The time has come for Canadian firms to take a wider view of trade opportunities, a global view of the link between logistics, trade, transportation and corporate strategy. Such a view implies an urgent need for Canadian firms to design a global supply chain. These authors have the plan to help companies achieve this goal.
Students of business strategy and international business typically focus on a range of optimal strategic choices, based on competitive force analysis, resource views of the firm’s competencies, or internal leadership skills to execute best-practice models. Global logistics and technologies now make past behaviours sub-optimal or obsolete and call into question current practices for a range of manufacturing and retail businesses. A global view of the link between logistics, transportation, trade, and corporate strategy suggests that global supply chains are now a corporate imperative for strategy making and seriously calls into question corporate strategies based on national or regional perspectives of the firm.
For Canada, two issues stand out, as national transportation policies become linked to global trade and investment issues. The first is truly transformative, namely the staggering changes in global transportation supply chains, with ever bigger ships and aircraft, fewer but more strategic port developments, shifting traffic corridors through the Panama and Suez Canal, and new, integrated technological and communications links with inland transportation (freight forwarders, railways and trucking) and new, strategic management tools. The second issue is the role of corporate supply chains as a strategic element of corporate decision-making. Globalization dictates why companies and their employees must refocus their thinking. Past emphasis on provincial, regional, or even national supply chains must shift to truly global sourcing, marketing and transportation policies linking suppliers and customers across international boundaries. This article defines the challenges and offers solutions for Canadian firms.
For Canada, and indeed for North America, ports like Vancouver and Halifax are ideally suited to address these two global supply-chain issues mentioned. They have the location, deep-water natural harbours and channels, and direct links to inter-modal transport like roads and rail lines. The volume of container trade on mega-carriers is growing so fast that bottlenecks on the west coast, and the problems of using these ships to serve the shallower ports on the North American East Coast, are the competitive challenges for the Atlantic Gateway1. This initiative requires new thinking by all levels of government, the private sector and various stakeholders, because global trade and investment now directly integrate Asia with North America. Jobs, investment, immigration, training and education and national productivity demand new co-ordination, not only for Asian trade strategies, but for new technologies, new skills and new global thinking.
Asian trade, of critical importance to Canada’s well being, is now shaped by profound changes in the transportation tools available around the world. Economic forces drive these new supply chains, divorced from the national or continental perspectives of the past. In particular, new patterns of marine transportation, with supporting human resources – educated workers trained in new supply chain technologies – are being adopted in developing and developed countries alike. Global supply chains now involve a physical component – transport of goods via ships, rail, and trucks – an information component (computers, software tools, and PDAs) – and a people component, representing skilled workers who deliver the products.2
Global maritime shipping is itself being transformed – bigger ships, more cargo in containers, bigger and more productive ports and terminals, and new forms of inter-modal transport. This integrated package forms one element of the global supply chain, linking countries around the world on ocean transport routes, and opening new job and trade opportunities. But this transportation supply chain must be linked directly to the second global supply chain, which is company based. From Wal-Mart to Toyota, McCain Foods to Dell Computers, companies are expanding their supply chains as they enter new markets, and integrate how they source components and parts, process them, and deliver finished goods, on time, to their customers. Supply chains are about three imperatives: price, quality, and delivery.
The Atlantic Gateway, like the Pacific Gateway, can position Canada as a truly northern gateway for North America in these two supply chains: the global transportation network, and global corporate supply chains. In Canada, only two ports, Vancouver and Halifax, have the deep-water ocean channel, and land area and terminal capacity to handle the new ships on order in the shipping industry. The west coast ports of the United States already face massive congestion, and there is limited room to grow. There are other challenges – environmental and pollution concerns, labour-relations and road congestion. Shipping companies are introducing mega ships that lower transportation costs per unit shipped, but are a challenge for ports that accommodate them – the ports are too small, the water channels are not deep enough, and they lack inland transport, from terminals to rail and truck lines. As more goods are sourced from markets like China and India, global shipping companies are reconfiguring their trade routes.
Shipping companies are planning new transport corridors, through the Suez Canal, across the Atlantic Ocean to North America. Canada’s deep-water ports on the Atlantic coast are the closest to Europe and the Suez Canal, and potentially offer new trade and transportation routes to Asia. Containerization, the key platform for large container ships, will reach 650 million TEUs within a decade, up from zero 50 years ago. The container is the ideal mode of long distance transport for bulk cargo, dry cargo, and now refrigerated goods that allow easy transshipments of fresh and frozen goods (e.g. seafood, fruit and vegetables, flowers) in 20 ft and 40 ft boxes.
But global shipping and the demand for scale economies via large mega-vessels are not the only transportation and infrastructure challenges facing Canada. As more firms located in Canada are engaged in global trade, corporations have to deal with a new strategic challenge: organizing their own global supply chains. Such supply chains are enormously complicated, involving inland transit in foreign countries to inland transit in Canada, with various transportation modes in between, from trucking to rail, in-sea shipping to navigating the Suez or Panama Canal. In practical terms, global supply chains involve shipping from factories located in distant markets, across the global transportation networks, into stores and factories located in large consumer shopping clusters in Central Canada and markets in the US Midwest. Like their corporate counter-parts in the US, Canadian firms now need both West Coast gateways for cargo through ports and inland transport, and East Coast gateways and corridors. The reason is simple: supply-chain economics requires a measure of balance, of inputs and outputs, of suppliers and customers, of a full container in one direction and a full container in the opposite direction.
This is the central strategic point for both the Pacific Gateway strategy developed for Canada’s West Coast, around the port of Vancouver, and new infrastructure expenditures for Prince Rupert, and the Atlantic Gateway strategy for the East Coast around the Port of Halifax. It is a national transportation issue, not a regional issue, involving several forms of transport and inter-modal connections, and numerous stakeholders. But because the Atlantic Gateway is a national issue, and requires federal government’s attention, the Gateway is automatically a regional and provincial concern and requires Cabinet-level understanding, attention and priority setting. The two supply chains – one of transportation, one of corporate networks linking suppliers and customers – are intimately linked.
Trade and global logistics
Canada’s traditional marine strategy has been dominated by security issues (fishing rights, smuggling, and in-shore transport) and defense. Few of Canada’s 28 ports are centered on international trade, especially trade outside the North American triad. For the West Coast of Canada, there is a century-old link to Asia, dating from the ships run by Canadian Pacific to Yokohama, Hong Kong and Shanghai. More recently, the startling rise of the Asian economies, first with Japan a generation ago, then Southeast Asia and the Asian Tigers, and now China, all represent a tectonic shift in the global economy.
China, with over a billion people – 300 million of them attending elementary school – by itself shifts the global economic order toward Asia. Combined with India, with another billion people, the immediate and long-term effects on the global economy are simply enormous. Clearly, British Columbia, with its legacy of Asian immigration, educational ties, trade and transportation links, stands to gain enormously from its ideal location, with spillovers for Canada at large. For the Western provinces at large, with their abundant natural resources, trade links in potash, wheat, coal, and energy with Japan and other Asian countries, the attractions across the Pacific are critical, even excluding trade with China.
But these changes in the global order do not exclude the rest of Canada. For instance, Ontario has more two-way trade with China than Western Canada. Atlantic Canada has its own trade linkages with Asia, from education to French fries, pulp and paper to fisheries. Indeed, if properly managed, Atlantic Canada stands to gain tremendously as another gateway to the world economy, for several reasons:
- Atlantic Canada is the Canadian gateway to Europe and new trade routes to southern Asia and, over time, the polar routes to Russia.
- Global trade routes are being transformed by new transportation modes: global shipping companies, ever larger ships, new hub-and-spoke supply chains that favour speed and cost, not distance or cost per mile.
- The rise of sophisticated freight forwarding companies, now with a global reach, that allow small and medium-sized firms to ‘contract out’ all aspects of international trade, including documentation, customs clearance, insurance, and ideal mode of transport on a one-off or continuing basis.
- Inter-modal transport system for inland shipping from seaports or airports, combining rail, short-haul and long-haul trucks, and new techniques to load, unload quickly, and re-sort loads for deconsolidation for short-distance shipping.
- A new global network of terminal operators, financed by private equity, that increasingly integrate corporate supply chains from large, deep water ports, via global shipping companies that operate ever larger ships (the ocean equivalent of the largest jumbo jets) into other strategically located deep-water ports around the world, reinforced by the latest communication devices, including RFID (radio frequency identification devices) technologies for on-line precision tracking.
Unfortunately for Canada, the world is not standing still. From Dubai to Vietnam, from new ports in China to well-established ports like Rotterdam and Hong Kong, there are new gateway linkages on the East Coast of the United States. Three strategic stakeholders – shipping companies, terminal operators and port facilities (air and sea ports) – are accelerating corporate developments as part of changing global trade strategies. Consider some recent developments:
- A referendum in Panama to enlarge the Panama Canal to receive post-Panamax ships of up to 15,000 TEUs planned over the next 20 years (it was passed):
- New rail services (two trains per day) linking Long Beach, CA, to Atlanta, GA, to help diminish the congestion on the West Coast of North America.
- The development of new ocean ports in India for the shipment of manufactured goods like steel, textiles, and autos, not only for the markets of Asia, but eventually to North America via the Suez Canal.
- New combinations of ocean shipping and air cargo transport to reduce trans-ocean cargo shipping from Asian ports in about 32-35 days for a round trip across the Pacific, or 65 days via the Panama Canal.
- In a post 9-11 world, new (and often untested) security initiatives, including the US Secure Freight Initiative of screening through imaging technology for nuclear products and weaponry, including in foreign ports and terminals.
- Global alliances and business cooperation agreements between shipping companies, terminal operators, and railway companies to manage the dramatic new demands of Just-in-Time delivery around the imperatives of price, quality and delivery where true real costs are quickly exposed.
For generations, Canadians have been increasing their global trade exposure, but mainly with a mindset that focused on North America. Except for a few industries, Europe is seen as a niche market. Outside the airline sector, much of the transport focus has been through the prism of North America, and especially the states lying contiguous to Ontario and Quebec. Since the Canada-US Free Trade Agreement was signed with the US, later expanded to become NAFTA, Canadians have reoriented their trade links away from a national focus (east-west) to a North American focus (north-south). In the transport area, this has culminated in new arrangements, such as the Open Skies air pact with the United States, a powerful railway system developed by CN, not only across Canada (like rival CPR), but north-south to the Gulf of Mexico, and with a large terminus in Memphis.
On a global basis, international trade is based on an ocean-going transportation system. Seaborne traffic covers about 96% of international trade. The containerized portion of this passed a milestone in 2004 with 360 million TEU of throughput through the world’s ports. (A TEU is a transport term meaning a 20 foot equivalent unit. Most containers in North America are 40 feet, some are 53 feet.) For Canada, the challenge now is to design a national transportation system that is state of the art to deal with the world’s biggest market, the United States, and that reinforces Asia’s role in that market.
Two global trends are unmistakable. First, the international economy has already shifted dramatically, away from the Atlantic-centered market of Europe-North America to the Pacific Rim Asian markets like Japan, China and India; and away from the traditional developed triad economies (Europe, North America and Japan) to the developing world. This new mix, even when China is excluded, now accounts for one third of world trade (28.8% of merchandize exports, 26.3% of imports). China adds about 5.5%, but its trade is growing at 20-25% per year.
The second trend is equally profound for the global economy. Developing economies in Asia are following a similar path to Japan in the 1960s and1970s, i.e. accelerating their industrial growth by moving up the value chain to more sophisticated products and technologies. All over Asia, factories operate with state-of-the-art equipment, the latest industrial processes imported from Japan, the US or Europe, with managers and engineers trained in reputable foreign universities. What was true two decades ago about Japan, which trained engineers while the US trained lawyers, applies to Asia: India and China each produce more engineers than Europe and the US combined. India and China are shifting their industrial production away from labour-intensive and commodity-intensive product lines to sophisticated technology-intensive output, as Japan did a generation ago.
Air cargo and ocean shipping are the manifestation of the way Asian countries use global logistics to link supply chains into new global JIT systems. Historically, primary sectors like the oil industry used these ideas to link the source of oil production to refiners (often located in different countries, in part because of by products) and their distribution outlets, e.g. service stations. The Irving Group of companies illustrates this pattern. The Irvings purchase oil from Venezuela or the Middle East, ship the product to the Saint John refinery, and then market the product at service stations located throughout eastern Canada and New England, usually on their own ships and trucking fleet. In manufacturing, Toyota located its factories adjacent to deep-water ports, where the cost of shipping say from Nagoya to the Port of London was cheaper per car than transport costs for British Leyland shipping by truck or railway from its car factories located within Britain to the Port of London. Today, JIT global logistics has extended to the retail sector, led by firms like Canadian Tire, Hudson’s Bay Co., Sobeys, Home Depot or IKEA.
Canada’s gateway strategies
For over 30 years, Canadian policy makers have been concerned with the country’s Pacific Rim gateway – transportation links via air, sea and rail – that shape Canada’s exports and imports to Asia. In this period, Japan was one of the first priorities, as that country’s dramatic growth led to an apparently insatiable demand for Canadian raw materials – timber, coal, grains, fertilizer, chemicals – and an equally dramatic rise of Japanese exports like automobiles and consumer electronics. As Pacific Rim trade with North America has grown, West Coast ports – Los Angeles and Long Beach, Seattle and Vancouver – have faced increasing port congestion, as the flow of containers across the Pacific skyrocketed, from 2 million TEUs in 1970 to 17 million TEUs in 2005.3
Air cargo and ocean shipping are booming sectors because more countries are linked to global supply chains, which are based around companies. China is the dramatic example, but countries as diverse as the BRIC countries (Brazil, Russia, Indian and China) illustrate how global manufacturing extends around the world, depending on the sector (contrast oil with textiles or furniture production with cosmetics). The trends is clear: more trade means more JIT flows, involving bigger planes and ships, bigger airports and ocean ports, and vastly more people and companies to manage the supply chain, from freight forwarders and trucking companies, to IT and security firms. Global supply chains require intense cooperation among companies, among manufacturing firms and retailers with transport companies, and between private companies and the public sector. As countries become more integrated through global trade, firms require a mix of more integrated services, and cooperation of specialized functions. In transport, this means inter-modal transport services, from ocean shipping and containers, railways and ease of access to ports and factories, and truck services, often employing an integrated IT system to manage manifests, insurance, and other aspects of the global supply chain system.
While global trade is central to Canada’s wealth, so too is the need to become a player in the global supply chain system. For Canadian firms, and for the public sector, that means new imperatives: having global operating scale, a critical mass of skills and trained people, and tight transportation links to global companies. Both supply chain systems, global transport and corporate, illustrate the basic imperative: the organization is only as strong as the weakest line. Any barriers – bottlenecks, time delays, quality defects or sundry imperfections – quickly add to real costs. The transportation supply chain, by definition, involves both the public sector and the private sector. International trade means that goods cross borders, so there must be customs and security inspection. And that means a changed view of economic geography, where population centres no longer decide the transport economics: the oceans do. Consider the changes in port economics.
Starting with the Second World War, port economics became a function of large population centres, with factories located adjacent to city centres (London, Paris, New York, Chicago and Toronto) because inland transport costs were high and delivery was slow. Time problems could be ignored through scheduling adjustments like high inventories, despite high wastage. But starting with the development of the container, and ships to transport them, the economics changed, both nationally and globally. Once manufactured goods could be easily transported inland by truck or rail, and ocean shipping dramatically reduced the cost per container (regardless of distance), there has been a global shift to locate manufacturing to greenfield sites using JIT organization, especially in Asia (starting in Japan, and racing through East Asia into China), with container shipping being the primary means of transport to distant markets. That explains why Asia-North American trade is four times that of Europe-North American container shipments, and why trans-Pacific container trade is rising from 12.9 million TEUs to 16.5 million between 2005 and 2008.
The prospect of very large container ships coming into service makes Halifax the natural entry point for goods shipped from Europe or through the Panama Canal. In the US, new investment developments and new infrastructure, such as new terminals, warehouses, and new railway lines, show that the US is not a by-stander to the changing global trade game. Consider recent developments at the US East Coast ports:
- In New York/New Jersey, a $760 million investment to deepen the port channel to 50 feet and $1.6 billion for port infrastructure;
- The Norfolk, VA Port is investing $400 million in container terminals and new on-dock rail capacity;
- At the Port of Charleston, a new three-berth container terminal at a former naval base will elevate capacity by 1.4 million TEUs to more than 4 million TEUs per year, double that of Vancouver. Crane operations have improved substantially, from 40 container moves per hour to 53 per hour, thus reducing what is called dwell time.
- New warehouse facilities in Houston constructed by Wal-Mart (1.3 million sq. ft.) compliment a 1.4 million sq. ft. warehouse by Home Depot, and 1.5 million sq. ft. facility in Virginia by Target Stores;
- In Miami, there is a plan for $250 million of investments in port infrastructure, including port deepening by the US Army Corps of Engineers.
Part of the East Coast development in the US is driven by the staggering port development in China and, after some considerable delay, in India. In China, there are concrete plans for 100 new container loading berths, each with 500,000 TEUs per year capacity – the equivalent of Halifax. In India, there is a new 20-year plan for the development of ports and port infrastructure, to increase India’s port capacity from 750 million tons to 1.5 billion by 2012, and 2 billion in 2016. Private sector development in Indian ports now exceeds $2 billion dollars and is growing fast. Added to competition from the US are new developments in Mexico and ports in the Dominican Republic and other Caribbean islands adjacent to the Panama Canal.
These issues are central to the global context of the Canada’s northern gateway strategies. The question is: are local and regional ports in the Atlantic region prepared to build a globally successful gateway extending to a national transportation corridor? Transportation infrastructure is only one part of the strategy of the Atlantic Gateway. Most manufacturing and service industries in Atlantic Canada depend on quality transportation infrastructure, and as firms grow internationally, air, road and sea lines are central. For instance, how does Labrador deliver its iron ore to the steel mills of Hamilton and Pittsburg? The answer: by train and bulk cargo on the St. Lawrence River. Today, the markets of Asia are open to Newfoundland via inshore shipping and container vessels. Transportation challenges constantly face the region, especially in air transport, so critical to the tourist, cultural and convention industries. For example, as PEI develops its golf courses as part of its tourist industry, inferior air service often means visiting golfers (and musicians) arrive on time, but without their luggage.
It may sound like a contradiction in terms, but Canada needs an Atlantic Gateway strategy to cope with Pacific Rim trade. Two-way trade between North America and Asia, and between Canada and Asia, has increased dramatically. But global trade raises the need for complicated supply chains and logistical problems for Canadian companies. Much of this trade is in complicated shipping modes – commodities like coal, wheat, potash, and lumber, and manufactured products like capital goods, industrial machinery, transportation and aerospace parts, involving trucks, warehousing, trains and specialty ships.4 Canadian firms must re-organize their supply chains from a national to a global plan.
Some of these goods are destined for the North American interior, especially to Chicago-area manufacturing hubs. But the West Coast has its own challenges (strikes, antiquated facilities, minimal security). As noted, because of West Coast congestion, companies are addressing new shipping needs for East Coast ports. In the past, the cheapest routes were through the Panama Canal from China, South Korea and Japan into East Coast ports. Increasingly, there is a growing demand for state-of-the-art shipping into the Atlantic coast ports of North America, like Montreal, Halifax and Saint John.5 Potentially, the Atlantic Gateway combines a new policy mix, involving the needs of importers (countries, companies, and transport firms), the private sector (manufacturers, retailers and niche players), the transportation industry, the provincial governments of Atlantic Canada and the federal government.
What Canada at large faces, and what students of business strategy must address, is how Canadian industry fits into global transportation supply chains. National policy has started to address the West Coast issue, with an investment package amounting to $591 million. B.C. is now an extremely active player in Asia at all levels, from regular visits by the Premier, Cabinet Ministers, and private sector groups, and the Lower Mainland ports are integrating to form a new unified Port Authority. Vancouver is clearly the main container port in Canada, and West Coast container shipments are projected to double, from about two million TEUs per year to five million by 2020. However, there remain a lot of assumptions about the second West Coast port, Prince Rupert. Here, First Nation land claims, port infrastructure, and terminal construction are closely watched around the world, and by countries like Mexico, which sees its own port development as a possible competitor for the West Coast trade, possibly because, with China as a partner, time is on Mexico’s side.
Global trade and global logistics are realities. The Atlantic Gateway’s time has come. Canada needs to invest in a three-way national strategy, linking the Pacific coast ports, the Atlantic coast ports and the St. Lawrence-Great Lakes corridor. But any initiatives along these lines require a massive educational process, showing Canadians at large why the country intends to be a global player in international trade and willing to invest the time and money to design a transportation system that has global reach. This is not only a job for governments at all levels, although the public sector must be part of the solution. It is not only the task of transportation experts to exert pressure on both the public and private sector, although they can demonstrate what other countries are doing. And the Canadian private sector must change its outreach programs by openly having their own Team Canada trade missions to demonstrate what the rest of the world, and Asia in particular, are doing to play the global trade game.
Canada is one of the few maritime economies without a national ocean strategy for national gateways and corridors. It is also one of the few industrialized countries without a national highway strategy. As globalization proceeds, not as an offset to US-Canada trade or NAFTA enlargement and integration, but as a close complementary advantage, students of corporate strategy and international business must adjust mental views to global trends and design strategic supply chains accordingly. Time is not on Canada’s side – the changes taking place in Mexico and the US will soon be operational. As such, global gateways and transportation infrastructure should be a national priority and a natural complement to the Pacific Gateway investments. This opportunity to lead is Canada’s to lose.
1 This paper is based on a larger study, Embracing the Future: The Atlantic Gateway and Canada’s Trade Corridor (Vancouver: Asia Pacific Foundation, 2006).
2 For background, see Charles McMillan, The Strategic Challenge: From Serfdom to Surfing in the Global Village (Toronto: Captus Press, 2006).
3 George Stalk Jr., “The China Rip Tide: Threat or Opportunity” (Toronto: Boston Consulting Group, 2006).
4 For a superb background study, see Westac Group, Preparing for Success: Forecasting Surface Freight Demand. Vancouver: Westac, 2005.
5 For recent studies, see Brian Lee Crowley and Stephen Kymlicka, Atlantica and Trends in World Trade: the Opportunity and the Barriers (Halifax: Atlantic Institute for Market Studies, June 2006); James Frost, Shipping Out: The Development of a Gateway Hub at the Port of Halifax (Halifax: Atlantic Institute for Market Studies, April 2006); Michael C. Ircha, “Serving Tomorrow’s Mega-Sized Container Ships: the Canadian Solution,” International Journal of Maritime Economics, 2 92001), pp. 318-332.
|No.||Company||2004 Rank||AMP Opinion||ROA (25%)||Inventory Turns (25%)||Trailing Growth (10%)||Composite Score|
|2||Proctor & Gamble||3 (+1)||289||11.4||5.7||18.5||13.23|
|6||Johnson & Johnson||7 (+1)||191||16.0||3.0||13.1||10.91|
|10||Johnson Controls||8 (-2)||172||5.4||24.2||17.3||9.21|
|14||Home Depot||21 (+7)||108||12.9||4.7||12.8||7.81|
|17||Best Buy||18 (+1)||112||9.6||7.2||11.8||7.13|
|23||Public Super Markets||New||42||13.7||12.9||10.3||6.31|