Meli Marine is a leading player in the container shipping industry on intra-Asia routes and has built a strong presence in the market and demonstrated very high operating margins and operating ROA from 2002 – 2007 compared to its main competitors. As Meli Marine’s CEO, David Tian seeks to steer the company towards expansion in 2008, with an option to acquire 16 vessels from Teeh-Sah Holdings. With these ships, he plans to expand to the trans-Pacific market. However, we believe this deal will not be in Meli Marine’s best interest at the moment, and the company will be better off without the acquisition.
2. Prelude to Acquisition Consideration
2.1 Market Attractiveness: ...view middle of the document...
3. Problems with Expansion into Asia-North America Market
3.1 Internal Factors
3.1.1 Cost Incompatibility: The acquisition of Teeh-Sah’s vessel assets does not look favourable from a cost standpoint. In the industry where container carriers are largely price-takers, profitability depends heavily on reducing cost and gaining cost efficiencies.
Arguably, much of Meli Marine’s turnaround under David Tian was also due to its cost restructuring. Meli Marine thrived under David because it gained cost flexibility, with it owning just 30% of total fleet capacity. The decision to own less fleets gives Meli a cushion in the face of industry cycles. It reduces downside risk and gives Meli more ease in adjusting capacity to meet changing demands because of the medium term nature of the contracts.
Acquiring the fleets may undo the cost-saving strategy that Meli has benefited from since 1990s. In conclusion, currently, Meli is not yet in the best position to enter this route.
3.1.2 Niche Incompatibility: Meli Marine's niche is the delivery of a narrow set of commodities which include perishables, chemical commodities and halal products heading to Muslim customers in Malaysia, Indonesia, and India. In the NA market, demand for halal products is traditionally known to be smaller than in Asia, and perishables may not be suitable for long distance shipping. Thus, not only would Meli be venturing beyond its niche expertise, they would also indirectly face demand uncertainty for their services.
3.1.3 Unfavourable Economies of Scale: The demand for shipment to Asia from North America is much lower than the supply due to global trade imbalances as seen in Exhibit 1, where 70% of the Asia-North America trade comes from Asia compared to 30% from North America. Meli Marine’s vessels could thus potentially return from North America half empty. Furthermore, the price they get from this capacity is also less optimal as seen in exhibit 7, where North America to Asia rates are only about 70% of rates charged for Asia to North America. Given the significant risk of drops in volume and price, Meli Marine may not be able to achieve economies of scale nor break-even should such a scenario occur.
3.1.4 Less than Optimal Ship Size: The vessels that Meli Marine planned to purchase were on average 4,500 TEU in size. This is smaller than the ideal size of 10,000 TEU for Asia-North America route. The supersize ships were better able to achieve economies of scale through spreading the fixed cost over a larger shipping capacity. In this manner, due to a lower cost, competitors may be able to successfully undercut Meli through lower pricing. Thus should Meli Marine enter this market, they would begin with a cost disadvantage compared to their competitors. As further elaborated in Appendix B2, the long-distance of Trans-Pacific route also makes it unfeasible for Meli to replicate its successful operational strategy that it has implemented in Intra-Asia.
3.1.5 Backlash from...