American essayist and editor Charles Dudley Warner coined the phrase “Politics Makes Strange Bedfellows.” Today’s maritime industry conditions are forcing some new relationships, ones that less than a decade ago might have been inconceivable, if not strange.
Most visibly, the carrier alliances and the potential for mergers and acquisitions puts container ports in the crosshairs. Facing a consolidating customer base, slower growth rates and the continued demand to invest in terminals, container ports find themselves with diminished leverage to guarantee sufficient volumes over time to generate a return on their investments.
Out of necessity, ports are taking strategic steps to enhance their leverage, reduce risk and protect their market share. They’re doing this by entering into more collaborative relationships with partners that are often their strongest competitors.
Two general trends are taking hold within the port industry. The first is governance and structural changes to make a port region more competitive. The second involves landlord ports moving beyond their traditional role to gain or retain market share by engaging as a supply chain participant.
Adjacent ports have a long history of collaboration, usually to secure funding for hinterland infrastructure. But when a port administration realizes its customers’ market power exceeds its own, an environment is created that allows discussions between port leadership of topics that might have been taboo in the past.
The merger of cargo operations in Seattle and Tacoma is the most dramatic example of governance change in the U.S. port industry in decades. Although it had been proposed by former Seattle Port Director Tay Yoshitani as early as 2007, Tacoma wasn’t ready to entertain the initiative. More recent industry trends, however, brought about the alignment between the two cities and their ports.
Seattle and Tacoma’s actions are a strategic move that recognized the two ports were on a trajectory to invest millions of dollars to chase the same customers. Working together gives them greater leverage in negotiating with carrier alliances.
Although the tool to bring about the collaboration — a joint powers authority — has been used by ports before, most notably by Los Angeles and Long Beach in 1983 and 1989 for hinterland rail infrastructure, the Seattle and Tacoma case is remarkable because the two ports licensed their core business assets to a newly created governing body, The Northwest Seaport Alliance.
Competition also is driving collaborative relationships in other port regions. The Flemish government initiated the Flanders Port Area in 2007, a collaboration of the ports of Antwerp, Ghent, Ostend and Zeebrugge, with the presumption that such cooperation would improve the competitive position of the Flanders ports. The opening of the Maasvlakte II terminal in Rotterdam triggered more recent attention on the value of this collaboration.
Although government-led cooperative initiatives have many benefits — including elevating public support for a region’s ports — the collaboration itself is no guarantee of commercial success. Cargo doesn’t automatically cascade among cooperating ports to maximize utilization of a region’s capacity. Zeebrugge’s available capacity can’t automatically satisfy Antwerp’s need for capacity.
The International Container Strategy Port, a Japanese-led initiative, was created in 2010 to make the Japanese ports more competitive against East Asian ports. The Japanese government traditionally promoted decentralization of port activities, but as Japanese manufacturing moved to other parts of Asia, there was an oversupply of Japanese ports to serve an increasingly smaller export market. Thus, the Japanese ports became feeder ports as increasing volumes of Japanese exports were transshipped through other ports, particularly Busan, South Korea.
But it was only in October 2014 that the separate port corporations at Kobe and Osaka were integrated into one entity, Hanshin Port Corp. This is the first time the Japanese government has invested in a port operating company, controlling 34 percent of the stock.
The creation of an integrated terminal company for Tokyo Bay to include the ports of Tokyo, Yokohama and Kawasaki was proposed to be finished by 2015, but the financial standing and assets of the Tokyo Municipal port are far superior and more diverse than those of Yokohama, making the merger more challenging. Yokohama and Kawasaki will move forward to create the first stage of the Keihin port corporation, but the implications will be limited, considering Kawasaki’s annual container volume is limited to about 50,000 TEUs.
U.S. ports in recent years have moved beyond their more traditional role as landlord to that of a supply chain participant, taking an active role in addressing congestion issues. The Port Authority of New York and New Jersey created the Port Performance Task Force in late 2013, comprised of executive-level stakeholders from all segments of the supply chain, entities that normally compete fiercely or have no business relationship with each other.
Here, information sharing is leading the integration effort through the creation of New York-New Jersey’s new Terminal Information Portal System. TIPS is a common Internet portal for the port’s six terminals that helps optimize transactions for the port’s drayage operators and beneficial cargo owners.
With their reputation on the line, the ports of Los Angeles and Long Beach also are trying aggressively to drive terminal performance. Supply chain optimization working groups are tackling such issues as container dwell time, chassis and performance metrics. Long Beach went so far as proposing to create its own chassis fleet for peak periods. Although that effort didn’t materialize, it’s an indication of how far the port was willing to go to resolve congestion issues.
As in the past, bringing about real change and consistency of participation at Los Angeles and Long Beach, where changes are complicated by the large number of terminal operations, may require the ports to use their tariffs as mechanisms to implement new programs.
Ports and the federal government today often are expected to make significant infrastructure investments without the safety net of a long-term cargo volume commitment. That means investment in channel deepening and terminal improvements come with greater risk. Ports face increased financial demands as their leverage to lock in customer business for the long term is diminishing. Gone are the days when the port administration could bank on the increased volume locked in through long-term leases that tied a steamship line to a particular port terminal.
Ports must respond to shipping lines’ changing business models. The Northwest Seaport Alliance will tackle the issue of there being too many terminals incapable of handling larger ships. The alliance recognizes the need for fewer, yet larger, terminals to ensure that they can adequately handle larger ships.
Terminal consolidation is the next logical step in ports becoming more efficient. It is not, however, as simple a process as “taking down a fence” between terminals, but one complicated by the existing framework of long-term leases and corporate governance.
On the U.S. East and Gulf coasts, however, the case for greater port integration is taking a slower path. The prospect of gaining market share after the expanded Panama Canal opens means many ports still are pursuing infrastructure investments. East and Gulf Coast ports are still advancing plans to improve their own facilities while their customer base is consolidating.
Given that cargo moving in shipping alliances might shift terminals more frequently, there is always opportunity for a port that may not have the capability today to handle big ships to capture some cargo even if it isn’t first in having adequate facilities. But the infrastructure investments are riskier, and they are being made without a commitment that guarantees increased cargo volumes.
Ocean carriers, especially the alliances, play one port against another, and ports try to respond to their demands. There is no advantage to ocean carriers triggering investment by multiple port authorities in their facilities. It’s not going to help the carriers if every U.S. East Coast port that wants a 50-foot channel gets one. Ocean carriers need concentrated investment in particular regions to ensure ports with sufficient terminal capacity and infrastructure can turn around their ships as quickly as possible. The carrier alliances need to rely on port infrastructure and information systems that are robust enough to service them.
Carrier alliances have a unique opportunity to do two things the U.S. government has been unable to do: drive the development of a national port system, and pick winners and losers. Rather than pitting one port against another for an incentive or lower rate, carriers must ensure a system will be in place to serve their ships adequately, not only the channel depth, but the terminal capabilities — including cranes, cargo-handling equipment and modern gate systems — as well as hinterland infrastructure and information systems.
Similarly, the Panama Canal Authority has more than 25 memoranda of understanding with East and Gulf Coast ports going back to 2003. Renewing many of those agreements over the past few years lends credence to the perception that the Panama Canal expansion creates opportunities for multiple ports. These MOUs were an impetus for ports to direct capital investment for infrastructure. but the sheer number defeats the purpose of devising a strategic network. Like the carrier alliances, the Panama Canal Authority requires concentrated investment in a few areas.
The outlook for 2016 is a continued trend toward greater integration among ports that recognize changing industry dynamics means they must take action. My own research shows that collaboration that comes from within the port organization is more successful than a top-down approach imposed by organizations outside the port. Although government-proposed collaborative initiatives have value, ports, by initiating their own collaborative efforts are, in effect, creating the national port system in the U.S., region by region.
The impending opening of the canal and the consequent shift to larger ships for East Coast calls will undoubtedly do the same for that region. The carrier alliances can be part of creating a national port system rather than a divisive force between ports. Competitive pressures will continue to drive increasing numbers and types of port collaborative efforts in the U.S. and worldwide. The results will be a truly integrated global port system.
Geraldine Knatz is a professor of engineering at the University of Southern California, a former executive director of the Port of Los Angeles, and former president of the American Association of Port Authorities and the International Association of Ports and Harbors. Contact her at knatz@usc.edu.