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Ports' growth: Biggest is not always best

Teo Chung Piaw, Ding Ding & Koay Peng Yen

866 words

18 March 2009

Straits Times

English

THE world's port industry has enjoyed runaway growth over the past 20 years, driven mainly by the forces of globalisation.

In the 1980s, Wal-Mart in the United States began sourcing for products in Asia, even as it launched its 'Buy American' ad campaign. Meanwhile, the Plaza Accord of 1985 drove Japanese firms to lower-cost locations in South-east Asia to escape the strong Japanese yen. The multi-country manufacturing strategy of Japanese firms - and also that of South Korean, Hong Kong, Taiwanese and Singaporean firms - as well as a surge in international sourcing by American and European firms, triggered a dramatic growth in container shipping activities. This growth encouraged innovations that led to efficient and low-cost container shipping, which in turn spurred the globalisation of manufacturing.

Globalisation and container transportation thus have a symbiotic relationship with each other; they are both the cause and effect of each other's growth.

International container shipping began in 1966 when a containerised ship sailed from Port Elizabeth in the US to Rotterdam in the Netherlands. The early years of container shipping were dominated by American and European ports, with Oakland, Rotterdam, Seattle, Antwerp and Belfast leading the volume ranking in the 1970s. Singapore was ranked 62nd then.

By 1990, Singapore had risen to the top. Shanghai was ranked 40th that year. Based on preliminary port traffic data for 2008, nine of the 10 largest ports in the world are now in Asia - five of them in China. Indeed, the annual volume of the third largest port, Shenzhen in China, alone exceeds the combined annual volume of all the ports in Germany.

Container port traffic has witnessed an amazing nine-fold growth from 1983 to 2005 - a compounded annual growth rate of over 10 per cent, almost three times more than the average global GDP growth rate over the same period. The combined annual volume of the two largest ports, Singapore and Shanghai, now exceeds the volume of the entire world in 1985.

Singapore is a transshipment port which acts as a hub for other regional ports. Shanghai is a gateway port which also acts a hub for other cities in its vast hinterland. In contrast, ports like Felixstowe in Britain rely mostly on cargo from their local vicinity. In their pursuit of growth, ports compete to act as hubs, or catchment points, for their respective regions.

A hub port status no doubt helps to increase traffic, for hub ports are able to tap into cargo sources beyond their municipal borders. But does size enhance growth rates?

At first glance, this would appear to be the case for global transshipment hubs like Singapore, whose size was deemed to have contributed a 'multiplier effect' on its growth rates. In Shanghai's case, its traffic volume reflected the intensity of manufacturing activities in its catchment areas. As the port grew, that in turn attracted more industries to co-locate around it, further enhancing its growth.

If size indeed enhances growth, then large ports will grow even larger, leading to a scenario in which a handful of global hub ports will handle the bulk of the world container port traffic.

But interestingly, when the data is examined, we discover that in each year from 1983 to 2005, growth did not depend on size. Ports of all sizes seemed to have grown at the same average rate. Being a global hub attracting a large volume of container traffic, does not automatically ensure that the hub's growth will be faster than that of smaller regional ports.

This phenomenon, often attributed to Robert Gibrat's Law of Proportionate Growth, has been observed in fields as diverse as city and firm sizes.

There are counteracting forces that can prevent large ports from growing at a faster rate. Congestion may put a dent in service levels and escalate costs of operations, leading to diversion of port traffic to cheaper or more efficient ports nearby. Competitive forces can check the growth of global hub ports, Maersk Sealand's and Evergreen Line's decision to move a big bulk of their business from Singapore to Tanjung Pelapas being an example.

Large hub ports like Singapore cannot rely on their size to drive growth. Instead, they should focus on other factors to drive their growth rates. Terminal productivity, attractive pricing, connectivity and improved linkages with other ports - such should remain the core focus of hub ports like Singapore.

Shanghai has muscled its way to its current second place in the port ranking table, by consistently growing faster than the average global growth rate 22 out of 23 times from 1982 to 2005. Singapore, on the other hand, managed to beat the world average growth rate 16 out of 23 times in that same period. Its growth rate fell below the average from 1998 to 2004, due to strong challenges from regional competitors.

Teo Chung Piaw is professor of decision sciences and vice-dean (research) at NUS Business School. Ding Ding is a research fellow in the school and Koay Peng Yen is a shipping and logistics industry veteran.