Slow boats from China?

Now that China has become the manufacturing Mecca of the world, the West Coast of the United States, Southern California in particular, is seeing unprecedented levels of container traffic moving through its maritime ports. One of the key commodities moving through the ports, not surprisingly, is

"The U.S. has become a net importer of goods from China," says Ron Brown, the Port of Oakland's manager of business development for maritime. "This is causing a tremendous impact on West Coast ports, because they are the closest ports of entry to get those goods to the U.S." All West Coast ports are seeing a significant spike in imports. In fact, most ports are seeing double-digit growth in the volume of containers.

For the electronics supply chain, this influx of traffic at West Coast ports and associated congestion may mean serious trouble—including delay-related cost increases—in the years ahead if steps aren't taken to tackle the situation now. Remember seeing images of ships stacked up, waiting to get into the Port of Los Angeles, splashed all over the news during the labor dispute in 2002 and the labor shortages of 2004? These slowdowns at the port caused major delays. And manufactured goods are only part of the problem: Many bulk materials, such as metals and plastics for product enclosures, are also being imported from Asia. Because these can be transported only by ship (moving them by air is prohibitively expensive), seaport access is crucial to the movement of these goods.

Electronics manufacturing service (EMS) providers are among those keeping a close eye on the ports, but none are panicking or complaining of delays—yet. Leading EMS player Flextronics reports that it is monitoring the situation closely but has not felt any impact from slowdowns at West Coast ports to date. Still, West Coast ports must overcome several daunting challenges, most of which require an exorbitant capital expenditure—on top of the more than $1.7 billion the ports spend each year to update and modernize their facilities—to successfully handle the escalating container traffic heading their way.

The port situation

There are currently seven major West Coast ports in the U.S. They are, from north to south, Seattle, Tacoma, Portland, San Francisco/Oakland, Port Hueneme, Los Angeles/Long Beach and San Diego. Of these, the Los Angeles/Long Beach port complex is the busiest, handling roughly 14.4 million 20-foot equivalent units (TEUs: units of measure equivalent to a 20-foot by 8-foot by 8-foot shipping container) in 2005. To give you an idea of the size of the West Coast ports, the Port of Los Angeles encompasses 7,500 acres and 43 miles of waterfront.

For perspective on the scale of the worldwide container fleet, as of year's end 2004, it comprised 3,375 vessels, with 7.2 million TEUs. And the top ports in the world were Hong Kong (21.9 million TEUs), Singapore (21.3 million TEUs), Shanghai (14.5 million TEUs), Shenzhen (13.7 million TEUs) and Los Angeles/Long Beach (13.1 million TEUs).

What's changing? The size and scope of incoming traffic. Asia accounted for 60 percent of U.S. container trade (imports and exports) in 2004, up from 55 percent in 2000. In terms of TEUs, the average size of container ships calling at U.S. ports increased by 26 percent, and they're getting more efficient, with a capacity increase of 39 percent. The trade imbalance is increasing, though (see the chart "Shift in U.S./China Trade").

What's being imported? The top import to Los Angeles in 2004 was "electronic machinery," with a value of $31 billion (roughly $18 billion of which came from China), although there's no clear definition of what exactly this category includes. Imported goods in the "magnetic and radio recording and playback devices" category reached $6.8 billion in 2004. And U.S. exports of semiconductors and integrated circuits (ICs) to China rose 14 percent, to $2.3 billion, in 2004, according to the U.S. International Trade Commission. Interestingly, semiconductor manufacturing and measuring, testing and controlling instruments were also near the top of the list of U.S. capital goods exports to China, at $1.3 billion.

How long does it take an average vessel to travel from China to the West Coast? About 13 days. "We communicate, so it's not a surprise when they arrive," says Brown. Roughly 30 containers can be loaded or unloaded per hour. Some vessels take six hours to load or unload, and others take two or three days or more. Because shippers are in the business of moving to make money, they try to get in and back out again as quickly as possible. Electronics companies factor transit time into their supply chain schedules. One global EMS player automatically adds two weeks to 15 days onto any delivery schedule it quotes when it's importing materials into certain regions. But it doesn't take much to cause a hiccup. In 2004 the combination of a shortage of dockworkers and problems with landside rail service at the Port of Los Angeles caused serious congestion. Adding to the congestion was the first of the "monster ships," with more than 8,000 TEUs, entering service. These ships—the equivalent of 20 miles of trucks—require a turnaround time twice that of an average ship. It takes three to five days to unload and load again. And only three West Coast ports (Seattle, Long Beach and Los Angeles) currently have the channel depth to handle them. They cannot pass through the Panama Canal, because its channel isn't deep enough.

Issues facing the ports

The West Coast ports must overcome several daunting challenges to successfully handle the escalating container traffic heading their way. Arguably the greatest challenge will be figuring out how to keep pace with the traffic, which will necessitate an increase in productivity and efficiency-labor and equipment. Landside infrastructure (railroads and roadways) must also be capable of supporting the increasing traffic. Yet another challenge is that vessel sizes are increasing, requiring deeper channels, more space, and more time to process. And ports are struggling to maintain environmental and economic balance in their operations. Add security, and the ports are looking at a massive to-do list.

That's not quite all, though. "On the West Coast, around 18 million containers are transported annually. This includes imports and exports. With that value doubling within the next eight to 10 years, we're looking at somewhere in the neighborhood of 36 million containers," explains Brown. "This essentially means that we're going to have to build a new port on the West Coast every year just to be able to accommodate the growth." Where the funds or real estate for such a huge undertaking will come from, no one is quite sure.

What about ports in Mexico? "There is a great deal of interest in developing Mexico's ports," Brown says, "although they have transportation issues to work out and infrastructure improvements to make before they can become competitive. Some of the ports there are seeing quite a bit of growth, mostly in bulk cargo, not containers."

Business as usual for now

Companies such as Flextronics report that they have alternative logistics plans in place in case a slowdown occurs. The details are considered a "competitive advantage," although the only real options appear to be abandoning just-in-time manufacturing, switching shipping over to air freight or moving some critical operations closer to home. For now it's business as usual. Global component distributor Avnet also isn't experiencing any product delays. "The direct imports we coordinate have not seen any slowing or challenges at the ports," says Jerry Biegler, director of corporate transportation at Avnet. "I haven't heard of any slowdowns in the supply chains of any of the suppliers we work with or any of the manufacturers we purchase from here in the U.S. that are also importing from Asia-China, specifically–to the West Coast."

What if there is a future slowdown at the ports? "As we've seen in the past, a slowdown creates an environment in which there's constraint on products, and allocations become very much a part of what we live with in regard to distribution," says Biegler. "It definitely influences cost, because at that point, it becomes even more about speed. Once time becomes an issue, it pushes cost. Any slowdown causes a cost increase."

"We will be able to accommodate growth," insists Oakland's Brown. "How it will happen is being worked out now. More efficient operation of all West Coast ports will play a large role. One of our metrics is the volume of containers we handle per acre of terminal space. This metric will improve through greater productivity and efficiency. Right now it's somewhere between 3,000 and 4,000 containers per acre. By contrast, ports in Asia are accommodating 10,000 to 15,000 containers per acre. They're being managed extremely efficiently."

Not everyone is worried about congestion at the West Coast ports. Many electronics industry companies, such as LSI Logic, air-freight the majority of their products, so port issues don't really affect them. Those that do use the port system are monitoring the situation and have backup plans. For those who don't have a backup plan: You should.