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Western Canadian Capabilities in Transportation and Logistics: Where East Meets West
Western Canada’s Pacific gateway ports, primarily Vancouver and Prince Rupert, together with inland corridors to/from the North American heartland, are increasingly providing solid value propositions to shippers and carriers on both sides of the Pacific. Of the three NAFTA countries, Canada is geographically closest to Asia, with western Canadian ports such as Prince Rupert and Vancouver offering major transit time advantages over competing U.S. ports. For example, Prince Rupert has a 68-hour transit time advantage over Los Angeles for product shipped from Shanghai to the continental United States, while Vancouver has a 32-hour advantage over Los Angeles110.
Port Metro Vancouver (PMV), Canada’s largest seaport, handled 114.6 million tonnes of cargo in 2008 valued at $75 billion111. In 2008, 63.8% of PMV’s traffic was bulk cargo and another 17.9% was breakbulk. In 2008, PMV processed 2.49 million Twenty-foot equivalent units (TEUs) in container traffic, making it the 5th-largest container port in North America (after Los Angeles/Long Beach, New York/New Jersey, Seattle/Tacoma and Savannah)112. In addition to its bulk, breakbulk and container services, PMV also handles cruise ship operations and provides the full range of marine, rail and land shipping and logistics options to its domestic and international customers.
The Port of Prince Rupert handles both international and domestic traffic, and is Western Canada’s second-largest cargo port. In 2008, Prince Rupert moved 10.6 million tonnes of cargo and 0.18 million TEUs in container traffic, and is quickly becoming an important choice for logistics and transportation companies worldwide.
Both of these western Canadian ports are linked to the North American heartland with an extensive road and rail network. Vancouver is the only West Coast port in North America with service by three major transcontinental railways: Canadian National Railway Company (CN), Canadian Pacific Railway (CP), and Burlington Northern Santa Fe Railway (BNSF). Prince Rupert is served by CN’s high-capacity northern mainline and the Trans-Canada Yellowhead Highway, which provides good road connections to the continental United States.
In addition to sea and land infrastructure, western Canadian centres have excellent air services, with Vancouver International Airport being the second-largest international passenger gateway on the west coast of North America, offering over 500 non-stop flights and 142,000 seats monthly to destinations in Asia113. Calgary International Airport also has direct air freight services to Asia-Pacific destinations.
An important future gateway development in Western Canada is Manitoba’s CentrePort. Intended to take advantage of Winnipeg's proximity to the geographic centre of North America, CentrePort Canada has quickly obtained the potential to become an important integrated logistics centre with comprehensive distribution, warehousing and manufacturing facilities, replacing capacity in higher-cost centres such as Northern Illinois/Indiana.
Western Canada’s strong capability in transportation and logistics has resulted in significant investments by foreign firms in this sector. In terms of shipping lines making calls on western Canadian ports, all of the Top 10 global shipping lines have offices in Vancouver, including APM-Maersk, Mediterranean Shipping Company, CMA GDM Group, COSCO Container Ltd., NYK, APL, CSCL, Hanjin, etc. In addition, some of the world’s largest 3PL companies have offices and distribution centres throughout Western Canada. These include DHL Logistics, Kuehne + Nagel, DB Shenker, Geodis and UPS Supply Chain Solutions, among many others.
Business Case Analysis: Transit Times and Lower Shipping Costs are Important Advantages for Western Canada
Our analysis of IBM-PLI data shows that from a cost and quality point of view, Vancouver and Prince Rupert offer superior advantages over competitor U.S. gateway ports. In terms of cost structures, western Canadian centres come out quite competitive, compared to other North American destinations. Analysis by IBM-PLI shows that centres such as Vancouver and Prince Rupert have a 15-20% all-in cost advantage over other West Coast cities (such as Los Angeles or Seattle/Tacoma). Key-value propositions include the lower cost of marine and surface transportation and shorter “to/from” transit times between the Asia-Pacific region and Midwest North American destinations.
Survey work undertaken by consulting firm Oliver Wyman and IEMR also suggests that the transit time advantages of western Canadian ports is significant. Oliver Wyman’s on-line survey of 118 shippers, receivers, 3PLs, freight forwarders and logistics contractors (commissioned by Transport Canada) found that Canadian ports (in isolation from supply chain factors) are “moderately attractive” because of relatively low costs, shorter transit times and higher labour stability and customer service114. IEMR’s survey (commissioned by Foreign Affairs and International Trade Canada) of 339 shippers, receivers, freight forwarders, 3PL, 4PL, logistics contractors and shipping lines found that Vancouver ranked 5th among the Top 10 ports in North America, with key advantages in competitively priced rail transit options, customer service and transit times across the supply chain115. We think that these factors, together with capacity and labour issues in the U.S., have resulted in increased throughput into western Canadian centres.
Industry Structure and Competitive Dynamics: Shipping Lines and Shippers/Receivers Distribution Centres are Key Drivers of Traffic and Downstream Investments
While the value propositions for Canada’s Asia-Pacific Gateway and Corridors are clear, there are a number of key ingredients missing that would help ensure the competitive success of the overall gateway strategy going forward. First, as far as marine and air transport is concerned, shipping lines and carriers (and, to a certain extent, shippers/receivers) remain the primary decision makers in selecting ports and continue to expand their role across the value chain.
Overall, these shipping lines make routing decisions (which ultimately drive volumes passing through gateways and corridors) based on a trade-off between transit time and total supply chain costs. Here, it is significant to note that the survey work done by Oliver Wyman and IEMR among executives in the logistics and transportation industry has shown that while Vancouver and Prince Rupert remain competitive on a pure-cost basis, western Canadian routes are not considered competitive on a supply-chain basis by these key decision makers. This is because of poor rail competitiveness, the fact that the port is not close to the origin/destination for shippers/receivers and poor perceived reliability in areas such as security. These are important factors, some of which can be influenced through marketing (such as security at the border), some through policy action (such as rail competitiveness).
A second factor that will continue to impact on the competitive success of western Canadian gateways and corridors is their ability to attract distribution centres of major North American retailers. These centres (such as those of Wal-Mart, Best Buy, IKEA, etc.) are already established at competitor ports offering clear advantages in terms of either distance to origin/destination or reduced distribution costs experienced by retailers.
Take the port of Savannah as an example. In 1975, Savannah was ranked the 14th-largest port in the U.S., and between 1975 and 2008 has grown at a CAGR of 12.1%. Savannah’s success is not based on a favourable location close to destination/origin or on a large population (Savannah has a population of 130,000 people and Georgia has a total population of 9.5 million), but on its strategy of attracting the distribution centres of major U.S. big box retailers. It is also the first major port of call on the East Coast for many all-water services from Asia, and has excellent intermodal rail connections to key distribution centres such as Dallas and Atlanta116.
The Georgia Ports Authority embarked on a strategy to attract big box retailers’ distribution centres in Savannah in about the year 2000. While Home Depot and Pier 1 Imports already operated facilities there, site selection decisions for distribution centre operators are driven by unique considerations of land availability, labour, local and state incentives, and port proximity. The Georgia Ports Authority set up a different department that worked with regional development authorities, private landowners, realtors and transportation firms to assemble a compelling argument for a location close to Savannah117. As a result, Savannah has been able to attract continental distribution centres of household names such as Wal-Mart, Bass Pro Shops, Kmart-Sears, Heineken, Best Buy, Target, IKEA, Hasbro, Petco, Dorel and Avon.
This strategy was underpinned by infrastructure investments. Savannah is the only U.S. East Coast port with two Class 1 railroads operating on-terminal. In addition, it is the only port in the U.S. offering two Intermodal Container Transfer Facilities: a clear reflection of how important intermodal rail traffic has become for the movement of goods118.
Competitive Dynamics: Demand Dynamics Shifting to Post-panamax vessels and supply dynamics see competing ports investing major resources
There are a number of key demand- and supply- side trends that will have an impact on the success of Western Canada’s Transportation and Logistics sector. On the demand side, it is estimated that post-Panamax vessels (i.e., with a capacity greater than 5,000 TEUs) will be an increasingly important part of the global cargo fleet. Because of the size of these vessels, shipping lines operating them will be making fewer ports of call, which means that competition among the top ports in North America is going to heat up. Post-Panamax vessels also result in a spike in logistics needs over a shorter period of time, and shipping lines will only call on those ports that have the capacity to move goods to staging areas inland to minimize port wait times.
We think that this post-Panamax vessel trend will be generally beneficial to both PMV and Prince Rupert. PMV’s and Prince Rupert’s deep-sea terminals offer virtually no draft restrictions, super post-Panamax capacity and extensive on-dock rail facilities, although a trend towards inland terminals and staging areas could have a net negative impact on Vancouver in the short term.
Another demand-side trend related to the introduction of larger container ships is the fact that shipping lines are increasingly being involved in port operations and, indeed, across the entire supply chain. Multi-decade port lease agreements are now quite common in the industry, and work well for both shipping lines and port authorities since they allow for certainty in revenue and traffic flows through any given port. This, together with the formation of alliances (such as the Grand Alliance, the New World Alliance and the CKYH Alliance) among global shipping lines, means that shipping lines are using ports of choice that give them better visibility of arrival and transit times, and better control over the use of their shipping assets across their supply chains. The increasing presence of shipping lines in terminal operations means that the “common use” model of Vancouver and Prince Rupert does not afford the larger carriers and carrier alliances the type of certainty they need to dedicate resources to making port calls in PMV and Prince Rupert. On the other hand, competition among terminal operators does result in better shipment costs.
On the supply side, infrastructure developments at competitor ports and the Panama Canal will have a definite impact on the use of PMV and Prince Rupert. All of the major ports along the west coast of North America (including Mexican ports) and major east-coast ports are undertaking investments in port infrastructures, including new container terminal capacity, increasing harbour depth, developing logistics centres and developing on-dock rail infrastructure.
For example, estimated investment on the Punta Colonet project in Mexico is $5 billion and will result in a brand new port with a 2-million-TEU capacity, tripling to 6 million TEU by 2015. The Punta Colonet port will cover an area of 70 km2, making it as large as Los Angeles and Long Beach combined. The projected multimodal maritime centre would make Punta Colonet the largest port in Mexico and the third-largest in the world, after Singapore and Hong Kong. The project alone will require a population base of 200,000 people, a new power plant, a desalination plant, a 300-km rail line from the Port to the United States border and an intermodal facility. What is significant about this project for both PMV and Prince Rupert is that labour costs and labour regulations in Mexico will allow for significant cost savings for carriers wanting to divert traffic away from the congested Los Angeles/Long Beach/Oakland gateways.
Foreign Direct Investment Implications: Lumpy Investment Decisions and Lack of Awareness
To a large extent, the growth and development of the Transportation and Logistics sector in Western Canada will depend on a wide range of actions, undertaken by various levels of government that will determine the extent to which foreign investments in transportation and logistics happen in Western Canada. A discussion of these implications has been very well covered in other reports, as part of the Government of Canada’s APGCI initiative119.
These policy options range from governance of port authorities, labour regulations, terminal operations and railway regulations to regulations surrounding the establishment of distribution centres, grain containerization, etc. Gateway development will also depend heavily on international air agreements that allow international air carriers to fly into Canadian airports, international cabotage and the development of integrated air distribution hubs such as Centre Port.
We view two sets of constraints as being important considerations when it comes to FDI potential. First, logistics investments are very high fixed-cost investments. This means that the location of a distribution site or the decision to change the port of call to a western Canadian port will depend on expansion plans of big box retailers or shipping lines, and will be determined by factors such as land availability, labour, incentives, proximity to origin and destination, and congestion at existing port facilities. Factors such as supply chain reliability, rail transit costs, etc. can also have an impact on the decision to invest in a distribution facility. As such, these decisions are not taken lightly and are only “once-in-a-decade” or “once-in-a-generation” investment decisions. The natural inclination of large companies is to undertake capital expenditures near their existing facilities.
Second, we think that more resources need to be put into place to aggressively market western Canadian gateways to U.S. transportation and logistics executives. In a survey conducted by IEMR for Foreign Affairs and International Trade Canada, we found that 40% to 47% of U.S. executives in the transportation and logistics industry are not aware of Canadian-government-or private-sector-led infrastructure and transportation initiatives.
As we point out in the Savannah Case Study below, an important part of a successful gateway strategy is the type of incentives on offer to investors. In the case of Savannah, distribution centres receive a special job tax credit, a port tax credit bonus and investment tax credits for port facilities, in addition to various tax abatement and exemption programs. These, together with a well-thought-out strategy, have resulted in substantial growth and investments by national distribution centres in Savannah.