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Sunday, 7 July 2013
Preparing for Competition – Strategic Facility Planning for Small and Medium-Sized Businesses
Topic: Strategic Planning

The “Strategic Planning for Small and Medium-Sized Businesses” series is meant to illustrate lessons learnt from larger businesses that could benefit smaller businesses.  Initial posts used examples that were intentionally anonymous because information shared was not common knowledge.  In my last post – “Taking Note of the Business Environment and Learning from Mistakes” - I broke from this tradition because the information used was common knowledge, though the conclusions were not.  This post continues in this vein, though it has not been decided if this shall be the trend of things to come. Nevertheless, our present example is being played out in the global arena between sovereign states.

 

The Jamaican Logistics Hub Project

 

To date, I have written two articles on Jamaica’s Logistics Hub, both being published in the Caribbean Journal.  The first – “The Logistics Hub Project and Jamaica’s Development” – introduced  Jamaica’s Logistics hub initiative as an effort to capitalize on the opportunity being created by the intended doubling of the Panama Canal’s capacity in 2015 to establish the world’s fourth logistics transshipment hub.  The second – “What History Means to Jamaica’s Logistics Hub” - established the historical precedent of Jamaica’s strength in regional maritime activity.  This post looks at the threat of Panama’s logistics hub.

 

The Panama Logistics Hub Project

 

In an article entitled – “Jamaica trails Panama in Logistics Hub Race” – appearing in the Jamaica Gleaner dated 6 February 2013, an emerging market specialist, Dr. Walter Molano, is recorded as being skeptical  of Jamaica’s initiative, and makes reference to the Masters thesis of Daniel Munoz and Myrian Rivera entitled Development of Panama as a Logistics Hub and the Impact on Latin America.  In that document, reference is made to the widening of the Panama Canal as the final leg of Panama’s two-part strategy, which began in 2007, to develop a regional logistics hub like Singapore or Dubai.

The first leg of the strategy involves the development of a logistics park on 3,500 acres of land, which began in 2009 and is scheduled to be completed in 40 years. The Colon Free-Zone has been in place since 1947.  It now comprises three major ports, a free trade zone, and an airport: all linked by highway and railway.  154 companies already occupy the free zone.  Two ports – Balboa and Cristobal – are located on the Pacific Coast.  The third – Manzahillo – is located on the Atlantic coast.

Balboa and Cristobal are owned by Hutchinson Port Holdings: owner of four of the seven largest ports in the world, including Rotterdam.  Manzahillo is operated by SSA Marine, which also manages ports on the Atlantic and Pacific coasts of the United States. The United Nations Conference on Trade and Development [UNCTAD] recognized Manzahillo as the “most important transshipment port in Latin America; and, there are plans to expand Manzahillo in 2015.  The 2008 Maritime Review listed Manzahillo and Balboa as key transshipment hubs, along with Freeport in the Bahamas, and Kingston in Jamaica.

The Munos and Rivera thesis benchmarked the Panama transshipment hub against the logistics hubs of Singapore and Dubai and determined performance gaps which needed to be addressed for Panama to develop its own logistics hub.  It also compares the performance of the transshipment ports of Freeport and Kingston.  It concludes that Panama has the greatest connectivity to top global shipping routes and should leverage it against its competitors: adding that ports will cooperate against others if their profits will be higher in doing so.  More specifically, it indicates that the short-term effect of growth of transshipment in Panama will affect Freeport and Kingston; and, that diversion will be due to proximity to main trade routes not capacity.

 

Effect on Caribbean Transshipment Ports

 

On implementing the Panama Logistics Hub project in 2007, both Bahamas and Jamaica dropped in the UNCTAD rankings of port activity by countries in the Latin America and Caribbean region:  Bahamas dropped one rank to eighth, and Jamaica similarly fell one rank to fifth.  After the global reduction in port activity in 2009 due to the recession, both ports dropped a further two ranks: to tenth and seventh respectively.

On closer inspection, the “Containerized movement of Latin America and the Caribbean Ranking 2012" revealed that Freeport held the tenth rank; but contrary to Jamaica’s overall activity, the port of Kingston was actually ranked twelveth.  Even more interestingly, the Freeport container port is operated by Hutchison Port Holdings – the owners of Panama’s Balboa and Cristobal Ports; and according to Munos and Rivera “Freeport provides cheaper costs than Panama and can maintain its position as transshipment hub for routes South-North America and Europe-South America and the Caribbean.

 

Threat to Jamaica Logistics Hub

 

Jamaica has significant hurdles it needs to clear.  Its ambition to become the fourth global logistics hub is contingent on Panama completing the widening of its canal.  But, Panama has been first out of the blocks establishing its logistic capability and multi-modal transportation services.  In doing so, it has secured foreign “anchor” companies, which is a critical component of logistics hubs.  To top it off, the company that owns two of Panama’s ports also controls Kingston’s competitor Freeport and its other operator manages U.S. ports along the Atlantic coast.  So, they could potentially divert traffic away from Kingston.

 

Threat to Panama Logistics Hub

 

However, an environmental scan also reveals hurdles in Panama’s path.  On 29 August 2012, the Jamaica Gleaner published an article entitled “Gordon Cay Project to be tendered in September” which stated that the dredging of the Port of Kingston would commence by March 2014 to be completed by April 2015, the deadline for completion of works on the Panama Canal.  But more importantly, U.S. east coast ports of Savannah, Jacksonville and Charleston did not have sufficient draught to accommodate the larger ships.  The CEO of the Panama Canal – Alberto Aleman Zubieta – has even criticized authorities in the United States and Canada for not preparing their ports. Dredging is now scheduled for harbours on the U.S. eastern seaboard, but this will not be completed before 2020: five years after the widening of the Panama Canal. 

 

The Nicaragua Canal

 

If Panama even contemplated delaying completion of the canal, a new competitor has arisen to challenge the canal itself.  There is a proposal from a Hong Kong based developer, HKND Group, to construct a canal across Nicaragua, starting in 2014 and scheduled for completion in 2020.  This proposal includes a “dry canal” freight railway, an airport and two duty-free zones.  Whereas the Panama Canal has been designed to allow passage of ships up to 65,000 tons in capacity, the Nicaraguan Canal will allow ships up to 250,000 tons: thus allowing LNG tankers to pass through, en route to China.  So, the viability of the Panama Canal itself is being threatened, because there is currently not enough business to support both canals, unless world trade significantly increases by 2020.

 

Prognosis for Logistics Hubs

 

There is no upside for Panama.  This development not only challenges its logistics hub, but even its core competence: the Canal.  However, there are several advantages in Jamaica’s favour.  Jamaica will be able to receive larger ships than are expected from the Panama Canal.  It could start offering LNG bunkering service from the LNG tankers expected through the Nicaragua Canal; it will have the unique ability to transship and consolidate cargo destined to or from either of the canals. This is of course a long-term strategic advantage.  But, investors will bear this in mind when deciding on the free zone they will occupy.

In the short term while feasibility studies are being completed for the Nicaragua Canal, Jamaica will commence work on its logistics hub, and the race will be on in earnest. We have already noted that Panama cannot afford to delay completion of its canal. But, there may also be no practical advantage to fast-tracking either this completion or the expansion of its Atlantic port.  Few ports will be able to receive the large ships earlier; and, the demand for added port capacity may not exist. Many investors will take a wait-and-see posture and suspend or postpone plans to utilize the Panama Logistics Hub, as they await word of the Nicaragua Canal studies.

 

Conclusion

 

Panama will therefore not get the lead it had planned, when Jamaica starts its logistics hub.  So, Jamaica will have less ground to cover from its late start. Risk-averse investors may favour it, because it can handle cargo to or from either canal.  In the mid-term when it is certain the Nicaragua Canal will be built, investors - like those transporting LNG - who need to use the largest ships will be established in Jamaica.  These larger ships will also increase Jamaica’s container throughput.  This Jamaican initiative does have weaknesses it needs to work on.  But, Panama’s logistics hub strategy is contingent on it having the greatest connectivity to global shipping routes, and that is now uncertain. 

Furthermore, an article entitled “Chinese, Port Authority sign deal”, in the Jamaica Gleaner dated 5 February, indicated that the Port Authority of Jamaica had signed a memorandum of understanding with a Chinese Shipping line to undertake a feasibility study of developing Jamaica’s transshipment terminal and logistics centre.  Results of that study were never published; but, the Chinese company is China Ocean Shipping Company [COSCO]: Asia’s largest operator of containerships, sixth largest in the world in the number of containerships, and ninth in aggregate volume. It also offers services in logistics, ship building and repairing, and terminal operations. If they are still involved, it is unlikely the Nicaragua Canal will impede their operation.


Posted by phcjam at 5:25 PM EDT
Updated: Monday, 8 July 2013 4:04 PM EDT

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