Creating new economic zones

A paradigm shift from transhipment to logistics hub

By Fritz Pinnock and Ibrahim Ajagunna

By virtue of its location, the transhipment hub port network of the Caribbean is the one best placed to serve the United States. The opening of the expanded Panama Canal in 2015/16 is a milestone event for the Caribbean because the growth in vessel size transiting the canal from 4,500 to 12,500 teu will provide greater opportunities for transhipment to access the US east coast and South America more competitively.

The last decade has seen hub ports in the region announcing expansion after expansion in an effort to become the most attractive transhipment port. Since the global recession in 2008, the international take on transhipment seems to be shifting to ports that provide greater value-added logistics through integrated economic zones because these provide a more equitable balance between imports and exports. In addition, the shift from ‘offshore’ to ‘nearshoring’ is creating new economic zones within the Caribbean region. Offshore manufacturing, for example, has been synonymous with the Pacific Rim for decades and is still often the best way to save a line of business that might otherwise decline because of rising labour costs.

Trend

As the offshoring trend has progressed, however, the drawbacks of moving production away from the demand have been more obvious. For example, the language barrier, time zones and infrequent face-to-face meetings make common design adjustments difficult and expensive for Asia-based production models. The variables can also affect delivery time.

This calls for a new generation of logistics hub ports with large areas of land that could also integrate into air cargo services, all with one common customs border, making value-added services flexible and mobile. This will introduce the new port of Mariel in Cuba and the much talked about Goat Islands port in Jamaica to be developed by the Chinese. This shift also affects sub-regional hub ports such as Kingston Wharves Limited, which is investing heavily in upgrading portside and shoreside facilities.

The growth in Caribbean transhipment is linked to issues such as economic growth in Latin America and the need of shippers to accommodate these inbound and outbound trade flows within their shipping networks.

Transhipment is thus a mix of hub-and-spoke configurations and interlink between long-distance shipping routes. The advantages gained in terms of network inter-connectivity and better use of ship assets outweigh the additional handling costs involved in transhipment. According to Rodrigue and Notteboom, the expansion of the Panama Canal comes at a time when world trade developments are prone to uncertainties, because the main drivers of trade, such as American import-based consumption, are being questioned while new trade relations are not firmly established. In addition, South America offers great potential for additional volumes and transhipment activities.

Caribbean transhipment ports can be classified into three layers: • Global hub ports • Sub-regional hub ports • Service ports.

Global hub port status will be shared by at least three major ports – KCT, Jamaica; Cartagena, Colombia; and Manzanillo, Panama – based on investment in existing hub ports by international port management companies and shipping lines. These are the non-aligned competing hub ports that could swing the pendulum through new investment in the region.

Improvements

Vessel size has been growing constantly with improvements in technology and more specialised containerships that do not have onboard container cranes, thus obliging Caribbean ports to provide shore cranes and other container handling facilities.
Consequently, large transit sheds used primarily for storing sugar and bananas must be removed to create large areas of open storage for containers.

Some Caribbean states have invested heavily in modern port infrastructure with a view to offering their services as global transhipment hub ports and sub-regional hub ports. The rest operate as service ports catering to domestic economic needs.

Efforts to improve cooperation among Caribbean port authorities and shipping companies could lead to further benefits. Transhipment allows the use of larger and more specialised vessels and exploits the economy of scale at hub ports. For small countries, even a low volume of transhipment can make up a high proportion of total port cargo traffic. Transhipment is very attractive to ports because it adds cargo to the local trade, making otherwise uneconomical operations profitable and infrastructure investment more viable. This, in turn, brings direct benefits for local traders and consumers by attracting more ship services while lowering unit costs.

Developing the most efficient port network would require regional agreement to share the costs of infrastructure investment costs so that all might benefit from increased traffic flows. A lack of cooperation among carriers, too, leads to inefficient use of cargo space. Carriers with a backlog often prefer to keep cargo idle and customers waiting than to approach a competitor sailing away half-empty. In other regions, carriers cooperate with slot-sharing agreements and alliances to use capacity in a more effective way. A voluntary regional system whereby ships and shippers can access information on available capacity could greatly improve the use of cargo space.

The ports of Kingston (Jamaica) and Freeport (Bahamas) are good examples of how transhipment adds economies of scale beyond what local business will permit. For Caribbean countries on major trade routes, transhipment of foreign cargo can be a big part of operations.

Logistics and supply chain integration

Today’s biggest business challenge is knowing how to respond to a world in which the frame and basis of competition are always changing; against that backdrop, any effort to set corporate strategy must consider more than just traditional performance measures.

Companies must now consider how well their supply chain strategy addresses the risks and opportunities created by global trends that are reshaping how our businesses and societies will work.

According to McKinsey, the coming decade will be the first in 200 years when emerging-market countries contribute more growth than the developed ones; and this growth will not only create a wave of new middle-class consumers but will also lead to profound innovations in product design, market infrastructure and value chains. McKinsey says there will be 1 billion new middle-class consumers in the next seven years, expanding to 3 billion by 2030. In addition, about 1.2 million people per week will move from rural areas to urban centres and cities will be the new epicentres of growth. As a result, 440 cities will account for more than half of the worlds GDP growth over the next decade. The global economy is growing and it is also ever more connected. Complex flows of capital, goods, information and people are creating an interlinked network that spans geographies, social groups and economies in ways that permit large-scale interactions at any given moment. This expanding grid is seeding new business models and accelerating the pace of innovation. It also makes destabilising cycles of volatility more likely and potentially more frequent.

The present volume of cargo originating from the Caribbean does not, in the short term, justify the large fixed capital cost needed to secure more efficient port operations. One container handling crane, for example, costs US$ 8 million. Administration and support services costs are also greatly influenced by economies of scale. In addition, smaller island ports are generally served by smaller or underused vessels, with a direct impact on per-unit shipping costs.

According to Pinnock and Ajagunna, analysis shows that Caribbean ports may not necessarily lack capacity overall; nor is the number of carriers insufficient for present needs. Instead, harmonised regulatory and legal reform strategy is needed to create incentives to improve management and administrative practices; stimulate investment in modernising facilities; and ensure efficient pooling of resources. Freight logistics and shipping industry reforms should emphasise greater competition, regional cooperation and modern efficiency techniques.

With the impending opening of the expanded Panama Canal in 2015/16, it is good to link the Port of Kingston and Caucedo (Dominican Republic) with Barbados and Trinidad to improve efficiency in shipping and freight logistics. In essence, this will provide a greater link between global, regional and sub-regional ports (schooner trade). So it is important for the schooner trade network to be recognised and integrated into the Caribbean network.

Supply chain volatility

The often-contradictory demands of driving economic growth and providing safety nets to maintain social stability have put many national governments under extraordinary pressure. In addition, globalisation brings more pressure. It has been observed that globalisation is accelerating, leading to structural shifts for global supply chain organisations. The figure below illustrates this. According to experts, traditional supply chains were designed at times of prolonged stability; but today’s supply chains must be ready to accept and adjust to greater turbulence, changes and uncertainty introduced via: • Commodity prices • Natural disasters • Financial markets • Logistics costs.

Supply chain managers must operate in volatile conditions; which suggests that conventional wisdom needs radical rethinking in the light of major changes in the global business environment. The nature of volatility in key business parameter illustrates that future supply chains must adapt to a setting we refer to as ‘turbulence’. Experts measured the turbulence in supply chains and created a Supply Chain Volatility Index. Garry Fay, chief global and logistics and operations officer at Avnet, put forward what he described as the three macro factors. He believes these micro factors have remained constant over time and should be on the radar of every supply chain professional. They are:

Global economic conditions

According to Garry Fay: “Not a day goes by at my company when there isn’t a deep discussion of world economic conditions. One day the dialogue may be about the US economy and the anticipated effects of the sequester. On the next day, the focus may shift to China’s growth rate and the following day the topic may be on productivity trends or tax policies in Latin America. These discussions are not limited to the direct impact of these issues on our company but include an expansive evaluation of how these economic conditions influence our trading and transportation partners.”

Of course, you would all expect the leadership of any global company to be constantly evaluating these issues, but Garry Fay says all supply chain professionals should be equally concerned with global economic fluctuations, follow these changes closely and view the evolving conditions as precursors to changes in the supply chain landscape.

Political climate

According to Garry Fay: “We all tend to view the political climate through the prism of the politics within our own country. Unfortunately, that perspective tends to distort our interpretation of events elsewhere in the world and bias our understanding of geo-political trends. Hand in hand with the diversity of political initiatives around the world is the diversity of cultural perspectives that underscore and drive regional political dynamics.”

Every supply chain professional must work to understand and appreciate the political and cultural environment in each of the countries and regions that influence the vitality of their supply chains. This is not an easy task and requires multiple sources of informational input.

Legal and regulatory environment

The degree of global regulatory complexity is staggering and becoming more so each day. As a result, the wider the dimensions of your supply chain, the greater your exposure to trade compliance risk. Understanding the detailed requirements of emerging regulations is absolutely essential to successfully navigate through the regulatory maze. However, that is easier said than done. Too often, as new regulations go into effect, there is a lack of clarity and a cloud of misunderstanding within our industry. Proactive involvement is necessary along with the active participation of our industry associations to drive consistent standards between industry trading partners.”