1% 81.9% 18.1%

2007 82.9% 17.1% 82.6% 17.4%

2008 83.1% 16.9% 82.4% 17.6%

2009 82.9% 17.1% 82.0% 18.0%

2010 84.9% 15.1% 84.3% 15.7%

Source : Calculated from the database obtained from Ministry of Land, Transportation and Maritime Affairs, Korea.

These two seemingly contrasting pictures of market concentration between in Korea and in the world implies that the Korean government's efforts for restructuring the Korean shipping industry has been focusing on deregulation and liberalization, thus improving efficiency by allowing global shipping companies to enter the Korean market. This can also be clearly observed in <Table 5>, which represents a trend of the performance of Korean national fleet in seaborne liner container cargo handling for 2000-2010. Throughout the entire period, except 2005-6, the share of the seaborne liner container cargo handled by foreign flag has been steadily increasing while that of Korean national flag were persistently falling, irrespective of the including or excluding transshipping liner container cargo volumes. That is, the share of that seaborne cargo volume handled by the Korean national flag liner shipping companies has declined from around 18% in 2000 to approximately 15% in 2010.

IV. Concluding Remarks

Facing a recessionary outlook for the global economy ensuing from the global financial crisis world trade has experienced in 2009 the so-called 'great trade collapse' in 70 years time. It is well known that maritime industry generally critically hinges on the performance of global trade and thus eventually the world economy and that shipping industry, especially liner shipping industry, in the world encounters an extremely difficult business environment. The situation has deteriorated since overcapacity in the global shipping industry has emerged and thus continued to exert persistently an ailing downward pressure on international freight rates and thus overall management of the shipping companies, liner and tramping. Pursuing economies of scale by the liner shipping companies is not a new phenomenon. Instead, it was a chosen strategy for global liner shipping companies in order to survive in a highly competitive shipping market condition. Scale economy was believed to give a competitive advantage to the liner shipping companies by reducing the average cost of shipping service.

Amidst some concerns over the economies of scale regarding market structure and subsequently ensuing economic inefficiency issues it seemed

almost inevitable for Korea's liner shipping industry to pursue an scale economy. It was envisaged it becoming a globally leading logistics and shipping industry. Contrast to the potential that Korea can generates for its seaborne cargo volume and fleet capacity the size of Korea's shipping industry measured in revenue terms seemed much smaller than the globally leading shipping and logistics companies: 1/3 and less than 7% of the sizes respectively in 2007.

An additional effort has been made to investigate the market concentration in the Korea's liner shipping industry. Concentration ratio of the top four companies, i.e. CR4 and the Hirschman-Herfindahl Index (HHI) were calculated. CR4 of the Korea's liner shipping industry showed that the market share of the four largest liner shipping companies has declined between 1992 and 2004 in Korea. This movement of CR4 indicates that the concentration ratio in Korea was much smaller than that of the global market, and it also indicates that the Korean liner shipping industry has been laid in an increasingly more competitive environment, as reflected in the declined CR4 values during the period. Although the market structure measured by the HHI showed a higher value for Korea's liner shipping industry than that of global counterpart, both Korean and global liner shipping markets are assessed still an unconcentrated and highly competitive business environment, due to the persistent deregulation and liberalization efforts at a global scale.

This set of the findings in the paper auger well for the efforts made by the liner shipping companies and also by the Korean government in pursuing economies of scale in terms of vessels size and operations. It reveals that although the global shipping market consolidated through mergers and acquisitions (M&As) and strategic alliances it still remains highly competitive on the contrary to the concern expressed over the dominant market power and innate economic inefficiency issues.*

* Date ofContribution ; February 28, 2013 Date of Acceptance ; August 1, 2013

References

BOYER, K. D. (1997), Principles of Transportation Economics, New York: Addison-Wesley.

BUTTON, K. (1993), Transport Economics, Aldershot: EdwardElgar.

CHOI, N. Y. H. and YOSHIDA, S. (2013), "Evaluation of M&A effects in Japanese shipping companies: Case study of NYK Showa Line and OSK & Navix Line," The Asian Journal of Shipping and Logistics, Vol. 29. No. 1, pp.23-42

DOBREV, S. D. and CARROLL, G. R. (2003), "Size (and competition) among organizations : Modeling scale-based among automobile producers in four major countries 1885-1981," Strategic Management Journal, Vol. 24, No. 6, pp. 541-558.

HA, Y. S. (2012), "Comparative analysis on the resolution of crisis-relief for the shipping Industry in Korea- in the Cases of Shipping Rationalization Plan, IMF bailout an global crisis," The Journal of Shipping and Logistics, Vol. 28 No. 2, pp. 1-16. (Korean)

HA, Y. S. and HAN, J. G. (2009), "Policy measure of sustainable growth for shipping industry," The Journal of Shipping and Logistics, Vol. 26, No. 4, pp. 1007-1025. (Korean)

HA, Y. S. and SEO, J. S. (2011), "Global financial crisis, world trade and Asian shipping industry : Challenges and prospect," A paper presented at the 51st Conference of Association of Shipping and Logistics, November 4, Seogang University, Korea.

KIM, H. S. (2012), "A note on globalization strategy for Korea's logistics companies," Korea Logistics News. April 24. (Newspaper column; Korean)

KIM, T. I. (2011), "A study on the degree of concentration in the container shipping Market," Shipping and Management, Vol. 7, No. 25, pp. 8-23. (Korean)

LAI, K. H. (2004), "Service capability and performance of logistics service providers," Transportation Research Part E., Vol. 40, No. 5, pp. 385-399.

LEE, T. W. (2000), "Aftermath of the financial crisis and challenges for the shipping industry in Korea," in proceedings ofKASS & KOMARES International Symposium, pp. 129-150.

LUN, Y. H. V, LAI, K. H. and CHENG, T. C. E. (2010), Shipping and Logistics Management, London: Springer.

LUN, Y. H. V., PANG, K. W. and PANAYIDES, P. M. (2010b), "Organizational growth and firm performance in the international container shipping industry," International Journal of Shipping and Transport Logistics, Vol.2, No. 2, pp. 206-223.

MIDORO, R. and PITTO, A. (2000), "A critical evaluation of strategic alliances in liner shipping," Maritime Policy and Management, Vol. 27, No. 1, pp. 31-40.

OECD, Regulatory Issues in International Maritime Transport, Directorate for Science, Technology and Industry Division of Transport, (http://www.oecd.org/sti/transport/ maritimetransport/2065436.pdf)

OREFICE, G and ROCHA, N. (2011), "Deep integration and production networks: an empirical analysis," Staff Working Paper ERSD-2011-11, WTO.

PORTER, M. E. (1999), Strategy: Seeking and Securing Competitive Advantage, Boston, M.A: Harvard Business School.

SYS, C. (2009), Measuring the Degree of Concentration in the Liner Shipping Industry. (http://www.feb.ugent.be/soceco/sherppa/members/christa/documents/paperl.pdf)

United Nations (1998), Concentration in Liner Shipping: Its Causes and Impacts for Ports and Shipping Services in Developing Regions, ECLAC.

UNCTAD (2010), Import Demand Elasticities (SITC - 1970-2009), Trade Analysis Branch, DITC.

UNCTAD (2011a), Trade and Development Report: Post-Crisis Policy Challenges in the World Economy, Geneva: United Nations.

UNCTAD (2011b), Review of Maritime Transport 2010, Geneva: UnitedNations.

UNESCAP (1999), Framework for the Development of National Shipping Policies, New York: Transportation Division,.

WINTER, S. G. (2000), "The satisfying principle in capability learning," Strategic Management Journal, Vol. 21, pp. 981-996.

WTO (2011), International Trade Statistics 2011.

YIP, T. L., LUN, Y. H. V. and LAU, Y. Y. (2012), "Scale diseconomies and efficiencies ofliner shipping," Maritime Policy and Management, Vol. 39, no. 2, pp. 673-683.