Port Management and Economic Growth
3.1 ESTABLISHING A PORT’S COMPETITIVE EDGE IN A NICHE WORLD
Ports are a nation’s links to prosperity. Since a chain is only as strong as its weakest link, a port’s constitutional weakness within a supply chain will eventually affect a country’s economic sovereignty. After all, ports of all sizes and types are important tools to build a country’s competitive advantages, as long as they aim toward a niche market. Despite this compelling theoretic approach, in reality, the performance of a country’s ports is not always synchronized; neither is it focused on comparative advantages that are based on opportunity cost. Perhaps this is the reason why today’s trade has experienced an increas- ing disparity among harbors that have adjusted to the new technological and supply- chain needs and harbors that have not reconciled with this new reality.
As discussed in Chapter 2, competition among ports is beneficial for the supply chain and the market end users, as they obtain tariff discounts and optimum productivity, quality, and quantity of services. Another equally significant element of competition is that it enhances innovation and corporate breakthroughs: to survive, ports are forced to differentiate, keep low costs, save time and resources, and improve techniques and pro- cesses. While ports thrive for success, they surpass their own limitations and invent ways of doing things better and faster. In fact, this concept verifies Charles Darwin’s theory on The Origin of Species (Darwin 1859), which supports that evolution is a result of natural selection whereby external or performance traits improve, enabling an individual to get accustomed in a changing environment. Evolution is therefore the positive side of competition, that is, exactly what modern ports need in order to regain (a) their niche, (b) their comparative advantage, and (c) their opportunity cost.
Nothing contributes so much to the prosperity and happiness of a country
as High Profits.
David Ricardo (1772–1823)
3.1.1 Comparative Advantage, Competitive Advantage, Absolute Advantage and Niche: Better, the Best, or Simply Different?
In the twenty-first century’s rapidly growing and ever-evolving global trade and trans- port, it seems difficult to clearly define the difference between a port’s absolute advan- tage, as opposed to a comparative advantage or a niche. In order to better understand the evolution of socioeconomic thoughts with a logical sequence, these theories are hereby presented (a) in a chronological series as they were developed and (b) in connection with the factor of production that better pinpoints the magnitude of growth. It is worth noting that for the past two centuries or so, these theories are still dominant: modern scholars have only managed to extend them but never to replace them:
a. An Absolute Advantage is based on higher workforce productivity. It enables a nation or a port to offer a specific commodity or service at a cheaper price on the basis of increased labor efficiency. In port management, it suggests that the port can either (a) utilize the same amount of labor compared to other ports, and deliver a greater output, or (b) employ a lower amount of workers and be equally productive to other ports that offer similar services though they employ more workers.
Adam Smith (1776) developed the absolute advantage theory in his publica- tion An Inquiry into the Nature and Causes of the Wealth of Nations. During the ages of the powerful British Empire and the concept of mercantilism, Adam Smith contended that, in practice, mercantilism could not bring profit and growth to all countries, as during an export/import transaction, one country’s profit was based on another country’s low cost and limited gains. Hence, Smith proposed that only free trade and specialization would enable countries to develop their absolute advantage, that is, fields of specialization, where all trade and transport parties involved would profit.
b. A Comparative Advantage focuses on lower opportunity cost. It establishes the capabilities of growth and profitability from industrial and commercial specialization. Opportunity cost is the value of a choice—in terms of service or production—that must be relinquished so as to engage in a priority pro- duction that will potentially bring more profit. Corporate strategies and the decision-making process of port managers are based on measuring the oppor- tunity costs of two or more options and comparing the benefits of each option at a micro and macro level.
The principles of comparative advantage were conceptualized by the British economist David Ricardo in 1821, that is, 45 years after Smith’s absolute advan- tage theory (1772–1823). Applying his principles in the maritime industry, a port’s value and profitability for the services rendered are analogous to the degree of obstacles encountered during the input process. Alternatively, earn- ings could also increment owing to advancements in production or achieving an increase in output, while retaining the same level of input (Ricardo 1821). A port with a comparative advantage indicates its potential to deliver services at a reduced opportunity cost compared to other ports. When this occurs, not only can a port’s tariffs be more competitive as a means of attracting more clients, but a better allocation and controlling of resources can help the port grow.
c. A Market Niche, finally, is a specialized market segment; a unique service or commodity that is offered to a market that has an unmet demand.
Although a niche strategy is a widely recognized way of maximizing profits, there is no long-term guarantee of market share retention or sustainable suc- cess. New entrants can always claim their market share, or the demand for the product or service may diminish (Noy 2010). Hence, port strategies should be reviewed and reconsidered on the basis of market fluctuations, annual balance of trade statistics, government trade agreements, and so on.
Ports of any size, type, or geographical location can offer a niche when they have studied their supply chain’s market segments and have identified the dif- ferent supply and demand trends. Niches are not readily available but are stra- tegically designed by identifying this specific market demand and supplying the commodities or services required.
The “niche” principle was presented as a component of an economic theory as industry segmentation and niche generic strategy (Claycamp and Massy 1968;
Porter 1980; Smith 1956).
d. A Competitive Advantage resembles the benefits of a comparative advantage and a market niche. It positions a company as an industry’s leader, in terms of either lower cost or product differentiation advantages. Michael Porter has recognized two principal kinds of competitive advantage: (a) cost advantage, where the com- pany is in a position to offer the same products or services as its competitors, yet at a decreased cost, and (b) differentiation advantage, when the company creates superior advantages or value within their products or services that surpass those of their competitors.
A nation’s economic and business objectives can be reshaped when it learns to develop, identify, and evaluate the comparative and absolute advantages or niche markets connected to its ports and supply chains. Once a port’s advantages are recognized, it may prompt other regional ports to diversify and therefore grow in size and influence, as opposed to consuming their resources in regional competition.
A port may seek for an absolute advantage through higher productivity, may gain a comparative advantage through pursuing lower opportunity costs, or enter a niche mar- ket through service differentiation. This means that a port can still be better, be the best, and be different, on the basis of its geography, socioeconomic and legal factors, demog- raphy, markets, and all of its factors of production. The ports’ matrix reflecting potential niche markets and advantage areas could be based on the following criteria:
a. Geographic profile: infrastructure and interconnectivity profile, for example, island-nations, coastal areas, and landlocked areas
b. Regulatory framework: safety, security, environmental laws, and so on, strict or lenient
c. Legal and governance framework: tax reform/incentives, government subsidies, liability, social responsibilities
d. Demographic profile: gender; age, ethnicity, education, employment status, income range, and socioeconomic structure of population
e. Financial and economic framework: banking and financing systems; trade, manu- facturing, transport incentives; balance of trade; currency strength; market- based economies versus command-based economies; national debt; consumer spending; inflation
f. Factors of production—cost-based profile: land, labor, technology and entrepre- neurship. Adam Smith’s factors of production
g. Factors of production—innovation profile: technology, entrepreneurship, labor (e.g., innovation vs. brain drain)
h. Commodities profile: raw materials, energy, value-added goods, commodities and factors of production
When economic theories are extended to fit the principles of port management, it becomes evident that a port can achieve advantage, specialization, or niche through four principal paths: (a) by delivering a service that is hard to provide, (b) through innovation, (c) through lower cost, and (d) through efficient allocation of resources:
a. Delivering services that are difficult to supply
As an example, Port of Anchorage is Alaska’s lifeline, handling over 90% of the state’s cargoes (Prokop et al. 2011).
The significance of Alaska’s ports is increasingly highlighted as a result of Alaska’s vast oil, gas, and shale gas resources. Ongoing scientific researches and plans by national and local authorities, USCG, the US Army Corps of Engineers, and so on, aim at the extraction and transportation with the Port of Anchorage as a focal logistics point (Prokop et al. 2011).
The recent economic and energy developments require that Alaska plays a leading role as a national and global energy exporter in the decades to come.
The constraints the energy industry and the port face include weather and geo- graphic restrictions, inadequate infrastructure, difficulties in securing the high levels of investment required through public or the private sector, and developing innova- tive engineering and architecture designs that would fit the Arctic, sub-Arctic, and Alaskan inland waterway particularities (Northern Economics, Inc. 2011).
Hence, Alaska’s comparative advantage (or niche) will be achieved under the condition that a highly strategic and innovative energy and transport plan will be developed to encompass port functions, inland waterways, and global networks.
Port planners must also look into the future, as global warming will open new, unpredictable Arctic shipping routes by 2050 (Zabarenko 2013). Scientists have discovered at least three alternative sea passages that will shorten vessels’
navigation by at least 5000 nautical miles, or 14.88 days, calculated based on an average vessel speed of 14 knots (nautical miles per hour). The new sea routes will connect Alaska, Northern Europe, and Russia to the Far East markets of China, Japan, South Korea, and so on, which suggests that other ports along the Arctic route will benefit as well.
b. Innovation
An innovation pertains to novel ideas that offer increased value and usage to a port’s, company’s, or nation’s factors of production, that is, labor, technology, processes, services, and products. For a method to be considered as innovative, it should offer a novel perspective of service or product that exceeds a simple
“improvement.” The Global Innovation Index was developed through a collabo- ration of the United Nation’s World intellectual property organization, Cornell University, and INSEAD.
Its design is based on two sub-indexes, the Innovation Input and the Innovation Output, which are both established on the five input pillars of innovation. These five pillars reflect components of the global economy that facilitate pursuits of innovation: (1) organizations, corporation; (2) think-tanks, workforce, research;
(3) infrastructure systems, (4) industry growth and refinement; and (5) business
enterprise growth. The output of innovation is reflected through two pillars that establish proof of innovation, namely, supporting evidence of (1) technology, intelligence, and information; and (2) creative designs and progressive outputs (Global Innovation Index 2013).
This is one of the most widely accepted indexes for measuring and evaluating innovation that modern ports and the maritime industry can use.
c. Cost minimization
A port’s costs consist of direct and indirect costs. Direct costs are allocated for financing the input of a specific task, product or service, salaries for technical work, port labor, research and development, and transportation expenses directly allocated for existing business. Indirect costs include the overhead (administra- tive and facilities) costs, administrative salaries, maintenance, procurement and spare part purchases, and traveling for marketing and future business.
Cost estimation techniques include linear regression, high–low method, account analysis, scatter graphs, and so on.
By estimating the production function of a port, one can estimate its cost function. Based on the Cobb–Douglas production–function model:
Pit A Uit MRe Nit
= MRi
−
−
γ θ θ
θ 1
1 (3.1)
where Pit represents the port’s real production over a specific time, (1 – θ) and θ signify the parameter of share coefficients in terms of the real port output, A is the technology input, γ reflects the capacity to modify the port’s technological performance, and N represents the number of employees. To ensure the port’s cost efficiency, the MRe represents the marginal revenue of employment at the port, whereas MRi represents the amount of investment.
Capital cost
A port’s capital costs are typically estimated by the investment price, that is, cost of assets such as buildings, storage facilities, equipment, and so on. Ungo and Sabonge (2012) proposed a capital cost estimation that is computed by calculat- ing variables pertaining to a new asset’s cost. Depending on the source of invest- ment, contractual arrangements, and financing options, port managers may estimate the asset’s residual value, interest rates, and amount of years financed.
The capital cost per annum signifies the yearly loan repayment for the total sum of the purchased asset’s value with a residual price upon repayment of the loan.
The capital cost is estimated as follows:
CC NAC= − +
+ −
− + −
i i
i R i
i
n
n n
( )
( ) ( )
1
1 1 1 1 (3.2)
where NAC is the new asset cost, i represents the annual interest rate as appropri- ate, n is the year’s number of loan repayment, and R is the residual asset’s value.
Energy consumption
The energy consumption factor is a critical expenditure for ports and termi- nals, as the cargo handling equipment, infrastructure, and superstructure are
heavily dependent on energy costs and fuel efficiency. Costs also depend on other parameters such as maintenance costs, life expectancy for the equip- ment, and so on. Hence, the estimation for the energy consumption per year is calculated by the equation:
EGC CC
LT MC EC
= + +
n
(3.3) where EGC is the energy consumption, CC is the capital cost, LTn is the
asset’s lifetime expectancy estimated in years, and MC and EC reflect the maintenance cost and energy cost, respectively, for the period.
Cost minimization in a capital intensive industry such as the maritime industry should by no means be achieved at the expense of quality, reliability, and productivity. Cost minimization can be achieved when the budget alloca- tion and the expenditure process are characterized by the following principles:
(i) utility, that is, each expenditure should bring benefit to the port’s production and a tangible result to the business output; (ii) sensibility and shrewdness in expenditures and the management of economic affairs; and finally (iii) consis- tency should be applied in order to comply with the port’s expenditure plan.
A port’s commitment to cost minimization may employ techniques of computing input and costs of production in order to develop the minimum costly output, that is, services or products. Among the factors of production, labor and technology are the two factors that are directly related to time and money and therefore monitoring and controlling the performance of labor and machinery can bring optimum results.
Technological performance
A port planning strategy is heavily dependent on technology and machinery;
hence, technological performance, availability, and dependability warrant a port executive’s serious consideration. As this chapter deals with the port’s competitive advantage, the measurement of a port’s dependable services should also be evaluated. A modified version of the Hidden Markov Model has been hereby developed in order to evaluate the system’s functionality and dependability not restricted to a single unit machinery but for the func- tionality of all port terminals. The estimation subdivides the port system’s reliability into mechanical integrity and cargo handling process. Hence, the equation verifies to which extent a port’s technological performance offers the requested level of reliability in terms of cargo handling and distribution services. Since a modern port’s performance is typically measured by evaluat- ing the overall performance of different segments, the following formula can be used to estimate dependability per berth or terminal, in order to isolate the different divisions and functions, or for the port as a whole:
R t t t
e n
( )= Re( ) ( )
∏
=1 Rch (3.4)where R(t) reflects the reliability of all the equipment within a port; Re(t) represents the reliability and availability of the port’s equipment to meet
the demanded production; n reflects the sum of the equipment used at the port, that is, per berth or terminal; and Rch(t) represents the reliability of the equipment’s subsystem, such as distribution functions, cargo handling auxiliary equipment, warehousing and logistics subsystems, and so on.
Labor performance
Although shipping is a global industry, costs typically vary at the regional, national, and local levels, based on factors such as national balance of trade, currency strength, inflation, cost of labor and unemployment, national debt and taxation, consumer spending, and so on.
China’s wages serve as an example of cost minimization and how a nation’s competitive edge may fluctuate over the years. According to the World Bank, a decade ago, that is, in 2003, cost of living and the factors of production, including salaries, were five times lower in China compared to the United States (World Bank 2013). From the middle of 2005 to late 2008, cumulative appreciation of China’s currency, that is, the renminbi, against the US dol- lar exceeded 20%; however, the rate of exchange was still pegged to the US dollar from the 2008 world economic crisis to June 2010, when a progressive currency appreciation took place. As of 2013, China is second to the United States in the value of services it produces, although China’s per capita income is below the global average (CIA 2013). When these economic figures are combined with a population of 1.349 billion people (World Bank 2013; CIA 2013 estimate), it gives China an unprecedented competitive edge.
“The soft three dollars” is a figure of speech commonly used by Asian traders over the past decade to describe that for every single dollar of pro- ductivity input, there were three dollars pertaining to trade commissions and profit through Asia’s global exports.
Interestingly enough, after the 2008 global crisis, salaries in most of the world, for example, in Europe and the United States, have significantly dropped after four consecutive years of diminishing productivity. At the same time, salaries in Asia are increasing. In 2012, about half of China’s workforce experienced a salary increase of at least 10%, thus making China the nation with the highest salary rate (Forbes 2012). The laws of supply and demand have proved that history repeats itself. The Western economies have out- sourced to the East, and now they both expand their outsourcing activities primarily toward Africa and the less developed Asian economies, followed by South America and Eurozone’s collapsed economies, such as Greece, Italy, Spain, and Ireland. The geography of outsourcing is extensively highlighted herewith, as a reminder that ports and maritime activities will grow where manufacturing, energy sources, and raw materials are located.
d. Through efficient allocation of resources
Finally, a port can achieve advantage, specialization, or niche through optimum allocation of resources, which implies that diversification is promoted in order to eliminate internal competition.
Excellent examples of business diversification that leads to growth and devel- opment can be seen from the Port of Virginia Authorities, USA:
i. The Norfolk International Terminals (NIT) is the largest facility of VPA, with remarkable infrastructure outlets, that is, railroad service and intrastate and interstate highways. NIT has evolved from a surplus Army base in the