The Future of Containerization: Box Logistics in Light of Global Supply Chains Jean-Paul RODRIGUE Department of Economics & Geography Hofstra University, Hempstead, New York 11549, USA Theo NOTTEBOOM ITMMA – University of Antwerp Keizerstraat 64, 2000 Antwerp, BELGIUM

Containerization, Production and Distribution Introduction: Looking Back at 50 Years of Containerization Containers in Global Supply Chains Challenges to Liner Shipping Networks Ports and Terminals: Convergence and Divergence Pressures on Inland Distribution Limited attention has been placed in the role on containerization in the production and distribution processes.

Looking Back at 50 Years of Containerization Intermodal Integration 50 years of stepwise technical improvements. Growth and Diffusion Forces shaping containerization and its adoption. Peak Growth? A look at the inflection of the logistic curve.

Major Steps in Intermodal Integration Advanced Containers Advanced Terminals Regionalization Intermodal rail crane (1985) Doublestacking; IBCs (1985) Intermodal Integration Deregulation (1980s) COFC (1967) Before trying to infer about the future of containerized inland freight distribution, it is worth having a look at some key issues that 50 years of containerization have brought forward. The history of intermodal transportation and containerization is fairly well documented. There is somewhat of a contention about what truly marks the beginning of intermodal transportation. It is clear that in the late 19th and early 20th centuries that attempts were made to improve transshipments between modes, particularly between road and rail. By the early 1930s about three days were required to unload a rail boxcar containing 13,000 cases of unpalletized canned goods. With pallets and forklifts, a similar task could be done in about four hours. The goal here is not to settle the matter, but from a modern freight distribution perspective it can be argued that the introduction of pallets, particularly during WWII which demonstrated the time and labor saving benefits of using pallets, is an important stepping stone since a manageable load unit is available. The introduction of the trailer-on-flatcar (TOFC) approach in the 1950s provided a good source of income for rail companies since they were able to attract a new market segment. It is of course the advent of the container that had the largest impact on intermodal transportation. Even if 1956, with the launching of the Ideal X, can be considered as a key date, this event is of limited importance in the greater scheme of things. Capacity was very limited and the ships used were simply converted tankers (many WWII surplus) purchased at rock bottom prices; such a radical shift in transportation was considered a very risky endeavor, even among its strongest proponents. Like any technological innovation, the container faced a long period of introduction which lasted about a decade. Although significant productivity improvements were realized along the transport segments it was initially applied to (e.g. services to Hawaii and Puerto Rico), many major players were unwilling to commit substantial financial resources to convert to containerization; each was waiting things out, particularly which standard would prevail. In the mid 1960s, the adoption of standard container sizes, particularly the 20 and 40 footers, and of standard latching systems marked a significant paradigm shift and its associated surge in containerized traffic. In 1966, the first transatlantic container service was inaugurated, opening up long distance containerized trade. Soon after in 1968, the first cellular containerships were introduced and containerization started to revolutionalize both maritime and inland freight transport systems. Rail companies started to offer Container-on-Flatcar (COFC) services but their extent was limited due to high intermodal costs. For instance, 1967 saw the first containers transport on rail by Santa Fe, and also early attempts at land bridge services, but rail was slow to adopt the container. The situation was much different for maritime transportation as many players jumped in as container services began to be offered across the Atlantic and the Pacific. Thus inland freight distribution faced several hurdles as its modes, particularly rail, were heavily regulated and in many cases of public ownership. By 1980 a deregulation process was set in motion in the United State with the Staggers Act aimed at the rail industry. It improved profitability and favored the merger of existing rail companies into a system that will eventually become 6 large companies. Companies were no longer prohibited from owning across modal types, and there developed a strong impetus towards intermodal cooperation. Shipping lines in particular, began to offer integrated rail and road service to customers. The advantages of each mode could be exploited in a seamless system. Customers could purchase the service to ship their products from door to door, without having to concern themselves of modal barriers. With one bill of lading clients can obtain one through rate, despite the transfer of goods from one mode to another. Additionally, doublestacking, Inter Box Connectors (IBC; which removed the requirement for bulkheads on doublestack rail cars) and the setting of landbridges in the mid 1980s proved to be a boost to long distance inland containerized distribution. This placed pressures to introduce efficient and high volume intermodal rail cranes (1985), which played a significant role in improving intermodal rail operations. These cranes are the outcome of modifications and improvements of existing concepts to the high throughput requirements of intermodal rail terminals. Still, there are several hurdles left to overcome to insure the setting of a truly efficient inland freight distribution system. It is argued that three major issues will be addressed in the future of inland containerized transport. One is regionalization, which implies a more efficient maritime / land interface, particularly with the usage of inland freight terminals with direct connections to the port through rail or barge services. Another concerns a new generation of inland terminals that will improve the productivity, efficiency and throughput of inland distribution. A third one involves the container itself. It is worth considering what forms of improvement are likely to take place on the container. Are we going to see new container specifications in terms of size? Transatlantic (1966); Containerships (1968) Standardization (size and latching) (1965) Containerization (1956) TOFC (1950s) Pallets (1930s) Time

Two Processes behind Containerization: Growth and Diffusion Globalization Global containerized commodity chains (Optimal: 75% ?) Regionalization Growth Port / inland terminals systems Experimental niche markets Diffusion (Functional and Geographical)

Diffusion: Degree of Containerization, Selected European Ports, 1980-2005 Source: calculations based on data respective port authorities

The Largest Available Containership, 1970-2006 (in TEUs)

World Container Traffic, 1980-2005. Reaching Peak Growth? Adoption Acceleration Peak Growth Maturity 2010(?) - 2002-2010(?) 1992-2002 1966-1992 The graph portrays a cyclic perspective about the growth and diffusion of containerization, likely to follow a logistical curve, similar to many other transportation technologies. Four major phases are considered, adoption, acceleration, peak growth and maturity. The boundaries between difference phases are flexible and the choice made here is simply an informed guess. Adoption: Mainly concerns the early adoption of containerization by ports and maritime shipping companies. An arbitrary starting point is 1966 with the first transatlantic container services (or 1965 with the adoption of standard container sizes and latching systems) until 1992 when world container traffic reach 100 million. During that time a global containerized transportation system was gradually set in place. Acceleration. The early 1990s clearly mark a phase of acceleration of containerization, particularly with the entry of China in the global sphere of production. This implies a growth of the volume of containerized traffic, which was multiplied by a factor of 3 in a mere decade, as well as a fast diffusion of containerization in regions that were previously under-serviced. Peak growth. Coupled with a massive phase of globalization and the usage of containerization to support commodity chains, growth reach its maximal momentum. This places intense pressures of transport infrastructures to cope with this growth. Also linked with the emergence of strong imbalances in container shipping. Maturity. Implies that containerization has completed its diffusion, both geographically and functionally. Under such circumstances, growth (or decline) is mainly the outcome of changes in the level of economic activity. What would be the volume of containerized traffic when the system attains a phase of maturity? Providing such an answer is very hazardous considering the wide variety of issues involved, ranging to macro economic considerations. The fundamental assumption is based on the logistical curve which replicates phases of introduction, growth and maturity well known in the business and product life cycle theories. Looking at this history of transportation reveals that transport technology has consistently followed such a behavior. Under such circumstances, two extrapolations are presented: The high range scenario would entail an ongoing growth of international trade at a rate similar to what took place in the last decade. Low energy prices. Intensive deregulation in ownership with further consolidation. It must be said that this scenario raises serious questions concerning the amount of intermodal and modal infrastructures that would need to be brought online. Would inland transport systems, such as North America, be able to handle such volumes? The low range scenario, which can be called a divergence from current expectations, would entail a major global recession. Protectionism. High energy prices. A restructuring a manufacturing towards a more regional base. As usual, we are likely to get something in between. Source: Drewry Shipping Consultants. Divergence

Containers in Global Supply Chains Logistics and the Velocity of Freight Intermodalism and pull logistics Containerized Global Production Networks The container as a production, transport and distribution unit

The Velocity of Freight: From Push to Pull Logistics Transshipment Speed Speed barrier Future improvements Pull Logistics Logistical threshold Containerization Push Logistics Shipment Speed

Containerized Global Production Networks Synchronization of inputs and outputs (batches) Flow management (time-based), warehousing unit Production Distribution Container Transport Modes, terminals, intermodal and transmodal operations

Challenges to Liner Shipping Networks Liner Service Networks in Transition Reconciling frequency, direct accessibility and transit times. Schedule Integrity Issues Port congestion as the main factor. New Intercontinental Shipping Routes Circum-hemispheric maritime / land interface.

Liner Shipping Networks: Variety of Scales and Services Regional Port System Regional Port System Conventional liner / break bulk services Mainline services One important element of the foreland is the structure of liner shipping services, which can be characterized in terms of port calls, volume and frequency. The conventional liner / break bulk service was a point to point venture, often involving several direct connections between regional ports as well as between port systems. Such a structure is still prevalent in bulk shipping networks and commonly involves empty backhauls. The setting of pendulum services has favored two particular types of network structures. The first is the emergence of feeder services from smaller ports to the hub port. The second is the emergence of a hierarchy of services ranging from high capacity and high frequency services between first tier ports to second and third order networks servicing smaller ports. This network hierarchy interconnects at offshore hubs. Source: Adapted from Robinson, R. (1998) “Asian Hub/Feeder Nets: The Dynamics of Restructuring,” Maritime Policy and Management, 25: 21-40. Feeder services Third order network First order network Second order network

Schedule Integrity of Liner Services on Specific Trade Routes Source: based on Drewry (2006)

Circum Hemispheric Rings of Circulation Pacific Connector North American Landbridge Eurasian Landbridge Arctic Routes The most significant offshore hubs are along the circum-equatorial highway. Atlantic Connector Circum-Equatorial Maritime Highway

Ports and Terminals: Convergence and Divergence Convergence: Terminalization and Value Capture Terminals and commodity chains. Divergence: Planning Process Scarcity in terminal capacity.

The Value Capture Process along Commodity Chains Maritime Services Port Holding Port Authority Port Services Inland Services Maritime shipping has a profit margin of only about 2%. Single operator controls the berth-to-gate operations. Maritime shipping lines moving inland to capture value. Port terminal operations. Rail and trucking operations. Distribution centers. Logistics. Vertical Integration Horizontal Integration / Vertical Commodity Chain Maritime Shipping Port Terminal Operations Inland Modes and Terminals Distribution Centers

Delays in the Planning Process: Some Cases in Northwest Europe Development of initial plans Proposed date for start operations (first phase) Earliest date for start terminal operations Le Havre ‘Port 2000’ – France 1994 2003 2006 Antwerp – Deurganck Dock - Belgium 1995 2001 2005 Rotterdam – Euromax Terminal – the Netherlands 2000 2004 2008 Rotterdam – Maasvlakte II – the Netherlands 1991 2002 2013/2014 Deepening Westerscheldt -the Netherlands/Belgium 1998 2008? Wilhelmshaven/JadeWeserPort - Germany NA 2010 Cuxhaven - Germany Never Dibden Bay – UK London Gateway – UK 2009 Felixstowe South – UK 2007 Hull Quay 2000/2005 Additional factual evidence: It takes at least one year for the PANYNJ simply to agree on a strategy.

Some Terminal Development Options Initial situation (B) New terminal development in existing ports (C) New terminals along the wider coastline (D) New terminals/ports near existing ports SEA LAND Corridor Consider the gateway / corridor paradigm. Congestion level High Multi-port gateway region Low

Pressures on Inland Distribution Imbalances and Repositioning Coping with macro-economics and the global structure of production. Port Regionalization Improving the maritime / land interface. Maritime Gateways Corridors and the logistical hinterland.

Imbalances and Container Repositioning Strategies Container manufacturing costs High limit of feasible actions High imbalance Repositioning not economically feasible Unit Repositioning Costs International Source: Theofanis, Rodrigue & Boile (2007) (Overseas repositioning) Regional (Intermodal repositioning) Low limit of feasible actions Local (Empty interchange) Low imbalance Imbalances not considered a problem Repositioning Distance (TEU – KM)

Port Regionalization and the Development of Logistics Poles Logistics site Multimodal transshipment center Company-specific logistics network Transport corridor Primary and secondary logistics zone LAND Logistics Pole SEA

Gateways and the Logistical Hinterland Pacific-Asia (e.g. Pearl River Delta) North American West Coast (e.g. LA/Long Beach) Landbridge North Europe (e.g. Rhine Scheldt Delta) Container port / terminal Logistics zone / site Strongly developed corridor Poorly developed corridor Multi-port gateway region

Conclusion: Containerization Reaching Maturity Risks in supply chains Growing efforts spent at dealing with disruptions. Coexistence of shipping networks Flexibility in routing options in light of global production networks (costs / time options). Development of multi-port gateway regions New port hierarchies and a multiplication of the number of ports engaged in containerization. Three scales of inland containerization Continental: high capacity long distance corridors. Regional: integration between maritime and inland transport systems. Local: advanced terminals.