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Developing Smarter Port Infrastructure Remarks by William Villalon, Vice President & Head, Global Marketing Department, APL Co. Pte Ltd., before the World Economic Development Congress Smarter Is Often Better than Larger When Developing Port Infrastructure Good afternoon. On behalf of APL, let me thank the World Economic Development Congress for inviting me to address this prestigious forum. I am also delighted to participate in this afternoon's panel alongside representatives from two of the world's premier port terminal development and operating firms. My hope today is to provide a customer's perspective of port development, from the scheduled container and intermodal service segment of the market. Siting, designing or operating a port today - a port that will meet the key objectives of facilitating trade and creating jobs and value for the region it serves - involves a number of very complex factors. Some of those factors are economic and financial, some demographic and geographic, some political. I will mention some of these considerations today. But, especially, I would like to provide some insight into the changing global business environment in which the carriers operate. The reason is that, ultimately, port selection - and prosperity - hinge on a facility's ability to meet the needs of the carriers and their customers. And those needs are changing rapidly. Keep in mind that APL wears several hats in this discussion. We are an ocean carrier, with a fleet of 87 container vessels deployed worldwide... an operator of inland intermodal services in North America and Asia... manager of an equipment fleet of some 278,000 containers and 62,000 chassis worldwide... an alliance partner with three other carriers in the Asia trades, and with another major carrier between the U.S. and Latin America... and a provider of logistics and supply chain services such as warehousing, cargo consolidation, inventory control, order fulfillment and management reporting. And we also operate 10 ocean and 4 inland terminals worldwide, most notably a new $300 million facility at San Pedro in Los Angeles harbor, a new $100 million terminal in Seattle, a first-of-its kind, specialized intermodal container terminal at South Kearny, New Jersey, and a new terminal venture in Karachi, Pakistan. Liner shipping, as the scheduled container service segment is typically called, has a unique set of operational considerations that influence port development economics. We are in a highly capital-intensive segment of the industry, in which new container ships cost an average of $80 million each and a minimum of five ships are needed for a service string, such as between the Pacific Northwest and Asia. Container equipment alone to support a single new-generation vessel costs in the $10-to-15 million range, with an average dry container costing about $3,000, and with refrigerated units ranging from $25,000 for an insulated container with a standard generation unit, up to $50,000 for a container that uses microprocessors to continuously monitor and control temperature and humidity. That does not include maintenance and repair overhead for this equipment, nor the cost of chassis for pickup at the customer's premises and transfer at the destination port, nor the supporting shoreside equipment and infrastructure, including multi-million-dollar gantry cranes which in many port locations APL itself purchases. Many carriers, including APL, now own and operate rail car fleets specially designed to carry containers. They maintain global networks of sales and customer service offices. And they invest heavily in information systems - both proprietary and internet-based - to manage the flow of cargo and equipment in a seamless, door-to-door transportation and logistics system. Most of these high capital and operating costs per voyage - typically 85 to 90 percent - are fixed, because the schedules and port calls are fixed. Whether there is significant cargo to be picked up or delivered, the ship arrives and departs every port as scheduled. Shoreside crews show up to load and unload. The same amount of fuel is consumed. Trains and trucks show up at the dock. A typical 42-day trans-Pacific round trip voyage, according to industry studies, incurs a daily operating cost in excess of $40,000, for a typical linehaul container vessel of 4,000 to 5,000 TEU, including capital, administrative and operating costs. Against these costs, which, as I said, are largely fixed, container lines rely largely on short-term bookings for their revenue stream. While much of our cargo in the Pacific moves under service contracts, this type of contract does not guarantee cargo - it simply establishes a customer's minimum cargo commitments for obtaining discounts over a specified time period, usually a year. So, on a per-voyage basis, revenue is highly variable - especially when it can easily be eroded by fluctuations in exchange rates, inflation, wage levels, fuel prices, changes in government policies, and so on. Most freight bookings are made within 90 days of sailing and often within 30. Supply and demand also play a role in carriers' costs and long-term investment decisions. Carriers must order new ships for 15 to 20-year cycles, weighing long-term demand forecasting against price trends in the global vessel construction market. In 1994, most major trans-Pacific carriers looked back at two years of solid, double-digit cargo growth in the Asia trades, at the same time that they were being offered highly concessionary terms from shipyards looking to fill their order books. 1996-97 saw a dramatic increase in new container capacity in the Pacific, just when cargo demand was beginning to level off. The pressure to fill ships in both directions and hold onto market share caused rates to fall by $600 to $1,200 per 40-foot container - a 30 to 50 percent drop over eighteen months. Against this backdrop, service requirements - driven by our largest, global customers but expected by all customers - continue to expand. Fifteen years ago, most liner shipping was basic, "point A to point B" transportation. Today ship, rail and truck connections are coordinated at port and inland intermodal terminals, under a single, door-to-door freight bill. Carriers track freight for their customers down to the individual carton of sweaters, stereo equipment or glassware in a container - in transit or in storage. They modify routing and timing of shipments to meet delivery objectives. And they increasingly serve as supply chain partners, handling automated order fulfillment, inventory replenishment and management reporting. Shipping lines have attempted to address this difficult combination of high capital and fixed operating costs, expanding service requirements from customers, and an uncertain revenue stream, in several ways: First, ships have gotten larger, in order to lower per-unit carrying costs on the linehaul voyage. The largest vessel to enter service recently is nearly as long as three football fields, and more than 10 meters wider than the Panama Canal, carrying up to 7,000 20-foot containers. Second, these linehaul ships are designed for loading and service flexibility, making fewer port calls and spending less time in each port. In the Pacific, for example, they deliver huge container volumes at high-capacity "load center" or trans-shipment ports, for regional distribution via smaller "feeder" vessels, truck or rail. Third, carriers have turned to alliances as a means of leveraging complementary strengths to offer flexible, comprehensive service across a wide range of markets. Alliances also enable carriers to achieve greater economies of scale through the sharing of vessel space, terminals and equipment. In so doing, they increase schedule and routing options for customers, while improving vessel utilization and permitting more efficient retrieval and positioning of container equipment. A key component in alliances involves terminal-sharing - to improve efficiency and to reduce each partner's exposure in terms of lease payments and throughput charges. The port benefits, in turn, from better utilization of fewer, larger terminal facilities and a more predictable revenue stream to amortize capital costs. Finally, even carriers that traditionally positioned themselves in the marketplace as low-cost providers of transportation are now beginning to re-focus their strategies and offer value-added logistics and supply chain management services. Why? Customers increasingly demand those services and are willing to pay a premium for them in an industry whose "product" is otherwise becoming commoditized. In summary, the results of changing carrier economics and customer demand have led to larger ships... Segmentation among ports into large "load centers" and smaller "feeder"and niche ports... alliances and terminal sharing that favor fewer, larger terminals at a port... and the strategic carrier shift from basic transportation to more complex logistics services. In that context, carriers and alliances now have very specific shopping lists as they build their trans-shipment hub port networks. |
