Global Logistics—January 2006
"China’s emergence as a global economic power is having a seismic impact on the global logistics market." This statement, from New Zealand-based international property adviser DTZ’s recent Global Logistics Markets report, is not surprising. What is surprising is just how far China’s impact reaches when it comes to the international industrial landscape. "The negative impact of China’s rise on the manufacturing sector is balanced by phenomenal growth in logistics activity throughout the world’s industrial markets," says Simon Lloyd, director of logistics at DTZ. In particular, sites near ports and airports have benefited from China’s rise to economic powerhouse. "As global ports and airports become congested with imports from China, secondary ports will emerge as key distribution centers," Lloyd explains. For shippers, China’s economic rise has created a "chicken-and-egg" effect: shippers use China as a manufacturing, warehousing, and distribution hub to reduce supply chain costs, but as the number of companies employing that strategy increases, developers and industrial operators realize revenue potential and hike rates for warehouse properties and available land. In addition, as those areas in China—as well as the ports around the world receiving goods from Asia—reach maximum capacity, secondary markets emerge, changing the routes shippers use to send and receive goods. Here is a breakdown of the major global industrial markets impacted by China’s growth, as outlined in the DTZ report:
- Asia. The Asian industrial and logistics markets have benefited most from China’s rise. The number of containers handled at China’s mainland ports, for example, increased 1,200 percent between 1994 and 2003. As a result, Shanghai, Shenzhen, Guangzhou, and Beijing have become hotbeds of logistics activity. Pent-up demand for industrial space in these cities is starting to favor logistics operators and developers. Warehouse rents, for example, have surged recently—in the spring of 2005, average sales and rents across Shanghai’s 11 major industrial zones increased for the sixth consecutive quarter. Land prices are also rising.
- Europe. Europe’s sharp increase in Chinese imports—which totaled $115.4 billion in 2003—has been a catalyst for growth in the European logistics market. The ports of Rotterdam, Hamburg, and Antwerp have seen above-average trade growth, with Germany’s Hamburg—the main European entry point for Chinese imports—faring particularly well. More than 300,000 square meters of logistics property, for example, was purchased in Hamburg in the second quarter of 2005. Holland has experienced a similar growth trend, with increasing demand for warehousing around The Port of Rotterdam. In the last two years, 90 percent of total trade growth at the port originated from China. Italian companies receiving goods from Asia are flocking to warehousing space around the Gioa Taouro port in southern Italy. Developers are building new logistics space there to support demand.
- North America. The increasing volume of Asian goods entering North America via the ports of Los Angeles and Long Beach have made Los Angeles the strongest industrial market in North America. Demand for space in L.A. far exceeds the current supply. Unfortunately for shippers, the trade increases have worsened congestion, which has driven the logistics industry eastward to California cities such as Hesperia, Victorville, and Barstow. The eastward push also extends across the United States to The Port of New York and New Jersey, which saw 43 percent of its business come from Asia in 2004—largely from shippers trying to avoid busy West Coast ports.
- Australia. The logistics markets Down Under have continued to strengthen, again driven by increasing trade with Asia. Industrial rents in Brisbane increased by 15 percent in 2004, while industrial land prices increased by 50 percent.
EU Revamps Customs Code
Shippers frustrated by import/export delays when dealing with European Union (EU) trade partners cheered the recent introduction of a new EU customs code. The code—planned to go into effect by 2012—will reduce shipping costs and speed exports and imports, resulting in a projected $60-billion yearly trade increase, according to the European Commission. The current fractured system—each EU member state has its own requirements and procedures for recording customs information—will give way to an electronic system connecting the 25 EU customs agencies. When the new code is in effect, businesses will move goods within the EU by logging information for customs, police, border guards, veterinary, and environmental agencies once, at the shipment’s point of origin. Customs will perform all checks on goods at the same time and place. Customs agents will then send shipment information to the customs office in the member state where the goods will be delivered. Companies will be able to bring their goods directly to the point of sale. Because of this increased communication among countries, European customs authorities expect the new code to help fight counterfeit goods as well. The code carries an estimated implementation cost of $96 million to $120 million, which the European Commission and EU member states will share.
The Darling of Dubai
Starting in 2007, Dubai, United Arab Emirates, will have a new claim to fame: home of the world’s largest airport. The $8.3-billion Jebel Ali International Airport (JXB) will be 10 times larger than Dubai International Airport, occupying an area equal to London’s Heathrow Airport and Chicago’s O’Hare International Airport combined. With six parallel runways and as many concourses, JXB will handle up to 12 million tons of cargo annually. The airport is the center of Jebel Ali Airport City (JAAC), a 140-square-kilometer mixed-use urban development, comprising business, residential, educational, and entertainment areas. JAAC also includes Dubai Logistics City (inset), a new hub for international logistics and transportation companies. The airport project will be completed in phases—officials expect the first aircraft to land at JXB in early 2007.
Among the recent spate of logistics industry merger-and-acquisition deals, German mail and package delivery firm Deutsche Post’s bid to buy British-based logistics provider Exel stands out. European Union regulators recently cleared the $6.5-billion deal, the largest-ever international acquisition for Deutsche Post. The merger creates the world’s largest logistics business, with a combined workforce of nearly 500,000 employees. The takeover lets Deutsche Post significantly increase its market share for airfreight forwarding in Finland, Hungary, and Sweden, according to the European Commission. Though the merger initially evoked anti-trust concerns, the Commission’s investigation found the new mega-company would not damage competition because "shippers have strong bargaining power, and often use multiple suppliers." The Commission also cited competition from companies such as UPS, TNT NV, and Kuehne + Nagel, which offer a range of services similar to Deutsche Post.
Suez Canal: New Year, New Rates
Because of an uptick in global trade—particularly from India and China—higher oil prices, and greater demand for bulk items such as coal, the Suez Canal plans to raise tolls for the second consecutive year. The Canal Authority expects more tankers to pass through its waters, increasing the need for maintenance and development. Charges will increase 3 percent on March 15, 2006, for nearly all ship categories, except large crude carriers—which can hold as many as 2 million barrels of oil—coming from the Gulf of Mexico, the Caribbean, and the north coast of South America. A 20-percent rate drop is scheduled for these vessels, according to Ahmed Fadel, the Suez Canal Authority’s chairman. The Canal projects a record $3.4 billion in revenue for 2005, up 9.7 percent from $3.1 billion in 2004, reports Fadel. Roughly 50 percent of the revenue is from containerships, and 22 percent from oil tankers.
HOS, The Canadian Version
In a move mirroring the U.S. Federal Motor Carrier Safety Administration, Canada’s federal transportation agency recently announced hours-of- service (HOS) rule changes that reduce Canadian truck drivers’ maximum daily driving time, and increase their minimum off-duty time. The new rules reduce maximum driving time for commercial drivers from 16 hours to 13 hours in a 24-hour period. They also increase minimum off-duty time from eight to 10 hours, and reduce daily on-duty time from 16 to 14 hours, the agency reports. The United States’ new HOS rules, by comparison, prohibit truckers from driving more than 11 consecutive hours, and require them to rest for at least 10 hours between shifts. The new Canadian regulations incorporate current scientific research on driver fatigue and reflect a 2001 agreement between Teamsters Canada and the Canadian Trucking Alliance, according to Canadian Transport Minister Jean Lapierre. Shippers and carriers affected by the HOS rule changes in Canada have one year to prepare—the new regulations go into effect Jan. 1, 2007.
ACEing U.S.-Mexico Shipments
American retailers, manufacturers, and distributors shipping goods to the Mexican market can now take advantage of electronic truck manifests to speed border crossings. In a much-needed step toward modernizing the cross-border process, the first U.S.-Mexico electronic truck manifest was filed recently through Customs and Border Protection’s (CBP) Automated Commercial Environment (ACE) e-manifest program. The shipment crossed the United States’ southern border with Mexico at Nogales, Ariz. Carriers use the e-manifest capability to submit information—such as shipment details, driver and passenger data, and a description of the conveyance and any applicable equipment—prior to a truck’s arrival at a U.S. border crossing. The automated transmission minimizes wait times at the border and results in faster delivery times—both high priorities for shippers. CBP eventually plans to mandate the e-manifest feature. "The faster carriers adopt e-manifests, the faster the border-crossing process speeds up for all parties," explains Louis Samenfink, CBP modernization office director. Currently, 31 ports in Arizona, Michigan, Minnesota, North Dakota, and Washington operate ACE programs; selected Texas ports will begin using e-manifests in early 2006. To date, nearly 40 companies are certified to submit e-manifests using Electronic Data Interchange or the ACE Secure Data Portal.
China Rails Get Upgrade
As part of China’s ongoing expansion and rebuilding efforts, Communist Party leaders recently endorsed a campaign to spend 500 billion yuan (US $62 billion) on improving its railways. The aim is to promote faster development and greater efficiency in its transportation sector, according to the Shanghai-based Railway Ministry. Though its economy is growing at a healthy clip—9 percent annually—China’s rail system is stagnant, causing congestion problems for shippers. China’s railways transport nearly 25 percent of the world’s cargo volume on only 6 percent of the world’s rail length, and actually turn away two-thirds of cargo due to lack of capacity, according to state media reports. The government plans to expand the rail system to 62,500 miles by 2020, from the 45,600 miles in service at the end of 2003. It also plans to double-track and electrify many lines. Interestingly, the plan to fund the ambitious upgrades calls for China’s railways to sell shares to private investors, an unusual move in China’s state-dominated business market. Spending and drawing more investments from both domestic and foreign sources was part of China’s overall economic blueprint for 2006-2010, says the Railway Ministry.
Tunnel Vision: Switzerland’s AlpTransit Gotthard Tunnel
Increasing congestion, rising global fuel costs, and concerns about environmental sustainability have spurred the need for innovative engineering projects that match long-term infrastructure needs with shifting economic demands to create more viable and efficient options for moving cargo. Switzerland’s AlpTransit Gotthard Tunnel is one such project. Tucked amid the verdant mountains of southeastern Switzerland, the Gotthard base tunnel project will carve a 35-mile corridor through the Alps stretching from the Swiss cities of Bodio in the south, to its northern terminus in Erstfeld. When completed, the tunnel will be the longest in the world. Together with two other alpine tunnels under the Zimmerberg and Ceneri mountains, the Gotthard rail passage will create an important nexus for cargo transportation. It will also be pivotal to integrating the growing high-speed train network within Europe, while bringing major economic centers on both sides of the Alps closer together. Switzerland’s penchant for building alpine tunnels is nearly as prolific as its pedigree for watch-making—and just as precise. The first Gotthard rail tunnel though the Alps was constructed in 1882. At the time, the nine-mile passage was the longest in the world. In 1947, Swiss engineers envisioned the preliminary idea for a flat Gotthard base tunnel that could accommodate faster trains and heavier cargo loads. The first design for the base tunnel was completed in 1962, and passed approval in 1992. Construction began in 1998. The AlpTransit initiative and its anticipated boon for Switzerland’s transportation industry is a quintessential example of Swiss innovation. The precision, planning, and execution of the Gotthard tunnel suggests early engineers had a "master plan" of how the project would unfold to meet the changing needs of Switzerland and Europe’s economy, notes Mario Brossi, senior representative for Location: Switzerland, a Zurich-based economic development group. The AlpTransit tunnel offers a cathartic solution to myriad problems facing Europe’s cargo sector. Pollution, fuel costs, congestion, capacity, and velocity are all paramount concerns for Switzerland and other EU countries. Switzerland’s topography and well-developed railroad infrastructure give it a head start among its European and global competitors in finding more efficient and less-intrusive ways to move cargo. Because of its location in central Europe, cargo transporters moving both north and south are more than likely to pass through its mountains. "Switzerland has always been at the intersecting axis of transportation within Europe—by foot, rail, or road," says Brossi. Stretching 500 miles long and 100 miles wide from southern Germany to the Mediterranean Sea, the Alps present a major obstacle for shippers moving product within Europe. Switzerland sits in the middle of this supply chain and serves as a vital transportation crossroads within the central mainland. It will become even more important to global supply chains as manufacturing growth in Eastern Europe continues. A key component in this developing trade dynamic is ensuring Europe’s railroad infrastructure and networks are capable of supporting increased volume and growth, especially as congestion-choked roads become prevalent. "International trade has grown more rapidly than domestic trade, greatly impacting the roads. Road traffic through the Alps doubles every eight years while rail traffic remains static," notes a recent report published by the Canton of Ticino Department of Finance and Economy. Freight traffic in the alpine region is expected to grow 75 percent by 2010, which poses environmental concerns for crossroad countries such as Switzerland, according to a study by the European Commission. Placing cargo on the rail for cross-alpine transit offers shippers both economic and environmental advantages. Currently, rail cargo accounts for 35 percent of all shipments within Switzerland, compared to 18 percent overall in the EU. The Swiss railroad accommodates 65 percent of all cross-alpine freight volume in the country. These numbers are expected to grow considerably when the AlpTransit rail corridor is complete. Equally important, as global fuel prices continue to skyrocket, the cost of moving product over the road is increasing as well. Among all 25 EU countries, total energy consumption for cargo moving via rail rose from 9.5 million tons of fuel in 1992 to 9.6 million tons in 2003, while fuel consumption for road transport grew much faster—from 262 million tons in 1992 to 314 million tons in 2003, according to the European Commission. This trend, however, is gradually changing. The AlpTransit Gotthard Tunnel initiative will play a large role in increasing capacity and cargo velocity, luring more shippers to the railroad. "The new AlpTransit Gotthard line will carry goods through the Alps in an environmentally friendly way, while increasing freight capacity from 22 tons to 57 tons per year," the Ticino report adds. Currently, 150 freight trains per day cross the Gotthard pass—the AlpTransit Gotthard tunnel will increase this capacity to more than 200 trains per day. And because the new route is flat, it will accommodate longer freight trains that pull up to twice the current weight. Also worth noting, the fastest freight trains will have a top speed of 100 miles per hour on the Gotthard pass—trains on current cross-alpine routes cannot travel that fast because of the routes’ grades and curves. In addition to increasing speed and capacity, the Gotthard tunnel corridor will enable shippers to convey more cargo with fewer locomotives and less energy output, providing significant economic and environmental incentives. The Gotthard tunnel has generated a considerable amount of interest despite the fact its debut is still six years away. But the anticipation of its potential is perhaps its greatest impact. "Success in shifting passengers and goods off Europe’s roads will depend principally on improving its railways, particularly for freight," reports Europe at a Crossroads: The Need for Sustainable Transport, a 2003 missive from the European Commission. In addition, Europe must gradually enact "a network of main lines dedicated exclusively to cargo to make sure freight is given the same commercial importance as passenger traffic," the report notes. If rail is the transport mode that will alleviate Switzerland and Europe’s over-the-road congestion, reduce pollution, and facilitate cargo movement, the AlpTransit project is the light at the end of the tunnel.
Gotthard at a Glance
LOCATION: Underneath the Alps between Bodio and Erstfeld, Switzerland.
LENGTH:When completed, Gotthard will be 35 miles long, surpassing the current record (33.5 miles) held by Japan’s Seikan Tunnel.
ELEVATION:The tunnel corridor will go no higher than 1,800 feet, versus the current height of 3,700 feet. Because of the Gotthard Tunnel’s slight gradients, trains will be able to haul double their current tonnage.
SCHEDULE:Total time planning and building the current design will be 25 years, but a proposal for the Gotthard base tunnel was first envisioned in 1947.
COST:Current estimates indicate the total cost will surpass $6 billion.
CAPACITY:Freight train capacity across Gotthard will increase from 150 trains per day to more than 200 trains per day.
SPEED:Trains will be able to travel 100 mph, versus the current limit of 50 mph.