East Side Story: Ocean's New Direction
The triple-whammy of high container growth, tight capacity, and rising fuel costs crashing in on ocean transport to West Coast ports has shippers flooding the East Coast in search of a more effective solution. Though they face challenges of their own, East Coast ports and carriers are making a strong push to tap into Asian-origin cargo volume.
As ramp-up for another holiday season looms, many U.S. retailers are experiencing deja vu. West Coast ports anticipate double-digit container growth, fuel costs are climbing to all-time highs, and capacity is tight. Concerns abound that increasing volume will compound existing infrastructure problems and further expose intermodal disconnects, labor strife, driver shortages, and the cost of moving product in highly-congested areas.
Excessive delays at the ports have marginalized lean inventory models, forcing some retailers to carry more supply during peak periods to eliminate out-of-stocks. As a result, inventory carrying costs and warehousing demand have increased in areas where space is already constricted.
Many importers, contract manufacturers, and retailers are considering strategic, long-term measures to alleviate stress in their supply chains by creating more reliable transportation options. In some cases, a change in strategy is as simple as a change in geography.
Some businesses have shifted more import volume to the Pacific Northwest where congestion is less of an issue and throughput is considerably faster; others have circumvented the West Coast entirely, shipping cargo via all-water routes direct from Asia to the Gulf Coast and East Coast for transshipment.
East Coast ports, in particular, have been aggressive in targeting additional container traffic and luring major retailers and manufacturers to their docks. The promise of less congestion, more expansion room, closer proximity to growing consumer markets, and cheaper end-to-end costs has neutralized concerns about allocating more time for shipments.
"The vast majority of volume pushes through the West Coast and that won't change because it's driven by China," says Anne Marie Kappel, director of communications, Maersk Sealand, Madison, N.J. "But clearly, the big importers have decided to locate new distribution facilities on the East Coast to be closer to that population base for more efficient end-to-end movement."
Major retailers such as Target and Wal-Mart have invested in large import facilities on the U.S. East Coast, lending further credibility to the importance of having multiple transportation portals—especially for businesses touting themselves as "global sourcers."
A Tale of Two Coasts
Logistics-driven demand for better supply chain reliability and quicker turnaround times when product hits the ports has driven container growth on the East Coast. As this trend increases, other infrastructure pieces fall into place.
Ports have aligned their growth strategies to meet customer demands by investing in new container facilities, equipment, and dredging channels to accommodate larger ships. Ocean carriers, for their part, are expanding their East Coast port callings and liner services though the Panama and Suez canals.
Just 12 years ago, the U.S. container import equilibrium was fairly well balanced. In 1993, container volume into the United States was evenly split between West and East Coast ports, with 9.7 million TEUs and 9.3 million TEUs moving through the respective coasts.
The growth in Asian and outsourced manufacturing during the past decade, however, has significantly shifted the trade balance in favor of the West Coast, with container volume more than doubling during that period.
In 2003, West Coast ports logged 21.2 million TEUs, compared to 16.2 TEUs on the East Coast. Los Angeles and Long Beach alone accounted for more total container units shipped in 2003—11.8 TEUs—than the 11.1 TEUs logged by the East Coast's top six container ports combined (NY/NJ, Charleston, Hampton Roads, Savannah, Miami, and Montreal).
By comparison, the East Coast trade paradigm is more diversified in terms of the number of ports, their locations, and the commodities they specialize in, as well as the overall import and export volumes for container, Ro/Ro, and breakbulk distribution. Unlike Los Angeles and Long Beach, which have been deluged with container volume because of their locations, container volume on the East Coast—with the exception of The Port Authority of New York and New Jersey—has been measured, and port authorities have been able to scale growth initiatives to meet demand.
"The East Coast ports have actively stimulated the development of warehousing and distribution centers to attract importing from businesses such as Wal-Mart and Target," says Tom Valleau, executive director of the North Atlantic Ports Association, Portland, Maine.
As a result, capital investment in distribution and warehousing facilities and container-handling terminals along the East Coast has been rampant. As Asian-origin container volume grows, these ports will increasingly compete for a greater share of this business—especially as ports previously targeting niche markets such as Ro/Ro and breakbulk diversify their cargo imports.
Already, ports have seen their cargo portfolios and trade partners shift with the increase of Asian-origin cargo imports.
Ports such as Savannah, Charleston, and Virginia have fueled growth on their own terms by bringing in major retailers and attracting new carriers, port drayage companies, and third-party intermediaries. These ports have become major economic drivers in their regions, spurring further economic and real estate development as well as creating jobs—all while stimulating even greater oceanborne commerce.
"Twenty years ago we attracted Pier 1 Imports to Savannah, and the company now operates an 800,000-square-foot facility," says Tom Swinson, spokesperson for the Georgia Ports Authority. "In 1994, The Home Depot located here. Today, a dozen high-volume DCs are located within two hours of the port. Together, they cover some 10 million square feet and generate more than 450,000 TEUs."
Virginia Takes a New Approach
The fiscal impact from increased container volume along the East Coast is significant. Virginia's economy, for example, was historically driven by the tobacco and textile industries, which have declined significantly in recent years.
Growth at the Port of Virginia has given the state a new economic lifeline—namely distribution and warehousing. Well-known businesses such as Wal-Mart, Nautica, Target, The Home Depot, CVS, Best Buy, and eToys Direct now have import distribution and processing facilities in the region, due largely to the port's anticipated potential, as well as its central location and access to Northeast, Southeast, and Midwest markets.
In 2004, the Port of Virginia, which comprises terminal facilities at Portsmouth, Norfolk, and Hampton Roads, processed 1.8 million TEUs, a 10-percent increase over 2003. The port's long-term plan is to add greater density to its container terminals—close to 100,000 TEUs a year—reduce dwell times in container yards, and expedite truck movement in and out of terminals, notes Russell Held, managing director of marketing, Virginia Port Authority.
In 2003, APM Terminals, an A.P. Moller-Maersk Group subsidiary and the third-largest container terminal operator in the world, announced plans to build a container terminal located on the Elizabeth River in Portsmouth, Va. The facility, expected to open by 2007, will greatly expand the port's capacity to traffic containers. As a result, cargo volume is expected to double by 2020.
For eToys Direct, a direct-to-consumer e-tailer that sells toys and video games through partners such as Amazon.com and Macys.com, having the Port of Virginia at its back door is a boon to its transportation capabilities. eToys Direct operates a 650,000-square-foot distribution facility in Blairs, Va., which ships product to all 50 states and Canada.
The company sources approximately 45 percent of its supply from Asia and nearly 100 percent of that volume comes through the Port of Virginia at Norfolk.
Given the velocity and fickleness of the market, eToys Direct relies on efficient and reliable sourcing to keep up with consumer demand. In terms of both cost and reliability, it makes sense to source product through Norfolk, says Danny Zahrn, operations/transportation manager, eToys Direct.
Toys and Their Buoys
"The 'all water' transit time to Norfolk is about 26 days; another three to five days to get product to our distribution facility means a 31-day total," Zahrn says. "Transit time via the West Coast is about 27 days—15 days to Los Angeles, seven days on rail, then three to five days to our DC—and that's without any slowdowns in Los Angeles or on the railroad. When you add everything up, all-water East Coast moves are cheaper for us."
"West Coast port congestion, and especially rail delays, make transit times for West Coast entry estimates at best," explains Held.
"Shippers often prefer the transit-time integrity of all-water services to the East Coast. With actual transit times very close via either West Coast or East Coast service, the cargo value becomes a moot point."
By contrast, high-end retailer Nautica, which has a distribution facility in Martinsville, Va., currently imports the majority of its product from Asia and Southeast Asia through the Port of Long Beach. It has partnered with a forwarder there to distribute inventory to special accounts on the West Coast.
Concern about congestion and bottlenecks during peak seasons has led Nautica to look at alternatives to porting at Long Beach, says Roy Cooper, the company's vice president of distribution.
"It takes an extra five days to route shipments through the Panama Canal to Norfolk," says Cooper. On occasion it has shipped containers to the East Coast, but for the time being, Nautica is more interested in finding ways to transload freight from rail to truck to make sure product arrives at its facility on time.
Still, delays in transit could have a negative impact on Nautica's ability to redistribute product from its Martinsville facility, especially because its retail customers are controlling the outbound freight transportation from the facility and therefore rely on accurate time windows to ensure seamless distribution.
The latent threat of bottlenecks on the West Coast and the uncertainty of turnaround times ultimately pushes the envelope in favor of all-water service to the East Coast, says Held.
Follow the Feeder
For Maersk Sealand, which services most of the major ports on the western and eastern seaboard, terminal expansion opportunities at locations such as the Port of Virginia are difficult to ignore. The Port of Virginia's 50-foot channels are among the deepest on the East Coast, and its proximity to the Atlantic Ocean—18 miles away—enhances its value proposition.
"A lot of ports are not set up to handle large vessels because they don't have the proper draught clearance or the necessary cranes to efficiently handle containers coming off these ships," says Maersk's Kappel.
Bringing in bigger ships is a primary concern for shippers—one reason the APM terminal expansion in Portsmouth is so attractive.
"If efficiency doesn't improve and you can't expand terminal size, there won't be enough future terminal capacity. So carriers are forced to find places to increase terminal capacity," Kappel adds.
With 70 percent of its business tied to Asian trade, and a majority of that tied directly to China, the Port of Savannah expects continued container growth, notes Swinson.
To meet this demand, Savannah plans to invest $710 million in container-related infrastructure during the next decade. The plans include developing two sites along the Savannah River, which will provide 11 million TEUs in paved storage for additional container terminal operations.
"We now offer 15 weekly all-water services—14 via the Panama Canal and one via the Suez Canal," says Swinson. "We will increase our number of service calls over the next year as new tonnage becomes available and carriers implement new strategies. We expect to announce additional services via both the Suez Canal and the Panama Canal this year."
If ports build enough hype and demand by making capital expenditures in infrastructure and attracting commercial investment, ocean liners are likely to heed the call. Maersk Sealand currently runs two transpacific strings from Asia to the East Coast: the TP3, which services Miami, Charleston, Newark, and Norfolk; and the TP7, which calls on Miami, Savannah, and Charleston. It also operates a Middle East container line service that originates in India, transits the Suez Canal, and stops at Charleston, Norfolk, and Newark.
"At the end of the day, services are customer-driven," says Kappel. "Two trends are happening almost simultaneously: customers decide whether or not to put a DC closer to a certain population base; then they talk with carriers to see if they can get alternate routings to serve that DC rather than pushing everything through the West Coast."
Despite the seemingly endless possibilities of pushing a greater share of Asian-origin volume to the East Coast, there are some obstacles to growth. The cost savings from moving cargo all water, for example, has gradually shrunk as tariff and rate hikes continue rising.
"Over the past few years it has been cheaper for shippers to move containers from Asia all water to the U.S. East Coast versus using West Coast entry and rail to the East Coast. Shipper costs, however, have narrowed in the two years, and today there is only a $200 advantage using the all-water route," says Held.
"The supply and demand balance largely drives the container shipping rate structure," adds Kappel. "Supply is very tight right now so it makes sense to seek increases when demand is strong."
Perhaps more important than cost considerations, the Panama Canal is nearing capacity in terms of the number of ships it can handle, and its century-old infrastructure cannot accommodate the larger post-Panamax vessels. Long-term plans to modernize and deepen the Canal exist, but won't alleviate near-term capacity issues.
"Limitations on the Panama Canal, the scarcity of ships that can transit the Canal, and the fact that you need more vessels to maintain the schedule when you do an all-water service from Asia to the East Coast, are all factors holding back East Coast ports," says Valleau of the North Atlantic Ports Association.
A shipping company going from Asia to California might need five ships, for instance, but going from Asia to New York, eight ships are necessary to maintain frequency.
"That is a constraint," says Valleau. "Despite the fact that West Coast ports are loaded with cargo, have significant delays, and it costs shippers a premium for rail service to move product to the East Coast, ocean carriers and shippers may think it's still the better route given the concerns with East Coast ports."
Mitigating East Coast Concerns
Rising fuel costs and intermodal capacity constraints in California may mitigate some of those concerns. "Generally speaking, as fuel costs go up, freight rates rise. Today, the railroads impose a 12 to 15 percent fuel surcharge, which affects the cost of the West Coast to East Coast rail service," says Held.
Additionally, for many shippers, warehousing inventory on a moving vessel may be favorable to leasing space at a terminal because there isn't enough truck capacity to move product to its final destination.
New services coming on line via the Suez Canal are also a consideration for Asia-East Coast routing, notes Held. Several ocean carriers plan to initiate such services by the end of the year or early in 2006, and this added capacity could have a significant impact in accommodating more container traffic in Asia-East Coast trade lanes.
Quick turnaround times and supply chain reliability, through West or East Coast ports or both, ultimately drive the day.
"Analysts point to the labor lockout in 2002 as the primary reason shippers began diverting cargo away from Los Angeles and Long Beach to the Pacific Northwest," says Valleau. "But, take a closer look. It was not because of labor issues, but a more fundamental throughput problem. As a result, cargo diversion will continue."
Rolling With Demand
While import container volume might be the hottest growth market for East Coast ports, breakbulk, project, and Ro/Ro cargo have traditionally fared well, contributing to the diversity of freight entering the United States via the Atlantic Ocean. Ro/Ro export growth, in particular, has been steady over the past few years at ports such as Baltimore, New York/New Jersey, and Jacksonville, thanks in part to their proximity to burgeoning world markets.
"We've seen a spike in Ro/Ro exports, but it's not unusual or off the scale. Growth has occurred all over," says Roy Schleicher, senior director, marketing and trade development, Jacksonville Port Authority. "Wallenius Wilhelmsen, for example, has started a Middle East service at the port, and HUAL North America is already a major automobile exporter to the Middle East and West Africa.
"Additionally, the number of U.S.-manufactured automobiles shipped to Puerto Rico, the Caribbean, and South America has grown," he notes.
The Port of Jacksonville is a major trade corridor for the Southeast, and Florida is a huge market for automobiles because its population is one of the fastest-growing in the country.
"We also have a lot of rental cars serving the resorts here, and many of the car rental companies sell vehicles for auction to the Middle East and Africa," Schleicher explains. "Because of the large off-lease market, we have more automobile exports than most ports."
In 2004, three of the top U.S. automobile ports—in terms of both export and import volume—were East Coast ports, with New York/New Jersey (728,720 autos), Baltimore (548,505), and Jacksonville (486,167) leading the way, according to the American Association of Port Authorities.
Given its population, New York/New Jersey has traditionally supported a considerable import market. In 2003, it handled 13 times more inbound vehicles than outbound. But in 2004, exports more than doubled to nearly 100,000, contributing to 16.4-percent growth overall.
East Coast ports have traditionally focused their activities on cargo niches such as Ro/Ro largely because, unlike Los Angeles and Long Beach, space constraints have never been a major growth obstacle.
"In general, land on the West Coast is limited, so most ports there don't push for Ro/Ro volume," says Schleicher. "You can't stack cars seven high like you can containers. With acreage at a premium, West Coast ports target container volume instead."
East Coast shippers have greater options because there are more ports. These smaller ports have built facilities and tailored services to meet very specific shipping needs. Ro/Ro ports, for example, traditionally serve their own unique customer bases: Charleston handles BMW; Baltimore processes Hyundai, Kia, Nissan, Jaguar, and Porsche; Jacksonville recently landed Mitsubishi.
Given the cost of shipping vehicles, automobile manufacturers judiciously measure transportation costs to various ports.
For Ford Motor Company, export volumes are considerably less than domestic consumption, so most of its manufacturing and production facilities are located in areas where strong stateside demand exists—cities such as Kansas City and Detroit. As with other freight segments, the ability to easily and efficiently move Ro/Ro cargo in and out of port yards is a primary concern for Ford.
"Logistics cost, quality, and speed are all important factors," says Denny Carpenter, who manages worldwide logistics operations for Ford. "Making sure we properly align ourselves with ocean freight carriers and port processors, and choosing the most cost-effective solution to get vehicles from the plant to the port, is imperative. Certain ports are less competitive because domestic transportation costs are higher."
It is more economical for Ford to ship vehicles manufactured in Michigan, for example, to Jacksonville than to Baltimore. "We do a full-cycle comparison to find the lowest-cost port, and the best carrier and port-processing prices," says Carpenter.
"If a U.S. manufacturer shipping outbound doesn't have easy access to a port, it won't want to use that port," says John Felitto, senior vice president of commercial, Wallenius Wilhelmsen, a Woodcliff Lake, N.J.-based Ro/Ro carrier. "The same is true on the inbound side if there isn't a good distribution network to dealers and to plants.
"Import and export demands go hand-in-hand."