OFFERING THE KNIFE THAT WILL STAB YOU IN THE BACK

Income stabilization and return on investment score much better for logistics companies than carriers. The reason? Logistics companies buy ship capacity if, when, and as much as necessary. That is, they are demand-driven and thus they 'ride' the business cycle. Carriers, instead, create shipping capacity (i.e. they are supply-driven) and then they try to sell it. And if things don’t go so well, they then go down, together with the ship, as it happened in the 2009 economic meltdown. Logistics companies instead suffered little then: they just didn’t buy capacity and they didn’t have to “pay the bank” for the  (laid-up) ship mortgage.

For years I have been arguing that if carriers want to go into logistics, they shouldn't be giving away their comparative advantage (i.e., the ship) by selling, wholesale, capacity to 3PLs. By doing this, I have argued, it is like giving your enemy the knife to stab you in the back.

Why do they do this?
«But to fill the ship», they will reply.
«And why can't you fill the ship alone?» I ask, «or together with your alliance partners?»
«Because it is too big», they will say.
«And why is it so big?» I insist.
«But in order to enjoy economies of scale», they immediately retort.
«But to enjoy economies of scale», I continue, «you first must fill the ship, while you know you can't. Are you therefore building megaships as a gift to your competitor?» 

Silence.
Check mate.
Full circle.
Vicious circle.
Nice huh?

In my “Gigantism in container shipping, ports and global logistics” (link below), I have proposed a pricing strategy for liner companies, leveraging on their comparative advantage, which is the ‘ship’. In short, 'charge more for the component of the supply chain where you have the comparative advantage, and less for the one where you must compete'. The overall price of the 'door-to-door' transport should remain the same. But the 3PL will have to pay more now for your ship, and this will give you the competitive edge you seek to enter 'logistics'.

Some carriers have listened; especially those controlling marine terminals. Others have not.

HH
https://lnkd.in/exPVKDA

Do shipowners and ports see eye to eye?

 I just wrote up the intro to a nice little thing we do with two good colleagues from Turkey: Sedat Bastug and Soner Esmer, and I though I should share it in the network, until the full article appears.

The competitiveness of ports has received its fair share of attention in the scientific literature, perhaps more than many other sectors of the economy. This, because the crucial role of ports as the indispensable nodes in fiercely competing global supply chains is becoming increasingly felt by policymakers.

Factors determining the competitiveness of ports are many, but their importance is weighed differently by different stakeholders. This is normal in piecemeal assessments, which often resemble the time-honored fable of the blind men trying to assess an elephant. For instance, (port) costs may not be ‘declared’ of equal importance by all stakeholders, with some of them opting for higher efficiency in port operations, or better access to foreign markets (connectivity and centrality arguments), or a better hinterland access. At the end of the day, however, everyone’s interest is to minimize their costs, may this be achieved from higher operational efficiency, access to markets or from any of the above.

In the absence of a systems approach, or structural modelling, in the literature of port competitiveness (a project we are currently working on), the ranking of paired-comparisons attempted in the full article through the Fuzzy Analytic Hierarchy Process (FAHP) methodology takes us half way to our final objective. There is another objective here, however, summarized in the paper’s implicit questions: Are the criteria used by carriers in selecting a port of call the same as those valued as important by the ports themselves? Do the two actors, shipowners and ports, understand each other well? What is the value of a better ‘understanding’? Would shipowners look at the larger picture (generalized costs), over and above their preoccupation with port efficiency? And would ports understand that their good fortune of having a prime port location should not allow them to rest on their laurels, but understand that more needs to be done to attract the ship? As said, our questions are implicit and so are their answers. But by showing that ports and carriers do not always see eye to eye, we have covered a lot of ground towards helping them to eventually start thinking alike.

HH

Port Centrality and the ‘Composite Connectivity Index' - CCI

 

Port Centrality and the ‘Composite Connectivity Index’-CCI: Introducing a New Concept in Assessing the Attractiveness of (Hub) Ports

A lot of ink has been shed on the concept of (port) connectivity, following the pioneering work of Jan Hoffmann. This is particularly true these days in view of the strength of global shipping alliances (GSA) in ‘managing’ their joint supply of tonnage, and the impact this power has on the frequency of services; number o companies calling at a port; ship- and call sizes, and much more that I have covered before.

But ‘simple connectivity’ alone cannot explain the importance of a port as an international hub, its attractiveness to shippers, and its ability to develop new transshipment traffic. Connectivity needs to be combined with measures of ‘centrality’, as these are derived from network theory (no matter how well connected is a port in the Arctic, or in Tierra del Fuego, it will never assume hub-port functions). 

In our forthcoming research, I have therefore coined the term “composite connectivity”. Through the use of advanced optimization techniques and network theory (Two-Stage Data Envelopment Analysis), we first measure ‘connectivity’ and we use this measure as input to the second stage, which measures the strength of ‘centrality’. The “Composite Connectivity Index” - CCI is thus introduced as a weighted additive (or geometric) mean.

HH

 

IAME 2022, Seoul, Korea

International Association of Maritime Economists: IAME 2022, Seoul, Korea

Organized by 

Korea Maritime Institute (KMI) & Shanghai International Shipping Institute (SISI)

Reliving Ithaca.

In 1994, together with the late Richard Goss and the Korea Maritime Institute (KMI), we organized the Seoul KMI/IAME conference on “International Trade Relations and World Shipping”.

Next year, 28 years later, KMI will again organize the IAME annual conference in Seoul (together with SISI) and they asked me to lend a hand again; probably in a gesture of respect rather than anything else.

I immediately said ‘yes’ and as I was drafting my reply I couldn’t help thinking that walking down the memory lane, reliving one’s own journey to Ithaca, might for some be more challenging that the journey itself. 

But the memory lane is worth sailing; all 28 ports of call. 

HH

P.S. The photo was sent to me this morning by Professor Yong An Park, Chairman of the Organizing Committee.

Evolution of Port Systems, Productivity Premia, and Executive Pay (in ports)

 

Shift-share analysis (SSA) was introduced in Creamer (1943)* and has been widely used as a tool of economic analysis in most areas of economics, predominantly in regional and urban studies. 

In our forthcoming research, we use SSA to understand the evolution of port systems (e.g., Adriatic, Tyrrhenian, Mediterranean, Persian Gulf, North Sea, Pearl River Delta, East and West-Coast US, etc.) and the competitive forces acting upon ports in proximity. 

In short, the idea here is to decompose port traffic growth in two constituents: one (share) which is due to the general growth of the economy, and the second (shift) which is growth achieved at the cost of a port’s competitors. The SSA decomposition has a great appeal also in cases of staff productivity premia or executive pay. And this is so because for the share part, in a way an automaton, we have only our good fortune to thank. But it is really only the shift part of growth for which one should be rewarded; i.e., growth that outperforms the market or, differently, market share ‘stolen’ from one’s competitors as a result of good management (and staff) performance. 

Years ago, while running a small Mediterranean port, I managed to introduce such a premium (and executive pay), in spite of ferocious resistance by both management and employees. In the end, reasonableness prevailed among my dedicated staff.

HH

* Creamer, D., 1943. Shifts of manufacturing industries. Industrial Location and National Resources, Washington, DC: US Government Printing Office, 85-104. 

COVID-19, antitrust privileges of Global Shipping Alliances, and megaships again

 

For more than 30 years, I have been defending liner conferences and global shipping alliances, and the very 'unique' privileges antitrust laws have been affording them. I have been seeing conference price-fixing, and alliance capacity-management and information-sharing as low cost, self-regulatory arrangements, aiming to prevent competition in a declining average-cost industry (like liner shipping) from becoming destructive; no one would have wanted this[1].  

My views have not changed. But COVID-19 has shown us that carrier privileges have been abused, mostly due to the inertia of the (European) regulator and its passive, onlooking, stance. For, although one could somehow justify carrier capacity arrangements in the first half of 2020, no one could possibly defend current (2021) tariffs being more than three times their long-run average (see graph). This has brought discomfort to the consumer, instead of benefits, as required by the recently renewed block exemption regulation of the EC.

This week, transport, port, and logistics associations in Europe, in unity, have written to Ms. Vestager, the EU competition watchdog, asking her to initiate a formal investigation into carrier practices, following the example of the US. And she will have to do this. Convenient onlooking is over.

One of the things I have appreciated much in the letter of the transport associations -and I dedicate this to my colleagues, defenders of the megaship idea- is their statement (at long last...) that without the generous capacity-management privileges afforded to shipping alliances, these ships would not have existed.

I rest my case.

HH

---

[1] See our ‘Erasmus Report: Global Logistics and the Future of Liner Shipping Conferences’. https://www.researchgate.net/publication/294427101_The_Erasmus_Report_Global_Logistics_and_the_Future_of_Liner_Shipping_Conferences.

From Just-in-Time (JiT) to Just-in-Case (JiC) logistics, or April’s Fool?

One of the great advantages of the container revolution has been the reliability it has afforded to the global production-transport-distribution system. It was as a matter of fact the container that ushered in the JiT systems and the consequent minimization of inventories.

JiT has impacted not only transport, but each and every aspect of our lives. When I travel, I know exactly what time I must leave home to get to Schiphol airport by, say, 17h45. But if the Metro does not run; the taxis are regularly on strike; or the motorways congested during peak hours, then I need to leave home one hour earlier. And this hour is my own ‘inventory cost’.

In ports in particular, containerization totally revolutionized the landscape: i.e., port operations, planning, development, competition, and the regularization of port labor. Pressure on port space is now relieved, and ship-time in port minimized. These developments have increased ship and port productivity immensely and have allowed ships to become ever bigger. By-passing the waterfront in the stuffing and stripping of containers, and thus having them ready in port to be handled by automated equipment, increased immensely the predictability and reliability of cargo movements, and enabled manufacturers and traders to reduce high inventory costs through the adoption of flexible Just-in-Time and Make-to-Order (MtO) production technologies. Inter alia, such technologies have helped manufacturers to cope with the vagaries and unpredictability of the business cycle and plan business development in a more cost-effective way.

Maersk’s boss, Soren Skou, seems to believe that all this may be changing. In an interview in the Financial Times (April 1, 2021) he seems to claim that we may be willing to shift away from JiT and MtO, in other words, we may be prepared to assume higher inventory costs, in order to protect ourselves from disruptions such as those of COVID-19 or the blockage of Suez by Evergreen’s Ever Given. 

This is indeed a shot from the hip and I would strongly question it: The costs of securing our supply chains, reconfiguring them and making them more resilient to disruption, are far far less than the costs we would be imposing on our fine-tuned global trading system by an increase in inventory costs (and the implied unreliability); we have made this calculation countless times.

Of course, for a carrier, some unreliability might come in handy but, this time, the consumer will just not buy it.

HX

 

 

Port Integration and Regional Economic Development: Lessons from China (to the Antwerp- Zeebrugge integration)

The recently announced Antwerp-Zeebrugge port integration (PI) is an important development in the North Sea ports region, and just another step in a worldwide trend, championed by China. Below, follow the preliminary results of our research, titled as above (without the text in parentheses).  

Amongst them, perhaps the most interesting result for the Antwerp-Zeebrugge merge is that the positive effects of the integration are expected to be larger for Zeebrugge than for Antwerp!

CONCLUSIONS

It has long been established (Haralambides, 2002; 2017; 2019) that unfettered competition among regional ports -often being played one against the other by powerful carrier alliances- leads to unnecessary duplication of effort, excess port capacity and waste of scarce port resources. The world of business (and politics) is concentrating in the pursuit of economies of scale. In many countries around the world (with Italy an excellent example), earlier efforts to port devolution are being reversed and decision-making authority is re-centralized.

 With the help of the DID methodology, we are presenting the theoretical underpinnings of port integration (PI) and we measure its various impacts on regional economic growth. We have established that PI’s economic impacts vary depending on the geographic region and the size of the port-city. The following main conclusions are drawn: i) PI can stimulate the economic growth of cities, and its effects grow with time; ii) The effect of port integration on the economic growth of small-medium size cities is clearly discernible, while the impact on larger cities is weaker.

The design of port integration procedures is neither simple nor can it be uniform. Coordinated top-down (central government) directions may be required, following the results of our research. Such policy intervention would focus on rationalization of public investments; spatial differences and industry structure; city-sizes; and promotion of ‘port cluster’ effects, including education and R&D. Policy intervention may also be necessary, given that the effects of port integration are not, naturally, instantaneous but realizable in the longer-term. This is something that would perhaps require institutional reforms, alongside the necessary ‘port-centric’ infrastructure investments in road and rail infrastructure, warehousing, inland terminals, and logistics facilities by and large. Such investments would be more meaningful and demanded in smaller cities where the PI impacts are larger, as we have argued.

We hope our results provide sufficient theoretical support to the worldwide efforts on port integration, aiming at port resources rationalization, port competitiveness, and regional economic development (the full research will be published soon). 

HH

From Emerging to Mature: Optimum Sales Strategies in the Cruise Industry

In service industries, such as cruise tourism, intermediaries (agents) are crucial in the initial stages of foreign market penetration and business development. This is particularly important in emerging and protected markets such this of China a few years back. 

As the market matures, however, and the consumer becomes savvier, the role of the agent declines, and direct sales become more popular. 

We combine game theory and discrete consumer choice to construct a decision-making model for cruise companies, aiming to assist them in choosing the right pricing and sales strategy under different market circumstances and shocks (such as the COVID-19 pandemic).

 Our numerical experiments convincingly demonstrate that collaborative pricing and sales is a winning strategy in most market environments, including unforeseen situations of major shocks. Competitive pricing and sales, instead, reduces profitability for both company and agent. Single channel sales strategies, either direct or through the agent, appear to be the less performing options while, were the latter to be the case, the cruise company would be better off by selling only to travel agents.

Although our methodology and results are of generic value, China has nonetheless proven to be an excellent case study of the way cruise product pricing and sales strategies have evolved, to cope with the transition from an emerging- to a mature cruise market.

HH

Port Integration and Regional Economic Development: Lessons from China

 It has long been established (Haralambides, 2002; 2017; 2019) that unfettered competition among regional ports -often being played one against the other by powerful carrier alliances- leads to unnecessary duplication of effort, excess port capacity and waste of scarce port resources.

The world of business is concentrating, in the pursuit of economies of scale, and what better example could one possibly find than concentration in liner shipping in the form of global shipping alliances. In many countries around the world, earlier efforts to devolution are being reversed and decision-making authority is re-centralized. This is the background behind the concept and advantages of port integration. 

In a little thing we are working on (to appear in print soon), we have adopted the Difference-in-Differences (DID) model to analyze the effect of PI on urban economic growth, as well as to identify the causes of spatial differences in urban development, possibly due to PI. 

The figure above summarizes our results which are most gratifying: Since 2015, when provincial port consolidation efforts were instigated in China, PI has significantly advanced the economic growth of port-cities (treatment group line), vis à vis provinces where port consolidation has not started yet (comparison group line).

 Interestingly, and again a most gratifying result, the effects of PI increase over time, as they of course should (observe the divergence of the two lines after 2015.

HH