Co-operation in Container Handling: What Are the Effects on Economies of Scale?



Co-operation in Container Handling: What Are the Effects on Economies of Scale?

Authors

Thierry Vanelslander, University of Antwerp, BE

Description

Co-operation in container handling generates fixed-cost as well as variable-cost effects. This paper measures the extent to which these phenomena occur, by comparing costs of fixed inputs respectively economies of terminal activity scale.

Abstract

It is widely acknowledged that the competitive environment in the maritime and port sector is changing at an ever increasing pace. ?Globalisation? and ?the reinforcement of the world economy? are frequently used concepts to summarize current economic developments, also and particularly in container handling in sea ports. Container-handling companies have engaged in various forms of expansion, many of which have a co-operative character. In recent years, this evolution has gained momentum. A particularly striking question in this respect deals with the effect that such expansionist moves have on cost structures. On the one hand, such effect can 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 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. The related hypothesis states that container-handling companies feature economies of company scale. Often less clearly identified than the fixed terminal costs are the true operational costs involved in running a container terminal, and their evolution with changing output levels. It is generally accepted that a broad set of variables may impact to a larger or lesser extent on the supply and demand conditions at container terminals. However, the exact extent of such impact and of economies or diseconomies of scale has hardly been assessed in literature. Therefore, it is analyzed in this paper how co-operation and expansion determine container-handling conditions and therefore lead to different operational cost structures. This effect can be measured through the economies of scale in the variable inputs at a terminal, and is therefore termed the terminal-size effect. The corresponding hypothesis states that economies of scale differ in line with different terminal activity size. 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 a 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.

The third research hypothesis is tested by combining the analyses used when testing the first two hypotheses. A trade-off between fixed-cost and variable-cost effects is calculated by considering common terminal and container-handling company 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 country?s wealth through employment and value added.

Publisher

Association for European Transport