Port-Centric Versus Inland Location Decisions in Gothenburg, Sweden
INTRODUCTION TO PORT-CENTRIC LOGISTICS
Port-centric logistics means locating a distribution facility at a port (Mangan et al., 2008). In some cases (e.g. Teesport, UK), this means actually inside the port area, needing only a small shunt from the quayside to the distribution centre (DC). In other cases (e.g. Savannah, US), port-centric logistics means a large logistics area growing around the port. Sometimes, the term port-centric is used to refer simply to de-stuffing or transloading, e.g. from inbound container to pallets, or from inbound deep sea 40-ft containers to domestic 53-ft (US) or 45-ft (Europe) containers, enabling greater value from the inland transport costs. Such de-stuffing can be done in a container freight station inside the port or in other facilities outside the port. For example, many facilities perform this task in the areas surrounding the ports of Los Angeles/Long Beach. The choice of location for these tasks will depend on various factors such as timing, demurrage charges and local road haulage costs.
Whether a specific port is a good choice for port-centric logistics depends to a large degree on the local economy. An ex-industrial city with low employment will be looking to attract businesses, whereas a more prosperous city already experiencing congestion and not lacking jobs may find that wealthy residents form a strong lobby against such developments, preferring waterfront living and entertainment opportunities to noisy and dirty freight handling.
From a shipper perspective, whether port-centric logistics is appropriate depends chiefly on the balance of primary and secondary distribution as well as on the role of other costs such as land and labour. Centralisation of DCs is popular for a very good reason, and a coastal rather than inland location is not going to suit the majority of businesses. An inland location allows choice of port, choice of carrier, agglomeration economies and ease of secondary distribution to stores or customers. These very advantages, however, may produce high land and labour costs in the most desirable inland locations.
Ports logically want to anchor customers at a port, which will limit their opportunities to take their business elsewhere, in addition to providing a revenue stream from land rental. If a shipper wants to give up the advantage of port choice, it is essential that the coastal location matches their distribution patterns and they are confident of a continuation of a choice of carrier service options at that port in the future. They must also ensure to obtain significant savings on the land (and usually labour) costs to make it worth their while.
THE GOTHENBURG CASE
The Port of Gothenburg is the largest port in Scandinavia and the only one with direct trans-ocean lines to Asia and America, handling over 800,000 TEUs per year. In the past, it has enjoyed dominance due to its location and has also benefited from the development of a strong hinterland rail network. Now it is facing challenges from several directions, partly from its city location which results in a lack of space, congestion and labour conflicts, but also due to emerging competition from other ports.
With recently privatised terminals, the port authority is seeking to redefine its role with its Swedish hinterland by growing the area of port land devoted to logistics activities. This could be considered a contrast to the last two decades which has seen a large focus on the rail network and inland terminals for transporting goods to the hinterland. Branded and marketed as ‘Railport Scandinavia’ by the port authority, the share of hinterland transport by rail has increased from around 20% in 2000 to around 45% in 2016. This is an outcome from the port authority's collaborative work (cf. Bergqvist 2009, 2013) with inland actors to stimulate more freight on rail through the development of rail shuttles but without taking a direct stake themselves. The network currently serves around 30 different destinations.
The city of Gothenburg is undergoing a transformation, a process that started several years ago when old industrial and terminal areas were converted into residential areas (Olsson et al., 2016). For example, Norra Älvstranden (north bank of the river) has changed from a shipyard and industrial area into a cluster for high-tech companies, education and residential areas. As a consequence of the historically strong logistics position of the city, there is a conflict of interest between residential/commercial areas and some of the main transport routes. The port dominates the logistics developments in the city of Gothenburg, given that 85 of 135 freight terminals in the city are located close to the port area (Olsson & Larsson, 2015). Gothenburg is frequently ranked as the most attractive location to establish logistics facilities in Sweden (Intelligent Logistik, 2017). In the next 20 years, 5 million m2 of logistics facilities are going to be developed there, of which more than 1 million m2 will be developed by the port authority.
From a port-centric perspective, land availability inside the actual port is relatively low; however, there is great demand for further expansion of logistics facilities close to the port. A 1 million m2 logistics platform is currently being developed near the port, led by the port authority in conjunction with four other companies: NCC, Prologis, Eklandia and Bockasjö. The logistics development is estimated to generate some 2000 jobs and is projected to be completed by 2025 (Port of Gothenburg, 2017a).
A recent study commissioned by the port authority arrived at the conclusion that a port-centric location in Gothenburg is a competitive location for DCs in Scandinavia (Port of Gothenburg, 2017b). The study compared costs for transport of import freight from the port, palletised distribution, warehousing, customs and land. This study would seem to conflict with the general trend of migration of port-related logistics activities to hinterland locations with a better centre of gravity in relation to market population compared to coastal locations at the outskirts of the market, supported by the growth of the ‘Railport’ system described earlier.
Analysis of port-centric versus inland location
A recent study (Monios et al., 2018) comparing a port-centric (Gothenburg) versus inland (Falköping, located about 125 km from the port) location concluded that the inland location would be 4.8% cheaper per year. One of the biggest reasons behind the advantage of the inland location is that of land purchase, which is many times more expensive in the port-centric location (about 800 SEK per m2 near the port and 50–200 SEK per m2 inland). Successful port-centric development usually relies on cheap brownfield land that public authorities are highly motivated to develop, rather than on valuable city land with alternative uses. With high volumes and high-frequency intermodal connections, inbound transport by rail is efficient and competitive with road, but still represents a cost that the port-centric location avoids; nevertheless, the cost disadvantage of higher inbound cost is offset by the relative advantage with regard to cost of land.
In terms of outbound transport costs, the location of DCs is very dependent on the closeness to the centre of gravity in relation to the market it serves, which normally corresponds well with the centre of gravity of the population. Locating directly at the centre of gravity might seem an obvious choice but, in order to minimise the total cost, inbound transport cost needs to be considered as well, normally shifting the optimal location of the DC away from the population centre of gravity to the direction of the point of entry (e.g. border-crossing point for imports), which may make the port-centric location suitable for some flows.
It is also important to consider the relative proximity between the rail terminal and the warehousing at the inland location, allowing strategies such as using cheap storage at the terminal for stock buffering, which is not possible at a highly congested port terminal. In this case, it is a couple of kilometres from the port to the logistics zone, whereas in the Falköping example, it is a matter of a few hundred metres. Also at inland locations, they can often use private roads between the warehouse and the terminal, so they have more freedom to use tugmasters rather than registered road vehicles and also transport heavier loads than are allowed on public roads. A truly port-centric, meaning within the port perimeter, would also allow these advantages, but many “port-centric” developments in reality mean locations a few kilometres from the port.
The case showed that in Gothenburg, Sweden, the port authority plans to turn ex-port land into warehousing, but the analysis revealed that this might not be the best solution in city ports where other options exist for such real estate. A city port like Gothenburg, Sweden, has higher land and labour costs than the Swedish hinterland, whereas an old industrial or greenfield port such as the Teesport, UK example can offer land at much cheaper rates than a high-demand agglomerated inland logistics zone like the golden triangle in the UK's Midlands. There is thus a potential contradiction here: a port-centric logistics development would obtain cheaper land and labour costs at a non-city port, but it would be closer to final customers in a city port (Monios et al., 2018).
Location decisions have not changed over time, and remain based on the traditional cost factors such as land and labour, and particularly primary versus secondary transport costs. If the port has land available and a shipper has a distribution portfolio that suits a coastal location, then port-centric logistics can be a win–win solution. But if land or transport costs are high, then the shipper must calculate the trade-off and make a decision based on their distribution model, reflecting the fact that any location decision can only be made on a case-by-case basis.
1. Which type of goods or market segments do you think are most suitable for port-centric locations?
2. Can you think of reasons why companies and logistics activities would choose to be located port-centric even when the cost-related aspects favour inland locations?
3. How do you think port centric versus inland dynamics will change in the future? What trends might influence this and how (e.g. electric trucks and vans, autonomous vehicles)?