International trade faces capacity challenge from ports and intermodel infrastructure

The gist of the article suggests that developing new port capacity may not come easily in Europe and US with regulatory constraints. Rail infrastructure and freight constraints in the US may be limiting faster growth in international trade.


Are ports the choke point in the supply chain?
by John Fossey

(Containerization International) Could ports be the catalyst for a change in the supply chain as we know it today? At the most extreme could ports actually lead to a reversal in the globalisation process and lead to companies sourcing goods from nearer to home?

The latter scenario would be dream come true for the environmentalists who blame globalisation and therefore, indirectly, containerisation, for rising levels of pollution.

Port congestion is nothing new. But until 2004, the problems were largely confined to the developing world and countries throughout Africa, South America and southern Asia.

Poor investment, inefficient terminal management systems, which were largely geared to the conventional cargo era rather than containers, plus inferior customs clearance procedures, meant cargo would sit on the docks for ages and ships would have to wait at the anchorage. Waiting times could run to several weeks.

Then in 2004, ports such as Los Angeles and Long Beach in the US, Rotterdam and Antwerp in Europe and even Singapore – all bastions of ongoing and huge capital investment programmes and use of the most modern equipment – suffered the unmentionable; congestion.

At times, vessels were forced to wait outside of the two California ports for more than a week before they could be handled, retailers started to see their shelves empty of goods and manufacturers had to reschedule some of their production programmes.

The situation was blamed on several factors:

· The phasing in of the first super generation post-panamax ships (8,000TEU plus), which meant a significant increase in import/export exchanges at the terminal

· Poor cargo forecasting by the ports which affected terminal management efficiency

In fact all analysts/economists were guilty of underestimating just how much cargo would be shipped out of China and the role that the country would play in global commerce, following its joining of the WTO in November 2001.

Pure and simply the ports were not prepared for the surge in cargo volumes and everybody involved in the supply chain suffered. The experience served to illustrate just what an important ‘cog’ in the supply chain the marine terminal is.

Although the situation has improved as a result of new handling equipment being purchased, additional terminal capacity developed and extra labour recruited, many ports are on a ‘knife edge’ when it comes to congestion.

Moreover, vessels, one of the causes of the 2004 bottlenecks, are getting bigger. MSC, CMA CGM, Zim Integrated Shipping Service and Hanjin Shipping will all take delivery of vessels loading in excess of 9,500TEU over the next three years. And there are still more of Maersk’s E-class 11,000TEU monsters to be delivered.

Principally, this new tonnage is aimed at moving those expanding Chinese exports more quickly to consumer markets in Europe and North America.

However, this is something that the authors of a new report published by the Boston Consulting Group say will become increasingly challenging. They suggest that Congestion at North America's West Coast ports and continuing capacity problems at major European ports have complicated the China sourcing equation to such an extent that companies need to consider alternatives.

In a report entitled ‘Surviving the China Riptide: How to Profit from the Supply Chain Bottleneck’, George Stalk Jr and Kevin Waddell, write: ‘Companies in both regions need to look closely at the effects transportation bottlenecks can have on their profits and re-evaluate their manufacturing and distribution assumptions.

‘With no solution in sight, many US companies may be better off manufacturing in Mexico or at home, though labor and other costs are significantly higher than in China. Similarly, West European companies that now source from China may want to switch all or part of their manufacturing operations to central and eastern Europe. In their rush to source from China, many companies are blindly walking into a strategic risk.’

Stalk and Waddell add: ‘The risk is thinking that sourcing from China will result in lower product costs, when in reality the supply chain dynamics will, in many cases, drive up overall costs and reduce profitability.’

In particular, the analysts were concerned about the situation in the US, which they claimed was a landside infrastructure issue too. ‘Existing rail infrastructure to disperse the flood of goods from China is also being strained, with freight out of Los Angeles and Long Beach [America's busiest ports] already very near capacity and freight out of Oakland, Seattle and Tacoma expected to reach capacity in the next couple of years,’ said Stalk and Waddell. ’With no major projects to expand US rail capacity currently on the drawing board, this problem will worsen over time.’

Indeed, they referred to the problems in the US to be the equivalent of ‘a giant non-tariff trade barrier.’

In part, the report appears quite alarmist, particularly as other consultants, including teams at Global Insight have suggested that this year’s transpacific eastbound peak season period should pass without incident with plenty of container-handling capacity in place at US west coast ports.

However, it must be borne in mind that new container terminals can take years to build because of the increasingly onerous planning and environmental permits that are needed. In Europe and the US it can take as long as eight, even 10 years, to develop a new cargo-handling facility, for instance. Hence, unlike a ship where the lead time between ordering and delivery is three years, there is no quick fix to the problems being outlined by Stalk and Waddell.

Clearly, there are some recent incidents that highlight just how tight the situation is. Strikes last year and earlier this year in Rotterdam caused backlogs at ports all over northern Europe and resulted in ocean carriers’ schedules being heavily disrupted.

Interruptions like this are a further cost to companies and another reason why outsourcing does not necessarily save all the costs it is supposed to do. Moreover, it can damage client/customer relationships and affect future business opportunities.

Outsourcing to China, or for that matter to India and/or Vietnam, is, therefore, not just a simple case of looking at labour savings of 20 to 30 times that of western Europeans or Americans, but increasingly in taking into account costs associated with a malfunctioning supply chain.

It is for this reason that Stalk and Waddell suggest companies consider a different set of options in the future, including:

· Bring manufacturing home.

· Build ‘land-side’ capacity at ports not yet overwhelmed by congestion (a solution that is probably more applicable in Europe than the US, where environmentalists routinely lobby against the expansion of existing facilities).

· Aggressively manage their China-based supply chain, ‘looking for ways to squeeze time from it that competitors haven't identified or exploited.’

· Explore shipping alternatives, such as air freight, ‘that may appear costly but may actually lower overall expenditures by reducing hidden costs.’

· Invest in ‘premiums’ and ‘capabilities’ - paying higher prices, for example, for priority service improving the company's own abilities to move goods quickly and efficiently past or around congestion.

· Diversify supply with ‘multiple suppliers and supply points’ or produce critical components and products domestically, accepting higher production costs as a tradeoff for lower supply-chain costs and reliable delivery schedules.

Clearly, for US-based manufacturers/buyers, Mexico and the Caribbean/Central America might offer some options, whereas in Europe, Hungary, the Czech Republic, Poland and the Baltic States (Estonia, Lithuania and Latvia) could prove attractive. In addition, to manufacturing costs being on average only a third to a fifth of those in the US and western Europe, transit times are significantly faster (just two to four days) and those congested ports can be avoided.

Stalk and Waddell concluded: ‘Success depends on providing customers what they want and when they want it.’

For the liner shipping and ports’ sectors the future looks exceptionally challenging, but failure to deal with the issues and ensure that sufficient capacity is available at the heart of the supply chain could threaten global trade itself.