This story originally published on Fairplay.IHS.com.

Most of the estimated initial combined savings of JPY110 billion (USD960 million) per year due to the merger of Japan's three largest container shipping companies will come from applying the most favorable of three supplier contracts with vendors in the global marketplace, senior executives with the three lines told Fairplay.

The 'tariff effect' will take an estimated one to two years after the set-up of the company in July this year to start delivering substantial savings and is expected to be just the beginning of multiple benefits realised from the merger.

"After the merger we will be able to pick up the cheapest and best supplier contracts of a choice of three existing contracts in each case," Noriko Miyamoto, a senior executive with NYK, said at a meeting at the group's headquarters in Tokyo.

Scheduled to begin operations in April 2018, the new company has yet to be named but is unofficially referred to as '3J' by the three Japanese liner companies.

K-Line, MOL, and NYK will start to meet to discuss global network, market, and pricing issues once approvals for the new company are obtained from global anti-trust authorities. An independent third party is currently collating information and providing separate feedback to the lines ahead of the official launch of the new company on 1 July..

According to Miyamoto, initial plans are to maintain the existing scale of capacity, service, and network reach of the three individual carriers after which the management of the new entity will start to plot and implement its own development strategy.

The existing overseas terminal operations of the three lines will be included in the new entity but domestic Japanese terminals will remain under the remit of the three individual groups.

Details such as the branding and location of headquarters have yet to be decided but it is widely expected that key decisions will be made in Tokyo. The group administrative headquarters of 'K'-Line, MOL, and NYK are in Tokyo but MOL and NYK currently have their operational headquarters for the container business in Hong Kong and Singapore, respectively.

Removal of duplicate functions, streamlining of services, identifying and applying best practice across multiple areas of the business and operations, as well as economies of scale, are expected by the lines to deliver savings well beyond the initial estimation of JPY110 billion.

"With three times the volume, we will be in a much stronger position to negotiate better contracts with vendors," said 'K'-Line managing executive officer, Yukio Toriyama.

"The leveraged effect of consolidated volumes means it is feasible to expect gains in terms of cost reduction beyond the baseline figure [of JPY110 billion]," said MOL executive vice-president and board member, Masahiro Tanabe.

Tanabe said '3J' will give the Japanese carriers sufficient scale to compete effectively in the global market.

"There are clearly too many players in the market at the moment. It is difficult to say with certainty how many companies [the market] can support, but it may be just five or six. The scale benefits offered by '3J' will take us to a position where we can compete effectively and be one of the surviving companies."

Meeting deadlines for the set-up and operation of the new entity as well as bridging corporate culture gaps are seen in Japan to be among the main challenges for its success.

"It is very complicated to integrate the networks, systems, people, and terminals of three different companies. It is more difficult than integrating two companies, and we need to do it in a relatively short time period," said K-Line's Toriyama.

"There are also corporate culture gaps that need to be bridged but we are already working together in areas such as our global container shipping alliance and the backbone is very firm."

"At the moment we are standalone independent entities so there are certainly gaps. However, we all share similar anxieties, hopes, and expectations and we have the incentive to get past those gaps," said MOL's Tanabe.

Successfully finding and exploiting synergies is a further challenge to be surmounted.

"'3J' will need to further enhance its profitability in terms of both cost leadership and revenue growth. We will also need to sharpen our competitiveness vis-à-vis the existing large players in the marketplace," Tanabe said.

MOL and K-Line will each have a 31% shareholding in the new company while NYK will have a 38% share. The combined capital is estimated to be about JPY300 billion.

'3J' will have an approximate total capacity of 1.4 million teu, giving it about 7% global market share. IHS Markit data show this will make it the world's sixth-largest shipping line, slotting in behind the newly merged Hapag-Lloyd and UASC and ahead of Taiwan's Evergreen Corporation.

Discussions to form the new entity started about one year ago when, after a large influx of capacity at the end of 2015 and 2016, it was apparent the industry was facing a worsening supply and demand situation and that significant moves towards consolidation were starting to take place.

"At the time, the [Japanese] lines had decided to be part of the same alliance. We thought that if we are already in the same alliance then why not take it a step further and create a single company," said Miyamoto of NYK.