As the “Great Recession” slowly begins to recede into memory, the attention of shippers, ports, and supply chain professionals across the globe is once again turning to the east.

Scores of cargo ships remain idled, but a positive uptick in container volume at the close of 2009 has already inspired hope, if not of a near-term return to normalcy, at least of a modest recovery by late 2010 or early 2011.

And, shipping lines are responding by tweaking services not just from China, but other points in the emerging Asian crescent as well.

Take, for instance, APL, which launched a new weekly direct container service between Vietnam and the U.S. West Coast last May.

Prior to kicking off the service, Vietnam’s exporters relied on feeder vessels and multiple costly container moves to gain access to the world’s most prosperous consumer markets. Today, it takes just 15 days to ship a container from Saigon Port to Seattle, and 16 days to Los Angeles.

Eng Aik Meng, APL’s president, has described the effort as “the beginning of a new era” for trade in Vietnam and recognition of its increasing importance as a manufacturing and export center.

And, APL has not been alone in its embrace of emerging world economies as a key part of its future. The COSCO/CKYH Alliance launched a service from Asia to the Port of Prince Rupert, British Columbia in 2008 that’s seen as a primary reason container volumes held steadier and longer than they did at other West Coast ports when the downturn set in.

Not only is the port two days closer to Asia than the Port of Los Angeles and the Port of Long Beach, but its $170 million Fairview Container terminal provides a direct rail connection to Memphis, Tennessee, the largest intermodal hub in the South Central U.S. What’s more, the overland trip takes just over 134 hours.

 Such moves only validate earlier forays by companies like Maersk, which moved into the emerging markets of India and Turkey years ago.

China remains dominant

“What we’ve learned, Tom Friedman notwithstanding, is that the world still isn’t flat, that borders still matter, and distance still matters,” said Robert Lawrence, Albert Williams Professor of Trade and Investment at the John F. Kennedy School of Government, Harvard University.

 “The other thing that’s come out of the [economic downturn], politically, is that we have a well functioning trading system with rules that have been subjected to a great stress test and prevailed,” Lawrence said. “If you remember, it wasn’t so long ago that everyone was worried that countries were going to erect huge trade barriers, and while some nations have tinkered at the edge, by and large that hasn’t happened. So I think we can assume, going forward, that there’s a pretty healthy trade regime in place.”

When it comes to the importance of emerging economies and their influence on the future of trade lanes, Lawrence is as much an expert as anyone; he’s one of the authors of the World Economic Forum’s Global Enabling Trade Report.

The hefty, 300-plus page report, is an annual survey of 130 countries ranked on how well they facilitate trade.

According to the report, certain fundamental attributes govern a nation’s ability to become a player in facilitating global supply chains and remain attractive to shipping lines and their customers. These are market access, border administration, its transportation and communications infrastructure, and its overall business environment.

Based on those criteria, two Asian economics, Singapore and Hong Kong, took the top two spots in the ranking. China, Taiwan, South Korea, Chile, Brazil, Costa Rico, and the United Arab Emirates, also ranked highly.

Japan, Australia, and New Zealand fared well, although each lost points—as did some members of the European Union—for high or complicated tariff regimes.

The U.S. came in 16th, scoring high in almost all criteria, but earning some negative reviews from shippers concerned about security hurdles at its ports of call.

“We look at a number of factors, things like how well their customs [agencies] work, how well their ports work, and so on, and when you look at all the criteria, Singapore and Hong Kong are doing very well,” Lawrence said. “They’ve established themselves as very trade-friendly, but obviously, you also have to look at the size of the market once you get there.”

So, what markets are going to matter in the era of economic revival?

“The huge driver is China,’ Lawrence said. “In fact, just [recently] the newspapers reported that China has become the world’s biggest exporter, overtaking Germany.

“At the same time, India is growing rapidly, with a projected growth rate of 6 percent or 7 percent, and that’s directly related to a continued opening up of its economy,” he said. “At the same time, India has huge bottlenecks, and its leadership is paying a lot of attention to improving its ports and infrastructure.”

Although the global financial crisis of 2008 and 2009 continues to dominate headlines, Lawrence said the real shift in the importance of the emerging world began in 2000.

“Thanks to its wealth of natural resources, for instance, Africa grew very rapidly for much of the decade, slowing only with the onset of the crisis,” he said. “Everyone is expecting that growth will resume once the crisis lifts. In fact, it’s no exaggeration to say that the growth location on the planet is the emerging world.”

Unfortunately, Lawrence doesn’t see quite so much dynamism in the developed West, save for economies like Canada and Australia, which have vibrant commodity exporting sectors.

In fact, he says theirs is a model the U.S would be wise to follow in order to restore its own economic wellbeing.

“Bear in mind, we’re already exporting a lot,” he said. “Our exports are valued at well over a trillion dollars, and that’s not trivial. Now, I think it’s valid to say we’ve lost a lot of [manufacturing] capacity, but I would argue that with the right competitive environment, we can restore that capacity,” he said.

“Unfortunately, the prognosis for Western Europe and Japan is not as good,” he said.

Consumer demand is king

Looking at the demand side of shipping, import loads are, of course, what pay the most and what for many years have been the determining favor—the “head-haul” cargo—that drives the deployment of ships.

During the 15-year boom that preceded the crash, big import commodities included home building supplies (hardwoods, tile, and flooring materials) and home furnishings, auto parts (including engines, transmission, tires and miscellaneous parts), and that myriad of things called retail (shoes, clothes, kitchenware, sporting goods, toys and so on).

At this point, a consensus is building among financial analysts that the portion of the economy represented by housing has hit bottom as far as declining prices is concerned and that some inventory is now being absorbed.

That could auger well for ports near growing population centers, like Charleston, Savannah, and Norfolk. While no one is predicting 2010 will be great, it looks entirely likely that it will be better than 2009, possibly setting the stage for a renewal of building in 2011.

Equally important are the expectations of the battered automotive and retail sectors, represented recently at the Detroit Auto Show and the annual National Retailers Federation meeting in January.

For autos, several executives suggested sales in the U.S. could rise from an estimated 10.4 million cars sold in 2009 to somewhere between 11.5 million to 12.5 million cars sold in 2010.

As for the retailers, they received some good news at the end of 2009, with December being the first month in the previous 30 where imports actually rose. With their mood understandably bolstered, they predicted a better six months for imports compared to the same period last year. Again, this is in comparison with extremely low numbers for imports in 2009.

The consensus view is that U.S. cargo volumes have been set back 6 to 8 years by the Great Recession, and no one is forecasting a V-shaped recovery.

Focusing on the 'real story'

On the other hand, nearly everyone with a stake in the Asian-U.S. trade, save for those on the U.S. West Coast, for obvious reasons, is banking on a huge shift in cargo routing with the opening of the expanded Panama Canal in 2015.

Since the expansion got underway, every port on the East and Gulf Coasts that have had the land to do so have embarked on significant expansion plans.

At the same time, Norfolk Southern Railway and CSX Transportation have each worked on mega-million-dollar capital plans to make it easier to serve the Chicago and Midwest markets from the East Coast, in anticipation of a large swing of Asian cargo moving through U.S. East Coast Ports.

Bernard S. Groseclose Jr., who until last year was president and CEO of the South Carolina State Ports Authority and is now an industry consultant, recently reflected on the roller coaster ride the shipping and port industries have been on the past few years and offered a hopeful assessment on where they’ll both wind up.

Groseclose views the financial meltdown and resulting collapse of world trade as “consumerism that got out of control.”

“People had little experience with recession in their working life, money was first and foremost… there was a real race to do more and have more stuff,” he said. “On the port side, trade had gone through an extended period of continuous growth and became an ever larger piece of the economy.

“Unfortunately, just like in the case of the banks, the signs of an impending collapse were all there, it’s just that people refused to believe them.”

Groseclose recalled how in Charleston he’d attend annual economic forecasts where predictions of thousands of housing starts were routine.

“It was something like a 20 percent increase in new homes every year,” he said. “You’d wonder, ‘How can that be?’ ‘Where will all these new residents work?’ But people got caught up in the notion of growth, and in dealing with the growth they genuinely believed was coming.”

Groseclose said a far more reliable assessment was offered by shippers and shipping lines.

“I remember when we traveled to India about eight months or so before the onset of the recession, and they were telling us they were already anticipating big declines,” he said. “They had already seen that their exports were dropping. And you’d come away from those conversations saying, ‘Certainly, this is going to impact us. We need to review what we’re doing.’”

The former port executive said as the recovery continues, he believes the most important lesson of the recession will be the need to stay focused on “the real story.”

“Personally, I believe emerging markets like China, India, Vietnam, and Brazil will be very important, but at the same time, you have to remember that trade routes are determined by consumer demand” he said.

“It’s like with the Panama Canal expansion,” Groseclose continued, “everyone is racing to be ready for the canal opening, but I think you have to step back and say, ‘What are our realistic expectations of benefiting from it?’ It’s not like there are a bunch of ships waiting on the other side of the canal to get to our ports. The ultimate determinate will be where the consumers are for the products on the ships.”

Groseclose, who oversaw the early stages of development of Charleston’s planned new terminal at the former Charleston Naval Base, said while the canal expansion might not pan out for everyone as they expect, he thinks it’s vital that port expansions continue.

“If you were to stop a current project or delay it, as some people have urged since the recession began, you’d likely miss out on that opportunity,” he said.

USA: the next emerging economy?

“To my mind there is no question that our trade routes coalesced around China, Singapore, and Southeast Asia in the late twentieth century, and culminated at the Port of Los Angeles, and there will continue to be growth there,” said Steven Weber, director of the Institute of International Studies at UC Berkeley.

“I mean, American consumerism is declining, but I don’t think we’ve seen or even begun to see the substitution of say, Mexican goods for Chinese goods,” he said.

Weber envisions a future where the U.S. becomes a major exporter of high-end manufactured goods, software, pharmaceuticals and entertainment, and our primary trading partners are countries like Brazil, India, South Africa, and even Russia, which have predictable property rights protections.

So, who will be the emerging economy of 2030?

Weber suggested, almost playfully but in a decidedly serious tone, that the “emerging” economy of the era will be the U.S.

“It’s kind of a twist to the usual conversation, but think of it in terms of the following logic,” he said. “Imagine an investor in the [Persian] Gulf, talking about the U.S. as a reasonable place to do low-cost manufacturing, a country with good infrastructure, an educated work force, a weak currency, good ports, and moderate environmental regulations compared to Europe. It’s entirely possible.” wt



Contributing writer Dan McCue lives in Charleston, SC, where he writes on global trade, foreign direct investment, and port-related issues.

Sidebar: As Trade Lanes Shift, Security Becomes More Vital

As trade lanes shift and new markets emerge, real-time technology is helping BASF, the world’s largest chemical company, keep closer tabs on its shipments around the world and stay ahead of potential threats throughout its global supply chain.

According to Steven P. Williams, BASF’s Geismar, Louisiana-based logistics technology manager, the utilization of real-time technology has not only improved shipment visibility, but allows the company to “positively know the location of chemical shipments using self-generated data versus stale or filtered data from a third-party provider.

“Refreshing the data for decision making purposes is controlled by BASF,” Williams continued. “In regions with an elevated threat level, shipments can be positively identified, located, and thus prioritized for movement or alternate disposition.

“Further, by using mobile technology, exact position data can be communicated to response personnel for visual field inspections,” he said.

BASF relies on a combination of tracking hardware and software throughout its supply chain, with security efforts relying on much the same technology as the operational side.

“There’s no question the security component is an extension of the movement component,” Williams said. “For instance, open/close sensors complement the location data generated by the same hardware and interpreted by the same software. The value is a solution that delivers on both the security and the supply chain management fronts.”

However, Williams said the company’s ability to generate modal specific shipment data has progressed more rapidly than the ability to manipulate data to manage the entire supply chain.

“Tracking individual assets has been impressive; visions by vendors of a multimodal, global supply chain solution using multiple technologies has not,” he said.

At BASF, having multiple outlets for technology deployment has driven down its implementation costs and improved the functionality for cargo. But, the transmission of the data must be encrypted and protected, thus increasing the challenge, Williams said.

“The good news is technology exists and encryption can be done now. The value proposition must include delivery of more supply chain value of the data generated,” he said.

Like others in his field, Williams readily concedes that no single technology can provide end-to-end visibility for the international movement of goods.

In light of that reality, he believes vendors should provide integrated hardware options for various asset types. 

“When selecting technology, we take into consideration what mode and what commodity will be tracked,” he said. “A high margin, HAZMAT product fleet may require and can afford two-way, dual technology GPS tracking hardware with multiple sensors; a low margin, non-HAZMAT fleet of similar assets needs a lower cost, basic service option.”

Regardless of the situation, Williams said, both options should still feed the same supply chain management system as should the varying barge, ISO container, railcar, truck, and drum devices the company employs.

“If integrated hardware options feeding data to a common system is available, customers will not have to omit some assets or subsets of similar assets based on costs,” he said. “A cost-effective view to all assets regardless of the location and language is the solution.”

As for the perennial question of cost, Williams believes that evolving technology, manufacturing improvements, and volume deployment have already made the costs palatable. 

“The business case will be defined by what value these systems can deliver from both a security and supply chain efficiency perspective,” he said. “That value is a function of software development or integration of the data into existing ERP systems such as SAP. Hardware will continue to develop, providing lower costs and improved performance, if a market exists.”

Sidebar: The Recipe Calls for Capacity and Infrastructure

Lars Reno Jakobsen, senior vice president for network and product at Maersk Line, believes that when it comes to emerging markets, finding a place in the global supply chain is about a whole lot more than the simple growth of their economy.

“It’s gratifying to see countries that haven’t been ranked among the ‘traditional’ economies experiencing significant growth rates—in fact, in many cases it’s the emerging economies that have faired the best in the global financial slowdown—but from the perspective of a shipping line, what matters is the absolute size of those markets,” Jakobsen said from his office in Denmark.

“That’s one reason, I think, that while there’s a lot of talk about ‘emerging economies’ there are very few, if any, new or emerging trade lanes,” he said. “Maersk, obviously, is a global carrier, and I think I can confidently say there are very few trade lanes in the world that we don’t service.”

Jakobsen, who only a week earlier had been in Vietnam, an emerging market that’s garnering a lot of attention in the trade community, said that when it comes to determining whether there’s potential for a relationship between a new market and a shipping line like Maersk, the “absolute size” of the market is a critical consideration.

“It’s a matter of balance and options,” he explained. “What are your opportunities in the market and how do you optimize them? What are your customers’ requirements?

“The balance we’re seeking is the right balance between service and cost, and then, of course, you have to look at the infrastructure. How reliable and effective are businesses in the region at getting their containers from inland factories to the water’s edge?”

One way to bundle these considerations is to consider them evidence of long-term thinking.

Jakobsen described that perspective as “absolutely critical” in the world of global trade.

“For instance, given all that’s occurred over the past year, you have to look at people’s response to that,” he said. “For a long time, trade growth was quite robust and people planned accordingly. Now, we’ve experienced a major downturn. Well, how did people respond to that? You know, you can’t base shipping decisions on short-term events.”

Given that perspective, it wasn’t surprising to learn that Jakobsen is cautiously optimistic about the uptick in container volumes in the final months of 2009.

“I’d say that there have been signals of improvements in select trade, compared with the middle of last year, and that’s paved the way for a more optimistic view of the future,” he said. “Still, it’s very early days, in terms of the improvement. It’s still very difficult out there.

“I think what we are seeing is a restocking of inventories in certain categories,” he added.

In late December and early January, Maersk increased rates on several of its trade routes, increases in line with those imposed by other major players in the shipping industry.

Jakobsen said the reasoning behind the hikes was simple: Rates had dropped down to levels that were unsustainable.

“If you want to invest in services and your ability to serve the customer, you have to raise your rates,” he said. “And I’ll tell you, this is only the beginning.”

One reason, he said, is the price of fuel. As he spoke, oil stood at $80 a barrel. By late summer, it could be as high as $150 a barrel, according to some experts.

“It’s very difficult to make predictions about the price of oil,” he said. “But for sure, we have to share that cost—the risk, if you will—with the customer. That’s the only way that you can stay in business—even in the case of a large company like Maersk.”

Inevitably, the conversation turned on the subject of the ongoing expansion of the Panama Canal.

Jakobsen said that initially, the physical expansion of the canal would greatly expand the routing and business option of Maersk and the wider shipping community.

“But, it’s a dynamic situation because there are many things we still don’t know with any certainty,” he said. “For instance, there are the fuel prices we just talked about. Then there are the requirements of specific customers. And then, a lot will depend on the pricing of going through the canal.

“So I guess what I’m saying is I can’t give you a rule of thumb right now for determining what the impact of the canal expansion will be,” Jakobsen continued. “It will really be determined by the trade, by the customer, and then, by the size of the ports and their proximity to our customers’ distribution centers and distribution network.”

Of the billions of dollars being invested by ports along the U.S. Gulf and East Coast, Jakobsen said from the shipping perspective the work underway can only be a positive.

“Obviously, no one wants to wind up with too much capacity, but that’s a determination that needs to be made by the investors,” he said. “From our perspective, it’s good to prepare for the future, and the more capacity that’s out there, the more options we’ll have.”

He added that while capacity obviously hasn’t been an issue during the downturn, memories and concerns about the congestion that manifested itself on the U.S. West Coast still linger.

“It’s something you have to keep in mind because it doesn’t take much improvement in container volumes to make capacity an issue,” he explained. “Of course, it all depends on how much they’ve put into improving the flow of containers—and by that I mean, not just through their facilities, but also outside the gate.

“Intermodal, for instance, is very important. It’s important to us that infrastructure is in place so that containers move in a smooth and efficient manner,” he said.

With that, Jakobsen’s mind turned again to Vietnam.

“It’s quite exciting to see the developments there,” he said. “There are several developments going on and it’s creating a whole new dimension for export growth.”

Again, Jakobsen spoke of balance, in this case about whether one direct call on Vietnam makes sense, or whether it would be better to serve Vietnam’s facilities, at least in the near term, with calls by several feeder ships.

The port at Saigon is not yet big-ship ready due to the depth of its navigation channel, but the country’s long-term plans call for a harbor deepening, he said.

“The other consideration right now is whether they have the proper infrastructure,” Jakobsen said. “Right now, they have to barge containers from the inland to the port. It will be better once you have road infrastructure in place that allows the customer to drive their containers directly to the port.

“The thing about shipping and trade is that there’s a continuous need for capacity and infrastructure,” he said. “It doesn’t matter how many containers you can get on a ship if you can’t get them off and to where they need to be. Customers are always thinking about the entire supply chain.”