SUPPLY CHAIN OPPORTUNITIES, COMPETITION, AND CONFLICT PREVENTION

Connecting Hub Port Gateways to the Inland Infrastructure

2.3 SUPPLY CHAIN OPPORTUNITIES, COMPETITION, AND CONFLICT PREVENTION

This section highlights the changing role of ports and port managers as supply chains and global trade change. The three fundamental issues to be addressed are as follows:

first, in which manner did the logistics networks and nodal connection affect the global maritime industry? Second, who are the new industry’s key players within this redefined industry? And third, how can ports eliminate conflict and competition and benefit from the industry’s opportunities?

The significance of port connectivity became magnified over the past few years, when globalization and outsourcing required the transport of large sea trade volumes throughout expanded global sea routes. According to the latest UNCTAD annual sta- tistics (2012), the world cargo volume has almost doubled in 13 years, that is, from 27 billion in cargo ton-miles in 1999 to over 45 billion in cargo ton-miles in 2012. Ninety percent of this cargo involves sea trade, which means that the world’s 2000 seaports, 10,000 terminals, and 50,000 ships were employed to accommodate this trade growth.

With the globalization of cargoes and markets, modern ports needed to restructure their operations and networking systems, in order to enhance connectivity throughout their supply chain associates. Although the focal point of supply chains remains the reliable transportation and distribution from the ports to the markets, the new supply chain networks became more complex and lengthy in processes.

Designated transshipment hub ports have been developed owing to an increasing demand for gateway ports (OECD 2008). As of 2013, at least a quarter of the world’s largest ports serve as transshipment hubs, whereas most of the global hub ports’ container throughput is being distributed as transshipment. The following is a case study of Gulf Winds International Inc., a typical third-party logistics company serving global cargoes in Texas, USA.

Furthermore, larger ship sizes such as Maersk’s Triple E type aim to achieve economies of scale on behalf of the shipowners, which also suggests that less global ports will be used to serve the most profitable trade routes. This will eventually lead to fewer global ports of call, the concentration of cargoes in fewer, selected regions, and increased competition among domestic ports.

CASE STUDY: GULF WINDS INTERNATIONAL

A 3PL, THIS IS ABOUT MORE THAN THE MOVE

In our modern era of mega-ports, mega-ships, and a global trade volume of 8 billion tons, which is expected to quadruple in the next few decades, a seaport’s magnitude can only be sustained with a robust and reliable supply chain network that will offer customized drayage, storage, transloading, and long-haul transportation in a dependable, timely, efficient, and cost-effective manner.

This is the job of third-party logistics (3PL) companies that have gained a competitive edge by offering tailor-made solutions in the complex global logistics networks and market accessibility, eliminating port traffic and bottlenecks. Efficient 3PL companies are the bloodline of global, national, and regional trade and transport: they strengthen a port’s efficiency, eliminate competitors and transport sub- stitution from other regions, and as a result reinforce a nation’s marketing edge at a global level.

Gulf Winds Intl. is a 3PL company with over 250 trucks and 2 million square feet of warehouse space. Having opened its seventh warehouse in 2012, GWI offers industry-leading services focused on the following:

• Container drayage and management

• Warehousing: storage and distribution, transloading

• Logistics: transportation management, truck brokerage, port logistics

• Other services:

• Oilfield logistics

• Cost management

• Customs examination station

• Out-of-gauge cargo

• Local and long-haul transportation

Now, when the 3PL provider is headquartered in a strategic maritime location such as Houston, Texas, it is easy to understand why GWII’s Chairman, Steve Stewart, was named as “Maritime Person of the Year,” and why August 20 was proclaimed as “Steve Stewart Day” in Houston.

GWI’s mission is to provide world class logistics services through continual investment in their “people, clients, community and the world that we live in.”

Not only does Gulf Winds strive to live out this mission in everything they do, they make it their personal motto to consistently be “More than the Move.”

The company’s strategic locations adjacent to port and rail facilities in Houston and Dallas combined with state-of-the-art information systems provide real cost savings opportunities for their global clients.

The supply chain’s performance prerequisites remain the same, for example, what still matters is time, value for money, reliability, productivity, and quality (OECD 2009).

And yet, what changed were the distribution paradigms.

The industry is mostly familiar with the two leading networks, that is, point-to-point system and the hub-and-spoke system, yet global supply chains and their distribution paradigms have evolved gradually. As seen in Figure 2.13, the supply chain networks have evolved over time, in a manner that affects the players’ bargaining power.

Stage 1: The first supply chain networks adopted the point-to-point distribution mod- els. This linear process entailed linear types of negotiations; hence, the power distribution within the entire supply chain was more even. As can be seen in Figure 2.13, more points were involved and negotiations in this linear process were also performed in a point-to-point method. At this stage, port authorities were placed in the advantageous position of coordinating the factors of production along the goods movement process.

Tedd and Steve Stewart awarded with the Harrisburg Rotary Club for charitable work.

Source: http://www.gwii.com/

Stage 2: In an effort to benefit from economies of scale, supply chains became more centralized. The multiple global distribution centers merged and were relocated in the vicinity of mega-ports. Hence, they evolved into hub-and-spoke distribution paradigms, where the central hub has the bargaining power over the spokes. As can be seen in Figure 2.13, hub ports are the focal point of the entire network, whereas smaller ports served as spokes, that is, as feeders for inland connectivity and cargo distribution. Each spoke is assigned to a different shipper and terminal operator, which again shifts the power toward mega-ports.

Stage 3: As terminal operators, shippers and manufacturers merge or form strategic alliances; they coordinate with multiple networks. Efficiency systems need to be designed, for the supply chain to achieve economies of scale. The large-scale mergers lead the industry toward the next arrangement.

materialsRaw

Hubport

Land and labor

Manufacturing

Warehouses Value-added

services Global distribution

centers (b)

Port Port

Global distribution

centers Global distribution

centers Global distribution centers Warehouses Land Value-added services

Raw materials Land + labor Manufacturing

(a)

FIGURE 2.13 The evolution of supply chain distribution paradigms. (a) Type 1: point-to- point network: even distribution of power. (b) Type 2: hub-and-spoke network: the hub has increased bargaining power over the spokes. (c) Type 3: interactive hub-and-spoke networks: terminal operators, shippers, and manufacturers merge, and coordinate multiple networks. (d) Type 4: holistic networks: a large-scale lean and agile system.

Stage 4: This is the industry’s most recent arrangement: a holistic, large-scale lean and agile system, where optimum efficiency is achieved, in terms of resource allocation and economies of scale. The market power is increasingly shifting from the ports to the multinational conglomerates that own a large part of the supply chain, mostly shipping lines (see Chapter 4) and terminal operators (see Table 2.5). In order to increase their market share, the key players among the supply chains focus on the big picture, that is, controlling the trade flow from a holistic perspective, without permanently promoting particular routes.

On the basis of this principle, the key supply chain players can now achieve low costs and efficiency by endless network combinations, where ports and hinterlands compete, and thus become “the weakest link of the chain” (UNECE 2010). The power is hereby shifted from the hub ports to the global conglomerates that own the vast majority of the spokes within the supply chains. This concentration of power within the new struc- tures makes no port irreplaceable, a fact that intensifies competition among global and national ports.

These major players of the maritime industry share some common strategies, such as (a) geographical and operational diversity, (b) intensive financial and investment activities, (c) strategic alliances within the maritime, energy, logistics, and offshore industries, and so on. Quite frequently, a single conglomerate controls the vast majority of the supply chain and all the factors of production, that is, from the raw materials, to manufacturing, the sea

Port Port

Port

Port Conglomerates:

Cargo owners;

shippers; receivers;

terminal operators;

carriers; sea, land and air logisticians;

global distributors.

(d)

Hubport Hub

port

Global distribution

centers

Global distribution

centers

Value-added

services Value-added

services

Warehouses Warehouses

Manufacturing Manufacturing

Land and

labor Land and

labor materialsRaw

materialsRaw

(c)

FIGURE 2.13 (Continued) The evolution of supply chain distribution paradigms. (a) Type 1:

point-to-point network: even distribution of power. (b) Type 2: hub-and-spoke network: the hub has increased bargaining power over the spokes. (c) Type 3: interactive hub-and-spoke networks: terminal operators, shippers, and manufacturers merge, and coordinate multiple networks. (d) Type 4: holistic networks: a large-scale lean and agile system.

TABLE 2.5World’s Top 10 Terminal Operators: Corporate Profile and Equity-Based Throughput, 2011 Terminal Operator in Market Power SequenceCorporate Profile Strategic Location of Terminal Operations, Logistics, and Other Port Activities Million TEUs

% Share of Global Throughput

Americas and Panama CanalAsiaAfricaEuropeOceaniaMiddle East and Suez Canal 1. PSA International Ownership countries: China and Singapore

PSA is the world’s largest conglomerate in investments and finance, focused in the maritime and hotel business. PSA Marine services are actively involved in port operations and management, support vessels for the offshore oil and gas industry, heavy-lift, oil spill response, pilotage, port and terminal towage, and salvage services. Its network of operations includes 29 ports and 17 countries, mainly in Asia and Europe, as well as in Panama, South America, and the Middle East.

F/IT O E L C A

Δ F/IT O E L C A

F/IT O E L C A

47.68.1 2. Hutchison Port Holdings, Subsidiary of Hutchison Whampoa Limited (HWL) Ownership country: Hong Kong, China

HPH is a leading conglomerate, focused in Port and Terminal Investments, development and operations. Its network of port operations comprises 320 berths in 52 ports, spanning 26 countries mainly in Asia, Panama, and South America, as well as in the Middle East, Africa, Europe, North America, and Australia.

F/IT A L C A

Δ F/IT A L C A

F/IT A L C A

43.47.4 (continued)

TABLE 2.5(Continued) World’s Top 10 Terminal Operators: Corporate Profile and Equity-Based Throughput, 2011 Terminal Operator in Market Power SequenceCorporate Profile Strategic Location of Terminal Operations, Logistics, and Other Port Activities Million TEUs

% Share of Global Throughput

Americas and Panama CanalAsiaAfricaEuropeOceaniaMiddle East and Suez Canal 3. DP World Mostly owned by Dubai World Ownership country: United Arab Emirates

DP World Cargo Services; Container Rail Road Services Private Limited (CRRS/DP World Intermodal); P&O Maritime Services (former British- owned Peninsular and Oriental Steam Navigation Company). Its network of port operations entails 60 terminals throughout six continents; most of its business is focused in Asia (India and China) and Australia, as well as the Suez Canal and Europe. Its new strategic acquisitions are located in Africa, Western Europe, and Brazil. Sea and land container handling generating approximately 80% of its earnings, whereas 20% of its activities involve shipping and logistics services.

T C L F/I A

Δ T C L F/I A

33.15.6

4. APM Terminals and Maersk Shipping Lines Maersk Drilling Maersk Supply Services Ownership country: Denmark, HQ in the Netherlands

APM Terminals operate in 68 countries with interests in 69 port and terminal facilities and over 170 Inland Services operations. The Maersk Line fleet comprises more than 600 vessels, whereas the group of companies has expanded to oil and gas drilling, short sea shipping, global supply/ procurement services, warehousing and distribution networks. Their activities have expanded mainly in the Americas, Asia, and Europe, followed by strategic locations in Africa, the Middle East, and the Suez Region. APM expands its inland services in India, a rapidly growing economy.

F T O C L F/I A

Δ F T O C L F/I A

F T O C L F/I A

32.05.4 (continued)

% Share of Global Throughput

Americas and Panama CanalAsiaAfricaEuropeOceaniaMiddle East and Suez Canal 5. COSCO Group Ownership country: Republic of China

COSCO consists of six listed companies and owns over 300 subsidiaries globally, offering services in terminal operations, ship building, freight forwarding, ship repairs, container manufacturing, financing, real estate, trade, and IT. Its owned fleet has now expanded to over 800 ships. COSCO owns the world’s largest fleet of commodities ships, followed by the Japanese company Nippon Yusen K.K., Japan. As of 2013, COSCO’s terminal operations have expanded in Greece, whereas its shipyards and offshore drilling activities have also expanded. Interestingly enough, other global strategic regions in Asia and Africa have been heavily invested by “China Merchants Holding International,” China’s largest public port operator, also owned by the Government of China (CMHI 2013).

F T O E IT L F/I C A

Δ P F T B R O E IT L F/I C A

F T O E IT L F/I C A

15.42.6

6. Terminal Investment Limited (TIL) Ownership country: The Netherlands

Terminal Investment Limited (TIL) is a port, harbor, marine, and terminal manager and operator that invests in container terminals in five continents, often in joint ventures with other major terminal operators. Its geographically diverse activities focus on the Western Hemisphere, namely, Western Europe, the Americas, the Suez Canal, the Mediterranean Sea, and Africa. In addition to its terminal operations activities, TIL is also presently active in the development of several strategic alliances such as global Greenfield sites. TIL is closely affiliated with Mediterranean Shipping Company S.A. (MSC), one of the world’s leading container lines, as it handles a large segment of MSC’s volumes.

T AT AΔ T A

T A2.12.1 7. China Shipping Terminal Development Ownership country: China

China Shipping (Group) Company is a shipping enterprise owned by the People’s Republic of China. It is primarily involved in terminal management, logistics, finance, and investment, ownership and management of oil tankers, passenger and container ships, engineering, trading and IT.

F T L IT I A F/I

Δ F T P L IT I A F/I

F T L IT I A F/I

7.81.3 (continued)

% Share of Global Throughput

Americas and Panama CanalAsiaAfricaEuropeOceaniaMiddle East and Suez Canal China Shipping Terminal Development Co. Ltd is one of the group’s subsidiaries principally engaged in investment and finance, development and management of terminals in the oil, chemicals, and containers sectors. Among others, the company owns 141 container ships, has holdings in 13 port facilities in China, and shares in terminals within the United States (LA and Seattle) and Egypt (APM Terminals 2013a,b). 8. Evergreen Ownership country: Taiwan

Evergreen Marine Corporation is a global shipping company involved in ports and terminal operations, containerized freight, supply chain management, and logistics. Its principal trading routes include all continents. It operates terminals in the United States (LA and Washington), Thailand, Italy, and so on. It also operates four leading transshipment hubs, two of which are in Taiwan’s major ports, one in Panama and one in Italy. It owns over 150 container ships, and a number of logistics-related companies (Evergreen Marine 2013).

F T P L A

Δ F T P L A

F T P L A

6.91.2

9. Eurogate Ownership country: Germany

EUROGATE is Europe’s leading shipping line–independent container- terminal group, actively involved in terminal operating, intermodal transport, containers, and logistics. They operate a major container terminal in Germany, and they are involved in three joint ventures with significant global leaders: (a) the NTB North Sea Terminal is co-owned by Maersk Line, (b) the MSC GATE is a joint venture with MSC- Mediterranean Shipping Company, and (c) in partnership with Contship Italia, they operate sea terminals throughout Europe, from the North Sea to the Mediterranean and the Atlantic. They are specialized in “box”-related operations, cargo- modal logistics, container-depot services, container servicing and container repair, and customized IT logistics and engineering services.

Δ T L IT A

6.61.1 (continued)

% Share of Global Throughput

Americas and Panama CanalAsiaAfricaEuropeOceaniaMiddle East and Suez Canal 10. HHLA Ownership country: Germany

Hamburger Hafen und Logistik AG (HHLA) was established in 1885. It is a partly privatized company actively involved in four segments: (a) terminal operator, (b) logistics, (c) intermodal transportation, and (d) real estate. The firm operates three container terminals in Germany and Ukraine and extends its cargo handling and transport services by sea, rail, and road (Hamburger Hafen und Logistik AG, Germany 2013).

Δ T A L E C

6.41.1 Source:M.G. Burns, based on data from Drewry Maritime Research (2012). Available at http://www.drewry.co.uk (accessed on June 21, 2013); PSA International. 2013. Available at http://www.internationalpsa.com (accessed on June 21, 2013); HPH. 2013. Hutchison Port Holdings. Available at http://www.hph.com/webpg. aspx?id=87 (accessed on June 15, 2013); Dubai Ports World. 2013. DP World. Available at http://www.dpworld.com (accessed on June 15, 2013); APM and Maersk. 2013; China Ocean Shipping, COSCO Group. 2013. Available at http://www.cosco.com (accessed on July 3, 2013); Terminal Investment Limited (TIL). 2013. Available at http://www.tilgroup.com (accessed on July 3, 2013); CN Shipping. 2013; Evergreen Shipping, USA. 2013. Available at http://www.evergreen- shipping.us/ (accessed on July 3, 2013); Eurogate, Denmark. 2013. Available at http://www.eurogate.de/live/eg_site_en/show.php3?id=1; Hamburger Hafen und Logistik AG, Germany. 2013. HHLA. Available at http://hhla.de/en/ (accessed on July 3, 2013); CMHI. 2013. Available at http://www.cmhi.com.hk. China Merchants Holding International China’s largest public port operator; and Bloomberg. 2013. Available at http://www.bloomberg.com/news/2013-07-02/cosco- chairman-wei-retires-after-building-biggest-bulk-fleet.html; China Shipping Terminal Development. Available at http://www.cnshipping.com. Accessed July 4, 2013; Feport, Belgium. Available at http://www.feport.be. Accessed July 3, 2013. Feport is connected with Terminal Investment Limited (TIL), http://www. tilgroup.com, http://www.feport.be/index.php?cmd=operators&view=detail&ID=63. Note:Δ, Region of origin; A, Strategic alliances; B, Ship building; C, Cargo handling; E, Real estate; F, Fleet ownership/management; F/I, Financing/investment IT, IT; L, Logistics and warehousing; O, Oil and gas, offshore drilling activities; P, Ports/hubs; R, Ship and/or container repairs; T, terminals.

and land carriers, the logistics company, the terminal, the warehouse, the cargo handling facilities and stevedores (longshoremen), and the distribution centers. This can be clearly demonstrated in Table 2.5, which highlights the corporate profiles of the top 10 global terminal operators that manage over 35.90% of the global terminals in the industry.

The table further shows each company’s geographical diversification and corporate activities, such as ports and terminals management, investment, ship building and repairs, ownership of cargo or fleet, IT activities, logistics and warehousing, oil and gas, offshore drilling activities, container boxes ownership, distribution and repairs, and so on.

As an antipode to these conglomerates and the strategic alliances within supply chains, the vast majority of global ports seem to lose bargaining power at a regional, national, and global level.

This tendency generates further market imbalance, with the ports losing their competitive edge, while competing with neighboring ports. At the same time, controlling these routes has been a major subject of distributive negotiations and conflict among the major industry players, owing to the strategic significance of hinterland hubs as contacts between global cargoes and regional markets.

In a nutshell, the parties at a disadvantage are the supply chain players that directly benefit from and rely on a specific port (i.e., industries, customers, local authorities, markets), whereas winners in this power shift are the global players that are mostly interested in a cost-effective cargo transport, and they achieve this through alternative routes and transportation mode substitutes, for example, emerging ports, alternative inland routes, and so on. In this respect, the traditional role of ports is expected to change in the next few years, toward a specialization between global gateway ports and domestic transshipment hubs. Industry analysts consider that provided the sustainability of demand growth, the option of hub ports may not be plausible in the long run, since direct service costs are more competitive compared to transshipment hubs.

Port competition typically has two contradicting effects in the industry: healthy antagonism, which leads to improved services, increased efficiency, quality, and productivity, and reduced time delays at port. On the other hand, internal competition (i.e., regional and national) may lead to an input increase, for example, on behalf of the ports, without the analogous profit. To survive, modern ports may be forced to lower port tar- iffs, without eliminating the threat of loss of business from substitute ports.

The standard response for a port to reestablish its market power is leverage, integra- tion, and the formation of strategic alliances.

Regardless of a port’s size, the following factors will determine a port’s competitive edge:

• National and regional trade agreements

• Trade barriers: protectionist policies, cabotage restrictions, and so on

• Regional economic potential; vicinity to markets

• Interconnectivity potential; vicinity to logistic networks

• Port facilities, development, superstructures, services, infrastructure, berths

• Port’s ability to handle cargo volume and type

• Port tariff and overall cost

• Port’s traffic, berth occupancy

• Labor reliability: strikes, trade unions

• Regulatory compliance. Port, legal framework, regional/national

• Safety: weather conditions, for example, temperatures, hurricanes

• Security: terrorism, piracy, and so on

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