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In recent years, the previous evolution has gained momentum. This quickening
pace is illustrated by Figure 1, where the integratory moves of the major
container-handling operators are illustrated. The consequences this has on the
world container-handling market are shown in Figure 2, where the 2005
geographical location of APM Terminals container-handling activities is graphed.
Other major operators like Hutchison Port Holdings (HPH), Port of Singapore
Authority (PSA) and Dubai Ports World (DPW), the latter of which recently
acquired the bulk of P&O Ports terminals, have a similar geographical spread of
activities. This causes the same operators to compete in various container-
handling submarkets all over the globe. Other operators, even very large ones
Such effect can, on the one hand, be felt in the fixed part of the costs, leading to
for instance lower prices for capital goods installed or shared overhead costs. On
the other hand, variable costs can be influenced by co-operation or expansion as
they lead for instance to lower prices for variable inputs.
In this paper, both effects are assessed for a number of real-life terminal
configurations. The results of this paper are useful from an operational as well as
from a policy perspective. The absence of a framework for analyzing efficiencies
in container handling is for instance felt as a shortcoming by decision makers in
the business and in other, related businesses. Pricing of acquisition moves for
instance should be based on the efficiencies of the terminal(s) under
consideration. The efficiencies of the container-handling companies are
furthermore important as they affect the cost of sea-borne trade, and therefore
also impact on shipping companies, hinterland transporters and final customers.
With respect to policy, it can be stated that competitive developments in
container handling determine a countrys wealth through employment and value
added.
The fixed-cost and the variable-cost effect translate into two research questions
that are pursued in this paper. Values for fixed capital goods are relatively well-
commented in literature, although between-terminal comparisons are not always
explicit. Therefore, the paper aims at assessing whether or not a fixed-cost effect
occurs in container-handling companies. This effect can be termed an overall
company-size effect. With respect to the economic effects of co-operation, a
distinction can be made among transaction and size effects. Farrell and Shapiro
(2000) denote the first type of effects as synergies, the latter as efficiencies.
Efficiencies can but need not be merger-specific. In horizontal mergers or
acquisitions, only the size effect occurs. The related hypothesis states that
container-handling companies feature economies of company scale.
Trade-offs between fixed costs and operational costs have hardly ever been
assessed in literature. Therefore, a third part of the research in this paper
questions the existence of such trade-offs. The hypothesis states that there is no
trade-off: shared fixed costs usually go in line with larger economies of scale.
For testing the first research hypothesis, the methodology consists of comparing
companies of different size, i.e. with a different amount of fixed inputs required,
on the unit costs that these inputs stand for. For this assessment, companies
need to have comparable types of fixed inputs. The respective companies
therefore need to be carefully screened with respect to their terminal
configurations. 89 variables that were characterized as influential to the level of
terminal costs, and that are summarized as policy, scope, chain and terminal-
specific variables, serve as a starting point for selecting terminal configurations
for the analysis. The terminals of the companies selected have clearly identified
values for the policy, scope and terminal-specific variables, as well as the non-
size chain variables, whereas the chain-variables that determine company size
are left flexible. The real-life cost values corresponding to the fixed inputs are
collected by assessing the limited scientific literature available as well as the
broad and diverse business-related literature.
Testing the second research hypothesis involves simulating and analyzing cost
functions at container terminals. In view of the data nature, the engineering
technique is used: data are not always comparable or sufficiently available for
allowing econometric analyses. For the simulation of the cost functions, a cost
typology is elaborated which covers all operational costs. Again, the 89 variables
are the basis for selecting and comparing different types of terminals. The
configurations selected are tested on their economies of terminal activity scale as
they are integrated in larger or smaller companies. In the configurations
considered, the variables are assigned different real-life values, the
corresponding variable costs of which are again collected mainly from business-
related literature.
A first input in the research process was a literature review, assessing both port-
economic and broad industrial-economic literature, theoretical as well as applied
to comparable business sectors. The aim of the literature review was to check
how previous research has approached questions similar to our research
question. Translation to the cargo-handling sector requires sufficient creativity.
Further on, a review of literature dealing with the operational and economic
characteristics of cargo handling was used for gaining knowledge about the
sector.
The perspective taken in this thesis is that of the decision maker in cargo
handling. Objectives of other chain actors and of activities other than cargo
handling are only dealt with in as far as they influence cargo-handling supply and
/ or demand. The decision maker can be the management of a cargo-handling
terminal itself, as well as for instance a shipping company owning and directing a
cargo-handling business unit. In that respect, the cargo-handling activity for
which expansion decisions are considered needs to be a separable product.
A fourth constraint deals with the type of commodities: containers are the focus of
this thesis. A container is defined as a van, flat rack, open top trailer or other
similar trailer body on or into which cargo is loaded and transported without
chassis aboard ocean vessels; a large rectangular or square container/box of a
strong structure that can withstand continuous rough handling from ship to shore
and back. It opens from one side, to allow cargo to be stacked and stowed into it
(Paelinck, 2001, p. 16). Containers are usually distinguished from general cargo,
dry bulk and liquid bulk (Stopford, 2002, p. 388). Motivations for focusing on
containers are that it is the fastest growing cargo type, and that it is a cargo-
handling sector with considerable growth and merger and acquisition activity.
That some operators deal with several commodity types implies the need to
analyze the existence of economies of scope with an impact on container-
handling supply and demand.
The fifth constraint is on the physical location which is used as a unit for cargo-
handling activity: the terminal. The terminal definition used here is one adapted
from Port of Miami (2004): One or more structures comprising a terminal unit,
and including, but not limited to wharves, warehouses, covered and/or open
storage space, cold storage plants, landings and receiving stations, used for the
transmission, care and convenience of cargo in the interchange of same between
land and water carriers or between two water carriers. Such terminal is the
largest unit whose cargo-handling activities are grouped into one product, or a
set of products if the terminal provides multiple or joint products. Eventually,
several cargo-handling companies may run part of the same terminal, and
therefore several products may be supplied at the same terminal. In the latter
case, the separate companies are the terminal units under consideration in this
thesis.
For testing the hypothesis on the company-size effect, use is made of a matrix of
89 variables, comprising policy, scope, chain and terminal-specific variables, as
identified in Vanelslander (2005). The values for the policy, scope and terminal-
specific variables, as well as for the chain variables that are not related to
company size, are kept constant. Company-size chain variables that can be
allowed to vary are the various relationships between terminals and cargo-
handling companies, as described in paragraph one of this paper, and where the
focus is on expanding activities.
Depending on the operational setting used at the terminal, fixed costs are capital
costs, or the intermediary lease payment in case the one-time capital investment
was already made before the operator got control of the terminal, and
furthermore also the maintenance costs. Lease payments may not be fixed but
may vary with the use that is made of the terminal: efficient use is then
stimulated. Eventually, labour may be fixed in case the labour setting is not
adapted to the quantity of containers handled.
Both the Hessenatie and the Bremer Lagerhaus Aktiengesellschaft terminal are
comparable in the settings for the elements mentioned higher. Below are the
details for the common settings.
A lease agreement, fixed in nature, is in place. This implies that dredging
costs do not matter as they are calculated in the lease payment, just like the
container yard, storage yard and shed yard costs.
Labour is flexible.
Only new equipment is installed.
Equipment settings are comparable: they consist of 5 quay cranes, 6
spreaders, 15 yard gantries, 1 reach stacker, 2 forklift trucks, 25 tractor-
trailers, 1 generator and 6 work vehicles.
It turns out that the total amount of fixed costs is higher for Hessenaties Europa
terminal than for Bremer Lagerhaus Aktiengesellschafts Bremerhaven terminal.
The effect is mainly caused by equipment costs, but is compensated for slightly
by lease payments which are higher in Bremerhaven than in Antwerp. This
observation confirms the hypothesis stating that economies of company size do
indeed exist in container handling.
Further study is needed however to detail which operational fields exactly feature
smaller fixed costs for larger companies than for smaller companies. An
indication is given in Table 2, where it is assumed that firm structure allows
efficient management.
Just like for the company-size effect, testing the terminal activity-size effect
requires use of the 89-variable matrix from Vanelslander (2005). Again, values
for the policy, scope and terminal-specific variables are kept constant, just like all
chain variables not related to company size.
1997 Data from Drewry Shipping Consultants (1998) are used for each of the
cost items. The Drewry figures are reprocessed to calculate total labour,
maintenance and other operating costs, total costs and average costs, all of them
on a yearly basis. The aggregate figures are shown in Table 7. Following
specifications are used.
In view of data availability, calculations are done for a 600,000 TEU capacity
container terminal featuring 16ha. This situation conforms best to the 1997
situation at both the Hessenatie Europa terminal at Antwerp and the Bremer
Lagerhaus Aktiengesellschaft terminal at Bremerhaven.
Manpower costs are based on following labour setting:
1 ceo, 1 terminal, 1 financial controller, 1 finance manager, 3 seniores
accountants, 10 accounts clerks, 1 IT manager, 3 IT officer, 4 IT systems
support, 1 marketing manager, 2 commercial services manager, 1 human
resources manager, 1 supervisor human resources, 1 security manager, 3
securities, 4 secretaries, 6 general assistants, 1 assistant operations
manager, 4 supervisors, 4 planning supervisors, 6 planning clerks, 48 general
clerks, 12 gate clerks, 58 quay crane drivers, 71 yard gantry drivers, 112
tractor / trailer drivers, 55 forklift drivers, 4 foremen, 48 lashers, 10 general
Different royalties apply according to the total traffic volume and according to
a low or high royalty-scenario, like in Table 6. Table 7 counts with a low-level
scenario.
Lease payments are not included in the operating costs.
From Table 7, it appears that labour cost is the largest contributor to operating
costs, followed by maintenance and other operating costs. Average costs are
indeed decreasing in throughput, especially as a consequence of the fixed nature
of maintenance costs. Increasing throughput tenfold makes average costs
decrease to more than a tenth of the original costs. Still, overall economies are
observed: average operating costs decrease from 40.71 USD at 150,000 TEU to
33.87 USD at 200,000 TEU. The resulting cost functions are represented
graphically in Figures 3 (total operating costs) and 4 (average operating costs).
Table 7: Operating cost figures for a 600,000 TEU terminal (1997 USD)
Figure 3: Total operating costs for a 600,000 TEU terminal (1997 USD)
Total operating cost new equipment 600,000 TEU - 16 ha
8,000,000.00
7,000,000.00
6,000,000.00
5,000,000.00
4,000,000.00
3,000,000.00
2,000,000.00
1,000,000.00
0.00
1.00
100,000.00
150,000.00
200,000.00
1,000.00
10,000.00
Throughput
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
1,000.00
10,000.00
100,000.00
150,000.00
200,000.00
Throughput
It is therefore found that economies of scale at the terminal level do indeed occur.
It then remains to be seen whether there is a difference in the level of economies
to be gained depending on the size of the company and the degree and type of
co-operation agreements in place.
To test this, we apply the previous calculations to the two terminals considered
earlier: the Hessenatie Europa terminal and the Bremer Lagerhaus
Aktiengesellschaft Bremerhaven terminal. Operational cost calculation is done for
a throughput of 1,500,000 TEU. At this level, the Hessenatie terminal has an
operational cost of 18,095,506 USD, whereas the Bremer Lagerhaus
Aktiengesellschaft terminal has an operational cost of 17,258,183 USD. Similar
calculations could be done for other throughput levels. It will in each case be
observed that the cost for the Bremer Lagerhaus Aktiengesellschaft is smaller
than the corresponding cost for the Hessenatie terminal. This affirms the
hypothesis that terminals which are part of a larger network, and/or which have
more co-operative ties, feature lower operational costs.
In the previous paragraphs, it has on the one hand been observed that terminals
which are embedded in a larger network do feature economies of company-size
compared to stand-alone terminals, and that on the other hand all terminals show
economies of scale in terminal size, but that the terminals embedded in a
network have lower operational costs than their non-network counterparts.
Therefore, it can be concluded that there is no trade-off but rather a mutual re-
inforcement between the effects of fixed and variable costs.
Table 8: Total and average operational costs for two recent terminal types
(1997 USD)
Table 9 puts the previous operational costs into perspective, and calculates
operational costs for the designed throughput levels of both the 140ha and the
36ha terminal. First of all, it turns out that annual operational costs under an own-
construction scenario are about 40 times smaller than capital costs for a 140ha
terminal, and about 80 times in case of a 36ha terminal. Second, it can also be
observed that for a terminal which is about four times as small as the 140ha
terminal, corresponding operating costs are about four times as small too. Capital
costs are only half those of the larger terminal. Therefore, there are clear
economies in terminal capacity too, especially with respect to the capital cost.
Table 8: Operational costs for two recent terminal types (1997 USD)
6. CONCLUSION
Three hypotheses have been tested in this paper. The first hypothesis, on the
existence of economies of scale at the company level, is confirmed: the larger the
network which a terminal is part of, the lower the level of fixed costs will normally
be. With respect to the second hypothesis, on economies of scale at the terminal
level and the specific impact of networks and co-operation agreements, the
answer was affirmative again: economies of scale are observed in all situations
assessed, and larger networks usually imply lower operational costs. As to the
trade-off between fixed and variable costs, the answer is that there is no trade-off
but rather a re-inforcement between the effect of network size and co-operation
on the cost level. Capital costs usually are a multiple of the annual operating
Further study needs to be done however to get a better insight in the exact
determinants of the previous observations. Costs, capital as well as operational,
need to be further disaggregated in order to assess what operational fields
contribute most to economies of scale in container handling.
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