A Tale of Two Ports: Seeking to recast their brand in an unprecedented economic crisis

They knew the numbers were going to be bad. 

 

Years into a supply chain roller coaster ride that began with the onset of the U.S. housing crisis, and months into an unprecedented global financial meltdown, even the most wishful thinkers around the table knew the January report on container volumes wasn’t going to be pretty.

 

As the S.C. State Ports Authority Board convened for its February meeting in a conference room overlooking Charleston harbor, the packets awaiting them told of an overall 7% decline in cargo volume compared to January 2008.

 

Ironically, there was a little good news to go along with the bad, as the decline was far less than that of Seattle, down 20%, Los Angeles, down 15% and Long Beach, down 14%.

 

Even mighty Savannah, arguably America’s fastest-growing port in recent years, had experienced a 5% decline according to the statistics South Carolina ports authority staffers had culled from American Association of Ports Authority statistics.

 

The graph bespoke the obvious: That these last several months haven’t been good for anybody. The story it didn’t seek depict was equally obvious to those gathered around the room.

 

Three months later, the decline was reported to be even steeper, with the Port of Charleston handling 13.6% less freight between July 2008 and March of this year, compared with the same period a year earlier.

 

But once again, the harsh numbers were somewhat mitigated by the even worse 21.2 percent decline in cargo volumes at the Port of Seattle, and the 18.3 percent decline at the Port of Long Beach in California.

 

Only four years ago, the Port of Charleston appeared poised to smash through the two million TEU barrier, and its place as the second busiest port of the East Coast and fourth busiest port in all of North America seemed secure.

 

(A TEU or twenty-foot equivalent unit, is the size of a standard, 20-foot cargo container.)

 

Long acknowledged as the unassailable engine for South Carolina’s economic growth – its lure drawing a host of international investors to the state, including BMW and Michelin – the hot topic at maritime conferences held in the city through the mid-2000s was how to deal with the cargo tsunami flowing in from the Far East.

 

But what’s happened in Charleston isn’t just about sliding cargo volumes brought about by the slackening of demand for home furnishings, auto parts and consumer products. For years now the port has been engaged in the fight of its life – a battle over market share and percentages.

 

What’s bracing is despite fierce economic headwinds and the fact an estimated 10% of the world’s container fleet being idled, even a relatively diminutive port, like that of Wilmington, N.C. is still aggressively striving to cut into it.

 

Ironically, the seeds of Charleston’s recent challenges may well have been sown shortly after it achieved one of its greatest successes: the culmination of a 14 year terminal development project with the 1995 opening of the final phase of its Wando Welch terminal on the Mount Pleasant, South Carolina side of Charleston harbor.

 

The Wando terminal doubled the Port of Charleston’s capacity, and rocketed it from the mid-teens to fourth busiest port in the country, behind only the Ports of Long Beach and Los Angeles, and the Port of New York/New Jersey.

 

Container volumes and revenues soared; In fact, the container business was so good that additional capacity was needed almost as soon as Wando opened.

 

The ports authority’s proposed solution was the Global Gateway, a mega-terminal to build on a then-undeveloped island – Daniel Island — that was then being used mainly for the dumping of spoil material after periodic harbor dredgings.

 

The public outcry, however, was fierce. The explosion is container volumes had greatly exacerbated traffic issues in and around the historic city, and Daniel Island was still untouched.

 

In the end, the ports authority gave up its dream of the Global Gateway, private developers built a luxury community on the Island, and the plan for the new terminal coalesced around a portion of the former Charleston Naval Base. The permitting for that project took four years.

 

Despite these frustrations, operations inside the Port of Charleston’s gates were flourishing: dockworkers averaged 40.5 container-lifts an hour – among the highest rates in the world – and the turn-around time for trucks utilizing its terminals had been reduced to just 22 ½ minutes.

 

But it was outside Charleston’s terminal gates, and those of its competitors, that the competitive balance was beginning to change. The historic growth of the Charleston peninsula, which encompasses two cities: Charleston and North Charleston, not only hemmed in the port, it also constrained the growth of distribution centers and warehouses.

 

The same couldn’t be said for Charleston’s competitors. In fact Savannah, a mere 105 miles away and close to same rail and interstate system as its neighbor to the north, began to capitalize on the fact that it was surrounded by ample vacant land.

 

Having somewhere near-dock, but off the terminal grounds to hold cargo destined to feed America’s then-voracious hunger for consumer goods made Savannah irresistible to shippers.

 

By mid-decade, shipping lines began to overlook the fact that the terminal was 14 miles up the Savannah River and Savannah had moved past Charleston in overall container volume, and Charleston began to slowly sink down in the ranking, settling at number 10 in the country in 2007, according to the AAPA. Soon other ports in the Southeast were following Savannah’s example.

 

“Basically, we found ourselves in a double bind,” said S.C. State Ports Authority spokesman Byron Miller. “One, of course, was the onset of the housing crisis. A lot of what was coming through the Port of Charleston up to about 2006 was household items – toilets, sinks, lighting fixtures, you name it. And then suddenly, the bottom fell out of the housing market across the country, and a lot of that simply evaporated.”

 

“The other thing was we were competing against states that were essentially giving away land to foster distribution center development,” he said. “That’s hard to do.”

 

To compete, the Port of Charleston continued to do what it could inside its gates to foster efficiencies and improve its yard utilization. One example of these efforts is the recent $28 million on a new reefer yard at the Wando terminal and converting old reefer spots at the main terminal for use with non-refrigerated containers.

 

“That move along resulted in an overall 10% increase in capacity at the terminal,” Miller said.

 

But as the economy soured, such moves weren’t enough to appease some customers.

 

In December, the Danish Maersk Shipping Line stunned Charleston’s waterfront community when it announced it would pull its operations out of the city once its remaining contracts with the ports authority expire at the end of 2010.

 

Dana Magliola, a Maersk spokesman, said the shipping line’s decisions on which ports to call are based upon its customer’s needs, the structure of services to best suit their needs, as well as an assessment of costs associated with those ports.

 

“We view this as the decisions any business would make in screening or choosing vendors,” he said. “Of course, infrastructure which provides the most efficient and affordable access to the marketplace will serve as a beneficial characteristic for any port in consideration.”

 

Magliola defined infrastructure as including, but not limited to harbor depth, superstructure clearance, access roads, rail, warehousing, and other concerns.

 

“This again is driven by our customers; needs and demands,” he said. “We work very closely with customers, getting to know their business as well as our own.”

 

 

When the Maersk line announced that it would effectively abandon Charleston in two years no one was surprised to learn that Savannah would be a beneficiary of that decision.

 

Somewhat more of an eye opener was that the Port of Wilmington would be as well.

 

After all, with a capacity of just a half million TEUs, Wilmington is small, and like Savannah, relatively distant from the open ocean, being 11 miles up the Cape Fear River. The surrounding community is also not particularly well known as a Mecca of warehouses and distribution centers.

 

What it did have, however, was the intelligence to devise a winning strategy and stick to it.

 

“In a phrase, it was all about identifying a way to make ourselves more attractive to the shipping industry,” said Glenn Carlson, vice president of business and economic development.

 

The effort got underway in earnest in 2003 when the North Carolina State Ports Authority dredged the Cape Fear River down to 42 feet, and then purchased several post-panamax cranes and additional yard handling equipment in anticipation of big ships arrivals at Wilmington, a terminal with a throughput of a half million TEUs.

 

But the story Carlson told was more than another simple tale of build it and they will come.

 

Equipment in place, Carlson and his staff then began to look consider their marketing efforts from two different perspectives: that of the shipping line, and ultimately, that of the shipper.

 

“We spent a lot of time trying to create value for both audiences,” Carlson said.

 

The tool they relied on was PIERS trade intelligence, which they used to develop a compelling “what if” scenario they could present to potential customers.

 

“What we sought to identify was how much cargo that’s delivered to other ports actually ends up in North Carolina, and then we presented that data to the shipping lines, explaining that if you simply move it to Wilmington, here’s what we think you will save,” Carlson said.

 

“It’s kind of like pealing back an onion. You begin the process on the outside and you peal your way in,” he added.

 

In many cases, however, the N.C. State Ports Authority was arguing that its pealing back the onion could result in millions of dollars in savings.

 

“Of course, people want to verify those claims, so we began to get visits from people to go over our data,” Carlson said. “In one case, we had a gentleman come in from Asia who spent two solid days pouring over it. To date, no one has told us the data was telling them something different than we were.”

 

Karen Fox, spokeswoman for the ports authority said several steamship lines have told her they found the approach novel, and that translated into “value” in their minds.

 

“They tell us other ports use the same data simply to demonstrate the “how it is now scenario,” she said.

 

But a nagging question remained: Could they take advantage of the promised savings?

 

One of the major hurdles the N.C. Ports Authority has had to overcome is the long standing perception that Wilmington doesn’t have requirements to meet physical capabilities of today’s vessel operations. 

 

“Early on the one thing we consistently heard from the shipping lines was, ‘We go where the cargo goes and no one asks us to call on the Port of Wilmington,’” Carlson said.

 

To turn that around, Carlson and his staff began meeting with major importers and exporters, making essentially the same value arguments they made to the shipping lines, only addressing them directly to the shippers, building new relationships with every meeting.

 

“The conversations also touched on specific elements: Saving money at the port, throughput, saving money on inland trucking costs, having real estate upon which the repository of empty equipment is cheaper… and at a time when there’s been some pullback, that’s been an attractive lure – certainly a factor in attracting Maersk from Charleston, and also Independent Container Line Ltd. from the Port of Richmond.”

 

While the Maersk Line represented about 24% of the Port of Charleston’s business, the Port of Richmond lost about 75% of its business when ICL began rerouting its cargo service in March.

 

 

 

Dale Ross, chief operating officer for the company, said the decision to move ICL shipping to Wilmington will enable it to better compete for cargo moving through the Ports of Charleston and Savannah, while still being able to serve its Virginia customers.

 

Wilmington and Savannah’s success in honing a competitive edge against Charleston has prompted several South Carolina lawmakers to introduce bills that would restructure the ports authority’s management and potentially lead to the privatization of its terminals.

 

Although he took pains to avoid addressing the lawmakers’ criticisms directly, Miller said he believes the Port of Charleston is uniquely situated to capitalize on the economic rebound when it occurs.

 

The reason? An historic approach to budgeting that left the ports authority with an enormous cash reserve when container went south.

 

“Some people have criticized us for our budgeting practices but as a quasi-public entity, we always saw it as our responsibility to budget and forecast revenues conservatively,” Miller said. “As a result, we’re actively building a new terminal at the former Charleston Naval Base without having to go to the credit markets, which is a huge advantage right now.”

 

Within days of that comment, the ports authority was expected to let a $60 million contract for the construction of a new containment wall at the new terminal.

 

“What we’re doing during this crisis is continuing with the critical path items that need to be accomplished before the first phase of the terminal can open in 2014,” he said. “While we certainly do anticipate having to go to the credit market 18 to 24 months from now, by then, hopefully, the global financial situation will be much improved.”

 

Thanks to its cash reserves – estimated to be in the hundreds of millions of dollars — Charleston’s situation is in marked contrast to that of the Port of Tacoma and the Port of New York and New Jersey, which have both been far more buffeted in the short term by the volatility of the bond and credit markets.

 

Like many cities and states, ports authorities have been having trouble selling bonds through advertised bidding since the financial crisis intensified in September.

 

Many are simply putting previously aggressive expansion plans on hold in light of the dramatic slowdown in international trade. One example is CSX Corp.’s decision to delay construction on an on-dock intermodal rail terminal at the Port of Jacksonville because of the decline in cargo from Asia.

 

In another sign of the times,Neptune Orient Lines, the parent company of shipping giant APL, announced that it will move its Americas headquarters from Oakland to the Phoenix area later this year.

 

APL has had its headquarters in Oakland for the past 35 years. While the headquarters is moving inland, the company will retain its marine terminal operation at the Port of Oakland.

 

Mike Zampa, APL’s director of corporate communications, said the Phoenix area offers “a lower-cost base of operations, a favorable business climate and a good quality of life.”

 

“The pressures on the industry are unprecedented, and no one is certain when the market will recover,” he said.

 

But if some are retrenching, neither Miller nor Carlson nor the ports they represent appear ready to follow suit.

 

The South Carolina State Ports Authority recently launched a new Web site to promoting a recent surge of warehouse and distribution center construction in the Charleston region. While the facilities being built by Ross Perot Jr.’s Hillwood Associates, the Rockfeller Group, Johnson Development, Jafza International and others are not “near dock” facilities, he said they represent an entirely new level of activity in the Charleston market.

 

“Projects involving more than 20 million square feet of speculative Class a industrial space are in development within 20 miles of the port, and the interstate highway corridors within a 70-mile radius of the port are primed for distribution and manufacturing development,” he said. “Again, our attitude and that of our entire community is, you have to keep moving forward, no matter what adversity you might be facing.”

 

And good things are beginning to happen. Just this past week, as many in the Charleston maritime community gathered for the annual South Carolina International Trade Conference, the Mediterranean Shipping Company announced it would add another weekly call to Charleston beginning in early June.

 

Beginning on June 9, the Geneva-based carrier’s vessels will stop at its transshipment hub in Freeport, the Bahamas before proceeding directly to Charleston.

 

From there, cargo-laden vessels will proceed either to Savannah, or on up to U.S. East Coast to Norfolk, Va., Baltimore and New York.

 

The new service will add at least 52 more calls to Charleston, which already receives more than 200 from MSC on an annual basis.

 

In addition, the French CMA-CGM shipping line recently decided that an intermittent call it has been making at the Port of Charleston — to deliver goods for Wal-Mart’s Sam’s Club stores in the region — will become a regularly scheduled port call in June.

 

Fred Stribling, vice president of marketing and sales for the ports authority, an International Trade Conference attendee, said while cargo volumes are still a concern for everyone in the port industry, Charleston’s level of service from shipping companies is actually now ahead of last year.

 

But Carlson, for one, isn’t about to let up.

 

 “Everybody is saying 2009 is going to be rough,” he said. “In this climate, we’re looking under every bush and every rock, just looking for opportunities.”