An object’s
center of gravity is a matter of physics. In matters of business, by contrast,
there are man-made centers of gravity. These are governed by the desire to make
money or, at least, to avoid losing money. Logistics is the study of the
constraints of time, physical space and location that arise when moving
freight/people/information from origin to destination. Interestingly, those
logistical constraints can be matters of physics too. In particular, transportation
costs can make or break a sales transaction.
This is
especially true when the buyer and the seller are some physical distance apart
with challenging terrain and/or bodies of water in-between. The terrain and/or
bodies of water will determine the nature of the infrastructure available to
for-hire carriers. The buyer-seller transaction is possible if a carrier is
available to move the item across the available infrastructure. But the
transaction is not possible if the cost of carriage, when added to the item’s
sale price, is simply too high for the buyer. This may be due to lack of
competition in the for-hire carrier market or to the physical constraints of
the distances involved given the current state of technology.
Logistical constraints
need to be managed in order to control the costs of doing business. Centers of
gravity exert the force of attraction. When market conditions change by a large
enough magnitude, business activities will be attracted to a new center. Only
an equal and opposite force can fight this gravitational pull. What happens
when these centers of gravity change and what does it take to maintain current
ones in the face of such change?
Consider the
current U.S.-China trade war. The United States has chosen to fight this war primarily
with import tariffs. As a result, all U.S. supply chain managers who deal with the
inbound flow of China’s tariff-targeted imports know that the landed cost of these
items will be higher. It is not just the tariff-adjusted sale price of the item
that is higher, but also the cost of customs compliance.
Some supply
chain managers have already adjusted away from China, choosing instead to
source from nearby Taiwan, Vietnam and/or South Korea. On the export side, U.S.
food and agricultural products are good cases in point. From a peak of $25
billion in 2014, China-bound exports fell to about $9 billion this year. The
slide accelerated beginning in 2017 when the first serious talk of a trade war
began. U.S. tariffs on China were met by countervailing tariffs by China on U.S.
food and agricultural exports.
In a similar
fashion to outbound China supply chains the inbound China supply chains of food
have been shifting away from the United States to other countries in this
hemisphere such as Canada for wheat and lobster, and Brazil for soybeans.
The effect
of this shift can be seen sharply at the Port of Oakland, since about half of its
export volume is in agricultural products. With its proximity to California’s
farm sector it is an important exit point to Asia’s food markets. The port has
seen a rise in shipments to Taiwan, Vietnam, South Korea and Japan as U.S. farmers
sought to avoid China’s tariffs on their products.
A consequential
shift in the center of gravity might occur should enough manufacturers of low-cost
consumer goods move beyond the Far East into countries like India and
Bangladesh. If these countries replace the Far East as the manufacturing center
of gravity, it is possible that some transport routes might avoid the Malacca
Strait heading to U.S. West Coast ports and use the Suez Canal and the
Mediterranean Sea heading to U.S. East Coast ports. If the new pool of low wage
workers is to be found in and around India this possibility must be considered.
In fact, A.T. Kearney’s report this year on U.S. trade policy and reshoring
noted that the move of manufacturers from China toward India has been in motion
long before the current trade war.
Ted Stevens
Anchorage International Airport (ANC) is another logistical center of gravity.
In this case it is a gateway to the United States for outbound Asia air cargo.
About 80% of this traffic lands at the airport for refueling. Why should that
be when these air cargo planes are quite capable of overflying Anchorage? It
comes down to what ANC’s management team calls keeping their airport “sticky.”
Anchorage
has both geographic and operational advantages that are unique along the “great
circle” between Asia and the lower 48 states. Great circles are the shortest
distance between two points on a sphere. Geographically, Anchorage is just
about the distance (i.e., 4,400-4,800 nautical miles) a fully loaded jumbo or
wide-body U.S.-bound air cargo plane can go from, say, Hong Kong. So, if the
intent is to fill the planes in Asia with more revenue-earning cargo and less
cost-inducing fuel, it makes sense to land and refuel in Anchorage. It also
helps that ANC works hard to keep its landing fees and fuel charges very low by
industry standards. ANC is centrally located at 9.5 hours flying time to 90% of
the industrialized world. This makes it an excellent air cargo trans-shipping
point.
This operational advantage is accentuated by ANC’s innovative air cargo transfer program. Belly-to-belly transfer of U.S.-bound cargo between a foreign air carrier’s planes or between those of two different foreign air carriers is illegal at any other airport in the continental U.S. In fact, ANC’s management team has had to work hard to convince skeptical Asia-based carriers that this quasi-cabotage activity is quite legal.
What makes
it hard to believe at first is why the United States would offer such a
unilateral trade benefit to countries like China and Japan. Basically, Alaskans
can thank the advocacy of the late Sen. Ted Stevens when he wrote this unique operation
into a re-appropriation bill for the Federal Aviation Administration (FAA) back
in the mid-1990s. At ANC, airport managers know that their air carrier customers
can literally fly away, so they must be imaginative to maintain the airport’s
center of gravity against other U.S. and Canadian airports looking to attract
Asia-U.S. traffic.
Strategy is
typically informed by some vision of the future. The further into the future the
more the uncertainty. But uncertainty needs to be confronted and not avoided by
simply limiting mission statements and strategies to five- to 10-year
timeframes. Sticking with Alaska and thinking ahead over the next few decades,
consider the fact that the Arctic is steadily warming and its ice cap is
melting. Therefore, imagine the day when the Northwest Passage between the
Beaufort Sea and Baffin Bay becomes navigable to deep draft ocean vessels on a
year-round basis. Centers of gravity for ocean freight may well change. In this
scenario, ports along the Aleutian Islands archipelago (e.g., Adak and Dutch
Harbor) may become strategically important as bulk and container trans-shipping
points. Ocean vessels heading along the “great circle” between Asia and U.S.
West Coast ports could stop at such a port and switch cargo with vessels
traveling routes between Asia and Europe via the Northwest Passage.
Singapore’s
importance in trade began in the early 19th century when the British
East India Company established it as a port of call in the spice trade. It has
worked hard to maintain its center of gravity in container trans-shipping. The strategic
question for the future is “will global climate change give Alaska a new place
in the sun?” Who knows – one day a port out in the lonely Aleutians just might
become the “Singapore of the North.”
