MARCH 2016, WHEN THE MAJOR PORTS OF THE WORLD COMMUNICATE

 

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This text explains the performance of port sites by the theory of networks. It indicates that the level of integration of a port site to a network can explain financial profitability and performance. This performance comes from the synergy generated by the sum of the parts of the network. We speak then of “economies of network” or “network effect”.

The ports of the world support international trade

International trade is supported by a vast network of transport. If maritime transport represents approximately 80% of international trade, port infrastructure therefore play an essential role.

The maritime routes of this network are linked between the main continental blocks. The dynamics of trade is largely between three major poles called the ‘triad’: which consists of Eastern Asia, of Western Europe and of North America. These three major regions of the world accounted for 52% of global GDP in 2013, but their weight tends to decrease with time since they accounted for 70% of GDP at the turn of the century. The north-South maritime trade tends to develop more and more with countries in South America, in Africa, and in Australia. The concept of the triad could be extended to other global economic centres.

Goods are carried by accessing different groups of ports called “facades” located on each pole of the triad. For example, ports of Shanghai, Tianjin, Shenzhen represent the facade of the coast of China. The Japanese facade gathers ports of Tokyo, Kobe, Nagoya. The ports of Rotterdam, Antwerp, Hamburg represent the Mediterranean façade. Valencia and Marseilles, the facade of Europe. The West Coast is represented by the ports of Long Beach in Los Angeles.

A summary assessment of trade shows that it is fairly well distributed within the triad. According to the latest available data, mutual trade in goods accounted for 1 561 billion $US in 2011 to connect Europe to far East Asia. They represented 1 382 billion $US  to connect North America to Asia. Finally, from Europe to North America, they were of 862 billion US $[2].

The tables following give the distribution of exports and imports for the continents for the years 2011-2013. One can see the preponderance of Asia (including China) compared to the rest of the world in international trade. Exports and imports of Asia accounted for 32% in 2011 and 34% in 2013. Trade in Asia has become equivalent to trade in  Europe, or 34 per cent in 2013. America remained stable at 13% and  Europe has lost a point percentage in three years, or 35% to 34%.

table-import-export
 THE ASIAN PARADOX
One might expect that the distribution of the volume of goods handled in ports corresponds roughly to the distribution of these trade in value. For example, the volume of goods handled in Europe’s ports should have the proportion of  the value of goods exchanged : Europe is also responsible for a large part of international trade in the world (34%).

However, the distribution of the volumes of goods between the different ports of the triad is very uneven. 9 of the 10 largest ports in the world are now located in Asia. As the chart below indicates, China, alone represented 56% of all the volume handled in the whole of the world, while the weight of international trade in Asia is 34%, and while much of economic activity is located in America and Europe. If it was only a matter of volume, one would conclude that Asian port sites would be very effective, much more than those in Europe or America.

grapĥique ports of the world

How to explain this situation? Certainly, due to the movements of relocation, China has become the manufacturing base of the world. But, the high density of the population in China requires a distribution to high-volume ports. In America or Europe, the distribution of the population on a larger territory may require a distribution on several smaller ports.

In addition, because land infrastructure is less developed in Asia, goods are carried largely along the coast and not inland.  On can estimate that more than 20 of the 100 largest ports in the world are transhipment platforms where one half at least of traffic goes from one ship to another ship. This would explain a double counting when the volumes of ports are added as well as the disproportion attributed to volumes of Asian ports (see chart on the previous page).

Finally, North-South axis is largely dedicated to  transport of raw materials. If value of transported material is relatively small per unity of volume, the total volumes is considerable. China is a major importer of raw materials from the South, especially of coal.  This explains also the disproportion of the volumes measured.

A WAY TO MEASURE AND IMPROVE THE PERFORMANCE OF THE PORTS

This last question leads us to ask ourselves how to measure the performance but also the level of internationalization of the ports, and this, so as to eliminate the effect of the density of the market or of the distorting effect measured by the volumes of handling. There are several indicators to measure ports performance, including financial and operational health. Indicators like value of merchandise, efficiency, revenue and profit  are significantly more representative of the port performance than a simple measure of volume.

Network analysis allows to address this issue by highlighting the quality of the network links and the level of integration of a port in the supply and value chains. Three types of links networks can be considered to explain the performance. These links are a source of added value, allow an optimization of prices and port revenues.

First type of links networks: integration with supply chain (supply chain)

The  ‘supply chain’ describes the process of realization of the different logistical stages of handling and transport of goods from one region to another.  It is important to not to be confused with the concept of ‘value chain’ which describes the different stages of processing, from upstream to downstream, up to the final production of one product.
For decades the supply chains are integrated vertically in the global markets under the influence of the multinationals. This means that the elements of the supply chain are dispersed around the world. Centralized management allows to increase the performance of this chain in terms of price, quality of service and reliability. This structure has an impact on planning, vertical integration and conclusion of long-term contracts in order to reduce the costs and enhance the coordination and synchronization.

According to the OECD, recent studies suggest supply chain analysis has become the reference relevant to understand port competitiveness, which depends on increasingly coordination and the control exercised by external actors. The choice of a port by a sender should be based on the costs of network as a whole and not necessarily on the cost of services provided by the port itself. Selected ports are those that minimize the sum of the costs of the crossing by sea, port and on land, including the storage. The selection of a port would be thus regarded as a by-product of the choice of a logistical route.

This means that the ports can earn attractiveness and show that they can be an  efficient alternative to other routes by exploiting complementarities  links in the supply chain : for exemple by developing or strengthening ties to the main parts of the chain like distribution centres.

Second type of links networks: communications

In General, technological and operational innovations are one of the ways to increase productivity of the ports. A better communication system allow a better integration and a greater efficiency of the network. The issue is to insure compatibility between the communication system and the various players in the supply chain which are the  amateurs, marine lines, operators of terminals and same of public institutions (Ministry of transportation) of the different levels of Government.

This implies a diagnosis of the supply chain in order to ensure improvement at all levels of the chain, internal and external. The efficiency gain results into benefits for shippers in terms of coordination of transport and time savings. Overall, the integration of the communications system increases the attractiveness of the port site.

The compatibility of communication networks became an important criterion for preserving their integrity. In this regard, the development of new protocols for computer communications and the development of business (VPN – virtual private network) application to bring together, in a single network protected, computers of different companies belonging to the same chain of supply. These networks allow the development of applications with high added value, as for example, tracking in real time of the goods, the compatibility of timing of deliveries, the management, the management of the time of arrival and departure and the availability of equipment.

Third type of links networks: intermodality

Supply chain management must consider all of the different logistics functions for the delivery of the product of the goods from their points of origin to destination markets. The supply chain does not stop there or is located the port, but extends into Frontcountry and backcountry. This means that the extent of the network requires a connection with other modes of transportation, such as train, truck and even the aircraft. The quality of connections with other modes of transport allows a better movement of goods. It helps to increase the fluidity and efficiency of port operations and also the attractiveness of the opposite port shippers. They seek primarily to bringing the goods into the backcountry more quickly and at lower cost. Expectations for flexibility, reliability, and precision accuracy. Average life cycles of products and supply chain are shortcuts.

Louis Bellemare
Economist
The new World Maritime

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