The Port of Savannah Logistics Cluster Author: Dr. Jean Paul Rodriguez

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1 The Port of Savannah Logistics Cluster Author: Dr. Jean Paul Rodriguez 1. The Emergence of the Savannah Gateway: The port of Savannah is under the jurisdiction of the Georgia Ports Authority (GPA) and has become a major commercial gateway along the American East Coast. Up to the 1990s, the port used to be dominantly focusing on exports such as paper and chemicals. Savannah was a relatively small container port with a traffic level well under Charleston, a nearby competing port with deeper drafts. Since it is within the general mandate of GPA to promote port and regional development, strategies were devised to increase container imports and promote Savannah as a commercial gateway of the American Southeast. Such a growth was the outcome of three major trends: The first concerns demographic and commercial changes that have attracted cargo that conventionally transited through the middle or north Atlantic ranges of the east coast. The second concerns investments in port infrastructures to provide additional capacity, shorter transit times through the all water Panama route to complement and sometimes circumvent the rail landbridge from Pacific Coast ports. Large assets of greenfield real estate and lower labor costs, enabling to position the region as an attractive proposition for investments in warehousing and distribution. The Savannah logistics cluster was developed to capture hinterland commercial opportunities that were before ill serviced, particularly in the context of the changing commercial environment of freight distribution from the late 1980s. This includes access to the American Southeast with the port hinterland covering about 44% of the American population. The immediate hinterland includes the Piedmont Atlantic region (Atlanta, Charlotte, etc.) which accounts for a population of 15 million. These developments have been related to the setting of a number of logistics zones within a radius of about 40 km from the port, forming a port centric logistics cluster that accounts for the one of largest in the United States for import retail distribution centers. These zones are built upon a set of advantages mostly related to the availability of land, short drayage distances, effective use of container assets and supply chain considerations, particularly the proximity of producers and consumers. The development of logistics activities is strongly related to the level of port activity since the port is the main connection to global supply chains. The port / logistics relation is a self reinforcing as the growth of port traffic incites the setting of logistics activities and these new activities contribute to port traffic. Savannah is very illustrative of this process since the development of the logistics cluster created a virtuous effect where logistical activities attracted additional port traffic and additional port traffic was a driver in the locational decision of freight distribution activities within the cluster. For instance, Georgia has developed a significant export market of its poultry industry, which is carried in refrigerated containers. As such, this attracted large refrigerated warehouse facilities around Savannah, which accounts for 40% of American poultry exports. An important characteristic of the port s traffic that has a notable impact on logistics is the balance between import and export cargo. For instance, while 1.37 million TEU of cargo were imported in 2011, 1.57 million TEU were exported. This underlines that ports and their nearby logistics zones tend to fare better when there is a relative balance between imports and exports. Maritime shipping companies find this an attractive proposition to call Savannah since the

2 utilization of their assets is similar for inbound and outbound ships. The logistics cluster therefore offer container rotations opportunities between inbound and outbound logistics. About 20% of all the container traffic is carried by truck with 35 to 40% of the containers bound to logistics zones.the status of a Foreign Trade Zone (FTZ) offers several operational advantages in terms of postponement and added value strategy for American logistics zones. Importers are using this advantage to delay payments on their imports until they are leaving the FTZ to their stores or regional distribution centers. The logistic cluster of Savannah was granted FTZ status in The Savannah Airport Commission is the Grantee for FTZ 104. The zone has recently transitioned to Alternative Site Framework (ASF). Under ASF companies located on parcels, zoned business or industrial and located in a designated ASF county, can now quickly and inexpensively be designated with FTZ status.2. Port Centric Logistics: The Crossroads Business ParkThe Crossroads Business Park (CBP), designed in 1988, was the first logistics zones to be established in the Savannah logistics cluster, with its first user beginning operations in The logistics zone set in motion a business model and a development pattern that was replicated within the cluster with the setting of several other logistics zones. CBP is a 1,661 acres facility than comprises about 2.7 million square feet of warehousing space located directly adjacent to Interstate 95 (I95) within the City of Savannah. It is less than 10 km away from the gates of the Garden City Container Terminal, the main intermodal facility of the Port of Savannah. CBP is owned by the Savannah Economic Development Agency (SEDA), which is an independently funded organization whose mission is to support economic development in Savannah and Chatham County, Georgia. It assists companies interested in relocating to, or expanding in, the Savannah area. The Crossroads Business Park was developed to accommodate the first major distribution centers and related office activities in the Savannah metropolitan area and serves three major purposes: Inbound retail. Its core focus concerns deconsolidation logistics for major retailers for containers arriving at the port of Savannah. The cargo is then deconsolidated into domestic containers and sent to regional distribution centers. Manufacturing. While manufacturing was the major function initially intended for CBP, the only significant manufacturer is Gulfstream Aerospace Corporation, a manufacturer of business jets, which has facilities in the logistics zone. Education. To cope with the skills demand, particularly engineering, two academic institutions have opened campuses; Savannah Technical College and Georgia Institute of Technology. The development of the CBP was initially triggered by a failure to provide suitable logistics space for large freight distribution companies. In 1986, SEDA was in discussion with two large corporation interested to locate some of their activities in Savannah. However, in part because Savannah did not have at that time have large industrial or logistics areas to be developed, the location prospects were not realized. Around the same time the port authority was issuing statements that due to expansion plans and the expected growth in container traffic, that there would be an acute shortage of land to develop distribution centers. In light of this setback and the urgent need to compensate for the shortage of land, SEDA decided to move from a reactive to a proactive stance. The first step was site location, where SEDA found a track on land owned

3 by a single stakeholder, the Union Camp Corporation. It then contacted developers who might be interested at developing the site. However, global and national logistics real estate developers were not interested at developing logistics zones in Savannah. Port traffic was less than 500,000 TEU and Savannah was not known as a logistics gateway; the risk was perceived to be too high. SEDA therefore decided in 1988 to develop land on its own. After securing the first tenants, including the headquarters of Union Camp (a large paper manufacturer that was acquired by International Paper in 1999) and a major Home Depot distribution center, the construction of the logistics zone began in Mitigating Site Constraints The land use around Savannah, which is reflective of coastal regions in the Southeast, is occupied by about 60% of wetland. This created development and environmental issues that had substantial impacts on the siting and structure of logistics zones in the area. As such, CBP became the first logistics park in the United States to be developed over large tracks of wetland, which created unique planning and regulatory challenges (the Clean Water Act regulates all developments taking place on wetland). After a complex review process, SEDA was able to receive in 1991 a permit to develop land on the CBP site. Due to wetland protection regulations, CBP is surrounded by about 7,000 acres of green zones, many of which are preserved wildlife habitats. This wetland is protected under the Clean Water Act of 1977, which requires permit for any developments infringing upon it. The outcome of this constraint is low densities and the sitting of facilities to insure that minimal encroachment are made on wetlands. For instance, for a 100 acre development taking place on private land, there is usually 25 acres of wetland that are protected by federal law. Of these 25 acres, only 10 to 15% can be impacted (e.g. landfill). This implies the careful organization of facilities to minimize (within the 10 15% limits) the impacted wetland. Consequently, many logistics zones in the Savannah area have spread out structures with substantial green buffer zones. Companies prefer to have land being shovel ready within 4 5 months since once they approach developers they usually have already made their location decision and would quickly like to act upon it. Customers have narrowed their choice to a few sites and the matter is to find a site that is able to accommodate their development requirements (time, surface, accessibility, etc.). Locating at CBP was offered as a package where the land was shovel ready in timeframes not seen elsewhere in North America with infrastructure such a road access and utilities offered to quickly need the requirements of the customer. For instance, in 2000 Dollar Tree was able to begin construction of its distribution center 30 days after the deal with SEDA was brokered. This was a strong competitive advantage for CBP in regard to other logistics zones or logistics sites. An important value proposition of the deconsolidation centers located at CBP involve short drayage distances. The drayage of containers from the port terminal to distribution centers (or customers) is usually efficient within a radius of about 30 km as it supports an effective use of truck assets. Beyond that threshold, additional distances add to costs and delays, particularly for empty returns. The main accessibility advantages of CBP site involve: Direct access to I95 through a specifically built highway interchange. I95 is the most important highway corridor on the East Coast and thus a crucial element of its road accessibility to national markets. This accessibility is also supported by I16, which it linking Atlanta.

4 Within 10 km of drayage from the gates of the Garden City Container terminal, the main container terminal of the port of Savannah. The port handled 2.9 million TEU in 2011 and offer regular services to regions of the global market. Two near dock rail terminals, one owned by CSX (Tremont) and the other by NS (Mason Intermodal Container Transfer Facility), are located nearby. They transited 235,000 TEU in 2007, about 9% of the port's traffic. CBP is connected by rail spurs but they are currently not used, but remain an option for users. A specific advantage is that the State of Georgia authorizes gross vehicle weights (including truck, cargo, container and chassis) of 80,000 pounds (36,000 kg) and up to 100,000 pounds (45,000 kg) if special permits and equipment (chassis). This enables to support the maximum weight a container can handle which is around 26 tons (24,000 kg). Savannah Hilton Head International Airport is a marginal advantage. It is a mediumsized airport that handled 1.6 million passengers and 8,400 tons of cargo in Comparatively, Memphis and Louisville handled 3.9 and 1.8 million tons of cargo respectively in Thus, air freight plays a limited role in the dynamics within the cluster. A cluster of hotels and convention centers was developed adjacent to the airport, which offers supporting services to CBP. 4. Ongoing Expansion of Port Centric Logistics? The provision of space for logistics in the Savannah logistics cluster has evolved from a situation of under supply to oversupply. The main factors behind this issue are: The substantial growth of the logistics sector in the late 1990s and early 2000s, attracted new investments and may have lead to over expectations about future growth prospects. A large availability of greenfield land having limited agricultural value and therefore having limited competing activities that could bid for this land. Savannah represented a rather unique situation in North America where large tracks of land could readily be found nearby port facilities. Several adjacent and competing counties (Bryan, Chatham, Effingham, Liberty) developing their own logistics zone projects to attract economic development opportunities within their jurisdiction. There are about 5 million square feet of warehousing space ready to be occupied in the Savannah logistics cluster. The infilling of this space may take some time, so meanwhile there are limited incentives to develop new projects. Like all commercial projects, there is always the risk of changing market conditions. For instance, in 2008, due to a drop in retail volumes, Wal Mart decided to stop operations in its 800,000 square foot distribution center in CBP and consolidate its activities in Statesboro, about 70 km inland. In the current setting of port competition, the Georgia Ports Authority is concerned about draft issues in the Savannah harbor. Still, the port is anticipating a doubling of its traffic to 6 million TEU within a 10 year range (2020), particularly in light of the expansion of the Panama Canal and the dredging of the

5 harbor to an expected depth of 47 feet from its current draft of 42 feet. This requires several modifications of the existing terminal facilities, particularly the Garden City Container terminal. However, the footprint will remain relatively similar, implying a densification of terminal operations, such as stacking and gate throughput. If these traffic projections become a reality, it will likely trigger a phase of additional development of logistics and manufacturing zones as the existing overcapacity will be filled. On another front, an inland port 275 km west of Savannah became operational in late The main promoter of the Cordele Intermodal Center (CIC) is a county industrial council that follows the conventional strategy of landlord revenue generation and economic development by securing land in proximity to a rail terminal (CSX) and making it available for the development of logistic activities. Another goal is to improve the hinterland of the port of Savannah in southwestern Georgia, in the Florida panhandle and in western Alabama, competing more effectively with the port of Mobil. While in terms of traffic it could be a zero sum game, lower inland distribution costs could lead to indirect economic benefits. The rail link mainly belongs to two short line operators, which confers the advantage of having a rail shuttle service that does not impair the existing CSX network. The satellite terminal activities and the possible development of an inland port underline a set of strategies spearheaded by the port authority to cope with the import oriented functions generated by the freight distribution activities of North America's largest "big box" retailers.