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1 College of Business Administration University of Rhode Island William A. Orme WORKING PAPER SERIES encouraging creative research The Competitive Factors of Global Ports in the OBOR: Implications for Theory and Practice Doughlas N. Hales, Sui Lee Lam and Young-Tae Chang 2016/2017 No. 2 This working paper series is intended to facilitate discussion and encourage the exchange of ideas. Inclusion here does not preclude publication elsewhere. It is the original work of the author(s) and subject to copyright regulations. Office of the Dean College of Business Administration Ballentine Hall 7 Lippitt Road Kingston, RI

2 Competitive Factors of Global Ports in the OBOR Corridor: Implications for Theory and Practice Douglas N. Hales The University of Rhode Island (Corresponding Author) Sui Lee (Jasmine) Lam Nanyang Technological University Young-Tae Chang Inha University Graduate School of Logistics Abstract: The new proposed maritime route along the so-called new silk road involves a major change to traditional shipping routes. The change in maritime routes may have the greatest impact on water-borne cargo, much more than the land-based routes. The purpose of this study is to analyze the change in competitiveness of the eight major seaports along the route using variables represented in the new Balanced Theory of Port Competitiveness. The theory postulates that major changes will take place for ports along by constraining or improving their capability to attract new cargo volume and new investment. This study finds that older ports like Mumbai may benefit greatly, while newer ports like Xiamen may not realize the expected benefits. INTRODUCTION: The development of the new maritime silk road is designed to bring prosperity to under developed regions of Central Asia and China (Li, P., Qian, H., Ken, W., Howard, F., & Wu, J. (2015). Building a new and sustainable" Silk Road economic belt". Environmental Earth Sciences, 74(10), 7267). The major seaports along the new route should expect to see marked increases in cargo volume. This will undoubtedly change the way these ports compete. Figure 1 shows most of the proposed maritime route in blue, with the economic impacts expected to reach as far as the upper border, shown in red. Figure 1: Map of The New 21 st Century Maritime Silk Road

3 (Source: Li, et al, 2015) Experts propose that the ports shown in this map are potentially affected the route. They include, but are not limited to, Hong Kong, Rotterdam, Mumbai, Singapore, Klang, Jakarta, Chennai, and Xiamen (Hales, Lam, and Chang, 2016). This presents a problem in that these ports must prepare for changes in the way they compete which may lead to increases in cargo volume for some, and less for others. Planning for changing competitiveness often requires infrastructure upgrades to handle the potential new business that all of these ports wish to capture. Infrastructure changes can be expensive and take many years to complete, even after the design and financing are in place. But infrastructure financing must involve new investment which can come from governments or private investors. Port financing model usually involves both, and often referred to a PPPs (Public Private Partnerships). But before planning can take place, potential effects on the competitiveness of these ports should be examined including the potential increase in business and its ability to attract new investment? One method of examining the competitiveness of seaports is through the new Balanced Theory of Port Competitiveness (Hales, Lam, and Chang, 2016; and Hales et al. 2017). The theory was tested on 72 of the world s largest seaports and found a correlation between a port s ability to attract new customers and investors is highly correlated (.70) with their actual historical volume. Stated differently, the higher ports scored on volume and investment competitiveness, the higher they ranked on global rankings of actual cargo volume (Hales, et al, 2016).

4 This suggests that the theory may help predict the changes expected in port volume as the new silk road route is increasingly populated with cargo. This is important because ports must plan ahead to accomplish any infrastructure changes. LITERATURE REVIEW Due to the newness of the Balanced Theory of Port Competitiveness, the literature on its application is limited. There is currently only one paper that develops the conceptual basis of the theory (Hales, D.N., Lam, J.S.L., Chang, Y.T., 2016 The balanced theory of port competitiveness, Transportation Journal, Vol 55(2), pp ), and one that empirically examines the applicability of the theory. However, the empirical study was rigorously tested on 72 of the busiest seaports in the world using data collected between 2009 and 2014 (Hales, et al., 2017). Many of the seaports in the original study are also along the new proposed maritime route. This provides an opportunity to examine how the competitiveness of these ports can change in relation to their original ranking on a global basis as well as their relationship to regional ports that comprise the new route. This study focuses on measuring the regional competitiveness of eight ports along the proposed route. The Balanced Theory of Port Competitiveness (the Theory) is comprised of two key factors; namely Volume Competitiveness and Investor Competitiveness. The factor Volume Competitiveness (VC) measures the capability of a port to attract new volume either through increases in current customer volume or by attracting new customers. The factor Investment Competitiveness (IC) measures the capability of a port to attract new investment either through existing investors or by attracting new investors. The Theory postulates that effects on both factors should be considered in decision-making. Failure to do so can make a port vulnerable to competition. For example, when port owners consider changes at a port to improve competitiveness, they must examine their decisions for potential effects on both customers and investors. This balanced decision-making is rare since the vast majority of competitiveness literature focuses only one of these dimensions (Hales, Lam, and Chang, 2016). This is important because decisions that are meant to improve volume can harm their ability to attract investors. For example, investors like to see that expensive assets, such as gantry cranes, are heavily utilized (maximum effective crane utilization is typically 70%); however, knowing this deters customers because they know that delays will likely occur, seriously harming service levels. On the other hand, having excess capacity is attractive to customers because it indicates that their cargo can be loaded/unloaded with few delays. This means that owners who balance the effects of their decisions on both customers and investors are likely to be more competitive than those that emphasize either factor in isolation.

5 Next, we discuss the five variables that measure VC, and the five variables that measure IC. Volume Competitiveness is measured through Port Location, Port Facility, Cargo Volume, Service Level, and Port Fees. Investment Competitiveness is measured through Port Price, Institutional Structure, Legal Structure, Financial Resources, and Port Reputation. Port Location Port Location is defined as the physical location of the port. In previous port studies this variable has consistently ranked as the most important to port competitiveness (Lam and Yap, 2011; and Song and Yeo, 2004). The ports in this study were chosen by a panel of experts based on their location along the new maritime route (Hales, Lam, and Chang, 2016). Port Facility Port Facility measures the physical port assets that service all waterborne cargo. The asset capacity and operating efficiency are important to carriers and shippers as they directly affect service levels throughout the day (Cullinane et al. 2006; Guy and Urli 2006). Service Level Service level commonly refers to the ratio of the cargo on-loaded or off-loaded within the port s promised time period to its customers. These timely and reliable port services are highly-valued by port customers (Zhang and Lam, 2014). Port Fees Port fees measure the fees paid by users for the use of port assets (i.e. cranes, drayage, storage, etc.). In previous studies, these costs have shown to significantly affect port selection (Lam and Dai 2012; Ugbomai, Ugboma, and Ogwude, 2006) because they are seen as an indicator of efficiency. Legal Framework Legal framework measures the level of independence port managers have to resolve ports issues without involving local jurisdictions. Local courts are often congested, require elaborate filings, and can take years to resolve. Local courts can also be influenced by politics. Investors typically like to avoid costly delays and prefer ports with independent legal systems that are transparent and fair (Abbott and Snidal, 2000). Institutional Structure The institutional structure of a port describes how management and labor relations are handled. Investors prefer port managers who have good labor relations and with structures that allow sufficient autonomy to quickly resolve labor disputes (Wang et al, 2012). Financial Resources

6 Ports are capital intensive and can be dynamic. Investors prefer ports that have the financial resources to successfully cover port operations without consistently incurring long-term debt. A port s ability to access cash and maintain a reasonable margin is essential to providing returns for investors (Rountree, Weston, and Allayannis 2008). Port Reputation A port s reputation for allowing fair competition among operators is essential to attracting investors. A common mechanism to ensure competition is a port sector regulator (Bennett and Gabriel 2001). Recently, a port s reputation for implementing green practices has shown to be preferable to investors (Lam and Notteboom, 2014). Price Investors prefer ports that have the autonomy to set their own prices for services and have a reputation for using fair-market charges. This includes traditional cargo movement charges as well as peak/off-peak pricing options. This is important because pricing has a direct effect on return on investment (World Bank, 2007). These ten factors represent the principle variables in how ports compete in areas vital to their survival and growth. This includes the two higher-order factors of Volume Competitiveness and Investor Competitiveness. The ten factors are not new to the literature, but the discovery of the two higher-order variables representing VC and IC, as well as the critical balance among them is unique (Hales et al, 2016). Port managers that fail to address these factors find themselves losing customers and investors. Important examples include the loss of volume at the ports in Hong Kong, Korea, and South China (Song, D., 2002; Yap and Lam, 2006). The hierarchical model is shown in Figure 1.

7 FIGURE 1: The Hierarchical Model (Source: Hales, et al 2016) As the model shows, each port is evaluated on all ten variables that are then scored to the higherorder factors of Volume and Investor Competiveness. Each port is scored on both factors. The eight ports selected for the study came from those identified as most affected by the new maritime route at the 2016 OBOR conference (Hales, Lam, and Chang, 2016). They are the ports of Hong Kong, Rotterdam, Mumbai, Singapore, Klang, Jakarta, Chennai, and Xiamen. METHODOLOGY The data were collected through the same online survey as used in the large-scale empirical test of the Balanced Theory of Port Competitiveness (Hales, et al 2016). This is to ensure that the measurement instrument is consistent to allow scientific comparison of the results. The data analyzed using Analytical Hierarchy Process (AHP). The survey instrument collected data from a pair-wise comparison of each variable using a Likert scale, 1-9, to evaluate the relative value of one variable over another, and for each of the eight ports. For a detailed discussion of the instrument development, testing and piloting see Hales et al (2016). The only change to the survey instrument was the opening statement and instructions. The opening statement was revised to explain to respondents that they are evaluating the ports based on their capability to attract increased volume and investors driven by the increased traffic along

8 the new proposed maritime route. This statement was only included in the solicitation used to solicit respondents. The survey was ed to 130 port directors, asst. directors, senior managers, elected port officials, academic researchers, shippers and carriers at each port. Twenty-six respondents fully completed the survey. Another nine respondents started the survey but failed to complete it for a variety of reasons. This equates to a 20% response rate. Table 1 reports the number and type of respondent at each port. Table 1: Port Affiliation & Position Port Director Elected Official Port Senior Manager Researcher Shipper Carrier Hong Kong Rotterdam Mumbai 1 1 Singapore 1 1 Klang 1 Jakarta 1 1 Chennai 1 2 Xiamen 2 No Specific Port Affiliation 2 As Table 1 shows, each port had multiple respondents and two respondents answered the survey for specific ports for which they had adequate knowledge, but acknowledged no formal port affiliation. Multiple respondents increase the reliability of the results.

9 RESULTS The results of the AHP are shown in Table 2. This AHP measures the relative weighting of importance for each variable for VC, given the dynamic of the new maritime route. Not surprisingly, Port Location is the most important factor considering the port s location on the new silk road is a qualifier for this study. Table 2 Priorities for Volume Competitiveness Cargo Volume Port Facility Port Location Service Level Port Cost Weight Priority by Weight Cargo Volume Port Facility Port Location Service Level Port Cost The second most important variable is Service Level. This is important because it is essential that port users can rely on promised load and unload times in order to move cargo effectively. Even small delays can be expensive. It is important to note that as expected the variables Port Location and Service Level scored much higher than the other variables on priority for attracting new volume. Surprisingly Port Cost, which some studies show is the most important variable in attracting new volume, ranked third, and well below the first two. This indicates that a reliable movement of goods is more important than cost to port users. Port Facility ranked fourth overall. The lower ranking of this variable is only slightly lower than Port Cost and indicates that the infrastructure of equipment, cranes, support services, etc. are important to ensuring high Service Levels. In fact, in this study the respondents viewed Port Facility is viewed as an input variable while Service Levels are viewed as outcome variables.

10 This differentiation was not mentioned in the 72-port empirical study. The lowest priority for VC was Cargo Volume. Cargo Volume measures the actual cargo volume handled by the port, rather than the capacity. The lower ranking can be explained by idea that port users are more concerned with port capacity than how much cargo a port actually handles. Table 3 reports the results of the Investment Competitiveness. Table 3: Priorities for Investment Competitiveness Price Institutional Structure Legal Structure Financial Resources Port Reputati on Weight Priority Price Institutional Structure Legal Structure Financial Resources Port Reputation Table 3 shows that Institutional Structure is the most important factor in attracting new investment. Institutional structure describes how labor/management relations are handled. Ports with the autonomy to manage and resolve their own labor disputes are preferable to ports that use external means to work with labor. This is important because several ports along the route have reputations for labor disruptions. Financial Resources is the next variable that is only slightly less important than Institutional Structure. Luckily most of the ports in this study have strong financial backing by the government. Port Reputation is the third ranked variable. This means that ports with a reputation of fair trade and competition, relatively free from political interference are preferred. Not surprisingly, a port manager s ability to set their own prices for services was ranked fourth. This is because a port s ability to control Price is likely an outcome driven by the other variables which are more input oriented. Lastly, Legal Structure was fifth, indicating the investors want a structure to resolve port issues that is independent of local authorities.

11 After calculating the VC weights by port, Table 4 reports the individual scores as well as the overall scores. Table 4 lists each port by name in the first column, and each variable score across the top row. The fields report individual scores, with overall rankings in the last column. Table 4: Overall Rankings of VC Cargo Volume (.087) Port Facility (.171) Port Location (.282) Service Level (.276) Port Cost (.184) Overall Values Ranking Singapore Rotterdam Hong Kong Mumbai Jakarta Chennai Xiamen Klang Not surprisingly, Singapore and Rotterdam top the list of the most competitive ports along the new route for capturing new cargo. However, Singapore s overall rating suggests that it will benefit the most from the new route. This rating is much higher the previous study partly because Singapore relocated Terminal 1 out of the city to a location that has better hinterland access and reduced congestion. Rotterdam s newly completed expansion into Massvlakte has increased its capacity by 25% which improves its ability to handle new volume. The port of Mumbai was ranked # 3, and Jakarta at a close ranking of # 4. Mumbai is benefitting from the Indian government s approval for a fourth terminal at Jawaharlal Nehru. This expansion is necessary to alleviate the diminishing growing congestion at the port and hinterland truck access. Jakarta (Indonesia) ranks high as well because it handles over 50% of the transshipment volume through the region. Hong Kong ranked as # 5 on the scale continues to lose ground. If not for some of the volume protectionist policies by the Chinese government, the port could not effectively compete. It is still losing business to the newer facilities at Shenzhen, which gives the port excess capacity

12 that is driving heavily discounted prices on certain services. Hong Kong is losing its VC, ranking relatively lower on this study than in the Hales et al. (2016). However, its rating suggests that it will capture significant VC as the new route is developed. Ranking much lower than the others on VC is Chennai (6), Klang (7), and Xiamen (8). These results suggest that they will likely increase volume due to the new route, but not near the magnitude of the higher-rated ports. The overall ratings of each port on IC are reported in Table 5. Each port is listed in the first column, while the overall rankings are listed in the last column. Each variable and their relative weights are list in the first row. Table 5: Overall Ratings of IC Price (.163) Institutional Structure (.246) Legal Structure (.153) Financial Resources (.243) Port Reputation (.195) Overall Values Ranking Singapore Rotterdam Hong Kong Mumbai Jakarta Chennai Xiamen Klang Mumbai ranks as the most attractive for investors. There are possibly two reasons for this. First, Mumbai has just been approved for a huge expansion and technology upgrade which will alleviate the existing heavy congestion and demand for storage services. Because demand already exists, the investment risk is low. Second, with the upgrades, Mumbai will likely capture some exiting and anticipated business from existing ports in the region. Not far behind Mumbai are the consistent favorite ports for investment, namely Rotterdam (2) and Singapore (3). This is

13 because Rotterdam and Singapore have consistently earned a sizable return on investment. However, in relative terms, the exponential growth and potential at Mumbai allows it to score higher on IC. The port of Jakarta (#4) is attractive to new investment because it is the most modern port in Indonesia and handles over 50% of the transshipment volume through the region. CONCLUSIONS One application of this model is to assess a ports mission and its ability to attract new volume. For example, it is evident that Singapore, Rotterdam, and Mumbai are in a position to benefit the most from the maritime route. While their positions shuffle slightly, they rank the highest on VC and IC. This means that their strategies are working. However, despite its resources and positioning, Xiamen ranks relatively low on both scales suggesting that despite their promotion as the only fully-automated port in the world, they need to revisit their strategy in order to capture more the silk road business. Second, considering there are four basic types of ports, namely Public port, Landlord port, Tool port, and Private port, the asset management structure may differ. This means that the proper balance between VC and IC may differ based on purpose. For example, a Public port is primarily focused on essential goods that are relevant to society and are not as concerned with attracting commercial new business. Military ports are a special type of Public port that don t depend on VC or IC. They are normally fully-funded by local governments and thus score low on VC and IC. On the other hand, Landlord ports are providing numerous commercial services and asset management is conducted by operators who are interested in increasing VC, and port owners who are interested in increasing IC. This balanced model suggests that they should work together on new initiatives and strategy. Ports must decide whether the return is measured in terms of profitability or public good. Third, the model allows port administrators to evaluate the effects of public policy. This includes justification for developing public policy on port development, usage and management. For example, during the initial pilot study phase of the Hales, et al (2016) paper, China was considering a change in policy for import tariffs to eliminate the need for double-entry of goods effect (also called the One-Day-Trip-to-Hong-Kong effect). During this period, one port official at Xiamen indicated that the regional government was using the Balanced Theory model to consider the effects on the new policy on Hong Kong. It was evident that the impact on Hong Kong on VC and IC could be devastating. Not wanting to completely eliminate what China considered to be an important strategic port, the government added provisions to keep volume flowing to Hong Kong that would have normally gone to Shenzhen. Fourth, because the potential effects on volume for a given investment can be assessed, the model can be used to suggest whether port expansion is viable and which investment options (public, private, or mixed) would best serve the mission of the port. For example, when applying

14 the model to the port of LeHavre, France, it was evident that further investment in expansion would not yield significant increases in VC. The last major expansion at that time was to accommodate the larger 10,000+ TEU vessels. It was evident that investors were not interested in future development for at least several years. This harmed the port s IC competitiveness, while at the same time improving its VC. Fifth, the model has been applied as a scenario-building tool to evaluate multiple, sometimes innovative, and often conflicting public and private policy options pertaining to Asian, Indian, and European port decisions that are already in play or would be launched in the near future. The main contribution of the ongoing study would be to create scenario interplays to examine overlaps, conflicts and potential synergies of various policy options and the business impacts on global supply chains. Xiamen and LeHavre are only a few examples of the application of the model. LIMITATIONS AND FUTURE RESEARCH The major limitation of this study is its application to only eight ports along the new maritime route. While our justification for examining the eight ports in this study is adequate, future research should examine how the new maritime route will re-balance trade and investment globally. This is especially since the global economy has changed and global trade is down. A huge benefit of AHP is its ability to deal with a variety of data types including ration, ordinal, and interval data in the same analysis. One limit of this study is that most of the data is subjective and relies on the opinions of the respondents. Although there is strong agreement among the multiple respondents for each port, objective data should be collected on future studies. However, even with objective data, ports globally do not used a standard costing method and can even within the region or country. This means that the financial results should be interpreted carefully, and are usually under reported A major strength of this study is the data. Due to the vast network of researchers, port officials and administrators, and graduate students involved, replication would be very expensive and time consuming. In fact, the data matrix is so large, that it had to be analyzed on a mini-computer at Brown University, Rhode Island, USA. REFERENCES Abbott, K. W., and D. Snidal Hard and Soft Law in International Governance. International Organization 54 (3): Bennett, R., and H. Gabriel Reputation Trust and Supplier Commitment: The Case of Shipping Company/Seaport Relations. Journal of Business and Industrial Marketing 16 (6):

15 Cullinane, K., T. Wang, D. Song, and P. Ji The Technical Efficiency of Container Ports: Comparing Data Envelopment Analysis and Stochastic Frontier Analysis. Transportation Research Part A: Policy and Practice 40 (4): Guy, E., and B. Urli Port Selection and Multi-criteria Analysis: An Application to the Montreal-New York Alternative. Maritime Economics and Logistics 8 (2): Hales, D.N., Lam, J.S.L., Chang, Y.T., The balanced theory of port competitiveness, Transportation Journal, Vol 55(2), pp Hales, D.N., Chang, Y.T., Lam, J.S.L., Dholakia, N., Desplébin, O. and Al-Wuguyan, A. (forthcoming) An Empirical Test of the Balanced Theory of Port Competitiveness, The International Journal of Logistics Management. Hales, D., Lam, Siu Lee, YT Chang (2016). Competitive Factors of Global Ports. One Belt One Road (OBOR) International Conference 2016, Royal Melbourne Institute of Technology. Lam, J. S. L., and Yap, W. Y Dynamics of Liner Shipping Network and Port Connectivity in Supply Chain Systems: Analysis on East Asia. Journal of Transport Geography 19 (6): Lam, J. S. L., and J. Dai A Decision Support System for Port Selection. Transportation Planning and Technology 35 (4): Lam, J. S. L., and Notteboom, T The Greening of Ports: A Comparison of Port Management Tools Used by Leading Ports in Asia and Europe. Transport Reviews 34 (2): Roundtree, B., J. Weston, and G. Allayannis Do Investors Value Smooth Performance? Journal of Financial Economics 90 (3): Song, D., and K. Yeo. 2004, A Competitive Analysis of Chinese Container Ports Using the Analytical Hierarchy Process. Maritime Economics and Logistics 6: Song, D. W. (2002). Regional container port competition and co-operation: the case of Hong Kong and South China. Journal of Transport Geography, 10(2), Ugbomai, C., O. Ugboma, and I. Ogwude An Analytic Hierarchy Process (AHP) Approach to Port Selection Decisions Empirical Evidence from Nigerian Ports. Maritime Economics and Logistics 8: Wang, Y., K. Cullinane, and Y. Hu The Role of Feeder Shipping in Chinese Container Port Development. Transportation Journal 53 (2): World Bank Port Reform Toolkit, Modules 1-8, PPIAF.

16 org/public-private-partnership/library/port-reform-toolkit-ppiafworld-bank-2nd-edition. Yap, W. Y., & Lam, J. S. (2006). Competition dynamics between container ports in East Asia. Transportation Research Part A: Policy and Practice, 40(1), Zhang, A., and J. S. L. Lam Impacts of Schedule Reliability and Sailing Frequency on the Liner Shipping and Port Industry: A Study of Daily Maersk. Transportation Journal 53 (2):

17 Founded in 1892, the University of Rhode Island is one of eight land, urban, and sea grant universities in the United States. The 1,200-acre rural campus is less than ten miles from Narragansett Bay and highlights its traditions of natural resource, marine and urban related research. There are over 14,000 undergraduate and graduate students enrolled in seven degreegranting colleges representing 48 states and the District of Columbia. More than 500 international students represent 59 different countries. Eighteen percent of the freshman class graduated in the top ten percent of their high school classes. The teaching and research faculty numbers over 600 and the University offers 101 undergraduate programs and 86 advanced degree programs. URI students have received Rhodes, Fulbright, Truman, Goldwater, and Udall scholarships. There are over 80,000 active alumnae. The University of Rhode Island started to offer undergraduate business administration courses in In 1962, the MBA program was introduced and the PhD program began in the mid 1980s. The College of Business Administration is accredited by The AACSB International - The Association to Advance Collegiate Schools of Business in The College of Business enrolls over 1400 undergraduate students and more than 300 graduate students. Mission Our responsibility is to provide strong academic programs that instill excellence, confidence and strong leadership skills in our graduates. Our aim is to (1) promote critical and independent thinking, (2) foster personal responsibility and (3) develop students whose performance and commitment mark them as leaders contributing to the business community and society. The College will serve as a center for business scholarship, creative research and outreach activities to the citizens and institutions of the State of Rhode Island as well as the regional, national and international communities. The creation of this working paper series has been funded by an endowment established by William A. Orme, URI College of Business Administration, Class of 1949 and former head of the General Electric Foundation. This working paper series is intended to permit faculty members to obtain feedback on research activities before the research is submitted to academic and professional journals and professional associations for presentations. An award is presented annually for the most outstanding paper submitted. Ballentine Hall Quadrangle Univ. of Rhode Island Kingston, Rhode Island