At a fraction short of 400 meters in length, Marco Polo, a container ship operated by French shipping company CMA DGM, is gigantic. Berthed to offload more than 200 boxes before departing the same night, it spanned nearly half the key length of Colombo’s biggest container terminal in September 2015, on its first call to Sri Lanka.
Marco Polo entered Colombo’s new deep-water port, a Southwards extension to the existing facility where 18-meter depth alongside berths and 17 meter crane outreach make it possible to accommodate giant vessels. This ship cannot enter the older port with a load, where quayside depth is 12-15 meters.
Named after a Venetian merchant and traveller Marco Polo and launched in 2012, it is a new class container ship capable of carrying more than 16,000 twenty-foot boxes at a time. On the busy East-West route, these mega ships now carry a growing cargo volume.
After more than a decade of delays, Sri Lanka has built deep-water terminals at two ports – 18 meters deep at Colombo’s south port and 17 meters at the Hambantota port.
[pullquote]Sri Lanka’s port is a global top 30 by available capacity and could enter the top 15 in a few years, once the new container terminal (currently under construction) is fully operational[/pullquote]
Visionary leadership – building Colombo port’s first container terminal 30 years ago – geography and canny private investment have firmed Colombo’s position as a global shipping hub.
Seventy five percent of containers offloaded at Colombo’s port are for transshipment – boxes another ship will pick up for a destination elsewhere in the world. Colombo is the fifth busiest regional transshipment port, as a percentage of total traffic. Salalah in Oman and Khor Fakkan in Sharjah in the Middle East, and Tanjung Pelepas in Malaysia and Singapore in the Asia Pacific region are the only regional ports handling a greater share of transshipment traffic than Colombo, as a percentage of the total.
Only part of Colombo’s success is due to its location – a halfway point in the shipping route between Asia, Europe and the Middle East. Crucially, in a region plagued by instability, inefficiency and weak infrastructure, Colomboh as been a safe haven.
Sri Lanka is home to 0.25% of the global population and contributes 0.18% to global trade by value, but 12% of container shipping tonnage calls at the Colombo port. Of more than a dozen containerised ports west of Port Klang in Malaysia and east of Salalah in Oman, only Colombo has the capability to dock a giant ship like CMA’s Marco Polo. Colombo has flourished by building a bigger port and investing in rapid-loading equipment to efficiently manage giant new generation ships.
The Colombo International Container Terminal (CICT) – where Marco Polo docked – is a joint venture between China Merchant Holdings and Sri Lanka Ports Authority (SLPA). CITC is one of four terminals at the port. Efficiency is at a premium in the competition for global transshipment market share and berth productivity – measured as moves per hour of gantry cranes; CICT and SAGT, the port’s private sector terminal operators, compare well against the world’s best.
Colombo ranks in the global top 30 in container traffic volumes. Eleven of the ports bigger than Colombo are in China (including Hong Kong). Only 13 global ports handle more than 10,000 twenty-foot long containers annually, according to 2013 data.
Although Colombo now manages about half that volume, planned expansion and addressing underutilisation can raise it to the top 15 in the global ports league table in a few years.
When the mega liner Marco Polo offloaded 200 containers for transshipment and had they all been 40-foot boxes, CICT would have earned around $12,000 if the SLPA-published average rate of $62 per transshipped 40-foot box was applied. Supplying fuel and other services also earn revenue for companies operating in the port.
Shipping overcapacity has led to a 75% decline in freight rates in some routes since 2012. South Asian ports also have an overcapacity challenge. Colombo’s port handled 5 million TEUs in 2015, two million TEUs less than what its four terminals were capable of.
Shipping line and port overcapacity are weighing on the Colombo port’s transshipment rates. At $41 for a 20-foot container and $62 for a 40 footer, Colombo’s transshipment rates are lower than any of Asia Pacific’s and the Middle East’s major ports. In Singapore, transshipment rates are 144% higher, 69% more at Khor Fakkan, 67% higher in Dubai and 25% higher at Tanjung Pelepas.
Low transshipment yields, and not scale or efficiency, is Colombo’s greatest challenge.
Building ahead of demand has maintained Colombo’s position as South Asia’s top port. A fifth container terminal – the port’s second deep water one – is under construction.
Thirteen Indian ports in 2014 transshipped 2.7 million TEUs in the same period when Colombo’s transshipment alone topped 3.3 TEUs. Combined with flat demand for shipping, port productivity gains and extensions, the region’s excess capacity will continue to hurt the industry.
McKinsey – a management consultancy firm – estimates that 35% of available combined capacity in the ports of Colombo, Khor Fakkan, Salalah, Cochin and Hambantota, equal to 18 million TEUs, is unutilised. Planned new capacity, it estimates, is well above projected volume growth. Two new transshipment ports are planned in India’s South Western coastal towns Vizhinjam and Colachel, and existing ones in the region are being made much bigger. The grandest expansions between now and 2045 will be in Sri Lanka’s Colombo port, where container handling will grow to 12 million TEUs annually, and Hambantota, where from almost nothing now, it will reach 20 million TEUs.
Despite projected trade volume growth, estimates combined 22 million TEUs excess capacity by 2045 in the ports of Khor Fakkan and Salalah in the Middle East, the Indian ports, and ones in Sri Lanka, cutting utilisation to 70%. Future competition will be even more intense. Sri Lankan ports’ ranking at the top of productivity league tables and delivering services demanded by the world’s big shipping lines may yet grab market share. However, overcapacity will limit yields.
Colombo port handled a record 5 million containers (twenty-foot equivalent units or TEUs) in 2015. This is despite Jaya or JCT, the port’s largest terminal operated by Sri Lanka Ports Authority, which only filled 55% of available capacity. In addition to JCTs four million TEUs capacity, CICT is designed to handle 2.4 million TEUs and John eells Holdings-controlled SAGT 1.1 million TEUs. A fourth government-controlled facility called Unity handles small ships. A new terminal – now under construction – referred to as East Terminal will grow volume, and at a rate no regional competitor will match. Sri Lanka aspires to reverse a two-decade-long exports decline. Its port – a shining example of global success – it thinks can establish the country as a trading hub.
[pullquote]Visionary leadership – building Colombo port’s first container terminal 30 years ago – geography and canny private investment have firmed Colombo’s position as a global shipping hub[/pullquote]
Sri Lanka’s location has been the asset that established the country as a hub since the first Egyptian, Roman and Arab fleets sailed East. The island’s then rulers had a knack for making the most of this, welcoming traders, building ports and setting up customs infrastructure to make some revenue.
The scale of trade hubs was limited until the industrial revolution, when overseas shipping costs fell and cities were able to specialise in production because they could have customers all over the world.
A century later, shipping containers are the means by which cargo crossing oceans began to be organised. While steam engines made ocean crossings faster after the industrial revolution, shipping containers made cargo handling at ports more efficient. They were also easily transferred to trucks for over-land transport.
However, improving infrastructure alone cannot develop shipping and trade hubs. This is because the state of global manufacturing has changed. Factories now manufacture widgets that most consumers never see but probably use because they are parts of everyday products like cars, washing machines and mobile phones. They produce parts, but never all, of brand name goods.
On the other hand, a port itself won’t create widespread wealth, because even the largest ones employ only a few thousand people and the transshipment business suffers from overcapacity. Ports support mass wealth creation only when they link manufacturers to global supply chains and a country’s logistics industry is able to exploit these linkages. Sri Lanka’s links to manufacturing supply chains are almost non-existent and its logistics industry lacks scale. Ports are critical economic assets, especially for islands.
When transport costs are high, the accessible market for manufactured products is small, sometimes not beyond the next village. As transport costs decline, economic activity begins to unbundle; the village will import from further away the stuff it can’t efficiently make. As shipping costs declined in the last half of the century, large-scale production transformed towns into industrial cities.
Successful industrial cities can’t do without an efficient port, because land and air transport of inputs and finished products is must costlier. Port owners also profit more from import-export cargo than they do from the cut-rate transshipment business.
For decades, the most prolific goods exporters have been successful because they have specialised in segments of the value chain rather than producing complete products. In the 1990s, imported content in exported products globally was around 20%; by 2015, this has risen to 40%, and in 15 years, trade analysts forecast it will rise to 60% or more of the final goods.
Of Sri Lanka’s 2013 manufacturing exports, only 6.1% were parts and components ending up in finished products elsewhere in the world. The rest of Sri Lanka’s exports were all finished products. Sri Lanka didn’t do any final assembly by importing components. On average, UN Comtrade estimates that 47% of goods exported globally by value were either parts or stuff assembled off imported components.
Of developing country exports, the agency estimates that 62% comprised parts and assembled products. For instance, Thailand and Malaysia achieved 70% and 73%, respectively, of global production share in their exports.
[pullquote]Only part of Colombo’s success is due to its location – a halfway point in the shipping route between Asia, Europe and the Middle East. Crucially, in a region plagued by inst ability, inefficiency and weak infrastructure, Colombo has been a safe haven[/pullquote]
Even Indian manufacturers are now integrating global supply chains in their products. Linking with an Indian chain may be Sri Lanka’s first opportunity. Shipping links between the two are deep. Seventy five percent of the Colombo port’s transshipment business is from India. In 2014, Colombo also managed 20% and 23%, respectively, of Bangladesh’s and Pakistan’s transshipment market share.
The Indian states of Kerala and Tamil Nadu in the south have industrialised at clip faster than most other states in the country. While only 18% of Indian cargo is transshipped through Colombo, around 97% of south coast India’s exports move though the Colombo port.
The first opportunity is to attract FDI from global component makers who can supply Indian manufacturers of cars, electronics and other industries.
China now dominates global manufacturing. From less than 3% quarter century ago, China’s share of global manufacturing by value is now nearly 25%. It manufactures a staggering 80% of the world’s air conditioners, 70% of its mobile phones and 60% of its shoes, shipping containers of these in giant ships and dominating markets in Asia, Europe and the Americas.
Southeast Asian economies, together with China, produce nearly half the world’s manufactured goods by value.
The region’s ports linking Asia’s manufacturing hubs with global markets also link the supply chains that reach deep into Southeast Asia.
Foreign investors who can set up manufacturing and services ventures here to link with Indian and Southeast Asian supply chains won’t invest due to their being awed by Colombo’s impressive port. Instead, they will seek out locations with plentiful talent and ease of market access.
The World Trade Organisation’s (WTO) research shows that a 29% value addition of developing country manufactured exports comes from services. In trade jargon, this is now referred to as the ‘servicification’ of the manufacturing sector. Essentially, service liberalisation or servicification is reducing manufacturing costs.
Sri Lanka’s trade agreement with India – the only important such deal the country has – no longer offers the level of freedom of access that global investors now expect. That’s not surprising because trade deal structures have a useful lifetime and their returns start to diminish due to the pace of transformation in global manufacturing. Of the 360-plus regional and bilateral trade deals around the world, more than 90 have been upgraded to meet contemporary realities, including services and investment liberalisation.
In their most unbundled form, component manufacture, assembly, testing and final assembly will happen in multiple countries. Because stuff cross borders multiple times, smooth import-export procedures must be available.
To successfully bite pieces off global supply chains, Sri Lanka will have keenly exploit two fairly recent trends. There is only so far a supply chain can be stretched geographically, and recently, distance has started to assert itself in two ways.
First, production is seeking locations where talent is plentiful because of the boost to research and product innovation great people can have. No longer will manufacturing the widget as cheaply as possible suffice.
Second, information technology has made it possible to better coordinate manufacturing, but it may have also contributed to spreading it too thinly. Now it’s becoming necessary to keep plants close together so gains of fractured production aren’t eroded by transport delays. For latecomers, these trends have implications. Investors seek not just deep regional access and proactive trade facilitation, they want high-quality talent, large numbers of workers and geographical proximity to markets. Sri Lanka’s talent pool is small and has limited skills. However, its proximity to India is an asset. India is a big market and has a large pool of labour that may be attracted here.
Manufacturing-allied functions from financial services, research, warehousing, transporting, marketing and after-sales are all services. Many high skills jobs will be available in places where supply chains have made inroads. Sri Lanka’s export ambitions have been at odds with the policy on free movement of labour, trade facilitation and import tariff structures. On some fronts, Sri Lanka has moved backwards in the last decade.
[pullquote]Eleven of the ports bigger than Colombo are in China (including Hong Kong). Only 13 global ports handle more than 10,000 twenty-foot-long containers annually, according to 2013 data. Although Colombo now manages about half that volume, planned expansion and addressing underutilisation can raise it to the top 15 in the global ports league table in a few years[/pullquote]
Sri Lanka added an average, so-called para-tariff of 10% on imports since 2004. This includes cess and various import levies. Its nominal import tariff has also doubled in the period since 2004 to an average of over 20%. These have contributed to creating one of the most complex tariff systems in the world.
The island’s reluctance to open its borders to foreign migrants has resulted in labour shortages in critical economic sectors like hotels, construction and information technology.
When companies have implemented their flat structures, re-engineered processes and scrubbed waste off their production lines, logistics is worthy of their attention.
The concept of having components delivered at the last minute so as to keep inventories down, called just-in-time, has spread from vehicle assembly to every corner of manufacturing, giving rise to an industry now called logistics. This is the second trend that has swept the world.
Efficient supply chains enable manufacturers to buy from where prices are the lowest and logistics help maintain minimum stocks. Sri Lanka’s large readymade clothes exporters adopted just-in-time (also called lean manufacturing) early, since there weren’t any independent service providers to help the industry set these units up themselves.
The lines between logistics firms and manufacturers are blurred.
Early on, logistics firms just moved things around efficiently. But global brand owners and their partners are now demanding far more, including finely coordinated deliveries, sequencing of parts to the production floor and managing suppliers. Brand owners are left with just product development, design and marketing. Logistics firms reach deep into their clients’ core businesses to manage processes, freeing brand owners to focus on more important stuff.
For a global shipping hub, Sri Lanka suffers from surprisingly inefficient logistics. In the World Bank’s 2014 Logistics Performance Index, Sri Lanka ranks 89th, one behind Kazakhstan and in the company of Russia, Uruguay and Armenia. The Index scores each country on their customs, infrastructure, international shipping, tracking and tracing, logistics competence, and timeliness. It ranked 160 nations.
In contrast, Sri Lanka’s port is a global top 30 by available capacity and could enter the top 15 in a few years, once the new container terminal (currently under construction) is fully operational.
Global supply chain integration and mastering logistics are separate challenges. However, the route global manufacturing has taken in the last decades shows that success cannot exclude either.
[pullquote]Sri Lankan ports ’ ranking at the top of productivity league tables and delivering services demanded by the world’s big shipping lines may yet grab market share. However, overcapacity will limit yields[/pullquote]
Just-in-time partnerships are also complex. Global brands have a hierarchy of suppliers based on long-term relationships. Tier one suppliers usually deliver big integrated systems to the brand owner or original equipment manufacturer (OEM). Fanning out from these are tier two suppliers who provide individual parts or assembled components to the OEM or to a tier one supplier.
Partnerships are long term, and ensure mutual benefit and collaborate intimately. Latecomers must struggle to enter as tier two suppliers and work their way up. The faster way to make inroads is to attract established suppliers to invest in factories here. The benefits are self perpetuation, as hosting more of the supply chain boosts competitiveness and attracts more investment.
The south port moved the Colombo harbour from a regional to a global hub. In June 2016, 24 ships requiring a draught of 14.2 meters or more called at the Colombo International Container Terminal. In the first six months of 2015, that number didn’t exceed 10 ships in any one month. Building ahead of demand has paid off for the ports sector.
Quayside at CICT, it’s easy to be misled that a hub’s vision needs mainly infrastructure investment. A vital component is a liberal trade and investment framework. That’s the only way to protect and grow Sri Lanka’s position in the trading world.