The Port of Los Angeles is a major economic component of the Southern California economy, responsible, along with Port of Long Beach, for economic activity that supports over 900,000 jobs. However, the Port has run into strong headwinds as the volume of imported containers has slipped 6% over the last twelve months.
Even exports of loaded containers are down 12% this year after almost doubling over the last ten years.
These lower volumes, both of which are about 10% below their peak volumes, should serve as a wakeup call to the management of the Port, its Board of politically appointed commissioners, Mayor Eric Garcetti, and the City Council, especially as the competitive environment for international waterborne trade is increasing, eating into the Port’s market share and revenues and the incomes of Southern Californians.
In 2014, the widening of the Panama Canal is scheduled to be completed. This will allow for the more efficient shipment of containers from Asia to populous markets served by well-run ports on the Gulf and East Coasts.
At the same time, ports in Canada (Prince Rupert and Vancouver), Mexico (Manzanillo and Lazaro Cardenas), and the western USA (Seattle, Tacoma, and Oakland) are aggressively expanding their operations and marketing efforts, targeting retailers, manufacturers, and shippers who are fed up with the high cost Port of Los Angeles and our business unfriendly City.
Now is the opportune time for Eric Garcetti, our newly elected mayor, to introduce significant change to the Port of Los Angeles.
Importantly, Eric and his advisors need to realize that the salad days of the Port are history. It is not realistic to expect that the rapid growth of the last twenty years will continue, when the Port’s traffic increased four times, from 2.1 million containers in 1990 to a peak of 8.5 million containers in 2006. Rather, the Port is in a very competitive business, where efficiency, reliability, and cost are the basis for logistical decisions by beneficial cargo owners and the shipping industry.
Eric and City Hall must also come to the harsh realization that the Port is not the center of the universe, but just a cog in the multifaceted global supply chain.
As a first step, Eric should appoint five new commissioners who have industry or logistics experience or the managerial, technical or financial expertise or experience that will allow them to provide valuable guidance to the Port’s management and serve as representatives of the Port to its customers, suppliers, and partners.
Eric and the new commissioners must also assess the quality and capabilities of the General Manager and her team, especially given that over the last ten to fifteen years, the City has politicized the management ranks of the Port. More than likely, we need a new General Manager who has the authority to “clean house” and develop a realistic strategic plan that reflects the increasingly competitive environment.
The Port and the City of Los Angeles also need to improve their relationships with the international shipping community, the trucking industry, and large national retailers as its business unfriendly, my-way-or-the-highway attitude has alienated important segments of the supply chain.
Over the last five years, the Port and the trucking industry have been engaged in an acrimonious legal battle over the “company employee” provision of the Clean Truck Program that would have facilitated the unionization of independent owner operators of trucks. However, the courts found that the “company employee” provision violated federal law, but this was after the Port spent a rumored $15 million in legal fees and expenses.
The City’s political establishment has also alienated numerous retailers, including Wal-Mart, by far the nation’s largest importer, by refusing to allow the company to open big box stores within the City. As a result of this hostile reception (including opposition to a 30,000 square foot grocery operation in underserved Chinatown) and selected work stoppages, Wal-Mart has developed its Four Corner strategy. This has resulted in cargo being diverted to other ports on the West and East Coasts, costing the Southern California economy millions in economic activity.The Port will also need revamp its financial policies in this increasingly competitive world so that it has the flexibility to fund billions in capital expenditures that are necessary to maintain the Port’s efficiency and overcome its high cost structure.
The Port also needs to address the ever increasing, multibillion debt of the Alameda Corridor.
Overall, the Port’s finances appear to be in excellent shape. However, when the Port’s proportionate share of the Alameda Corridor’s debt ($1.1 billion) and interest expense ($60 million) are included in its balance sheet and income statement, its financial ratios, while still investment grade, deteriorate considerably.
As a result, the Port needs to limit its investments in and contributions to non-revenue producing ventures, including its $1 billion Waterfront Initiative, the $500 million marine research center, dollar a year leases, and other worthwhile community projects.
Furthermore, the Port will need to rationalize its work force, eliminate many of the surplus City employees that were dumped into its lap during the City’s fiscal crisis, and rely on proven professionals that have an excellent understanding of the Port’s operations and how the Port can service its customers’ needs.
The Port must adapt to the slow growth, highly competitive environment by revamping its management, by developing a realistic view of its place in the supply chain, by building strong relationships with its customers, and by maintaining a strong cash flow and balance sheet. Otherwise, the Port will continue to lose market share and impede the growth of the Southern California economy.
Eric, will you allow the past to torpedo the Port’s future or will you launch a new beginning for the Port of Los Angeles and show that our City and its economy can adapt to the new world?
Crossposted on City Watch LA.