VAN DE VOORDE

PORT COMPETITION WITHIN THE MARITIME LOGISTICS CHAIN

Prof. dr. Hilde Meersman

Prof. dr. Eddy Van de Voorde

1

CONTENT

• Ports are complex and heterogeneous economic entities

• Ports are nodes in the supply chain

• Port competition plays at different levels but is dominated by the competition between entire supply chains

2

WHY STUDY PORT COMPETITION?

• Port competition is an important topic in transport economics:

- Large volumes of goods

- Direct and indirect employment

- Considerable amounts of investments

- Public or private?

- Regulation/deregulation?

- Strategic position

3

• We want to understand the impacts of some important evolutions - increasing vessel sizes

- specialisation of vessels and use of unit loads

- vertical integration within intermodal chains

- hub & spoke; transshipment activities

- economic and managerial integration of logistics chain, driven by capital flows

- in- & outsourcing of logistic activities

- growing public concern about the sustainability of port activities

WHY STUDY PORT COMPETITION?

4

• Research should be able to analyse and predict the consequences for

- the capital/labour ratio and future employment in the ports and maritime sector

- port planning, port capacity and port expansion

- the optimal land-use

- the public support e.g. NIMBY syndrome

- pricing strategies for optimizing capacity utilization

5

Potential port throughput Port capacity

EFFECTIVE PORT THROUGHPUT

Economic activity International trade

Maritime trade

Socio-economic evolutions, economic policy and structural changes in the world economy

Competitive position of the port

THE FOCUS

6

THE FOCUS

Large seaports

characterised by three important elements:

• The maritime aspect i.e. location on the shore and/or the capacity to handle ocean-going vessels

• The goods-handling function

• The distribution function, including hinterland connections.

7

2002 2009 Port Cargo turnover Port Cargo turnover

(million metric tonnes) (million metric tonnes)

Singapore 335 Shanghai 506 Rotterdam 321 Singapore 472 Shanghai 239 Rotterdam 387 South Louisiana 196 Tianjin 381 Hong Kong 193 Ningbo 372 Houston 161 Guangzhou 364 Chiba 159 Qingdao 274 Nagoya 158 Qinhuangdao 244 Gwangyang 153 Hong Kong 243 Ningbo 150 Busan 226

Source: AAPA, 2010

8

CONTENT

• Ports are complex and heterogeneous economic entities

• Ports are nodes in the supply chain

• Port competition plays at different levels but is dominated by the competition between entire supply chains

9

VALUE ADDED

SERVICES CORE SERVICES

Marine services

Terminal services

Ship repair services

Real-estate

management

Information

management

General logistics

services

Value-added facilities

SEAPORT

SERVICES

Logistics chain

integration services

PRINCIPAL ROLES OF SEAPORTS according to the World Bank

10

THE HETEROGENEOUS PORT: A MULTI-ACTOR PLAYING FIELD

Non-port actors in port

perimeter

Port actors in port perimeter

Non-port actors outside port

perimeter

Port actors outside port

perimeter

11

THE HETEROGENEOUS PORT

The port actors may be roughly divided into three groups:

1. The port users: shipping companies, shippers, industrial enterprises,…

2. The service providers: terminal operating companies, pilots, towage services, agents, forwarders, ship repairers, suppliers of foodstuffs and spare parts, waste reception facilities, and bunkerers

3. Port authorities Quantification of relationships: Coppens et al (2007)

12

THE PORT ACTORS

13

RESEARCH

• Spill-overs - identification of the spill-overs: financial, employment, value

added, environmental

• Direct and indirect impacts of strategies and policies - Input-output analyses can study direct and indirect impacts

- Input-output analysis combined with micro- and company-data can reveal strategically important port actors

- Input-output analysis with specific attention to environmental impacts

• System Dynamics to simulate the complexity of the port sector

14

Interactions between port actors

• Decomposed forward linkages

• The linkage of industry i to customer j, relative to the output of that customer

15

DECOMPOSED FORWARD LINKAGES

AGENTS

FORWARDERS

SUPPORTING

ACTIVITIES

SHIPPING

COMPANIESTERMINAL

OPERATING

COMPANIES

HINTERLAND

TRANSPORT

COMPANIES

CUSTOMS

BROKERS

FUEL TRADE

DREDGING

SHIPBUILDING/

-REPAIR

OTHER TRADE

8.07%

8.85%

19.35%

12.82%

15.09%

11.92%

23.25%

10.73%

8.25%

8.09%

16

Interactions between port actors

• Decomposed backward linkages

• The linkage of industry j to its supplier i, relative to the output of that supplier

17

DECOMPOSED BACKWARD LINKAGES

AGENTS

FORWARDERS

SUPPORTING

ACTIVITIES

SHIPPING

COMPANIESTERMINAL

OPERATING

COMPANIES

HINTERLAND

TRANSPORT

COMPANIESCUSTOMS

BROKERS

FUEL TRADE DREDGING

SHIPBUILDING/

-REPAIR

OTHER TRADE

22.57%17.50%

16.54%

41.58%

24.76%

23.74%

10.68%

42.05%

11.72%

12.75%

19.23%

12.79%

12.06%

15.57%

16.46%

11.08%

18

CONTENT

• Ports are complex and heterogeneous economic entities

• Ports are nodes in the supply chain

• Port competition plays at different levels but is dominated by the competition between entire supply chains

Owner of the goods /

shipper Origin

Destination

Distribution

Centre

Port

Port

Receiver of the

goods

Shipping company

Terminal operating

company

Terminal operating

company

Hinterland transport

company

Hinterland transport

company

Forwarder

Agent

Customs broker

Customs broker

Distribution

Centre

20

CONTENT

• Ports are complex and heterogeneous economic entities

• Ports are nodes in the supply chain

• Port competition plays at different levels but is dominated by the competition between entire supply chains

Local/

national

authority

port Y

Traffic

category 1

Traffic

category 2 Port operator F

Port operator A

Port operator C

Port operator B

Port operator A

Local/

national

authority

port X

Port operator E

Port operator A

Port operator D

Port operator B

Port operator A

Port operator C

Port operator B

Port operator A

Traffic

category 3

Traffic

category 1

Traffic

category 2

Port

Y

Port

X

Port

range

Local/

national

authority

port Y

Local/

national

authority

port X

intra-port competition at operator level inter-port competition at operator level inter-port competition at port authority level

TRADITIONAL 3-LEVEL VIEW ON PORT COMPETITION

22

GROWING COMPETITIVE PRESSURE

At various levels:

1. Intra-port competition at operator level (e.g. between TOC’s)

2. Inter-port competition at operator level, e.g. between TOC’s within same range)

3. Inter-port competition at port authority level

23

ULTIMATE DECISION PROCESS OF PORT USER

• Does the port under consideration offer advantages compared to other ports serving the same hinterland?

• Does the port offer sufficient advantages in order to be considered as an addional port of call for an existing or yet-to-be-established liner or feeder service?

24

SUCCES FACTORS IN THE 3-LEVEL APPROACH

• Trade flows and industrial activity

• Geographical location

• Pricing strategy of port authorities and terminal operators

• Support of regional and/or national governments

- Financing port infrastructure and maritime access

- Subsidies

Port operator C

Port operator B

Port operator A

Port

X

SUPPLY CHAIN VIEW ON PORT COMPETITION

ORIG

IN

DESTIN

ATIO

N

Port operator D

Port operator B

Port operator A

Port

Y

Port operator E

Port operator D

Port operator A

Port

Z

Hin

terla

ndpro

vid

er D

H

inte

rlandpro

vid

er E

H

inte

rlandpro

vid

er

C

Hin

terlandpro

vid

er

B

Hin

terlandpro

vid

er

A

Shipping line 1

Shipping line 2

Shipping line 3

26

CRUCIAL QUESTIONS

• Where does the power of decision lie in relation to, for example, the choice of route and/or port, shipping company, terminal operator or hinterland mode?

• Which factors influence these decisions?

• How do such decisions affect decision-making by other players?

• Which decisions by which players determine the competitive position of the port in question?

• Is there a sequence to be discerned in decision-making or are certain decisions made quasi-simultaneously?

27

Owner/ Shipper

Forwarder Shipping company

Terminal operators

Cost xx x xx xx

Location xx x xx xx

Port operations quality/reputation

xx xx xx xx

Speed / time x x x xx

Infrastructure and facilities

x xx xx

Efficiency x xx x xx

Freq. of sailings x x x

Port info system x x x xx

Hinterland x x x xx

Congestion x x x xx

DECISION VARIABLES IN CHOOSING A PORT

28

MODELLING PORT COMPETITION: A GENERAL FRAMEWORK

• The main issue: which supply chain will be chosen? Which factors influence this choice?

• Summarised by the generalised cost of the chain

29

DECISIONS BASED ON GENERALISED COSTS

Subdivision into • time costs (e.g. wages, insurance premiums,

handling costs, storage…) and • distance costs (fuel consumption,….) TC = h.H + d.D + Z

Where TC = total costs h = time coefficient d = distance coefficient H = time factor (in hours) D = distance factor (in miles or kilometres) Z = other costs

30

QUANTIFICATION OF THE SUPPLY CHAIN

The supply chain is made up of various subsections, players and processes

decision-making unfolds at different levels and involves different parties

conflict of interests ?

the price charged by one party will be a cost to another party in the chain and will inevitably have an impact on its operating result

31

QUANTIFICATION OF THE SUPPLY CHAIN (ctd.)

• Modelling and quantification are required at different levels

• One should get a handle on all relevant tradeoffs between the players involved, at all possible levels of the supply chain.

• It also offers the opportunity to analyse how potential actions affect cost.

32

ACTORS, OBJECTIVES AND INSTRUMENTS

Players within a supply chain and their respective objectives and instruments Player Objective Instrument

Shipper and/or owner of goods

Minimisation of generalised cost, including time cost

Power of negotiation, dependent on size, strategic importance of product…

Forwarder Ibid., plus profit margin

Ibid.

Shipping company

Maximisation of profit

Rates. Cost control (capacity, volume, timing, cooperation…) Marketing Service

33

Player Objective Instrument

TOC Profit maximisation, Other objectives may include the establishment of a long-term relationship with the customer.

Pricing Technological choices The provision of value added services

Hinterland operator

Profit maximisation, i.e. maximum differential between total revenue and cost. Other objectives may include increasing market share.

Rates Capacity Flexibility Speed

34

Player Objective Instrument

Port authority or operator

In the case of a private or liberalised entity: profit maximisation Alternative objective: cost minimisation for the supply chain (out-of-pocket and time-related costs), or the maximisation of cargo volume handled.

Pricing Maritime access Concessions policy Socio-economic deliberation

35

NEW ISSUES IN PORT COMPETITION

Multiple actors with

- different objective functions, and

- different time horizons

complicated by interwoveness of the decisions:

- not only causality, but also

- simultaneity

36

NEW ISSUES IN PORT COMPETITION

The new playing field:

Drastic scale expansion by shipowners and terminal operating companies,

coupled with horizontal and vertical integration

37

UNCERTAINTY

• Each market player will try to anticipate on likely strategic moves by other players

• Each of these developments will have an impact on crucial decision variables, such as cost, price, and supply and demand

• As the various players are not affected in the same way, their strategies will vary accordingly

38

RECENT REACTION PATTERNS (1)

• Shipowners - reducing capacity by ending loops (e.g. CSAV),

merging loops (e.g. Cosco) - effect on alliances - aggressive capacity (e.g. MSC using ULCS) or

pricing policy (zero-tariffs) - diversification (e.g. CMA CGM in cruising and

cars)

• Terminal operators - fixed capacity, i.e. less degrees of freedom - pricing policy

39

RECENT REACTION PATTERNS (2): The Hutchison case

• Hutchison buys from NYK majority stake in Ceres Container terminals Europe (CTE)

- Containerterminal Ceres Paragon

- ro/ro and bulkterminal Ceres Amsterdam Marine Terminals

• NYK: minority stake in ECT (Rotterdam) and subsidiary of Hutchison

40

TO CONCLUDE

• Ports are clearly highly heterogeneous and complex environments

• Successful ports belong to successful supply chains

• Each port actor has his own agenda, strategic objectives and tools

• Much will depend on the behaviour of the largest and most influencing customers of ports, i.e. shipping companies

41

TO CONCLUDE (ctd.)

Port competition scenarios are more or less fixed

The timeframe remains uncertain

Timing and optimal speed of action will determine who ultimately comes out on top