Chapter 5.1 – Inter-Port Competition

Author: Dr. Theo Notteboom

Port competition is competition for trades, with terminals as the competing units, logistics, transport, and industrial enterprises as the chain managers of the respective trades with port authorities and port policymakers as co-developers.

1. The Port Competition Concept

The globalization of production and consumption, the emergence of a global transport network, and changes in inter-port relations, port-hinterland relationships, and logistics have created greater competition among ports. Shippers, logistics service providers, and shipping lines do not necessarily choose a port, but they select a chain in which a port is merely a node. In order to respond to the requirements of trade and international supply chains, ports need to accommodate and handle more and larger ships and hinterland transport modes faster. These trends and the expansion of the role of the private sector in port activities have forced ports to become more market-oriented, more innovative, and more responsive to the needs of all actors involved in the trades that pass through the port.

Port competition has become a complex and multi-faceted concept. The nature and characteristics of competition depend, among others, upon the type of the competing ports (e.g. feeder port, hub port) and the cargo group (e.g. containers, liquid bulk, dry bulk, non-containerized general cargo). In container transport, a distinction has to be made between the large load centers or main/hub ports and the smaller regional or feeder ports. The load centers are primarily competing for deepsea intercontinental liner services, in which large ships of up to 24,000 TEU are being deployed. Regional ports strive for connections to as many nearby load centers as possible and have good regional hinterland connectivity.

Port competition can be defined as competition for trades, with terminals as the competing units, logistics, transport, and industrial enterprises as the chain managers of the respective trades and port authorities and port policymakers as co-developers of the broadly defined port complex.

Terminals are the major focus of the competitive strategy, not ports. Competition between ports has increasingly been replaced by competition among market players who often are present in more than one port (cf. global terminal operators such as PSA, DP World, Hutchison Ports, and APM Terminals) or multimodal logistics and transport service providers who, in addition to operating various transport modes, have also combined stevedoring, storage, forwarding and other activities in one ‘bundle’ for shippers. Port competition can also involve rivalry among port authorities in view of offering the best facilities (both material and non-material) to all actors involved in the supply chains of the various trades (e.g. stevedoring companies, shipping companies, shippers, and multimodal operators).

The complex nature of seaport competition manifests itself in the number of competitive levels that can be distinguished.

2. Geographical and Functional Levels of Port Competition

A. Intra-port competition

Private port companies often compete to handle cargoes (terminals) and provide other port services (e.g. towage, bunkering). For the port authority or the port itself as a whole, such competition can serve as a management method to improve the efficiency of port activities. Competition between operators or providers of facilities within the same port can generally increase port efficiency and improve services. However, the need to realize economies of scale and reach the so-called Minimum Efficient Scale (MES) and the existence of competition from operators in other ports may justify an operational monopoly of port activities.

The playing field for intra-port competition is very often influenced by basic infrastructural investment decisions by port or regional authorities. For example, in many larger ports, not all container terminals have the same draft conditions, reducing the choice for very large container vessels. Therefore, even if there are a handful of terminals in a large port area, the largest container vessels might be able to call at one terminal only (Chapter 5.2 provides a detailed discussion on intra-port competition).

B. Inter-port competition within a multi-port gateway region

The multi-port gateway region concept provides an extended framework for inter-port competition (see Chapter i.1). Many stevedoring companies are expanding their activities over more than one port in the same maritime range or port region. The increasing footloose character of shipping companies pushes port authorities and port companies into fierce competition. On the port authority level, the battle is mainly focused on offering the best basic infrastructural (docks, quays) and ‘infostructural’ (IT) facilities, the best logistic/distribution facilities, and the lowest port user costs. At the terminal level, the competition mainly focuses on price, handling time, and productivity

When ports in the same gateway region do not fall under the same national government, government policies can impact the conditions and level of competition among sub-groups (e.g. Dutch ports against Belgian ports or the port of Singapore agains Malaysian ports). Regional authorities often aim to secure complementary product-market developments in neighboring (rival) ports of the same port region. As such regional authorities try to provide a framework in which each seaport can manage its port-specific advantages, while at the same time encouraging cooperation.

C. Inter-port competition within a port range

The third level of competition is the port range which can be defined as a group of ports situated at the same seashore and sharing a similar hinterland (see Chapter i.1). Within port ranges, fierce competition can be observed, particularly for discretionary cargo bound to an inland destination. For example, within the Hamburg-Le Havre range, the most important port range in Europe in cargo throughput terms, port cooperation initiatives are primarily based on the exchange of information (aimed at improving mutual understanding) instead of real structural cooperation. The vigorous intra-range competition in the Hamburg-Le Havre range is reinforced by the fact that the ports are spread over different countries (Belgium, Germany, the Netherlands, and France), each following their own port policy. Several mainports situated in different countries are competing for the status of nodal point of nodal points within a European transport network.

D. Inter-range competition

The fourth and last level of port competition involves the rivalry between port ranges. For example, the gradual completion of one European transport network and the increasing hub-feeder port relations has intensified inter-range competition in Europe, e.g. between the Hamburg-Le Havre range and the Mediterranean ports. Inter-range competition requires a common approach to port development, as different policies distort the playing field and thus lead to inefficient freight flow patterns. However, such a common approach is often complicated even when supra-national authorities, like the European Commission, are involved.

3. Port Competitive Advantages

The competitive position of a port is determined by its competitive offering to the host of shippers and shipping lines for specific trade routes, geographical regions, and other ports to which the port is connected. However, at the broader dimension, the competitiveness of a port is determined by the range of competitive advantages that are acquired or created by the port over time.

A port’s competitiveness will be high if it possesses the best array of resources for its business and strategy. Resources are the source of the port’s capabilities, which is the capacity of a set of resources to perform an activity. These capabilities are indirectly the main source of competitive advantage. In order to become or remain competitive, ports and their actors have to identify, cultivate and exploit their core competencies.

Core competencies are the collective learning in the organization, especially how to coordinate diverse skills and integrate multiple streams of technology.

The ability to consolidate the port’s capabilities and skills into competencies that allow adapting to changing opportunities is an important source of competitive advantage for port management. A competency can only be considered as a core competence and can only provide a solid basis for sustainable competitive advantage and thus for effective strategy if it exhibits the following five characteristics:

  • Inimitability. If it is difficult for a rival port or actor to imitate a port’s competence, the probability of generating a sustainable competitive advantage is increased. However, inimitability normally does not last forever. A port can forestall its competitors by focusing on resources that are inimitable by nature or by process. A number of core competencies are practically unchangeable or inimitable by nature, simply because they are physically unique (e.g. geographical location). Other core competencies can only be built through a process of continuous improvement and enhancement. If a core competence is based on the complexity of technologies and skills, it will be difficult for competing ports to imitate. Therefore, it will have a higher probability of generating a competitive advantage. Core competencies can relate to location-bound or non-location bound port-specific advantages depending on the possibility to transfer the competence to other ports or locations.
  • Durability. The sustainability of a port’s competitive advantage depends upon the rate at which the underlying resources and capabilities depreciate in time. A core competence should therefore possess a high degree of durability. For example, as port technology evolves very rapidly, a competitive advantage purely based on technological competencies is less durable than one based on the port’s reputation. Therefore, port management will have to invest relatively more in the former competence in order to retain its durable character.
  • Transparency. If competing ports are able to identify the different underlying resources and capabilities of a port’s competitive advantage, they may be able to learn about the port’s strategy rather rapidly. Therefore, a competence with high transparency will less likely lead to a sustainable competitive advantage. In contrast, port competencies based on a continuous process of improvement and a multitude of skills and capabilities (cf. port productivity) show little transparency, whence they are fairly sustainable.
  • Transferability. This element is related to location-bound as well as port-specific advantages not bound to a location. The higher the immobility of resources and capabilities needed for building up competitive advantage, the lower the transferability. High immobility can result from geographical factors, high transaction costs, or imperfect information. It discourages competing ports from imitating strategies. If a competing port faces little or no difficulty acquiring the necessary resources and capabilities to imitate a competitive advantage, the latter will be short-lived.
  • Replicability. If a competing port can not or does not wish to ‘buy’ the valuable resources and capabili­ties needed to gain success, it can always try to acquire these resources by internal investments. However, the non-replicability of resources reflects the difficulties associated with successfully developing resources and capabilities internally.

Besides these five elements, the port’s ability to appropriate the returns of a specific resource or capability is important in view of building sustainable competitive advantage. This means that a resource or capability of a particular port will be more valuable if the port succeeds in directing all resulting returns and profits to the port and not to third parties.

A broad array of core competencies form the breeding ground for (further) development of the port’s core services, each offering the necessary ingredients for a range of specialized port services. In fact, a port’s core services are the physical embodiment of one or more core competencies and contribute to the crucial input for specialized port services. For example, a port that developed core competencies in general port productivity and covered storage facilities will be able to use these core competencies to develop core services in covered storage of general cargo. These core services themselves will form the corner-stone for specialized port services, like the handling and storage of forest products.

4. Determinants of Port Competitiveness

The competitiveness of ports can only be understood by following a supply chain approach. Port and route selection criteria are related to the entire network in which the port is just one node. The ports that are being chosen will help minimize the sum of seaport and inland costs, including inventory and quality considerations of shippers. Port choice becomes more a function of the overall network cost and performance. A well-coordinated logistic and distribution function of seaports with the cooperation of various service providers facilitates the integration of ports in advanced logistical and distributional networks through a new range of high-quality value-adding services. The traditional view on a port’s competitiveness primarily considers standalone physical attributes of a port such as:

  • Physical and technical infrastructure (nautical accessibility profile, terminal infrastructure, and equipment, hinterland accessibility profile).
  • The geographical location (vis-à-vis the immediate and distant hinterlands and vis-à-vis the main shipping lanes).
  • Port efficiency.
  • Connectivity of the port on the seaside and the landside.
  • Quality and costs of auxiliary services such as pilotage, towage, customs.
  • Efficiency and costs of port management and administration (e.g. port dues).
  • Availability, quality, and costs of logistic value-added activities (e.g. warehousing).
  • Availability, quality, and costs of port community systems (PCS) and other digital solutions.
  • Port security/safety and environmental profile of the port.
  • Port reputation.
  • Reliability, capacity, frequency, and costs of inland transport services by truck, rail, inland barge, and pipelines.

The focus on standalone physical attributes of a port when assessing its competitiveness does not mirror the reality of (global) supply chains. Ports compete not as individual places that handle ships but as crucial links within global supply chains. Ports and terminals are forced to seek effective integration into these supply chains. The main selection criteria of logistics companies and shippers include:

The out-of-the-pocket costs of transporting goods between origins and destinations and the port (including cargo handling costs) constitute just one cost component in supply chain routing decisions by shippers or their representatives. The more integrated supply chain decision-making becomes, the more the focus is shifted to the generalized logistics costs. The implications on port and modal choice are far-reaching. Shippers or their representatives might opt for more expensive ports or more expensive hinterland solutions in case savings overcompensate the additional port-related and modal out-of-the-pocket costs in other logistics costs. These other costs typically consist of:

  • Time costs of the goods, such as the opportunity costs linked to the capital tied up in the transported goods and costs linked to the economic or technical depreciation of the goods.
  • Inventory costs are linked to the holding of safety stocks.
  • Indirect logistics costs are linked to the aggregated quality within the transport chain and the willingness of the various actors involved to tune operations to the customer’s requirements, namely in terms of responsiveness to variable flows, information provision, and ease of administration.

However, the out-of-the-pocket costs do not fully explain routing decisions. Connectivity via liner services and connectivity via rail or barge (where available) remain important factors for route decisions since they imply higher frequencies and better connectivity to the foreland and the hinterland. In practice, a port with high connectivity is typically able to attract more cargo for the distant hinterland, even if there is another port with much lower connectivity which also offers solutions for the hinterland routing of the goods.

The logistics actors and transport operators have designed more complex networks that need a high level of reliability. The current development and expansion of global supply chains and the associated intermodal transport systems rely on the synchronization of different geographical scales. The efficiency of transport systems can be seriously hampered if shipments are significantly delayed, although having low transport costs. But when the synchronization level increases, the sea-land network as a whole becomes more unstable. This leads to extra costs to find alternative routes. Given reducing the risk of major disruptions, logistics players tend to opt for a flexible network design offering various routing alternatives. This “not all eggs in one basket” approach implies a specific port-corridor combination rarely finds itself in a position where the market will forgive major flaws in system performance.

To add to the complexity, it is worth mentioning that the competitive position of a port cannot always be narrowed down to cost and quality factors only. Historical (the so-called ‘memory’ effect), psychological, political, and personal factors can result in the routing of flows that diverges from a perfect market-based division. Bounded rationality, inertia and opportunistic behavior are among the behavioral factors that could lead to a deviation from the optimal solution.

The last cost dimension concerns the external costs (congestion, traffic safety, and environmental damage) generated by port and inland transport activities. When major differences exist in external costs between modes or when these external costs are not internalized in a balanced way, the resulting market imbalances might enhance port and route choices that deviate from a situation in which external costs are more balanced and equally internalized in the generalized logistics costs.


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References

  • Coeck, C., Notteboom, T., Verbeke, A., Winkelmans, W., 1996, A resource-based perspective on strategic port planning, Proceedings of the 11th International Harbour Congress, Antwerp, pp. 29-40.
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