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9. Regional Impact

Published onMar 26, 2020
9. Regional Impact
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Many regional and state governments solicit investments by specific industries because they recognize the synergistic value of industrial clusters in creating competitive advantage. “Trade and Invest” organizations in most European countries as well as similar local and national organizations compete for foreign direct investment. In trying to attract tomorrow’s industry and not yesterday’s, these governments often focus on recruiting “sexy” industries employing highly paid knowledge workers (and in many cases, industries with a perceived lower carbon footprint). Yet replicating Silicon Valley appears to be difficult. Moreover, creating a high-tech cluster may fail to address pressing social problems like unemployment among less-skilled citizens.

While visiting numerous logistics clusters throughout the world and interviewing local executives, government officials, logistics park operators, consultants, legal experts, economists, and other parties, it became clear that logistics clusters generate significant economic and social benefits. Beyond the obvious economic growth and jobs impacts, logistics clusters offer diversified economic bases and even an element of economic justice. While they require infrastructure investment, in many cases these investments offer positive economic returns to the government.

Creating New and Better Jobs

Many of the knowledge-based clusters pursued by governments around the world favor highly educated employees. For instance, information technology clusters favor those with college and postgraduate education in computer science while offering comparatively meager opportunities for unskilled labor. In contrast, logistics clusters offer a broad spectrum of employment opportunities: blue-collar, white-collar, and no-collar jobs. Moreover, these clusters provide social mobility because the logistics profession and the industry value deep operational experience “on the floor” even among its executives. Thus, many logistics firms promote from within the company and within the industry, while providing educational opportunities to their employees who wish to improve their skills, certifications, and degrees.

Large Labor Forces in Logistics Clusters

To see the job impact of logistics clusters, consider the following examples:

• The port of Rotterdam employs 55,000 people directly and 90,000 more indirectly.1

• Louisville International Airport (primarily UPS Worldport) provides 55,000 jobs and a $2 billion payroll, generating $277 million in annual state and local taxes.2

• The Memphis International Airport is responsible for 220,000 jobs in the local economy, 95 percent of which are tied to cargo operations. The airport is responsible for more than one out of three jobs in the metro Memphis area.3

• AllianceTexas attracted over 265 companies employing 30,000 people to the logistics park, in addition to creating over 63,000 indirect jobs by 2011.4

Ricardo García-Becerril, the manager of the PLAZA Park in Zaragoza, told me in 2010 that “the original goal of creating 14,000 jobs at PLAZA by 2014–2015 is still [in force]; currently there [are] more than 10,000 people working here.”

When the Union Pacific Railroad added a $370 million intermodal terminal in Joliet to support growing rail volumes in the Chicago cluster, “the building of this facility created nearly 6,000 construction jobs,” said Jim Young, Union Pacific chairman and chief executive officer. “If we look at CenterPoint Properties’ entire development, we can also expect up to 1,300 permanent intermodal facility jobs, 4,500 industrial park jobs and more than 3,000 new truck driver positions,” he added.5

Range of Logistics Employment

Chapter 2 noted that many communities aspire to become another Silicon Valley. That dream, however, may fail to create balanced job growth across the spectrum of education levels. Marco Smit, the Boston representative of the Netherlands Foreign Investment Agency, shared some of his triumphs and frustrations when we talked in his office on the fifth floor of the Park Plaza building in Boston. He expressed frustration at politicians’ fixation with high tech and gave an example of trying to recruit a major biotech company to put their research and development center in the Netherlands. The company said they required 250 PhD microbiologists, which, Smit sighed, “is more than we have in the entire country.” Rather than employing Dutch citizens, landing this company would require hiring foreign technologists. Moreover, highly educated workers are the least in need of jobs—in the United States the unemployment rate for college graduates is about half that of the general population.6 Although there’s no doubt that high-tech clusters such as semiconductors, software, or biotechnology can create “good jobs,” these aren’t the ones most needed; high-tech clusters may fail to create jobs for those who have no jobs.

In contrast to high-tech clusters, logistics taps labor pools across a very wide range of skill levels. At the low-end of the spectrum, jobs such as truck driver, forklift operator, or warehouse worker require little formal education and modest levels of training or work experience. Yet logistics isn’t all manual labor because the industry now makes such heavy use of information and communications technology to interact with suppliers and customers around the globe, control product flows, cope with global risks, satisfy exacting customer service requirements, and cut costs at the same time.

The profile of skills employed in a logistics clusters expands further in three directions beyond those required to perform logistics and supply chain management activities. First, companies hire people to perform value-added services that can most efficiently and effectively occur in a logistics cluster. Chapter 5 provided numerous examples of value-added services in logistics clusters that require more skilled nonlogistics labor such as electronics technicians, assembly workers, florists, photographers, and pharmacists.

Second, as mentioned in chapter 8, many clusters actively recruit companies to relocate their headquarters, not just their logistics, to the cluster. The need to be in the “center of the action” can motivate companies to locate their global, regional, or divisional headquarters to the same location handling distribution of products to customers. In Singapore, Kelvin Wong, the logistics program director of Singapore’s EDB, told me “when we say ‘home,’ we believe that Singapore can be the home for business, home for innovation, home for talent.” Headquarters brings additional nonlogistics jobs across a wide range of white-collar corporate functions such as marketing, IT, strategy, and executive management.

Third, logistics clusters also provide jobs for the creative class, because many design-intensive consumer goods companies (such as clothing, toys, and housewares) choose to colocate headquarters and design centers near their major global distribution hubs. For example, designers for Tabletops Unlimited in Los Angeles work next to and even in the warehouse, ensuring a tight coupling between the designer’s vision for houseware products and the supplier’s delivery of goods coming in and going out of the distribution center. Mattel’s Los Angeles headquarters combines both the imagination and the distribution of the toy maker in a fashion similar to Imaginarium, almost 6,000 miles away, where designers and warehouse workers share the same facility in the PLAZA logistics cluster in Zaragoza.

A later section of this chapter (see p. 257) describes the move of manufacturing and other companies for which logistics is an important component into logistics clusters. Naturally, these companies bring with them even more jobs.

Paying High Wages

Not only do logistics clusters bring jobs, they also bring increased wages and productivity improvements relative to noncluster regions. Based on quantitative analysis of all German clusters, the Wiesbaden Center for Cluster Competitiveness estimates that a 1 percent increase in cluster presence in a region was associated with a €302 per employee increase in the average wages and a 44 eurocents per person per hour increase in regional productivity.7

The result is that logistics clusters offer a decent average wage. Dr. John Husing studies the impact of the logistics industry in Southern California. During breakfast at the Blu Restaurant in San Pedro, he shared with me data about jobs in Southern California. In the LA Basin, three sectors offer median or average wages above $20/hour for non-college-educated workers: logistics, manufacturing, and construction. In the economic environment of 2011 and looking ahead, only logistics promises long-term growth. Other growing, low-skill sectors such as retail, hotels, entertainment, and Indian gaming pay an average of under $15/hour. Of the four sectors that added jobs in Southern California between 1990 and 2004, Husing found that logistics offers the highest average annual wages ($45,987). These wages rivaled those of the manufacturing sector. A study by the Chicago Metropolitan Agency for Planning echoes these findings: transportation and logistics salaries in Northern Illinois were close to and in some cases higher than those in the so-called Chicago manufacturing “super cluster.”8

While the number of employees in US manufacturing jobs has been almost stable over the last sixty years, the share of nonfarm workers employed in manufacturing has been steadily declining from nearly 34 percent in 19509 to 9 percent in 2009.10 For example, the abovementioned CMAP study notes that while the transportation and logistics sector added jobs in Northern Illinois between 2000 and 2007, the manufacturing super cluster lost 27% of the jobs by 2007. And this was before the deep recession that started in 2008.

Creating Upward Mobility: Opportunities for All

Logistics clusters do more than just hire low-skill workers; they provide a conduit for social mobility. All of the investment in workforce development, training, education, and research described in chapter 8 means that logistics clusters create opportunities for a broad population, including unskilled, entry-level workers. Part of this opportunity arises from fluctuating work levels (e.g., a holiday surge, new product launch, or reconfiguration of a distribution operation) found in many logistics operations. Surges in the volumes of flowing packages mean that many companies hire temporary and part-time workers.

Surges have two beneficial effects on upward mobility for unskilled labor. First, the surge brings fresh temporary workers into the workplace who might then be hired fulltime if they prove themselves. Temporary and low-skill work let the employer see the employee’s intangibles (e.g., work ethic and ability to handle the coordination complexities of logistics) prior to committing to full-time hiring and training investments. Consequently, near-minimum wage and temporary jobs in logistics provide an entry point for better-paying permanent jobs for unskilled labor.

Second, surges in volume mean that when a company hires temporary workers, the existing staff shifts upward into de facto higher-skill positions and frontline management positions. For example, a company’s existing low-skill freight handlers might help oversee new temporary freight handlers or might help plan workgroup activities. This allows managers to have insight into which workers might be management material.

Most logistics service providers value operational experience and thus hire from within the industry and promote from within the company, fueling social mobility. For example, one of the basic values of UPS is a commitment to long-term employment relationships, which often starts with students working at UPS part time. UPS has a “promote-from-within” culture that includes multiple opportunities at every junction, as well as training and career development, starting at entry level.11

The numbers from UPS bear this out: an Accenture 2006 report mentions that “54 percent of UPS’s current full-time drivers were once part-time employees; 68 percent of its full-time management employees rose from non-management positions; and 78 percent of its vice presidents started in non-management positions.”12 This culture of internal promotion was more common than not in most of the logistics service providers I visited. With immersive on-the-job training plus occasional continuing education classes, an employee’s lack of a formal education need not prevent him or her from rising into white-collar and even executive levels.

This upward mobility brings higher wages to formerly low-skill, low-wage workers. Although wages vary from cluster to cluster and even among companies within a cluster, my interviews with Dr. Husing and Steve Arthur, director of operations at CEVA Logistics Inc. in Los Angeles provided a picture of the upward mobility of logistics work for noncollege-educated workers in that cluster. Some smaller companies may pay only $7 or $8 an hour in wages for unskilled entry-level workers, basically minimum wage. Larger logistics firms might have starting wages in the $10 to $12 an hour range. As logistics workers gain experience and skill, their wages can climb to $24 to $30 an hour. Some workers, even those with no college degree, go on to fill executive positions or start their own companies, leading to significantly higher incomes.

The same wage-improvement pattern is evident around the world. When Manzanillo International Terminals came to Panama in 1993 to create a port terminal for inexpensive imported Russian cars, they picked a location near the impoverished area of Colón. I met Juan Carlos Croston, vice president of marketing at the Manzanillo Panama offices, after driving along the modern highway leading from Panama City, on the Pacific Ocean, to the port of Colón, on the Atlantic. “At the beginning when we came here, Colón had a 40 percent unemployment rate,” said Croston. The company had eighteen months to produce the blueprints, secure financing, train people, commission the equipment, sign up customers, and get the terminal running. “We took out some ads asking for people to interview for jobs, we got 10,000 applications,” he added.

“I think one of the key decisions the company made was to hire people with no port experience whatsoever,” Croston explained. “We joke that they (new employees) were first driving these $4,000 cars and then they were promoted to truck drivers so they were driving a $40,000 vehicle and then they were promoted to forklift drivers—a $400,000 piece of equipment. And they were promoted to crane operators—and they’re [operating a] $4 million piece of equipment.” People in Colón found out that they could start out in an entry-level position and end up driving a $4 million piece of equipment and earning six to seven times the prevailing wage in the area. As of 2010, the terminal had 850 employees, 93 percent of whom come from Colón and about half have eight or more years with the company. “Basically, we gave them the opportunity to be promoted,” Croston said proudly.

Creating New Logistics Businesses

Logistics clusters, like other types of industry clusters, spawn new and growing businesses in the cluster that add additional capacity, offer new services, and provide suppliers to the growing cluster. When one sees the scale of FedEx and UPS hubs; BNSF and UP intermodal yards; Walmart and ZARA distribution centers; the ports of Singapore and Hong Kong; PLAZA in Aragón; and the Inland Empire area in South California, or any of the other large logistics clusters, it may seem like logistics is a big-company’s game, but that’s not the case. Underneath and all around the mega-entities of the logistics industry lie a multitude of small companies. Although logistics, in general, does require a significant base of physical assets, that doesn’t mean that small logistics providers cannot arise and thrive.

New logistics companies typically form in and around two types of clusters. The first is a logistics cluster, which houses multiple distribution and supply chain management activities. The other is an economic cluster that requires logistics services, such as a manufacturing cluster (e.g., the Detroit area) or a trading hub (such as Chicago in its early days). Naturally, both types of new company formation phenomena go hand in hand. As discussed on p. 132 in chapter 5, the services offered in logistics clusters attract manufacturing, trading, and other companies requiring logistics services, to logistics clusters. And logistics clusters also develop to serve industrial clusters. Both types of clusters, regardless of their origin, may be a fertile ground for spawning new logistics enterprises.

Opportunities for Small Logistics Firms

Although big transportation carriers may haul the bulk of all cargo on many trade lanes, no single carrier provides end-to-end service among all origin-destination pairs on all modes of transportation. Moreover, a given shipment may require multiple modes and multiple carriers in moving from road to ocean to rail to road. This creates an opportunity for small asset-less (or “asset-light”) firms that broker, synchronize and manage logistics activities between carriers, suppliers, customers, service providers, and government agencies.

For instance, freight forwarding entails helping shippers move goods internationally from a shipper’s loading dock to the origin port, across the ocean, through customs, and from the destination port to the consignee’s dock. The work requires many phone calls, fax and email communications, arranging and coordinating space and loading/unloading to/from several transportation carriers, and preparation of paperwork to comply with export/import regulations and customs regimes. Personal relationships are important to get through customs or inspection stations quickly in faraway lands, making sure that each shipment gets to its destination on time and damage-free. But the job doesn’t require any expensive physical assets. Anyone with a foot in two countries, logistics knowledge, and personal contacts can start a freight forwarding business. Consequently, many small forwarding companies are started by employees of established freight forwarders who split off to form their own companies.

The logistics business in Miami still retains some of its early “Wild West” business mentality, which was evident when I visited the area in 2011. The Miami Super Pages listed no less than 946 freight forwarding companies in the area,13 with new ones appearing seemingly every week. Most of these are, naturally, small operators founded by an entrepreneur who left one of the larger forwarders. The new entrepreneur, typically, trades on existing relationships and a strong connection to a particular region in South America. The Miami area brims with entrepreneurial activity of logistics service providers dealing with imports and exports through the Miami International Airport and the port of Miami. An October 2011 article in the Miami Herald makes the point that “hundreds of small trade logistics companies give South Florida a competitive edge in international commerce as a ‘one-stop-shop’ for companies moving products and improving their supply chain.”14

Even the asset side of the industry spawns large numbers of small enterprises. Anyone who is willing and able to drive a truck in the United States can finance the equipment and then obtain loads from many trucking brokers. These brokers, such as C. H. Robinson, Hub Group, Landstar, Pacer, and Total Quality Logistics,15 help independent truckers find loads, arrange for payments, create a buyer’s association for discount fuel purchases, and so forth. In addition, the low cost of information technology and widespread use of wireless systems mean that more and more independent truckers can find loads on their own. In 2010, over 100,000 new motor carriers applied to initiate operations in interstate commerce or the intrastate transportation of hazardous materials in the United States.16 About 256,000 truck drivers in the United States are self-employed17 and out of the 500,000 US trucking companies, 82 percent operate fewer than six trucks.18

Finding a Pack of Professionals for Coyote Logistics

Deep pools of high-skill logistics professionals make a logistics cluster attractive to logistics entrepreneurs. Jeff Silver was working for American Backhaulers in Chicago when the company was acquired by C. H. Robinson Inc. in 2001. Silver spent the next two years going back to school and contemplating his next move. In 2003, Jeff planned his start-up during the second semester of his nine-month master’s program in supply chain management at MIT’s Center for Transportation and Logistics.

After getting two master’s degrees, Silver returned to Chicago and, when his noncompete agreement with C. H. Robinson expired, launched his company, Coyote Logistics. Coyote brokers truck services. This means that Coyote quotes certain rates to customers (shippers who have to move loads) and then searches for an independent trucker, among the millions roaming the US highways, who would agree to carry this load, preferably for a lower rate than what Coyote quoted to its customers. The company uses sophisticated home-grown software to match truckers and loads. The company also re-engineers customer shipping patterns in order to reduce the customers’ costs.

Coyote became a huge success. In 2010, Inc. magazine named Coyote as number 6 on the list of the ten fastest-growing companies in North America, and the fastest-growing logistics company, reporting a three-year growth rate of 13,846 percent.19 As of 2011, Coyote had over 600 employees. In January 2012, Chicago mayor Rahm Emanuel announced during a visit to the company that Coyote will hire 400 additional people for “cutting edge” jobs in the Chicago area in 2012.20

Sitting in my MIT office with two of his lieutenants, Bill Driegert and Chris Pickett (both graduates of MIT’s logistics program—the same one from which Silver graduated), Silver explained why he chose Chicago. He focused first on professional logistics labor. As the largest Midwestern city, Chicago attracts a large number of young university graduates from Wisconsin, Iowa, Illinois, Michigan, Ohio, and Pennsylvania. Moreover, unlike other hotspots for young professionals (such as the San Francisco Bay Area, Boston, or New York), these graduates know about logistics. In fact, many of Coyote’s competitors reside in the Chicago area, including American Transport Group, AFN Logistics, Strive Logistics, Circle 8 Logistics, Trek Freight, Echo Global, and Command Transportation. In addition, there are many full-service logistics companies located in the area. Other companies, such as C. H. Robinson (based in Minneapolis) and Total Quality Logistics (in Cincinnati), recruit from the same labor pool. Just as important, the very large number of logistics service providers in Chicago makes the profession a recognized and visible career opportunity.

Finally, Silver mentioned that his first two customers were in the Chicago area. Both of them decided to work with Silver’s new company based on social relationships with Silver that predated the founding of Coyote Logistics. In talking about his first customer, Silver added, “I’ve known him very well over the course [of several years] and it would have been hard to have that same type of relationship with somebody in a different city.”

Morphing of a Company: YCH

A logistics cluster creates opportunities for local companies to grow in both size and sophistication with the cluster. In the early 1970s, the transportation company founded by Mr. Yap Chwee Hock in Singapore suffered a crisis. Its largest customer, the Public Utilities Board, canceled its contract to transport workers in its trucks. As the eldest son of Yap Chwee Hock, Dr. Robert Yap, who just graduated from the University of Singapore, stepped in to help.

The young Dr. Yap turned out to be a shrewd, smart, and energetic entrepreneur. In 1977, he abandoned the passenger transportation business and redirected the company to cargo transportation, becoming a major contractor to the Singapore Port Authority. In the early 1980s, the company diversified into warehousing and forwarding and then expanded to offer complete third-party logistics services including distribution, inventory management, and freight management. In the early 1990s YCH, as the company was called by then, developed a logistics park (“Distripark’) to serve the logistics needs of sophisticated multinational corporations. Throughout this period, it grew from a local Singaporean player to a regional logistics services provider serving the regional distribution needs of companies such as DuPont, Roche, and HP.

YCH took another important step in the late 1990s with the release of the first of a suite of proprietary information technology applications providing comprehensive supply chain solutions, including manufacturing and inventory management, consumer goods order fulfillment, and service and returns logistics management. These information technology solutions were adopted by several leading multinationals worldwide, expanding the range of services offered by YCH.

Hosting me in YCH offices in the Distripark on Tuas Road in Singapore, Robert and his team, including James Loo, chief information officer, and Lilian Tan, director of supply chain solutions, described YCH’s various supply chain software applications. The software is based on internally developed algorithms and capabilities stemming from YCH’s experience as a logistics service provider and supply chain management consultancy. At the time of the interview, the company had over 3,000 associates operating in twelve countries throughout Asia Pacific.

The growth and development of YCH from a company ferrying local workers on trucks to a sophisticated regional supply chain management powerhouse demonstrates the potential for new companies and new innovative services anchored in a local logistics clusters.

From Serving a Local Industry to Global Logistics: Armellini Industries

In 1945, Jules and Sarah Armellini began transporting flowers from Vineland, New Jersey, into Philadelphia and New York. The business started with a single truck and a barn for storage. After the company began hauling flowers out of Florida in 1953, it moved its headquarters to southern Florida to the heart of the flower-growing region in 1963 and offered logistics services to the local growers. But when increasing globalization and air cargo availability enabled the growth of the South and Central American flower industry, new competition drove the company to make a strategic decision. In 1977, Armellini created a subsidiary, J. A. Flower Services (JAFS) to clear fresh flowers through customs and USDA inspection. Today, JAFS is the largest customs broker for clearing perishables out of Miami International Airport, which is the fourth busiest US airport by cargo traffic. Furthermore, another subsidiary, Fresco Service, founded in 1983, is today one of the largest refrigerated bonded warehouses serving perishables brought by air from South America.21

Armellini, however, is not the only player in the logistics cluster importing fresh flowers and other perishables through the Miami International Airport and the port of Miami. As the global trade in flowers intensified, Miami became a cluster of logistics companies specializing in flower importation and distribution. The Association of Floral Importers of Florida cites seventy-five fresh-cut flower importing companies located near Miami International Airport in 2011.22 Every day, 40,000 boxes of flowers arrive at the airport, accounting for over 80 percent of flower imports into the United States.

Armellini’s refocusing of its business—from hauling flowers by truck within the United States to importing flowers from international locations—required new expertise, which was easily found in the Miami cluster. Furthermore, once the company established itself as a flower importer, it could branch out to be an importer of other time-sensitive, cold-chain-requiring items such as food products. Armellini, and companies like it, increased the demand for air cargo services, bolstering the Miami cluster and leading more logistics companies to start operating there.

A Fertile Ground for a New Type of Logistics Service Company: LogiCorp

In the mid-1980s, a few years after the deregulation of the transportation industry in the United States, some logistics professionals saw the still-unfulfilled potential of deregulation. Although trucking companies no longer needed government approval to offer new services, shippers (such as manufacturers, retailers, and distributors) were not enjoying many of the potential benefits. With this in mind, my friend Lorne Darnell (who was at the time director of logistics at the automotive division of Rockwell International) and I cofounded LogiCorp Inc. in 1988. The company may have been the first nonasset-based third-party logistics provider in the United States. LogiCorp’s customers outsourced their transportation management function to LogiCorp, which ran reverse auctions among carriers, chose the winning ones, negotiated the transportation contracts, managed the payment to the carriers, and monitored their performance on behalf of its customers (the shippers). It also worked with its customers to improve their logistics processes and re-engineer their logistics networks.

The company was based in the Detroit metropolitan area because of our experience in automotive logistics and the professional contacts Darnell had in the area. The concentration of automobile manufacturers and their suppliers in the area meant a significant amount of transportation activity and a vast cluster of distribution centers dealing with automotive parts, subassemblies, and machinery. Indeed, all the initial customers of LogiCorp were automotive companies and automotive suppliers concentrated around southeast Michigan. These early customers collaborated with LogiCorp to help it refine the idea of outsourcing the transportation management function. These included developing unique software solutions as well as new (at the time) processes for reverse auctions for contracting transportation services.23

The idea of consolidating volumes and offering carriers large amounts of freight worked well because the carriers could take advantage of economies of scope (see the conveyance cycle discussion on p. 97 in chapter 4) when bidding on the various movements, allowing them to bid aggressively, thus reducing shippers’ costs. The company grew quickly, and at the end of 2004 it managed more than $600 million worth of freight business. That year, LogiCorp was acquired by Ryder System Inc.,24 which renamed the new division Supply Chain Solutions, added many more services, and grew the unit to several billion dollars of freight under management.

Incubating and Testing Innovation

Some clusters explicitly incubate innovation by building a crèche for innovative start-ups. For example, PortTechLA is a clean technology transfer, incubation, and commercialization organization sponsored by the port of Los Angeles, the San Pedro Chamber of Commerce and the Wilmington Chamber of Commerce. Its mission is to “attract and mentor companies with technologies that will enable the port of Los Angeles—and ports world-wide—to meet environmental, energy, security, and logistics goals.”25 PortTechLA’s chairman, Herb Zimmer, added, “We’re looking to attract to our port the type of innovators who are developing new standards-setting technologies.”

“We can accelerate companies with sales, and incubate those that need more time to develop their business model,” said PortTechLA executive director Jeff Milanette.26 “And just as importantly, we want to help connect them with investors and users who share their vision and want to reap the benefits—financially, operationally and environmentally—from what gets developed here.”27

Los Angeles is not the only logistics cluster with an incubator or assistance program for logistics-related startups. The Dinalog Incubator in the Netherlands has eight fledging logistics businesses.28 Just as important, Dinalog has an ambitious research and development agenda, including some far-reaching goals (see also the discussion of Information Infrastructure on p. 160 in chapter 6 and the review of Dinalog on p. 227 in chapter 8). Likewise, Singapore’s Government’s “SPRING Singapore” program runs the Logistics Capabilities Development Program (see also the discussion of government efficiency on p. 194 in chapter 7). The program aims to develop new logistics capabilities, information technology tools, data interchange mechanisms, and strategic alliances among logistics operators. It offers funding and services to support entrepreneurs, small businesses, and local companies in the logistics sector.29

The Business of Creating Businesses: WTDC

Business incubators can also be private and quite informal. Consider, for example, WTDC in Miami. In 2002 Gary Goldfarb, fresh from selling his own forwarding business, Golden Eagle, ran into Ralph Gazitua, who was rebuilding his own family business in Miami, WTDC, after 9/11. When Ralph asked Gary what he is doing, Gary answered “nothing,” to which Ralph came back with “so why don’t you do ‘nothing’ here?”

WTDC developed a full set of supply chain management services. It takes advantage, for example, of flow imbalances—there is more cargo flowing from Miami to the east coast of Latin America than northbound (about 70/30 split in 2011). Consequently, the rate for hauling a standard twenty-foot container from Miami to Santos in Brazil, in January 2012, was $1,600, while the northbound rate was $850 for the same container. Similarly, there are many more truck shipments coming into Miami than going out of Miami to the US hinterland. Thus, the rate for a 53 foot truckload from New Jersey to Miami was $2,900 in January 2012 vs. a northbound rate of $1,850. Maritime container flows between Europe and Miami are even more out of balance but an equalization system diminishes Miami’s advantage.30 Taking advantage of these imbalances, one of the WTDC businesses books cargo from Latin America to Europe and to the US Northeast and Midwest, through Miami, at competitive rates.

Like many other logistics service providers in South Florida, WTDC grows by providing whatever customers need and then building a business around it. It moves furniture from Spain and China for Concepts & Design Studios LLC; manages cold storage for perishables; runs bonded warehouses for importers, and manages inventories in Brazil for its customers shipping into that country. It even obtained a license as an automobile dealer so it can locate, purchase, and ship automobiles all over the world.

Aside from its active foray into new businesses and its agility in serving its customers, WTDC is also in the business of providing infrastructure for budding entrepreneurs who are trying to build logistics business and businesses dependent on logistics. WTDC provides such companies with warehouse space, equipment, systems, marketing, and help with the regulations governing international supply chain management. In December 2011, there were thirty-two start-up tenants in the WTDC facility. Goldfarb described four of these companies: two recent startups, including a forwarder and a customs broker; one later stage forwarding enterprise; and a small food company, building on logistics capability. In his words:

Swift Custom House Brokerage and Logistics
Rolando Ayala was known to us because he was the regional director for FedEx Trade Networks. He left FedEx for an opportunity with OHL,31 building their business in Latin America. Eventually he said, “I’m going to start my own business.” At the same time, he was going out with a girl who was a customs broker at Expeditors. So, they got together, created a company called Swift Custom House Brokers. They started a company and a family at the same time. We gave them a little office, and I’m talking little. Two people fit in that office. They’re generating container load business, and they’re working so hard. Rolando told me the other day he hadn’t gone to sleep earlier than 3:00 am in the last two weeks. But, you know what, only in Miami can you all of a sudden just cobble a company together and two weeks later you have a business. So, they’re doing business and growing.

CEP Brokers
You have the mother, Carmen Puga and her daughter; a beautiful story because it’s a mother and daughter that work as customs brokers. They started very small, now the third generation was born and they come in and the baby crying while they’re taking care of the phone. You go there, it’s like you cannot but respect these people’s effort and work.

Tran Logistics
Lily Tran was an executive at Oriental Logistics, which is the big freight forwarder out of Asia, and had an opportunity to start her own business by renting an office from us and having the instant access to all the tools you need to be competitive against anybody else. So, she opened up an office, it’s done fantastic, she’s got like 10 people working for her.

Nueva Cocina
I met with a lady called Celeste De Armas. Celeste De Armas has a young company called Nueva Cocina. Nueva Cocina is new kitchen, new cooking. They sell prepared Latin foods that are preserved in pouches and whatnot. But, a very nice brand. And they want to penetrate the Latin American market. They started two years ago; it was an idea. Two ladies that cook well. Today these people are in Publix, Winn Dixie, in many of the local markets and they’re entering big time distribution into Latin American with Price Mart and Costco and Walmart and all of those guys. It’s incredible.

Diversifying the Local Economy

The story of Zara and Caladero in chapter 1 illustrates one of the special qualities of logistics clusters: the cluster’s tendency to diversify the economy of the region. Every major logistics cluster supports activities in a wide variety of industries. For example, Louisville is a distribution hub for aircraft spare parts, cell phones, repair parts for office equipment, industrial products, digital cameras, shoes, pharmaceuticals, and many other products. Logistics clusters even support companies that have no physical products at all—UPS in Louisville provides laptop repair, refurbishment, and delivery to Ernst & Young’s peripatetic global workforce of accountants and business consultants. Thus, logistics clusters diversify the local economy as they attract companies from a wide variety of industries that rely on efficient logistics services.

Resisting Recessions

This diversification effect is the biggest qualitative difference between logistics clusters and other types of economic clusters. While any given industry cluster has the potential to boost the local economy, it is also vulnerable to downturns in that one industry. The dot-com boom brought great riches to Silicon Valley, and the dot-com crash brought a significant downturn. Detroit rises and falls with the American auto industry. In contrast, a logistics cluster includes a diversity of shippers, distribution centers, and value-added activities, each subject to its own industry business cycle. Aragón’s investment in a logistics cluster has helped the area mitigate the effects of the 2008–2009 recession; during that time, Aragón had half the unemployment rate of the rest of Spain.32

Moreover, some value-added services in logistics clusters provide countercyclical economic activities. Repair, refurbishment, and field service distribution centers in clusters such as Panama, Louisville, AllianceTexas, and Memphis suffer less during recessions because many people choose to repair items or buy second-hand refurbished items instead of purchasing new goods. When the global 2008–2009 recession hit, Neptune Lines in Panama enjoyed a massive surge in refurbishment revenues from trade-in second-hand, earth-moving and construction equipment.

The effects of scale on transportation costs and service levels—some of the same factors that make clusters grow (see chapter 4)—mean that larger clusters are more robust than smaller ones. Between 2008 and 2009, total freight volume to Europe fell 16 percent.33 But the decline was concentrated in the smaller container ports. The largest European port, Rotterdam, lost only 9.6 percent of its traffic while Antwerp, the second busiest port by tonnage lost 15.6 percent and Hamburg, the third busiest by tonnage, plunged 28 percent.34 By 2010, Rotterdam rebounded to above prerecession levels while Antwerp and Hamburg, as well as many others, still lagged.

Similarly, Russell Laughlin in AllianceTexas told me that they, too, saw drops in airfreight as FedEx consolidated activity from peripheral hubs such as AllianceTexas to the Memphis core. Airfreight data confirm this observation. Between 2008 and 2009, air cargo volumes did not drop at all in Memphis and only dropped marginally in Louisville (–1.3 percent) while dropping significantly more in peripheral hubs such as Anchorage (–15 percent), Miami (–13.8 percent), Los Angeles (–7.4 percent), New York’s JFK (–21.2 percent) and Chicago’s O’Hare (–17.1 percent).35 During a recession, the same mechanism that helps fuel the growth of logistics clusters works to preserve the largest logistics clusters at the expense of smaller ones. As total freight volumes drop, service to and from most locations deteriorates, and both shippers and carriers relocate inventory and distribution activities to the largest hubs from which they can still maintain good service. Furthermore, as volumes drop, some shippers change from large shipments using direct operations (such as TL moves) to small shipments using consolidated operations (LTL moves). Thus, the largest consolidation hubs see relative increases in freight as carriers eliminate direct point-to-point service between smaller hubs and ocean carriers skip smaller ports. All these phenomena generate a negative feedback mechanism for all but the largest clusters, where relocation of activities from small clusters compensates for the general reduction in volumes.

Transcending Industry Obsolescence

The logistics cluster that triggered the writing of this book, PLAZA in Zaragoza, arose because government officials feared over-reliance on a single industry. When Juan Antonio Ros first conceived the idea in 1993, he told then-president Emilio Eiroa, “Mr. President, Aragón needs to look for something new; we cannot rely on the GM factory forever.” Later officials agreed. “When we took up office,” Consejero Velasco warily chose his words, “entering the government of Aragón in 1999, we performed a careful analysis of the region’s situation. We determined that Aragón was excessively dependent on the automobile industry.”

At the time of the decision to launch PLAZA, GM was a local powerhouse. Zaragoza had hosted General Motors’ largest European production plant since 1982. A quarter of a century of car-making saw GM’s Opel plant build ten million cars and play a pivotal role in the Aragónese economy. GM and its top suppliers spent close to €400 million per year on salaries and employed 7,000 workers directly and another 13,000 indirectly in the region. By some accounts, GM generated as much as 50 percent of the exports of Aragón. Despite GM’s might, Velasco summed up the situation: “We decided our best bet was to add new features to increase the scope of activity in the regional economy.”

Aragón’s fears about its dependency on auto making proved prescient. When the financial crisis hit in 2008, Detroit imploded. Europeans feared the carmaker’s bankruptcy and stopped buying Opels. By the end of 2008, the government of Aragón had to rescue GM-Opel, offering a €200 million line of credit.36

Economic robustness is one of the key differences between an industry-specific cluster and a logistics cluster. Whereas Detroit and the old Aragón tracked the ebb and flow of the automobile industry, Memphis and Louisville float on a succession of logistics-intensive industries. Where Western producers of consumer electronics suffer from the globalization and the off-shoring of manufacturing, logistics clusters thrive on the added trade flows. Whereas high-tech factories and their skilled workers represent extremely specialized assets that can become obsolete, logistics infrastructure and logistics workers offer flexibility in handling a range of products and services.

New Clusters of Logistics-Intensive Industries

The broad and deep service portfolios of a logistics cluster can become the scaffolding for other types of industrial and high-technology clusters. Chapter 5 described the rise of value-added services and the clustering of companies that require high-performance logistics such as the biomedical device cluster in Memphis or the fresh produce cluster in Rotterdam. Chapter 6 noted how logistics firms serve as infrastructure, attracting other companies to the area. For example, some 140 companies have moved to Louisville because of the UPS Worldport. These logistics-dependent industries help diversify and grow the local economy.

Logistics’ role as industrial infrastructure, where logistics clusters spur industrial development and the formation of industrial clusters, means that economic data tend to undercount logistics’ contribution to jobs and wages. For example, when Rolls Royce Jet Engines puts its assembly and test facility, as well as its joint ventures of engine repair and overhaul in Singapore, the country counts Rolls Royce’s employment there as “aerospace.” When Medtronic manufactures artificial joints in Memphis, it’s counted as biomedical manufacturing.37 When Caterpillar or Komatsu refurbish construction equipment in Panama, it’s counted as part of the heavy equipment industry. But none of these companies would likely be in their respective locations if those locations weren’t logistics clusters.

Promoting Trade and Exporting Expertise

Many economic studies have demonstrated that reducing the cost and improving the quality of logistics and transport systems improves international market access and leads directly to increased trade. For example, a 2002 World Bank study38 showed that the differences in logistics prowess among Asian countries—including ports infrastructure, customs clearance procedures, regulatory administration, and e-business use—are significantly related to differences in trade performance. Trade has been shown to be linked directly to improved standards of living and, most important, to alleviation of poverty. A 1999 paper in the American Economic Review argues that each one percent rise in the trade to GDP ratio increases income per person by at least 0.5 percent.39

By improving the performance of global supply chains, logistics clusters facilitate trade, with its resulting economic benefits. Logistics clusters also create exports of logistics technologies, services, and products through the expertise of home-grown logistics firms that grow into global players. Singapore offers several examples that illustrate the various types of logistics-derived exports. YCH grew from a local transportation company to a global service and technology provider; CrimsonLogic is a worldwide software and service company created by the spin-off of the technology behind TradeNet (described on p. 194 in chapter 7)40; and Singapore’s PSA now operates in twenty-eight ports in sixteen countries around the world.41 These examples illustrate the growth of exports through progressive expansion of services based on locally developed logistics technology and know-how.

Delivering the Goods—Economic Impacts

As mentioned above, logistics is a critical enabling service for other economic activities. These include both value-added services performed by logistics service providers, and manufacturing, which is attracted to a place that offers a superior global trading infrastructure.

Economic Growth

Growing employment, high wages, and the robust volume of goods flowing through a cluster mean that a logistics cluster can boost the region’s GDP. Approximately 10 percent of the Netherlands’ GDP is generated by logistics activities42; the port of Rotterdam, alone, adds about €22 billion annually to the Dutch economy.43 Similarly, Memphis Airport’s cluster creates $28.6 billion in annual economic impact, 95 percent of which arises from airfreight.

When I visited Breda in the Netherlands, where the Dinalog campus is located, Stephan Satijn, vice president logistics of the Holland International Distribution Council, took me through an estimate of the economic impacts of bringing one additional fulltime logistics job to the Netherlands.44 Various factors—such as labor cost mark-ups, the percentage of labor out of third-party logistics providers’ revenues, and shippers’ expenditure on 3PL services—create a series of multipliers for the total economic activity attached to that one added job. Accounting for the customs and VAT paid by the shipper, the contribution of the 3PL in terms of corporate taxes, VAT and labor benefits, and taking into account a modest economic multiplier effect, the study concludes that each additional full-time equivalent worker in the 3PL industry adds €81,851 per year in contribution to the Dutch society.

Individual companies in clusters also conduct their own impact studies to justify incentives and show the key role they play in the local economy. During my visit to DHL in Singapore, Stephan Muench, head of DHL in-house consulting Asia Pacific, described how DHL carefully analyzed the economic, social development, and technological innovations DHL brings to Singapore. The company enlisted the aid of Singapore’s Economic Development Board and other government agencies to ensure the soundness of the methodology and data. DHL found that the company’s three divisions in Singapore provided 4,000 direct jobs and contributed SGD 2.2 billion to the economy through wages and business with local subcontractors.

Similarly, BNSF has an internal analytical group that works with local government officials to estimate the economic impact of its facilities. John Lanigan, BNSF’s executive vice president sales, marketing, and business development, explained that BNSF uses these analyses to counter the antidevelopment groups that invariably protest each project. The protesters and even the local development officials often lack the information to estimate the economic benefits of a new facility, like an intermodal yard, for the local economy. BNSF’s analytics group and the company’s deep experience can develop well-grounded projections based on actual data and historical experience.

Tragedy of the Commons

When trying to attract new business investments, local and central governments have to be aware of the “Tragedy of the Commons.” This phenomenon (which has been hotly debated in the economics literature) can take place as local governments compete with each other in order to attract business and investments through incentives such as lower taxes and loan guarantees. The tragedy of the commons was articulated first by William Lloyd in 1833.45 Lloyd described a pasture open for grazing to several separate cattle herds. Each herd owner has the incentive to add more and more heads to his herd because each extra head adds to the owner’s welfare, while the marginal cost associated with each extra head of cattle (less available grass as a result of the incremental grazing) is everybody’s problem. The herds keep growing since all the herd owners behave in the same way. At some point, however, the pasture is depleted and everybody loses. Thus, while each individual entity acts in its own best interest, the common ecosystem in which they operate can fail, to the detriment of all the operating entities.

One can imagine regional governments each offering better and better terms (no tax, expensive government support, etc.) for attracting companies. All the while the country as a whole experiences a lower and lower tax base. This argument is particularly acute when the central government does not have its own taxing authority, as is the case in the European Union. There, countries can compete with each other while the EU cannot tax businesses directly. (In 2012 business taxes ranged from 12.5 percent in Ireland to 34 percent in Belgium.) Consequently, this issue is at the heart of the efforts by the European Union to address the “tax competition” between member countries.46

The tragedy of the commons, to the extent that it exists, is an issue affecting not only business investments but many aspects of economic activities and markets. All solutions to the tragedy of the commons involve some type of restriction. These restrictions—just like most laws—work for the betterment of the whole society at the expense of the short term benefit of the individual (company or person). Solutions can also be developed through voluntary restrictions based on education—changing mindsets so individuals understand their impact on the system and self-regulate their behavior, as is the case with individuals’ and companies’ efforts toward environmental sustainability.47

Return on Government Investment

Government’s economic goals typically include job creation, increased standards of living, business development, and general economic growth. While a cluster strategy may provide many of these benefits, the benefits must be offset against the government’s costs of providing education, infrastructure, amenities, and development incentives as described in chapters 6, 7, and 8. To be sustainable, a logistics cluster must create a tax base that at least defrays or repays all these government expenditures and debts incurred in creating the cluster.

Governments subsidize businesses for strategic, economic, and political reasons. These subsidies can generate healthy or unhealthy consequences, the very quality of which may not be apparent for many years and may not even be measureable. The US Government, for example, subsidizes sectors such as energy, agriculture, transportation, and defense, to name a few. And, as mentioned above, local governments offer subsidies, incentives, and tax abatements to attract companies of all kinds to their state or region. While in many cases such subsidies of strategic industries do contribute to national or regional prosperity, they also distort the market and involve potentially corrupting political influences. Subsidized companies also fail occasionally, as was the case with the 2011 bankruptcies of Solyndra, following the receipt of $535 million in federal loan guarantees, and Evergreen Solar, which received $58 million from Massachusetts tax payers.48

The logistics clusters I visited, however, seem to offer a more positive story and data. Ricardo García-Becerril, the manager of the PLAZA Park in Zaragoza, told me in 2009 that “for the government of Aragón, there has already been a return on the investment. It has created an economic base by attracting businesses to the area, and it has generated employment.” Similarly, the Memphis Chamber of Commerce tracked the incentives issue for more than a decade and found that government inducements to businesses did work out well for the region. The chamber determined that most companies delivered on their promised levels of hiring and stayed in the region beyond the term of the incentives.

Of all the logistics clusters studied, the AllianceTexas Logistics Park has been the most meticulous in accounting for every contribution (public and private) to the development of the cluster and for the cluster’s return on the government’s investment. When Ross Perot created the concept in the 1980s, his team developed an economic impact analysis to attract both public and private investors to the project. And in order to stay true to their promises and prove that this was a good use of public resources, they kept account of every dollar invested and returned over the years.

After an exhilarating aerial tour of the AllianceTexas Logistics Park in a fast helicopter, I sat down with the Hillwood team, led by L. Russell Laughlin, senior vice president of Hillwood Properties. “If I told you that you could invest one dollar and over ten years I could give you 20 in return, on a multiplying effect, you’d say, “That’s a good deal,” and I’d say, “Yes. All right, here’s what we need to do,’” Laughlin explained.

To create AllianceTexas back in 1987, local, state, and federal governments invested a combined $135 million to pave roads, provide public utilities, build the airport, and extend Fort Worth city services to encompass the development. Governments also donated 2,500 of the 17,000 acres of the development. That land and $387 million in total public investment ultimately attracted $6.8 billion in private investment and produced a $36 billion economic impact. Incremental taxes paid to local governments totaled more than $1.2 billion through 2008, representing a more than 11 percent annual direct return on the government’s investment. All these benefits, and the taxes paid, keep growing every year as the park continues to grow and attract new companies. “Nobody believed the economic impact numbers that we generated, but we thought they were conservative. And of course, we turned out to be right,” Laughlin added.

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