[130317.EN.BIZ] 'Economies of Scale' May Not Be Answer to Box Shipping's Woes

THE term "economies of scale" is so ubiquitous in container shipping today that its perceived merits are virtually axiomatic. Vessels are getting larger to support greater economies of scale. Ocean carriers are consolidating and collaborating in unprecedented ways in pursuit of greater economies of scale.

Ports too are expanding and collaborating as never before in order to achieve greater economies of scale. However, rates are low, growth is tepid and lots of capital has already been spent both on water and on land.

It would be difficult to argue that the current trend toward scale at all levels has changed the container shipping industry for the better. Ocean carriers are less profitable, large load-centre ports are more congested, roads and highways are more crowded, and shippers are less satisfied. Yet the next few years portend a doubling down on the current "bigger is better" strategy, even though it seems highly unlikely that doing more of what already is not working will make things better.

Increasingly, activity at large US ports is characterized by higher volumes of inbound non-local cargo whose final destination may be hundreds of miles away, sometimes even in another port city. This trend is predicted to intensify in coming years in conjunction not only with the continued deployment of larger container ships in both east-west and north-south trades, but with the perceived inevitability of service consolidation that is expected to follow the current round of ocean carrier merger and acquisition activity and alliance reshuffling.

The problem with this strategy from a shipper perspective is that rather than offer more options and more flexibility it offers fewer options and less flexibility, the American Journal of Transportation reported.

Worse still, rather than distributing millions of containers across multiple gateways so as to minimise landside choke points and mitigate risks associated with single-point failures, the funnelling of more cargo through fewer gateways leads to highly localised congestion, equipment imbalances, and stress on other resources, all of which have downstream and upstream impacts not just on shippers, but on the entire supply chain as well as the general public. In effect, rather than eliminate cost this strategy at best shifts cost from the waterside to the landside, and at worst adds cost as a result of congestion, thereby amplifying not just logistics challenges but environmental challenges and community tension as well.

Big ships are here to stay. So too are the nation's large intermodal gateway ports that are so critical to the international flow of goods. But for large ports to continue to be successful, they must resolve the many challenges that have resulted from the very scale that created those challenges and stop trying to be everything to everyone.

In some cases the answer to the challenges that large ports face may be to concede a certain amount of local volume to niche ports within the region in order to focus on improving the quality of their core non-local intermodal business.

Ports of all sizes are acutely aware of the near-term challenges that larger vessels represent and, large or small, all ports must continue to make the necessary capital investments, including both dredging and landside improvements, to meet those challenges.

Sacrificing service in pursuit of scale is a false choice and a race to the bottom, not a blueprint for future success. Cargo, like water, will always follow the path of least resistance. By focusing on service over scale, productivity over price and overall customer experience over bragging rights, niche ports eliminate many of the unintended negative consequences that economies of scale have forced upon larger ports.

Source : HKSG.