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The Cargo Cult The Myth of a Freight-Dependent Economy
!
Joe Cortright March 2016
Synopsis
• What drives our economy? • Freight facts • Containers: A case study • What about just-in-time? • A cluster case-study • Academic evidence
Freight Dependent
Widmer in ItalyWhy?
Great Beer.
Not Transportation Prowess.
Backwards Logic
We export things because we’re good at making them
We don’t make things because we’re good at exporting them
We’re dependent on a lot of things:
• Caffeine Dependent • Electricity Dependent • Oxygen Dependent • Water Dependent • Internet Dependent
Freight Facts
Fact 1: Most freight is heavy, low-value and local
Growing, High Value Industries ship trivial amounts of freight
Industry Pounds/Worker/Day Minerals 10,000 Wood/Paper 7,348 Food Processing 3,794 Metals 2,243 Apparel 554 Machinery 510 Electronics 50 Software/Prof. Svcs. 0 Source: 2002 Commodity Flow Survey for Portland-Vancouver
Most Freight is Low Value Bulk
Commodity Share of Freight Gravel & Stone 32.8% Wood Products 17.4% Non-Metallic Minerals 11.5% Coal & Oil Products 5.6% Total, these bulks 67.3%
High Value, Low Weight
Electronics
Machinery
Wood Products
Wheat
Value per pound of shipment (gross)
0 12.5 25 37.5 50
$0.11
$0.24
$6.46
$40.47
Source: 2012 Commodity Flow Survey, US Census
Most Freight is Purely Local
Destination of Outbound Shipments: Oregon - 73.6%
Origin of Inbound Shipments: Oregon - 62.1%
Shipments Traveling less than 50 miles: 67.5%
Source: 2002 Commodity Flow Survey for Portland-Vancouer, US Census
Portland-Area Freight Movements by Destination, Origin & Distance Traveled
Fact 2: Oregon’s economy has shifted to lighter, high value products, and tonnage is down sharply
Electronics & Machinery Drive Oregon Economy
0
12,500
25,000
37,500
50,000
2007 20120
30,000
60,000
90,000
120,000
2007 2012
Value, Millions. Source: 2012 Commodity Flow Survey, US Census
Everything ElseElectronics & Machinery
Up 51% Down 12%
Creating just as much value moving 42% fewer tons
0
40,000
80,000
120,000
160,000
2007 20120
50,000
100,000
150,000
200,000
2007 2012
Source: 2012 Commodity Flow Survey, US Census
Tons (Thouands)Value (Millions)
Down 42%
Oregon Exports: Value Up; Tonnage Down
0
10,000
20,000
30,000
40,000
2007 20120
5,000
10,000
15,000
20,000
2007 2012
Source: 2012 Commodity Flow Survey, US Census
Tons (Thouands)Value (Millions)
Up 55% Down 44%
Oregon: Trucking Ton Miles Down 40%
0
7,500
15,000
22,500
30,000
2007 2012
Source: 2012 Commodity Flow Survey, US Census
Fact 3: The economy is up; freight is down.
National: Freight intensity of GDP down
Oregon: Freight intensity down 40%
Oregon Truck traffic still below year 2000 levels
Trucks crossing Columbia down 20%
12,000
15,000
18,000
21,000
24,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: ODOT, Class 6 and higher trucks crossing I-5 and I-205, AADT
Flawed Freight Plans
2010 Metro Regional Freight Plan
Trade volumes in Portland are expected to double by 2035, to 600 million tons annually.
The region’s goods movement system will need to absorb a doubling of freight volumes by 2035, with approximately 75 percent of that dependent on trucks . . .
!
REGIONAL FREIGHT PLAN
2035June 2010
June 2010
Containers: Case Study
Feb. 2015: Hanjin Leaves
Apr. 2015: Hapag Lloyd Leaves
Portland’s Decline
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Pacific Maritime Assn. (2015-16 estd.)
Portland Share of West Coast Container Traffic
Always a bit player
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0% 19
95
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
2010
2011
2012
2013
2014
2015
2016
Source: Pacific Maritime Assn. (2015-16 estd.)
Portland Share of West Coast Container Traffic
Port in declinePortland Business Journal, Feb. 2016: “The port's other businesses are also struggling mightily.”
Containers
Grain
Bulk Minerals
Break Bulk
Cars
Change in Cargo Volume, 2014-2015, Port of Portland
-90% -67.5% -45% -22.5% 0% 22.5%
2.3%
-85%
-9%
-41%
-86%
After Hanjin left
• Portland Job Growth Accelerated from 3.2 percent to 3.8 percent
• Portland metro area added 38,000 jobs
• Unemployment dropped to 4.4%—the lowest level in 15 years
• Change: February to December 2015, compared to previous year.
Portland: 2nd Fastest Growing Metro in 2015
Oregon Employment Department
High Tech on HanjinWhile the imminent departure of Hanjin Shipping Co. puts a severe dent in the Port of Portland's containerized trade, it won't affect companies that ship some of the state's most valuable products. Semiconductors, computer equipment, medical devices and other high-value items move primarily by air these days. !"At a high level, will it really affect us? No," said Jason Willey, investor relations director at Hillsboro's FEI Corp. !The company doesn't expect a customer to wait three or four weeks for a focused ion-beam system to cross the ocean and clear customs. !The port says the most valuable things that come to or go from Portland by sea are autos and agricultural products, from wheat to logs. But highly engineered computer product and other technical equipment flies in and out of the region's airports.
High-Value Just-in-Time Deliveries
2005: Intel changed cutoff by 2 hours
Chapter 3 – Business Perspectives
routine shipments, and it adds to the difficulty of maintaining traditional routes and fixed delivery schedules. For manufacturing businesses with regular, high-volume movements between sites, congestion and reduced capacity on critical bridge crossings and city streets has significantly increased the time needed to move intermediate products, partial assemblies and raw materials. In many cases, especially where older manufacturing sites are located along waterways or in older industrial areas, introduction of new, mixed use development has combined with traffic congestion to compound delays in routine shipment patterns.
x� Earlier Scheduled Deliveries/Shipments. Most firms are involved in on-going
review of routings and have developed methods for “on-the-fly” rerouting or regular adjustment of departure times, loading and preparation of loads for delivery and other measures. However, some firms – particularly those with large, heavy loads moving between established manu-facturing operations – do not have the flexibility to make these adjustments. Slower turn-around between plants requires either adding more vehicles to sustain production, adding shifts, or cutbacks in production schedules.
x� Increased Inventory. Throughout the 1990s, reductions in inventories increased
efficiencies in the manufacturing and transportation sectors. These efficiencies are beginning to erode due to roadway congestion (highways) and reduced levels of service (primarily attributable to poor service from Class I railroads and a reduction in ocean shipping services). Increased variation in delivery times attributable to congestion, more missed deliveries, and other uncertainties related to maintaining services tied to rail deliveries and maintenance of delivery routes has contributed to keeping more inventory on-hand – both in distribution warehouses and in manufacturing operations.
x� Effects on Production Elsewhere. Many manufacturers operate multiple
production facilities throughout the US and in many foreign countries. The location of production on the part of most manufacturing companies is a complex decision that is based on a unique combination of factors such as labor, materials and markets. However, transportation has historically played a role in these
decisions. Almost all of the businesses interviewed and several of the retailers who are involved in manufacturing operate globally – with manufacturing on every continent and many regions of the globe (including Africa and the mid-East). However the predominant location of production is in the US
Cost of Congestion to the Economy of the Portland Region Page 25
Delays in Portland Affect Global Production
If Intel experiences delays or missed shipments, it can shut down a production line as far away as Costa Rica, China or the Philippines. These shutdowns can produce a ripple effect on world-wide production and testing operations. They may also have to pay inventory surcharges for various “non-chip” components, and other penalties tied to production delays.
“Last Call” for Outbound Shipments
Intel has moved their last shipment departure time from 5:30PM to 3:30PM for outbound shipments through PDX in response to increased congestion. A missed flight means loss of inventory and production at the receiving location.
The Cost of Congestion to the Economy of the Portland Region
Prepared for:
Prepared by:
Revised December 5, 2005
High tech to PDX
Greater Portland Export Initiative Portland Region Westside Freight Access and Logistics Analysis
10/1/13 SUMMARY | Page 2
study recognized the importance of the Westside C&E cluster and
documented some of its unique constraints and challenges, but
no study has ever focused exclusively on these manufacturers
and their unique logistical challenges.
Many changes have taken place in the region since the Cost of Congestion study, which was completed in 2005, including the
following:
x Traffic is a bigger problem. Where the previous study noted that 3:00 p.m. was a general cutoff time
after which reasonable freight movement could not be expected, this time has now been pushed
back to 2:00 p.m.
x Fast and efficient supply chains are even more important. The C&E industry has seen a shift away
from personal computers, which typically have a four-year lifecycle, and moved toward smartphones
and tablets, which have a one-year lifecycle.
Study Focus This study focuses on the outbound movement of goods from Westside C&E manufacturers to the freight
consolidation area at Portland International Airport (PDX), as shown in Figure 2. While not all C&E goods fly
out of PDX, the freight consolidation area, generally located north of Columbia Boulevard and south of the
terminal, is home to several firms that support international and domestic service by handling and combining
C&E goods before trucking them north or south of the Portland region for consolidation at other airports. For
the purposes of this study, Westside C&E firms are assumed to be clustered south of US 26 in the vicinity of
Brookwood Parkway.
Figure 2: Study Area
With the industry’s transition to short-lifecycle mobile devices, a fast, efficient supply chain is more important than ever.
2013: Most electronics are trucked to Seattle & SFO
Key Findings
PDX is a crucial location along the supply chain, but most Computer & Electronic freight moves out of PDX on a truck. Firms involved in freight movement and logistics currently use PDX as a freight consolidation hub, but they generally find it is most efficient to truck, rather than fly, goods to airports that have better links to overseas destinations.
!
!
October 1, 2013
Prepared by DKS Associates
Local Production
Regional Movement
Global Market
Greater Portland Export Initiative
Portland Region Westside Freight Access and Logistics Analysis
Get valuable cargo to PDX in a hurry?
$7,800 Flight Hour, including fuel and pilots
10,000 lb. Cargo Capacity !
Cruising Speed: 105 MPH
Erickson Air-Crane, an Oregon Company
Daily Flights Hillsboro to PDX
15 minutes flying time 5 tons per day
$3.7 million per year
Feeder Flight: Not worth time savings.
Use of Feeder Flights. Because manufacturers showed a strong willingness to pay for speed in delivery, they expressed significant support for the possibility of short flights (Hillsboro Airport [HIO] to PDX, for example) to replace truck trips. However, forwarders, integrators, and carriers were skeptical that this type of service would be competitive with current ground services. From their perspective, a feeder flight from HIO to PDX would not yield a significant velocity gain, if any, due to added logistical complexities. These firms also indicated that manufacturers are unlikely to pay the higher cost for an additional air cargo trip in the supply chain.
October 1, 2013
Prepared by DKS Associates
Local Production
Regional Movement
Global Market
Greater Portland Export Initiative
Portland Region Westside Freight Access and Logistics Analysis
What if we valued people?Total Value of Human Capital (BEA, 2010)
$738 Trillion
Per Capita: $2.5 million
1 million people go to work every day in Portland
That’s $2.5 trillion worth of human capital on the roads, buses, and bikes of the region, every day
And the places they work depend on just-in-time delivery: No employees—no work gets done.
Value Moved Daily in PortlandB
illi
ons
of D
olla
rs M
oved
per
Day
0
750
1,500
2,250
3,000
Human Capital Freight
40.3
2,500
Air Intel: For high value cargo: People
AirIntel: Hillsboro-San Jose Four Flights Daily, Round-Trip
Intel has 6 Embraer ERJ145XR Jets Each seats 50 passengers
Cost of operation is approximately $2.5 million annually, each aircraft.
Connects facilities in Oregon, California, Arizona, New Mexico
Port $10 million in subsidies to containers
2012: $2.7 million (ICTSI) 2013: $3.4 million (ICTSI) 2014: $4.0 million (Hanjin) !Source: Oregonian, “Port of Portland plans to subsidize Hanjin Shipping and other cargo carriers to keep them calling,” February 7, 2014; 2012 & 2013 are amounts spent, 2014 is amount budgeted for subsidies.
Athletic & Outdoor Cluster
Athletic & Outdoor
• 14,000 Jobs
• Hundreds of firms
• Very high wages
• Global leadership
• Fast-growing
Athletics & Outdoor Specializations
Portland specializes in these steps in the value chain
A&O Supply Chain
Donguan Memphis
Rail to Memphis
Portland
Ship to LA
Portland: High End of the Global Value Chain
AcFunction Location Wage Activity Location Avg. Pay
Production China $2 to $3/hour
Distribution Midwest $12-14/hour
Design, Finance Marketing, Mgt. Portland $40/hour
Academic Evidence
Does Freight MatterThe 90% reduction in freight transportation costs in the past century, and the declining importance of the good-producing sector of the economy, means that in our view, it is better to assume that moving goods is essentially costless than to assume that moving goods is an important component of the production process.” !
Ed Glaeser, Harvard, July 2003 “Cities, Regions and the Decline of Transport Costs”
Diminishing Returns
• Highway Investment has strong diminishing returns
• Building the first roads has a big impact; later roads have successively smaller impact
• New roads today have almost no impact
Shirley & Winston, 2004
Rate of return on highway investments, by decade
0
4.5
9
13.5
18
1970s 1980s 1990s
Eberts, 2014
Figure 5. Gross Rate of Return of Highways to Consumers and Producers
Figure 6. Net Rate of Return of Highways and Interest Rates
Source: Author’s calculations of Mamuneas’s data.
-0.100
0.000
0.100
0.200
0.300
0.400
0.500
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
Producer
Consumer
0.000
0.100
0.200
0.300
0.400
0.500
0.600
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
total net rate of return
interest rate
57
Randall Eberts, White Paper on Valuing Transportation Infrastructure, Upjohn Institute, 2014
Duranton, Morrow & Turner, 2014
More Highways = Heavier, but less valuable exports
A 10% increase in a city’s stock of highways causes about a 5% increase in the weight of exports, but does not cause a measurable change in the value of exports. . . . a 10% increase in within city highways . . . cause about a 5% decrease in the unit value of the city’s exports.
. . . city highways do not increase the value of exports . . . changes in trade caused by city highways probably do not have large welfare effects. . . . this suggests planners should not give much consideration to trade effects when planning a city’s highway network
Duranton, Morrow & Turner, “Roads & Trade: Evidence from the US,” Review of Economic Statistics, 2014
18 Wheeler Welfare CadillacCBO:
Truck subsidies = $57 and $128 billion annually social costs, over what trucks pay in taxes,
Subsidy = 21 to 46 cents per truck mile.
“Validating” 1997 & 2002 Forecasts
Portland/Vancouver International and Domestic Trade Capacity Analysis
Task 1
PORT OF PORTLAND
by:
Global Insight, Inc. 1850 M Street, NW, Suite 1100
Washington DC 20036
Paul Bingham
July 28, 2006
The work of the commodity flow forecast validation was to review the growth rate assumptions used in the commodity flow forecast completed in 2002. Using the 1997 baseline from that forecast, Global Insight has validated that forecast. . . . The forecast completed in 2002 was that freight volumes for the Portland/Vancouver region will double between 1997 and 2030.
Trade Capacity Analysis, 2006 Task 4. Assess of adequacy of land supply and transportation infrastructure to meet
forecasted trade volume.
Task 5. Validate results by review of national expert on trade, transportation, and related land use issues.
Key Findings
Trade Growth
The study forecasts a doubling of trade volume by 2035 in the Portland region, consistent with the last forecast in 1997. The project growth in trade, at approximately 2% per year, is also consistent with the region’s projected population growth over the same time period.
2000 2010 2020 2030 2035
Source: Global Insight, Inc.; 2006
Growth is likely to alternate between periods of slow to moderate growth and rapid growth, because our relatively small market size is more impacted by external forces in the national and international economies than in larger domestic markets.
Trade growth is also influenced by a market area that extends well beyond the metropolitan region. Because Portland is at the nexus of an excellent transportation network, it serves as a gateway to domestic and international markets for businesses located throughout Oregon, Southwest Washington, Idaho and even further east. As business and population grow in the market area, trade volumes will increase, which in turn will stimulate more growth.
0
100
200
300
400
500
600
700
Annu
al T
ons
(Mill
ions
)
Trade Capacity Executive Summary 2
Ed Glaeser
“At the local level, fundamentally the most important economic development strategy is to attract and train smart people.”
Talent determines prosperity
3,100 I-5 Through Trucks