The Cargo Cult The Myth of a Freight-Dependent Economy

!

Joe Cortright March 2016

Synopsis

• What drives our economy? • Freight facts • Containers: A case study • What about just-in-time? • A cluster case-study • Academic evidence

Freight Dependent

Widmer in ItalyWhy?

Great Beer.

Not Transportation Prowess.

Backwards Logic

We export things because we’re good at making them

We don’t make things because we’re good at exporting them

We’re dependent on a lot of things:

• Caffeine Dependent • Electricity Dependent • Oxygen Dependent • Water Dependent • Internet Dependent

Freight Facts

Fact 1: Most freight is heavy, low-value and local

Growing, High Value Industries ship trivial amounts of freight

Industry Pounds/Worker/Day Minerals 10,000 Wood/Paper 7,348 Food Processing 3,794 Metals 2,243 Apparel 554 Machinery 510 Electronics 50 Software/Prof. Svcs. 0 Source: 2002 Commodity Flow Survey for Portland-Vancouver

Most Freight is Low Value Bulk

Commodity Share of Freight Gravel & Stone 32.8% Wood Products 17.4% Non-Metallic Minerals 11.5% Coal & Oil Products 5.6% Total, these bulks 67.3%

High Value, Low Weight

Electronics

Machinery

Wood Products

Wheat

Value per pound of shipment (gross)

0 12.5 25 37.5 50

$0.11

$0.24

$6.46

$40.47

Source: 2012 Commodity Flow Survey, US Census

Most Freight is Purely Local

Destination of Outbound Shipments: Oregon - 73.6%

Origin of Inbound Shipments: Oregon - 62.1%

Shipments Traveling less than 50 miles: 67.5%

Source: 2002 Commodity Flow Survey for Portland-Vancouer, US Census

Portland-Area Freight Movements by Destination, Origin & Distance Traveled

Fact 2: Oregon’s economy has shifted to lighter, high value products, and tonnage is down sharply

Electronics & Machinery Drive Oregon Economy

0

12,500

25,000

37,500

50,000

2007 20120

30,000

60,000

90,000

120,000

2007 2012

Value, Millions. Source: 2012 Commodity Flow Survey, US Census

Everything ElseElectronics & Machinery

Up 51% Down 12%

Creating just as much value moving 42% fewer tons

0

40,000

80,000

120,000

160,000

2007 20120

50,000

100,000

150,000

200,000

2007 2012

Source: 2012 Commodity Flow Survey, US Census

Tons (Thouands)Value (Millions)

Down 42%

Oregon Exports: Value Up; Tonnage Down

0

10,000

20,000

30,000

40,000

2007 20120

5,000

10,000

15,000

20,000

2007 2012

Source: 2012 Commodity Flow Survey, US Census

Tons (Thouands)Value (Millions)

Up 55% Down 44%

Oregon: Trucking Ton Miles Down 40%

0

7,500

15,000

22,500

30,000

2007 2012

Source: 2012 Commodity Flow Survey, US Census

Fact 3: The economy is up; freight is down.

National: Freight intensity of GDP down

Oregon: Freight intensity down 40%

Oregon Truck traffic still below year 2000 levels

Trucks crossing Columbia down 20%

12,000

15,000

18,000

21,000

24,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: ODOT, Class 6 and higher trucks crossing I-5 and I-205, AADT

Flawed Freight Plans

2010 Metro Regional Freight Plan

Trade volumes in Portland are expected to double by 2035, to 600 million tons annually.

The region’s goods movement system will need to absorb a doubling of freight volumes by 2035, with approximately 75 percent of that dependent on trucks . . .

!

REGIONAL FREIGHT PLAN

2035June 2010

June 2010

Containers: Case Study

Feb. 2015: Hanjin Leaves

Apr. 2015: Hapag Lloyd Leaves

Portland’s Decline

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Source: Pacific Maritime Assn. (2015-16 estd.)

Portland Share of West Coast Container Traffic

Always a bit player

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0% 19

95

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

2016

Source: Pacific Maritime Assn. (2015-16 estd.)

Portland Share of West Coast Container Traffic

Port in declinePortland Business Journal, Feb. 2016: “The port's other businesses are also struggling mightily.”

Containers

Grain

Bulk Minerals

Break Bulk

Cars

Change in Cargo Volume, 2014-2015, Port of Portland

-90% -67.5% -45% -22.5% 0% 22.5%

2.3%

-85%

-9%

-41%

-86%

After Hanjin left

• Portland Job Growth Accelerated from 3.2 percent to 3.8 percent

• Portland metro area added 38,000 jobs

• Unemployment dropped to 4.4%—the lowest level in 15 years

• Change: February to December 2015, compared to previous year.

Portland: 2nd Fastest Growing Metro in 2015

Oregon Employment Department

High Tech on HanjinWhile the imminent departure of Hanjin Shipping Co. puts a severe dent in the Port of Portland's containerized trade, it won't affect companies that ship some of the state's most valuable products. Semiconductors, computer equipment, medical devices and other high-value items move primarily by air these days. !"At a high level, will it really affect us? No," said Jason Willey, investor relations director at Hillsboro's FEI Corp. !The company doesn't expect a customer to wait three or four weeks for a focused ion-beam system to cross the ocean and clear customs. !The port says the most valuable things that come to or go from Portland by sea are autos and agricultural products, from wheat to logs. But highly engineered computer product and other technical equipment flies in and out of the region's airports.

High-Value Just-in-Time Deliveries

2005: Intel changed cutoff by 2 hours

Chapter 3 – Business Perspectives

routine shipments, and it adds to the difficulty of maintaining traditional routes and fixed delivery schedules. For manufacturing businesses with regular, high-volume movements between sites, congestion and reduced capacity on critical bridge crossings and city streets has significantly increased the time needed to move intermediate products, partial assemblies and raw materials. In many cases, especially where older manufacturing sites are located along waterways or in older industrial areas, introduction of new, mixed use development has combined with traffic congestion to compound delays in routine shipment patterns.

x� Earlier Scheduled Deliveries/Shipments. Most firms are involved in on-going

review of routings and have developed methods for “on-the-fly” rerouting or regular adjustment of departure times, loading and preparation of loads for delivery and other measures. However, some firms – particularly those with large, heavy loads moving between established manu-facturing operations – do not have the flexibility to make these adjustments. Slower turn-around between plants requires either adding more vehicles to sustain production, adding shifts, or cutbacks in production schedules.

x� Increased Inventory. Throughout the 1990s, reductions in inventories increased

efficiencies in the manufacturing and transportation sectors. These efficiencies are beginning to erode due to roadway congestion (highways) and reduced levels of service (primarily attributable to poor service from Class I railroads and a reduction in ocean shipping services). Increased variation in delivery times attributable to congestion, more missed deliveries, and other uncertainties related to maintaining services tied to rail deliveries and maintenance of delivery routes has contributed to keeping more inventory on-hand – both in distribution warehouses and in manufacturing operations.

x� Effects on Production Elsewhere. Many manufacturers operate multiple

production facilities throughout the US and in many foreign countries. The location of production on the part of most manufacturing companies is a complex decision that is based on a unique combination of factors such as labor, materials and markets. However, transportation has historically played a role in these

decisions. Almost all of the businesses interviewed and several of the retailers who are involved in manufacturing operate globally – with manufacturing on every continent and many regions of the globe (including Africa and the mid-East). However the predominant location of production is in the US

Cost of Congestion to the Economy of the Portland Region Page 25

Delays in Portland Affect Global Production

If Intel experiences delays or missed shipments, it can shut down a production line as far away as Costa Rica, China or the Philippines. These shutdowns can produce a ripple effect on world-wide production and testing operations. They may also have to pay inventory surcharges for various “non-chip” components, and other penalties tied to production delays.

“Last Call” for Outbound Shipments

Intel has moved their last shipment departure time from 5:30PM to 3:30PM for outbound shipments through PDX in response to increased congestion. A missed flight means loss of inventory and production at the receiving location.

The Cost of Congestion to the Economy of the Portland Region

Prepared for:

Prepared by:

Revised December 5, 2005

High tech to PDX

Greater Portland Export Initiative Portland Region Westside Freight Access and Logistics Analysis

10/1/13 SUMMARY | Page 2

study recognized the importance of the Westside C&E cluster and

documented some of its unique constraints and challenges, but

no study has ever focused exclusively on these manufacturers

and their unique logistical challenges.

Many changes have taken place in the region since the Cost of Congestion study, which was completed in 2005, including the

following:

x Traffic is a bigger problem. Where the previous study noted that 3:00 p.m. was a general cutoff time

after which reasonable freight movement could not be expected, this time has now been pushed

back to 2:00 p.m.

x Fast and efficient supply chains are even more important. The C&E industry has seen a shift away

from personal computers, which typically have a four-year lifecycle, and moved toward smartphones

and tablets, which have a one-year lifecycle.

Study Focus This study focuses on the outbound movement of goods from Westside C&E manufacturers to the freight

consolidation area at Portland International Airport (PDX), as shown in Figure 2. While not all C&E goods fly

out of PDX, the freight consolidation area, generally located north of Columbia Boulevard and south of the

terminal, is home to several firms that support international and domestic service by handling and combining

C&E goods before trucking them north or south of the Portland region for consolidation at other airports. For

the purposes of this study, Westside C&E firms are assumed to be clustered south of US 26 in the vicinity of

Brookwood Parkway.

Figure 2: Study Area

With  the  industry’s  transition to short-lifecycle mobile devices, a fast, efficient supply chain is more important than ever.

2013: Most electronics are trucked to Seattle & SFO

Key Findings

PDX is a crucial location along the supply chain, but most Computer & Electronic freight moves out of PDX on a truck. Firms involved in freight movement and logistics currently use PDX as a freight consolidation hub, but they generally find it is most efficient to truck, rather than fly, goods to airports that have better links to overseas destinations.

!

!

October 1, 2013

Prepared by DKS Associates

Local Production

Regional Movement

Global Market

Greater Portland Export Initiative

Portland Region Westside Freight Access and Logistics Analysis

Get valuable cargo to PDX in a hurry?

$7,800 Flight Hour, including fuel and pilots

10,000 lb. Cargo Capacity !

Cruising Speed: 105 MPH

Erickson Air-Crane, an Oregon Company

Daily Flights Hillsboro to PDX

15 minutes flying time 5 tons per day

$3.7 million per year

Feeder Flight: Not worth time savings.

Use of Feeder Flights. Because manufacturers showed a strong willingness to pay for speed in delivery, they expressed significant support for the possibility of short flights (Hillsboro Airport [HIO] to PDX, for example) to replace truck trips. However, forwarders, integrators, and carriers were skeptical that this type of service would be competitive with current ground services. From their perspective, a feeder flight from HIO to PDX would not yield a significant velocity gain, if any, due to added logistical complexities. These firms also indicated that manufacturers are unlikely to pay the higher cost for an additional air cargo trip in the supply chain.

October 1, 2013

Prepared by DKS Associates

Local Production

Regional Movement

Global Market

Greater Portland Export Initiative

Portland Region Westside Freight Access and Logistics Analysis

What if we valued people?Total Value of Human Capital (BEA, 2010)

$738 Trillion

Per Capita: $2.5 million

1 million people go to work every day in Portland

That’s $2.5 trillion worth of human capital on the roads, buses, and bikes of the region, every day

And the places they work depend on just-in-time delivery: No employees—no work gets done.

Value Moved Daily in PortlandB

illi

ons

of D

olla

rs M

oved

per

Day

0

750

1,500

2,250

3,000

Human Capital Freight

40.3

2,500

Air Intel: For high value cargo: People

AirIntel: Hillsboro-San Jose Four Flights Daily, Round-Trip

Intel has 6 Embraer ERJ145XR Jets Each seats 50 passengers

Cost of operation is approximately $2.5 million annually, each aircraft.

Connects facilities in Oregon, California, Arizona, New Mexico

Port $10 million in subsidies to containers

2012: $2.7 million (ICTSI) 2013: $3.4 million (ICTSI) 2014: $4.0 million (Hanjin) !Source: Oregonian, “Port of Portland plans to subsidize Hanjin Shipping and other cargo carriers to keep them calling,” February 7, 2014; 2012 & 2013 are amounts spent, 2014 is amount budgeted for subsidies.

Athletic & Outdoor Cluster

Athletic & Outdoor

• 14,000 Jobs

• Hundreds of firms

• Very high wages

• Global leadership

• Fast-growing

Athletics & Outdoor Specializations

Portland specializes in these steps in the value chain

A&O Supply Chain

Donguan Memphis

Rail to Memphis

Portland

Ship to LA

Portland: High End of the Global Value Chain

AcFunction Location Wage Activity Location Avg. Pay

Production China $2 to $3/hour

Distribution Midwest $12-14/hour

Design, Finance Marketing, Mgt. Portland $40/hour

Academic Evidence

Does Freight MatterThe 90% reduction in freight transportation costs in the past century, and the declining importance of the good-producing sector of the economy, means that in our view, it is better to assume that moving goods is essentially costless than to assume that moving goods is an important component of the production process.” !

Ed Glaeser, Harvard, July 2003 “Cities, Regions and the Decline of Transport Costs”

Diminishing Returns

• Highway Investment has strong diminishing returns

• Building the first roads has a big impact; later roads have successively smaller impact

• New roads today have almost no impact

Shirley & Winston, 2004

Rate of return on highway investments, by decade

0

4.5

9

13.5

18

1970s 1980s 1990s

Eberts, 2014

Figure 5. Gross Rate of Return of Highways to Consumers and Producers

Figure 6. Net Rate of Return of Highways and Interest Rates

Source: Author’s calculations of Mamuneas’s data.

-0.100

0.000

0.100

0.200

0.300

0.400

0.500

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

Producer

Consumer

0.000

0.100

0.200

0.300

0.400

0.500

0.600

1948

1952

1956

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

total net rate of return

interest rate

57

Randall Eberts, White Paper on Valuing Transportation Infrastructure, Upjohn Institute, 2014

Duranton, Morrow & Turner, 2014

More Highways = Heavier, but less valuable exports

A 10% increase in a city’s stock of highways causes about a 5% increase in the weight of exports, but does not cause a measurable change in the value of exports. . . . a 10% increase in within city highways . . . cause about a 5% decrease in the unit value of the city’s exports.

. . . city highways do not increase the value of exports . . . changes in trade caused by city highways probably do not have large welfare effects. . . . this suggests planners should not give much consideration to trade effects when planning a city’s highway network

Duranton, Morrow & Turner, “Roads & Trade: Evidence from the US,” Review of Economic Statistics, 2014

18 Wheeler Welfare CadillacCBO:

Truck subsidies = $57 and $128 billion annually social costs, over what trucks pay in taxes,

Subsidy = 21 to 46 cents per truck mile.

“Validating” 1997 & 2002 Forecasts

Portland/Vancouver International and Domestic Trade Capacity Analysis

Task 1

PORT OF PORTLAND

by:

Global Insight, Inc. 1850 M Street, NW, Suite 1100

Washington DC 20036

Paul Bingham

July 28, 2006

The work of the commodity flow forecast validation was to review the growth rate assumptions used in the commodity flow forecast completed in 2002. Using the 1997 baseline from that forecast, Global Insight has validated that forecast. . . . The forecast completed in 2002 was that freight volumes for the Portland/Vancouver region will double between 1997 and 2030.

Trade Capacity Analysis, 2006 Task 4. Assess of adequacy of land supply and transportation infrastructure to meet

forecasted trade volume.

Task 5. Validate results by review of national expert on trade, transportation, and related land use issues.

Key Findings

Trade Growth

The study forecasts a doubling of trade volume by 2035 in the Portland region, consistent with the last forecast in 1997. The project growth in trade, at approximately 2% per year, is also consistent with the region’s projected population growth over the same time period.

2000 2010 2020 2030 2035

Source: Global Insight, Inc.; 2006

Growth is likely to alternate between periods of slow to moderate growth and rapid growth, because our relatively small market size is more impacted by external forces in the national and international economies than in larger domestic markets.

Trade growth is also influenced by a market area that extends well beyond the metropolitan region. Because Portland is at the nexus of an excellent transportation network, it serves as a gateway to domestic and international markets for businesses located throughout Oregon, Southwest Washington, Idaho and even further east. As business and population grow in the market area, trade volumes will increase, which in turn will stimulate more growth.

0

100

200

300

400

500

600

700

Annu

al T

ons

(Mill

ions

)

Trade Capacity Executive Summary 2

Ed Glaeser

“At the local level, fundamentally the most important economic development strategy is to attract and train smart people.”

Talent determines prosperity

3,100 I-5 Through Trucks