The East Coast/West Coast pictureclarifies … or does it?

Dr. Rob LeachmanUniversity of California at Berkeley

TPM ConferenceMarch 3, 2014

The Status Quo

The lion’s share of imports from Asia to Continental USA follow one of three types of supply chains:

• Push

• Push-Pull 3[4][5] Corners

• Push-Pull all-at-San-Pedro-Bay

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Impact of the Panama Canal Project 2

Push Supply-Chain Strategy

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Impact of the Panama Canal Project

Push-Pull Supply Chain – All at San Pedro Bay

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Potential port of entry

Regional distribution center

Rob Leachman Impact of the Panama Canal Project

Push-Pull Supply Chain – Four Corners

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Impact of the Panama Canal Project

Cheap, Moderate and Expensive Imports

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Impact of the Panama Canal Project 6

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

0.0 ‐4.0

4.0 ‐8.0

8.0 ‐12.0

12.0 ‐16.0

16.0 ‐20.0

20.0 ‐24.0

24.0 ‐28.0

28.0 ‐32.0

32.0 ‐36.0

36.0 ‐40.0

40.0 ‐44.0

44.0 ‐48.0

48.0 ‐52.0

52.0 ‐56.0

> 56.0

Percen

tage

 of Total TEU

s

Declared Value ($ per cu. ft.)

Value Distribution of 2005 Asia ‐USA Waterborne Containerized Imports

25%InexpensiveImports

50%Moderate-valueImports

25%ExpensiveImports

Source: WTA, PIERS, PMA

Each Kind of Supply Chain is Best for Some Goods

7

Push Push-Pull 3, 4 or 5 Corners

Push-Pull All at San Pedro Bay

Nation-wide distribution of inexpensive goods and one-time-sale goods by large retailers (~13.5%)

Nation-wide distribution of moderate-value goods by large retailers (~27%)

Nation-wide distribution of expensive goods imported by large OEMs (~13.5%)

Small and regional importers (~46%)

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Impact of the Panama Canal Project

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Impact of the Panama Canal Project 8

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

0.0 ‐4.0

4.0 ‐8.0

8.0 ‐12.0

12.0 ‐16.0

16.0 ‐20.0

20.0 ‐24.0

24.0 ‐28.0

28.0 ‐32.0

32.0 ‐36.0

36.0 ‐40.0

40.0 ‐44.0

44.0 ‐48.0

48.0 ‐52.0

52.0 ‐56.0

> 56.0

Percen

tage

 of Total TEU

s

Declared Value ($ per cu. ft.)

Value Distribution of Asia ‐ USA Containerized Imports, 2005 Actual vs. After 15% Increase in Values

19%InexpensiveImports

49%Moderate-valueImports

32%ExpensiveImports

But the mix of chains is evolving

OK, So What Effect Will the Canal Expansion Have?

• West Coast Store-Door, IPI and All-Water are services are sold by the Lines as separate services.

• Importers set up their supply chains based on prices for these services and consideration of their inventory economics.

• So the effect of the Canal expansion is really a question of what will happen to the differential between all-water and West-Coast-port-of-entry rates.

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Impact of the Panama Canal Project 9

A What-If Analysis• 2010 – 2011 season confidential rates

• 2005 distribution of declared values and importer shares

• 2008 distribution of purchasing power

• For each of top 83 importers, choose supply chains minimizing total inventory + transportation costs

• For 19 “generic proxy” importers, choose least-cost Push supply chain

• Total up the imports by port and by Coast …March 3, 2014

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A What-If Analysis (cont.)

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20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

0.85 0.875 0.9 0.925 0.95 0.975 1 1.025 1.05 1.075 1.1 1.125 1.15

Share of  Con

tainerized

 Trans‐Pacific A

sia ‐U

SA Im

ports

Normalized All‐Water Rates (2010‐2011 = 100%)

Predicted Shares of Trans‐Pacific Asia ‐ USA Imports as a Function of the Differential in All‐Water vs. West Coast Rates

West Coast Share

All‐Water Share

A What-If Analysis (cont.)

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0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

0.5

0.85 0.875 0.9 0.925 0.95 0.975 1 1.025 1.05 1.075 1.1 1.125 1.15

Share of Con

tainerized

 Trans‐Pacific A

sia ‐U

SA Im

ports

Normalized All‐Water Rates (2010‐2011 = 100%)

Predicted Shares of Trans‐Pacific Asia ‐ USA Imports as a Function of the Differential in All‐Water vs. West Coast Rates

All_Water

WC_IPI

USA_WC_TL53

WC_Local

So What’s Going to Happen?

• “Forecasting is hard. Especially about the future.”

• A 10% rate differential one way or the other would make a huge difference:– If All-water rates go down 10% relative to WC rates, then

Panama Canal volume will be up 31% while West Coast ports will be down 14%

– If All-water rates go up 10%, then Panama Canal volume will be down 20% while West Coast ports will be up 9%

• If the (relative) rates do move, I predict two or three years of turbulence before a new equilibrium is reached.

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Impact of the Panama Canal Project 13