As wave after wave of cheap asian goods rolls toward U.S. shores, the expression that comes to John Vickerman's mind is "Constant bearing, decreasing range"—a maritime phrase used to describe a ship heading for a collision. If the metaphor seems stark, it may nonetheless prove accurate. As Asian-made shoes, toys, T-shirts and computer components flood into the United States, fed by supercharged Pacific economies, the systems and facilities in place for receiving and processing those inbound containers are creaking under the strain. Some fear it's only a matter of time before that surging tide of imports overwhelms the U.S. transportation infrastructure.
It's not that the threat is anything new. The United States' transportation infrastructure has been under severe pressure for some time now, points out Vickerman, who is a principal of TranSystems Corp., an engineering firm that's developing facilities for ports, railroads, air carriers and government agencies around the world. Anyone whose freight was caught in the West Coast port logjam last year can attest to that.
The trouble, Vickerman says, is that the country has been slow to do anything about it. And both offshore manufacturing and shipping continue to swell, practically guaranteeing further delays in the coming months and years as more imports pour into an already overtaxed system. And it's not just a problem for the nation's ports. If U.S. imports continue to grow at current rates, Vickerman told the audience at a recent conference on transportation capacity constraints organized by MIT's Center for Transportation and Logistics, they could overwhelm not just the ports, but the extended intermodal infrastructure of highways and railroads as well.
And grow they will. Consider the results of a recent study of the global trading patterns of 170 North American companies. When asked whether more than 25 percent of their suppliers were based in another country, more than half of the respondents answered yes, says Beth Enslow, vice president of enterprise research for Aberdeen Group and author of the study. And more than two-thirds said they expected that at least one-quarter of their supplier base would be made up of foreign companies by 2008. Furthermore, the study, New Strategies for Global Trade Management, found that nearly four out of 10 respondents—39 percent—expect that in three years' time, more than half their suppliers will be based somewhere other than the United States.
Made in China
What's driving the trend can be summed up in one word: China. Though factories all over Asia continue to ramp up production, China's output has virtually exploded. Between 1985 and 2003, U.S.-China trade grew twentyfold, to $180 billion, according to a study conducted for the Transportation Research Board last year by Michael Bomba of the University of Texas. China now accounts for 70 percent of all Pacific cargo flows, Vickerman says. And if anyone still doubts that China has become a strategic manufacturing base for U.S. companies, consider that 78 percent of the respondents to Enslow's survey—and 90 percent of those with more than $50 million in revenues—were doing business in China.
It's not just China's skyrocketing output that has transportation strategists worried. It's that output coupled with the country's investment in the infrastructure needed to ship out those goods. David Fries, chairman of AMB China Ltd., reports that his company alone is developing logistics and distribution centers not just in Shanghai, where it's based, but also in Beijing and the Pearl River Delta. He says it's clear to him that Chinese manufacturers won't be content to let those newly produced goods linger on China's shores. The multi-story distribution facilities his company and others are building in the area are geared toward fast-cycle operations, not storage, he says. "Everybody is emphasizing inventory turns in their warehouse."
To move those goods out, Shanghai is investing heavily in its airport and seaport. Fries says the Shanghai airport will eventually be able to handle five million tons of cargo a year. As for the seaport, projects are under way that will bring the port's capacity to 25 million TEUs a year within five years, Vickerman says. (A TEU, short for 20-foot-equivalent unit, refers to a 20-foot maritime container.)
Shanghai is by no means alone. Up and down China's coast, ports both major and secondary are boosting capacity. The Port of Hong Kong alone has capacity equal to the top seven U.S. container ports, says Vickerman, and expansion projects will push its capacity to 31 million TEUs by 2011. Overall, he says, China's container throughput is growing at a compound annual rate of close to 30 percent. That has enormous implications for U.S. trade—the vast majority of Chinese goods entering the United States (98 percent, according to Bomba's report) arrive on container ships.
China's infrastructure investments aren't limited to airports and seaports. Frank Wade, senior vice president of international business development for AMB Property Corp., a large developer of distribution facilities in the United States, reports that the Chinese government is continuing to develop a major highway network to link ports to production centers as well as intermodal rail facilities.
Flood watch
The goods streaming out of China's factories are bound for destinations around the world, of course, but a large share of them are headed for the United States. Take those Chinese goods and add those produced in Korea, Thailand and Singapore, and you have the makings of a tidal wave of imports.
Capacity problems promise to be particularly acute at America's ports. Vickerman predicts that U.S. ports can expect their current volume to double or even triple. That's a worrisome prospect for a system that's already overtaxed.
Congestion at the largest U.S. port complex, Los Angeles and Long Beach, has already prompted exporters to develop workarounds, note Vickerman and Fries. Some are shifting their business to other West Coast ports. Others are routing ships laden with cargo from the Far East in an entirely different direction--through the Suez Canal to East Coast and Gulf Coast ports. One beneficiary of that trend is Virginia, where Maersk Line, one of the world's largest container ship lines, is building a major new terminal. Another is the Port of Houston, which has seen its volume swell with goods bound for Wal-Mart, whose supplier base is now reportedly 80 percent Chinese.
But shifting freight from port to port is not a permanent solution. In order to handle the impending influx of imports, shippers, carriers, ports and container terminals, suppliers, and government agencies will have to develop and implement collaborative technologies or risk longer and longer delays throughout the transportation system. As an example of one of these technologies, Vickerman points to the development of what's known as an Agile Port System by the Center for the Commercial Deployment of Transportation Technologies at the University of California Long Beach. That technology would link port, intermodal, and corridor freight operations. The idea, he explains, is to manage information in ways that reduce terminal dwell time, and as a result, increase capacity without major investment in real estate, equipment or labor.
But that and other efforts may be fingers in the dike. If the logjams experienced at West Coast ports in recent years are any indication of what's to come, international business may someday find itself a victim of its own success.
As cost-cutting strategies go, offshoring may not always prove to be a surefire thing. Companies that move production overseas to tap into the vast supply of cheap labor often come away disappointed with the results. Of 170 North American companies surveyed in a recent study, the top two complaints were unexpectedly high costs and long lead times. Fully 91 percent found the costs of doing business internationally to be higher than they had estimated, and a similar percentage complained that long lead times were hampering their efforts to respond to customer demands, says Beth Enslow, vice president of enterprise research for Aberdeen Group and author of the study, New Strategies for Global Trade Management.
The problem, says Enslow, is that these companies are simply not managing their lengthy supply chains efficiently. The majority of international supply chains are cobbled together with manual processes, she reports. Fully 70 percent of companies do not manage global trade cross-functionally, which hinders their efforts to respond quickly to changing regulations, shipping requirements and business conditions. "If you look at the domestic supply chain of 30 years ago," she says, "that's what the global supply chain looks like today."
Enslow holds out hope that things will improve, however. Driven by security regulations and tougher financial reporting rules, more companies are turning to technology to help them manage their global trade. Automated systems can eliminate shipment delays, reduce documentation problems and cut costs. And now that many businesses around the world are using Internet-based procedures, governments are moving toward electronic document processing, further streamlining the process.
In the meantime, one way companies can ease the pain is to fine-tune their systems for tracking product lead times. "The more confidence you have in lead times, the better decisions you will be able to make on inventory," says C. John Langley, a professor of supply chain management at Georgia Institute of Technology.
Langley urges companies to maintain good warning systems—systems that can provide alerts anytime something threatens to disrupt the flow of goods. That has two benefits, he says. If forewarned of possible shipping delays, a company can take steps to build up safety stocks, averting a customer service crisis. If, on the other hand, it receives solid assurances that all's well in the supply chain, it can use that information to strategic advantage too. "If you know with confidence your lead times are four to six weeks and not 10 to 12 weeks," says Langley, "you can turn that [knowledge] into a lot of cash."
Gartner, Inc.
