Globalization of Maritime Commerce: The Rise of Hub Ports

Daniel Y. Coulter

In an era of economic globalization, ports are evolving from being traditional interfaces between land and sea to providers of complete logistics networks. The momentum of this trend is creating a port shakeout, leading to the development of a sharply delineated hierarchy on a global scale. Ports are being increasingly differentiated by their ability to handle the latest generation of container ships coming on stream. With the trend toward even bigger container ships, fewer ports are becoming capable of handling them. As a result, the flexibility of the world seaborne trade flow is becoming increasingly constricted—particularly in the event of a natural or man-made crisis or disturbance.

While the emergence of the hub-and-spoke networks in the container liner industry in the past decade has been widely noted in shipping literature, much less has been written about the underlying maritime security implications of hub ports. With respect to vulnerabilities in seaborne trade flows, we are accustomed to thinking in terms of chokepoints, which are heavily defined by physical geography. Examples that come to mind are the Strait of Hormuz, Suez Canal, and South China Sea (the issue of chokepoint vulnerability is dealt with extensively in chapter 8). But an even more potentially disruptive effect resides within hub ports such as Singapore and Rotterdam, which possess similar attributes of a chokepoint, since they “collect” numerous trades at a single concentrated point; hence, the name “hub port.”

The difference between the two lies in the response mechanisms in a disruption scenario. In the case of chokepoints, ships may deviate around an obstacle, and the business inventory cycles can adjust accordingly, since the amount of extra transit times can be calculated with a high degree of certainty. With hub ports, the effect is both cascading and chaotic, since ships in a hub-and-spoke network adhere to a stringent and fixed sailing schedule. This, in turn, makes the necessary adjustments in inventory cycles more difficult to formulate quickly and effectively.

Introduction of Containerization

Since the first container ship crossed the Atlantic in May 1966, world trade has come to be dominated by containerized freight. The ubiquitous container now accounts for 60 percent of the world’s trade by value and is expected to reach 70 percent by 2010. The container’s success has been due to its ease of handling and the protection it offers against damage and theft..¹ One crane operator can load and unload cargoes that would have taken an army of dockworkers in the 1950s. Port turnaround times of vessels have been reduced from 3 weeks to less than 24 hours.² This greater efficiency has dramatically reduced the cost of shipping. Before the arrival of the container, the cost of sea freight was typically 5 to 10 percent of the value of the retail price. Now a $6,000 motorcycle can be shipped on an intercontinental journey for $85, 1.5 percent of its value, and a $1 can of beer for one cent.³

World trade and globalization have been facilitated by containerization, as evidenced by four significant trends:

Shift from ocean carrier to total logistics system. The carriers’ strategy has shifted from a port-to-port to a door-to-door focus. The container made this shift possible by virtue of its interchangeability among the various modes of transport (road, rail, sea), giving birth to the term intermodalism. Containers packed with goods at the point of production can be transported over water and land without ever being opened until they reach their point of sale of final destination, creating a secure, seamless flow of goods from the manufacturer to the retailer.

Greater concentration of trade flows. The worldwide spread of containerization has led traditional commodities such as raw cotton, sugar, wood pulp, waste paper, raw timber, and even grain to become increasingly containerized. Consequently, once-specialized trade flows carrying specific commodities to ports with general cargo-handling facilities are gradually merging to form a steady stream of containers to ports equipped only to handle containers. For bulk commodities such as iron ore, coal, and crude oil, there is less concentration due to geographical diversity of supplies.

Globalization of production facilities. Manufacturing is becoming a process of bringing together and assembling raw materials, parts, and semi-finished products from all over the world. Only final assembly adjustments are carried out in local markets. To imagine the scale of this complexity, consider as an example the automotive giant, Ford:

Ford owns 154 factories worldwide. Of these, 58 are “vehicle operations” plants, which make tools/dies, fabricate body frames and stampings, and actually assemble vehicles. Then there are 55 “powertrain plants” making castings, forgings, transmissions, chassis, and engines. A further 41 plants make “automotive components,” i.e., body trim, glass, fuel systems, electronics, climate control equipment, and plastic items. Then there are another 30 joint-venture plants (mainly Asia) making a whole range of items. Many of these plants’ outputs must be moved to other plants as the production processes progress. In addition, the plethora of “vendor” components—brought in from outside suppliers—have to get to where they are needed.⁴

The rise of supply chain management as a discipline. With the container offering visibility in the cargo pipeline, the constant need to reduce inventory investment and speed products to the market has prompted companies to focus on supply logistics in their quest for a competitive edge. Future emphasis will center on consumers choosing to view how a product gets delivered as an actual part of what they are buying, based on the theory that as goods move faster, then the logistics directly affect the value, and overall buyer appeal rises. In this instance, speed and selection can become more important than price. As a consequence, many companies are shifting logistics strategies from “operational effectiveness” to one of customer “value maximization.”⁵

Emergence of Megaships in Ocean Shipping

The ocean shipping industry today focuses on pursuing greater economies of scale to generate lower unit costs per ton or container moved. This is certainly true of the container liner industry, where the term mega is de rigueur. In their quest for dominance, major shipping lines are ordering megaships of 6,000 twenty-foot equivalent unit (TEU) capacity and greater in efforts to leverage their enormous economies of scale and force their smaller competitors to either be swallowed or relegated to marginal/niche trades. (Twenty-foot equivalent unit is the standard measurement of size [length] for the container shipping industry. Although containers are available in a variety of sizes, capacity is typically calculated in TEUs.)

These megaships are chiefly employed on the high-volume or mainline trade routes, and they call principally at hub ports equipped to handle them. These hub ports are dubbed megaports for their ability to handle these monster ships. Such ports must meet the following criteria: minimum quay length of 330 meters (m); minimum draft of 15m without tidal windows; and minimum crane outreach of 48m. The ports that qualify will then need to ensure fast turnaround times for these ships or risk losing the alliances and the many associated feeder connections. For ports not selected by the major shipping lines, the choice will then be to either invest heavily in an attempt to gain hub status or seek their market serving niche or feeder trades that typically employ ships less than 4,000–TEU capacity.

This mega phenomenon is sparking a coalescence of power, which is dividing the container world via ports along the lines of volume, strength, and reach. With plans on the drawing board for container ships up to 18,000–TEU capacity, the port shakeout is far from settled. What is clear is that there will be an inverse relationship between the size of the ship and the availability of suitable ports to handle it. The price of admission to the exclusive hub club will not be principally determined by geography factors, but rather by the amount of capital investments and politics. Dredging for deeper draft, ordering the latest generation of cranes, and expanding the land available for port development not only require huge sums of capital but also deft navigation of the political and environmental approval process.

The fate of ports worldwide is also being determined by the development of hub-and-spoke service networks. Such a network allows the ocean carriers to serve smaller markets where volumes do not warrant direct calls; reduce container repositioning costs by giving carriers multiloading opportunities and enhanced utilization of mainline vessels; eliminate duplicated ports of call for those carriers with multiple service strings; and negotiate a volume contract that can make the cost of the whole voyage, including its feeder connections, more competitive.⁶

The Hub Port as Weak Link

The vulnerabilities of just-in-time (JIT) logistics to disruption and its subsequent economic impact are well known. Consider the impact of the 17-day strike in March 1996 by a local United Auto Workers union at 2 Delphi Chassis Systems brake plants in Dayton, Ohio. The strike virtually shut down General Motors, halting production lines at 22 of its 29 assembly plants in the United States and Canada. More than 75,000 workers were without paychecks at parts and assembly plants from Chihuahua, Mexico, to Lordstown, Ohio, to Oshawa, Ontario.⁷ The strike lasted long enough to shave a half a percentage point off the growth in Canada’s gross domestic product (GDP) in the first quarter of 1996.⁸

It also provided a particularly instructive comment by David Andrea, director of forecasting at AutoPacific, an auto marketing firm, who said, “There just isn’t the slack in the [JIT] system to keep assembly plants running for 2 to 3 weeks anymore.”⁹

Indeed, like the Dayton brake plant and the oil refineries, the hub port constitutes a weak link in the global transport chain. The great Hanshin earthquake that destroyed the Japanese port of Kobe on January 17, 1995, provides an excellent case study. At the time of the earthquake, Kobe was Japan’s biggest international trade hub and a major production and logistics center. It handled 25 percent of all trade from Asian countries going to North America and Europe,¹⁰Rand some 30 percent of Japan’s maritime transport network was concentrated there.¹¹ The port accounted for 17.8 percent and 14.5 percent of Japan’s total exports and imports, respectively, by value in yen.¹² The Kansai region, which includes Kobe, accounted for 20 percent of Japan’s GDP¹³ and for half of the world’s supply of flat-panel displays found in personal computers.¹⁴

The global impact of the earthquake was best described by the headline that appeared 4 days later on the front page of The New York Times: “Quake in Japan: Kobe Earthquake Disrupts the Flow of Global Trade.”¹⁵ The article noted that the “effects of the quake, which made the port unserviceable, were being felt in many parts of the world, with companies in Japan and the United States having to hold back goods. The closing of the port and uncertainty of finding alternate routes had a domino effect.”¹⁶

Yet the worst fears of the closure of Kobe paralyzing global trade did not materialize. The Japanese ports of Osaka, Nagoya, Tokyo, and Yokohama and the regional ports of Pusan, South Korea, and Kaohsiung, Taiwan, were able to handle the diversion of the ships en route to Kobe. The global impact was mitigated by the fact that a large part of Kobe’s business involved the transshipment of containers. Since the container-handling infrastructure was relatively standardized in most Japanese ports and throughout the Pacific Rim, the diversion of container ships was accomplished with relative ease and with minimal delays. The location of transshipment was dependent not on the physical infrastructure, but rather on pricing and service.

All that changed, however, with the introduction of 6,000–TEU containerships. The 6,000–TEU number is significant since neither this specific ship designator nor the container cranes to handle these behemoths were in existence before the Kobe earthquake. The first 6,000–TEU ship did not enter service until a year later in January 1996, and the first cranes specifically designed to handle them were on the drawing board when the earthquake struck. The introduction of the 6,000–TEU ships has since forced the ocean carriers into a race to “outsize” their competitors by ordering ever larger sizes of containerships. As of 2001, the biggest container ship can handle 7,400 TEUs.

The carriers have discovered that bigger is beautiful when it comes to cost savings. In comparison to two 4,000–TEU ships, a single 8,000–TEU ship requires less capital expenditure for new building and offers up to 20 percent savings in annual operating costs. The prospect of such savings has prompted Ocean Shipping Consultants (OSC) to declare in a recent report that “8,000–TEU ships will be dominant in all trades by 2010.”¹⁷

Since the OSC prediction in 1997, the goal post has shifted to 18,000–TEU ships, dubbed the Malacca-max containership. As the name suggests, these container ships will reach the limits of the draft in the Malacca Straits, which is the key artery for the Asia-Europe container trades. They are currently on the drawing board, but the team responsible for the Malacca concept—Professor Niko Wijnolst, chairman of the Dutch Maritime Network foundation and former member of the marine engineering faculty at the respected Delft University of Technology, and Marco Scholtens, a Delft student of naval architecture—argues persuasively in its publication, “Malacca-Max(2): Container Shipping Network Economy,” that such super ships will be a commercial reality far sooner than anyone anticipates.¹⁸

The significance of this statement is that as the more popular these behemoths become, the fewer ports there will be to handle them. For example, there are only four ports on the Atlantic side of North America—Halifax, Nova Scotia; Freeport, Bahamas; Hampton Roads, Virginia; and Charleston, South Carolina—that can handle the latest generation of container ships on order. Yet only two of the ports (Halifax and Freeport) can handle ships greater than (>) 6,000 TEUs when they are fully loaded. Thus, the flexibility of ships and trade to divert would not be as elastic as it was at the time of the Kobe earthquake. Not only are there significantly fewer ports capable of meeting the criteria of handling > 6,000–TEU ships, but also they are spread around the globe. This means that the loss of a hub port halfway around the world creates a cascading effect, since the > 6,000–TEU ships represent the linchpin of a fixed and regular delivery schedule on a global basis.

Linkage beyond Hub Ports

The vulnerability of the global economy to hub port disruption is best described by analogy to a cybermap of the world’s Internet coverage. Such a map would consist of a network of spindly wires converging in key nodes in the cyberuniverse, similar to the hub-and-spoke network of the airline industries and the one emerging in the ocean container shipping networks. In December 2000, an accidental cut to the world’s longest sub-sea cable system in the Strait of Malacca, allegedly caused by an unspecified “marine contact,” brought chaos to Web links in Australia, Singapore, and Indonesia, and users in the United States, Europe, and elsewhere trying to connect with them. Losses through business interruption ran into the millions of dollars daily before repairs could be completed. During the emergency, telecommunications were able to reroute Web traffic to another sub-sea cable, but the cascading effect of the rerouting slowed down the speed of Internet connections worldwide.¹⁹

Now consider the world’s busiest container handling port, Hong Kong, where a vessel arrives or departs every 1.2 minutes, one TEU is handled every 2 seconds, and one passenger arrives or leaves by ferry every 2 seconds.²⁰ Imagine the ensuing chaos to world container movements if the port of Hong Kong was crippled either accidentally or by more sinister means. The severity of the business losses would, of course, depend to a large degree on how quickly the other regional ports could absorb Hong Kong’s transshipment business and how quickly the manufacturers can adjust their production schedules.

But the crippling of the port need not be through the destruction of physical assets—it can also occur through the disruption of the information systems controlling port flow. Only a sophisticated information network management system can allow the port of Hong Kong to manage the volumes and complexity of handling different cargoes all at once. If an event similar to the damage to the sub-sea cable were to occur in Hong Kong’s information system, significant disruption to the port’s activities would occur until repair.

This points to the growing linkage between Internetted information systems and hub port operations. As the hub ports grow bigger, even more information needs to be processed and disseminated. This makes the hub ports—and the entire maritime shipping structure—even more vulnerable to disruption of the information network itself.

Conclusion

With the global port shakeout under way, the eventual winners in the hub port sweepstakes may engender significant maritime security implications. Similar to the chokepoint concept, the hub port represents a vulnerable link in the chain of the free and orderly flow of maritime commerce. However, it differs from a chokepoint in several important respects:

These differences are further described in Chokepoints: Maritime Economic Concerns in Southeast Asia, a study conducted by the Center for Naval Analyses in 1996.²¹ The analysis notes that if all the straits, including Malacca, Sunda, Lombok, Makassar, and the South China Sea, were closed and the ships diverted around Australia, the extra steaming costs would amount to roughly $8 billion per year based on 1993 seaborne trade flows. In sharp contrast, the same study estimated that the global economic impact from a closure of the port of Singapore alone could easily exceed $200 billion per year from disruptions to inventory and production cycles.

This disparity suggests the need for a change in strategic thinking concerning maritime security. For example, what role do navies play in defending a port against transnational threats that do not possess traditional naval attributes, such as those described in chapter 4? All of those threats have a potential impact on hub port activity. What role do navies play in cyberattacks on a port? Who is responsible for the security of landside facilities in the port? Why continue to invest in power projection capabilities at the expense of homeland defense mission?

All of those are policy issues that require in-depth analysis. But there are several preliminary suggestions that may be offered concerning our responses to the hub port phenomenon and its implications for security. First, it may be in our interest to use Federal dollars to construct (or at least encourage the development of) a series of dispersed > 6,000–TEU handling facilities. The growth of vessel size and the development of hub ports are the result of the search for efficiencies and profit by private businesses competing in a fierce shipping market. Attempts to prohibit these developments by U.S. Government legislation would inevitable place U.S. commerce at a grave disadvantage. But the development of alternative, perhaps standby, facilities that could be activated in case of hub port disruption would be in keeping with our Nation’s new emphasis on homeport security. Such facilities would not be intended to replace all of the capabilities of commercially developed hub ports but would provide reduýdancies that would be essential to our economy and security in a crisis. Likely locations for such alternative facilities might be naval bases scheduled for downsizing or decommissioning. In 1998, for example, Maersk Shipping Lines considered the defunct Naval Air Station Quonset Point, Rhode Island, as a possible candidate for its U.S. East Coast megahub operations, which eventually went to the Port of New York/New Jersey.

Second, port protection should be viewed as a joint and interagency effort, not simply as the province of the U.S. Coast Guard (or potentially naval units). Cyberprotection of port operations should be included in our joint efforts for computer network defense (CND) for critical infrastructure. This task may be best assigned to the forthcoming Department of Homeland Security (DHS), but the Department of Defense is also developing joint CND assets. Physical protection of the landsides of our ports might be assigned to National Guard units on a regular basis or to some other force the DHS might create. Most important is that we take steps to enhance the existing (and sometimes weak) private security that currently exists.

Third, there must be a general recognition that naval assets—when called upon—should be capable of playing a significant role in the protection of U.S. ports and commerce at home, and not simply an offensive role from a forward presence posture. This is more a question of mindset and planning than of asset allocation. Any naval role would be as a supplement to U.S. Coast Guard or other port protection agencies—but if plans and training efforts are not developed, the ad hoc nature of current naval participation will not be sufficient to significantly enhance homeland security.

In the aftermath of September 11, the answers to these and other issues pertaining to maritime security have taken on new sense of urgency and will not go away any time soon. They require an institutional awareness of the potential for even greater terrorist attacks and a paradigm shift in how we handle the security of maritime trade. Only will such an awareness lead to a multifaceted and multilayered approach to the maritime and general security of global trade and economic development.

Notes

¹ As noted in chapter 4, the use of containers to smuggle weapons, drugs, and illegal migrants, as well as terrorists’ bombs or weapons of mass destruction, has been recognized as a major homeland security threat. See, for example, Richard Owen and Daniel McGrory, “Business-Class Suspect Caught in Container,” The Times (London), October 26, 2001.[BACK]

² Charles Batchelor, “Choppy Waters Ahead: Declining Returns on Container Operations are Behind Recent Spate of Mergers,” The Financial Times, April 25, 1997, 21.[BACK]

³ Ibid.[BACK]

⁴ John Critchon, “Ford—the Global Shipping Shopper,” Containerisation International (February 1997), 33.[BACK]

⁵ Intermodal Asia (Summer 1997), 49.[BACK]

⁶ Containerisation International (June 1997), 43.[BACK]

⁷ Michael Clements, “GM Strike Snowballs: Local Labor Dispute Out of Control,” USA Today, March 14, 1996, B1.[BACK]

⁸ Bertrand Marotte, “GM Strike Will Be Brutal for Economy,” Vancouver Sun, October 4, 1996, D6.[BACK]

⁹ Clements.[BACK]

¹⁰ Florence Chong, “Kobe’s Dogged Hop, Step, and Jump,” Business Times, July 14, 1995, 6.[BACK]

¹¹ Ibid., 2.[BACK]

¹² The Nikkei Weekly, February 20, 1995, 3.[BACK]

¹³ EQE, The January 17, 1995 Kobe Earthquake: An EQE Summary Report, April 1995, accessed at <www.eqe.com/publications/kobe/economic.htm>.[BACK]

¹⁴ Craig Heaps, Cable News Network, January 24, 1995, transcript #721–1.[BACK]

¹⁵ Agis Salpukas, “Quake in Japan: Commerce: Kobe Earthquake Disrupts the Flow of Global Trade,” The New York Times, January 21, 1995, 1.[BACK]

¹⁶ Ibid., 1.[BACK]

¹⁷ “Mega Boxships Loom: Ships of 13,000 TEU Possible,” Fairplay, July 10, 1997, 38.[BACK]

¹⁸ Niko Wijnolst, “Malacca-Max-2,” Lloyd’s List, November 28, 2000, 7.[BACK]

¹⁹ James Brewer, “Internet: Malacca Break Reveals New Web of Demands,” Lloyd’s List, December 5, 2000, 2.[BACK]

²⁰ “Hong Kong Retains Top Box Slot,” Fairplay, January 11, 2001, 11.[BACK]

²¹ John H. Noer and David Gregory, Chokepoints: Maritime Economic Concerns in Southeast Asia (Washington, DC: National Defense University Press, 1996).[BACK]