95752 China Transport Topics No. 13 April 2015 Integrated Logistics Centers Experience from North America and Options for China Luis C. Blancas, Gerald Ollivier, Richard Bullock The World Bank, Washington D.C. China’s shift toward accelerated economic growth in central and western provinces and increasing levels of personal income and consumption are all consistent with the need for rail-enabled Integrated Logistics Centers (ILCs). Yet, while hundreds of logistics clusters have been developed in China over the past few years, modern, international standard rail- and multimodal-transport enabled ILCs are less common. Close, long-term collaboration between public sector authorities and private sector specialized firms, such as real estate developers, have proven effective in the development of North America’s focused network of ILCs critical to facilitating transcontinental and other freight itineraries. This model can succeed in China as well. Integrated Logistics Centers (ILCs)—well- reduce urban congestion, and, critically, leverage connected clusters of multimodal transport, limited public sector capital expenditures logistics, light assembly, manufacturing, and through public-private partnerships. supporting services—play an increasingly important role in the logistics networks of While logistics parks have proliferated in China North America and Western Europe. In the at breakneck speed over recent years, true ILCs particular case of the U.S. logistics system, the are less common, and in fact the likely over- most comparable to China based on lengths of supply of logistics parks at present may reduce haul, ILCs have facilitated “mini land bridge� (i.e., ILCs’ potential in the country. According to the transcontinental) and other domestic and China Federation of Logistics and Purchasing international long-haul containerized shipments (CFLP), the number of logistics parks, loosely supported by the country’s rail intermodal defined, in China—whether in the planning network.1 This has allowed shippers and logistics stage, under construction or fully operational— service providers to operate extended supply grew at an average annual rate of 24 percent chains more efficiently, despite the increased between 2006 and 2012. That is approximately operational complexity posed by longer two and a half times the rate of growth of the distances, multiple modes, and several cargo overall Chinese economy during the same hand-off points. But the role ILCs have played period. By June 2012 there reportedly were 754 goes well beyond reducing logistics costs for logistics parks in China, approximately half of firms. North American ILCs have become which operational, about a third under strategic tools for local and state governments to construction, and the rest in the planning and generate employment, stimulate economic design phase. The challenge is that, according to activity, strengthen regional competitiveness, trade journal reports,2 the performance of many such parks is constrained in practice by a lack of 1 The term “rail intermodal� refers to the movement of capable logistics service providers and containerized cargo from origin to destination where a insufficient availability of basic infrastructure, portion of the journey takes place on rail. The U.S. rail intermodal network comprises the rail tracks, rolling stock, such as utility (power, sewage, water) and rail terminals, and cargo handling equipment used to telecommunication services. The sheer number transport containerized cargo (whether in containers or of logistics parks being built casts doubt over the trailers) throughout the country, typically over long distances (e.g., 700 miles or longer). 2 Geng (2008). China Transport Topics No. 13 2 The World Bank, Washington D.C. robustness of the economic, financial, and between these terms, it can be argued that technical appraisals underpinning them (the these differences exist, primarily, at the margin. presence of multiple, likely overlapping facilities From a policymaking point of view, these terms within the same conurbation is reportedly not refer, fundamentally, to the physical uncommon). And the fragmentation of logistics organization of logistics activities where co- facilities negates one of the key advantages of location of—and collaboration among— logistics parks in general and ILCs in particular: complementary activities creates value. In this economies of agglomeration. As Chen and Lee vein, the key distinction between logistics (2013) note, “many Chinese logistics parks were clusters is the extent of this co-location built in a rush, without sufficient justification and (“agglomeration�) along the dimensions of with no definitive objectives [. . .] the value of multimodal transport connectivity, infra- and current logistics parks in China needs to be supra-structures to facilitate logistics services, reevaluated.� and availability of human and technical (e.g., information technology) resources. For the This note will argue that China could purposes of this note, an ILC will be understood substantially benefit from developing a focused as an agglomeration of containerized logistics network of well-planned, economically activities where the extent of activity co-location justified, financially viable, and carefully is substantial and comprehensive rather than implemented ILCs supported by rail intermodal limited. operations. Such a network could become a facilitator of manufacturing and services activity The ready availability of multimodal transport in China’s rapidly-growing western provinces. connectivity is the most critical component of The note will first define ILCs in the context of any cluster of logistics activities. In particular, myriad similar terms in logistics. It will then successful North American ILCs are anchored by describe the nature of agglomeration economies one or more rail intermodal terminals, made possible by ILCs. It will then share the supported by access to national and regional experience and lessons learned in public policy highways and the presence, with varying degrees from two of the most successful ILCs in North of proximity, of one or more airports. In this America: the CenterPoint Intermodal Centers context, “ready availability� of multimodal near Chicago, Illinois; and the AllianceTexas transport alludes to the fact that congestion, development near Fort Worth, Texas. Last, the whether in highways or on rail, must be avoided note will derive implications for China. or kept to a minimum for an ILC to become attractive. As a result, successful ILCs tend to be Key Definitions located in suburban locations, close enough to large conurbations so that these may act as Logistics as a discipline is ripe with technical natural volume-generating hinterlands but away jargon that all too often obscures points from the congested access arteries to major without necessarily adding analytical value to cities. decision making; the agglomeration of containerized logistics activities is a case in The presence of multimodal transport point. The terms logistics village, logistics park, connectivity enables an ecosystem of logistics logistics cluster, logistics platform, logistics activities that allow ILCs to bring together an center, dry port, inland port, inland container integrated—in other words, comprehensive— depot (ICD), container freight station (CFS), and set of services and logistics solutions. The latter consolidation/deconsolidation center all refer to include asset-based trucking, air, and rail the agglomeration of a given set of logistics activities at a particular, well-defined location. And while there may be technical differences China Transport Topics No. 13 3 The World Bank, Washington D.C. transport services; 3 freight forwarding and other typically characterized by imbalanced flows non-asset based transportation services; between headhaul and backhaul lanes. This dedicated and multi-tenant warehousing and forces carriers to incur high rates of empty distribution facilities; consolidation- (“deadhead�) or low-load-factor moves in deconsolidation facilities and container freight backhauls, which generate little or no revenue stations; light manufacturing and other industrial and therefore reduce operating efficiency. As facilities; financial, insurance, and managerial the number of firms located in the cluster grows, office space; container storage, repair and increasing cluster density, the cluster’s multi- scrapping facilities; chassis pools; and other directional freight generation potential rises and support services. the incidence of economies of scope increases. b. Economies of Scale arise from the larger Why Agglomeration Creates Value in Logistics freight volumes that a logistics cluster can generate relative to non-clustered operations. There is a vast literature in economics and Larger volumes result in higher load factors, the management that demonstrates the use of larger transport units (e.g., larger -trailers, advantages generated by industrial clusters unit trains, vessels, and the like), and a higher (e.g., Silicon Valley in software); 4 logistics incidence of direct point-to-point service, all of clusters are no different. According to Sheffi which reduce the cost of transportation service (2013), logistics clusters generate value5 through provision—including environmental (a) transportation-related operational externalities—per ton-kilometer transported. advantages; and (b) inter-firm collaboration in This may also result in further reductions in the form of asset sharing. Sheffi observes that overall logistics costs for shippers via lower the agglomeration of transportation activities in inventory carrying costs. a logistics cluster results in economies of scope, scale, density, and frequency, as follows: c. Economies of Density result from the agglomeration of freight-generating firms in a. Economies of Scope are generated from close physical proximity, which reduces the cost the directionally balanced nature of freight flows of first- and last-mile consolidated logistics, such moving in and out of the cluster, which reduces as the provision of less-than-truckload (LTL) the cost of transportation service provision. Non- services.6 clustered, fragmented logistics operations are 3 d. Economies of Frequency, like those of “Asset-based� transport services are provided by firms density, also apply to consolidated (or less-than- that generally own (or lease) the underlying transportation assets used to move freight—such as trucks, aircraft, or rail full-load) logistics operations, whereby the tracks. This is in contrast with “non-asset based� transport presence of numerous freight-generating services, which are provided by firms that generally do not entities in a cluster will be able to fill a specific own (or lease) transport assets, and instead act as transport unit load (say, a marine container) intermediaries between shippers and asset-based transportation carriers. In North America, non-asset based more frequently by pooling their freight. This can logistics service providers play critical facilitating and 6 strategic roles in the daily functioning of supply chains, and Consolidated logistics, such as less-than-truckload and include, for example, freight forwarders and truck brokers. less-than-containerload shipments, refer to the aggregation 4 See, for example, Porter (1998). (“consolidation�) of cargo belonging to multiple shippers 5 For the purposes of this note, the term “value� denotes into a single unit load, such as a truckload or a container, both enterprise value at the firm level (typically measured instead of the unit load being fully allocated to a single by such metrics as returned on capital employed), and shipper. The co-location of multiple freight-generating firms economic value (typically measured by such metrics as (such as manufacturers) that may share unit loads reduces economic internal rate of return) at the local, regional, and the cost of providing consolidated services, as it increases national level. load factors and facilitates pickup and delivery over the “last mile�. China Transport Topics No. 13 4 The World Bank, Washington D.C. shave days out of supply chain cycles by railroads BNSF and Union Pacific; 7 they have preventing individual firms from having to wait ready access to major east-west and north-south until enough freight is generated on their own to highways; they are in close proximity to large fill a given unit load before commencing airports (in the case of AT, the cluster itself transportation. houses an airport); they are home to an extended, densely arranged ecosystem of The sharing of high-fixed cost physical assets and warehousing, distribution, manufacturing, and other valuable resources, such as human service facilities; they are located in suburban resources, is a fifth value-creation advantage of locations that are both close to major freight- logistics clusters. This can be referred to as the generating hinterlands and well located relative generation of Economies of Co-location. For to their broader regional and national example, logistics clusters facilitate the optimal connectivity; and they both play a key role in the allocation of transportation capacity (say, rail intermodal, long-haul supply chains that airfreight carrying capacity) among carriers or have been essential to the everyday functioning third-party logistics service providers (3PLs) of the U.S. economy over the past 15 years. when they are co-located. If a carrier has spare capacity, it can make it available to a competing By 2012, for example, CIC had become the carrier in need of capacity at the same location, largest inland port in the U.S. and the country’s capacity that would have otherwise moved third largest port of any kind (including all empty (and therefore been lost) in a non- maritime ports—only Los Angeles/Long Beach clustered setting. Similarly, clusters facilitate the and New York/New Jersey were larger), with sharing of labor resources, such as qualified annual handling volumes of 3.1 million TEUs and warehousing and cargo handling staff, either a potential capacity of up to 6 million TEUs. AT, through staffing agencies acting as middleman however, was the pioneer ILC of North America. between service providers or organized by the Developed in the late 1980s and now considered service providers themselves. All these cases “the grandfather of U.S. inland ports,�8 AT is a result in better capacity utilization, higher return 6,800-hectare master-planned site with on capital employed, and value creation. approximately 3 million square meters of developed mixed-use properties as of year-end Given that the above advantages build on and 2012. Indeed, when developing its CIC increase with scale, more integrated (i.e., more intermodal terminal, BNSF used the carrier’s AT comprehensive) logistics clusters—such as facility as prototype. ILCs—are more conducive to generating operational and resource utilization efficiencies Beyond the service delivery and operational than less integrated clusters. This is the primary similarities shared by CIC and AT, both ILCs distinction between ILCs and other clusters, as were planned and developed in ways that the latter may lack one or more critical elements ultimately led to their current success. The key of transport infrastructure (e.g., rail connectivity) elements of this development experience are as and/or service provision. follows: 9 7 Developing ILCs in Practice In North America, Class 1 railroads are the largest railway operators by revenue. Currently, a total of 7 North CenterPoint Intermodal Centers Elwood-Joliet American railway operators are classified as Class 1. 8 (CIC) and AllianceTexas (AT) are the two most 9 Jones Lang LaSalle (2011). important ILCs in North America. Both ILCs This section builds heavily from Envision Freight (2011) and Steele et al. (2011). The reader is referred to these share many of the definitional characteristics sources for a detailed, chronological account of how CIC outlined above: they are anchored by two rail and AT were developed. intermodal terminals operated by the Class 1 China Transport Topics No. 13 5 The World Bank, Washington D.C. a. They are Public-Private Partnerships activities within it; and (d) provide CenterPoint (PPPs). Both CIC and AT were conceived of and with tax incentives for development of the land. planned jointly by a public sector authority and a In all, planning and approving the development private sector real estate developer. Once of CIC took approximately five years. operational, everyday management of the center was the responsibility of the developer, c. The PPP structure of these sites resulted while the public authority regulated service in the mobilization of substantial private sector delivery and approved further development funding compared to a relatively modest plans. At CIC, for example, the Illinois state provision of public sector funds. In the case of government established the Joliet Arsenal AT, for example, approximately US$160 million Development Authority (JADA) in 1995 to plan in public sector contributions were required to the development of the land now occupied by develop the site during the early stages of the logistics center. JADA produced a Strategic planning and construction (1986-1989). On its Plan for the development of this land and sold part, Hillwood contributed the acquisition of the land to private developers—originally to a land, financed and conducted project design and company called Transport Development Group, preparation, and was responsible for marketing which later sold the property to CenterPoint, the and business development activities. Between current owner and developer of the site. In AT’s 1989 and 1995, however, as tenants (shippers case, the site was planned and implemented as a and logistics service providers) began to joint effort between the City of Fort Worth, establish a presence at AT, the investment Texas, the Federal Aviation Administration (FAA), contribution from these private entities reached and Hillwood, a private real estate developer. US$1.25 billion, dwarfing the initial investment The developers’ technical specialization, market by public agencies. By year-end 2012, public orientation, and shareholder value creation sector investment accounted for only 5.4 mandate were and continue to be a primary percent of the US$7.7 billion in cumulative driver of success for the sites: such attributes, investments at AT since inception. which public sector authorities generally lack, reduce the risk of building redundant facilities in d. Among the objectives pursued by the crowded markets and prevent policy making establishment of these centers, public sector based on choosing ‘winners’. Public sector aims were as important as—and highly authorities, on the other hand, play critical roles complementary of—private sector aims. For of their own in integrating ILCs into the broader example, in the case of CIC, JADA was created by community, industrial, and urban fabric the state government of Illinois with the explicit surrounding these facilities. goal of generating private sector jobs and boosting tax revenues. As for AT, the FAA was b. Their development required substantial interested in relieving congestion at Dallas-Fort collaboration among public sector entities and Worth International Airport (DFW) by developing consultations with local communities. It is a general aviation and freight-focused airport in estimated that CenterPoint, the developer of the vicinity of DFW. Similarly, the City of Fort CIC, directly worked with 50 national, state, and Worth was interested in promoting local and local government agencies over the course of regional economic growth. developing this project. This included agreements, inter alia, to (a) demolish existing e. While small compared to the size of structures at the target site; (b) donate land to private sector investments over time, initial minimize the center’s impact on nearby public sector capital expenditure contributions residential and environmentally protected areas; were critical to the early stages of development. (c) issue a “flexible zoning� designation for the During the planning phase of CIC, the project site to allow both manufacturing and distribution obtained funding from the Illinois Department of China Transport Topics No. 13 6 The World Bank, Washington D.C. Commerce and Community Affairs (DCCA) to approximately US$43 billion in business sales replace the site’s water and sewage system. and paid slightly more than US$1 billion in DCCA, in conjunction with the Illinois cumulative property taxes since inception. In Department of Transport (IDOT), also financed 2012 alone the cluster reached annual sales of improvements to the site’s access roads. At AT, US$3 billion, paid US$22 million in taxes, and the Texas state government provided US$30 directly employed 35,000 people. Meanwhile, by million in funding for improvements to state the same year CIC had generated US$2 billion in roads; the City of Fort Worth contributed US$45 investments since inception, approximately 90 million towards the construction of local roads percent of which provided by private sector and basic utility infrastructure (water, sewage, sources, and housed 1 million square meters of gas, and power); and the FAA contributed US$85 industrial facilities.11 million towards the construction of Alliance airport. The timely and well-coordinated Implications for China provision of such basic infrastructure proved From an economic geography point of view, critical to the development of the sites and their China’s transportation network is closest to ability to facilitate multimodal connectivity and that of North America, suggesting that the reliable logistics services. same principles that made ILCs successful in the latter can work in China as well. As economic f. Government oversight of the sites has activity is progressively transferred from China’s been an important component of their eastern seaboard towards western provinces—a operational effectiveness. There is no doubt that result of not only labor cost pressure in large the ability of these ILCs to capture increasing eastern cities but also explicit government volumes of freight and logistics activity results policies to support this shift—the long-distance from the specialized, best-in-class operations of supply chains that this is generating could asset-based carriers (such as Class 1 railroads) increasingly rely on rail-enabled ILCs, while being and non-asset based logistics services providers less reliant on the mono-modal or single- (such as global freight forwarders and other commodity focused logistics parks that appear to 3PLs) located at the sites. But government be the norm at present. oversight has been a critical facilitator of this in the background. At CIC, JADA developed a CRIntermodal, the rail intermodal arm of China transportation plan to address increasing Railway Corporation (CRC), 12 has had some concerns of congestion risk in and around the success in developing rail-enabled logistics cluster. First developed in 2004 and later centers. CRIntermodal has announced plans to updated in 2010, the plan brought together build and operate a network of 18 intermodal numerous local stakeholders under the JADA terminals across China. Nine of these terminals Study Oversight Committee (SOC), which are currently in operation at the key logistics facilitated decision making. The plan markets of Shanghai, Chongqing, Chengdu, recommended a shortlist of transportation Wuhan, Xi’an, Qingdao, Dalian, Zhengzhou, and projects to alleviate congestion and called for Kunming. All of these terminals, as built, have the creation of a public entity to promote and elements of ILCs. For example, in Chongqing, a coordinate the implementation of these market that has attracted sizable investments by projects. major multinational manufacturers like Foxconn 11 g. The economic impact of these sites CenterPoint Properties (2013). 12 eventually became enormous. According to CRIntermodal is a joint venture between China Railway Hillwood,10 by year-end 2012 AT had generated Container Transport Co., a subsidiary of CRC; NWS Holdings; China International Marine Containers (CIMC); Luck Glory; 10 and DBML, a subsidiary of Deutsche Bahn. AllianceTexas (2013). China Transport Topics No. 13 7 The World Bank, Washington D.C. and Hewlett-Packard, CRIntermodal’s terminal is cluster, others quickly follow. In the case of AT, equipped with a unit-train capable, 850-meter for example, once Nokia, the cellular phone long loading/unloading terminal and is manufacturer, decided early on to invest in a strategically located in the vicinity of several distribution center at AT in 1994, several logistics and industrial parks, as well as major supporting companies followed. Securing Nokia’s highways. Similar setups have been commitment, however, required a concerted implemented at the other operational terminals, marketing and business development effort on although limited data on the terminals’ actual the part of Hillwood, the real estate developer. performance (e.g., freight volumes, productivity Private sector participation is also more likely to metrics, regional economic impact, and the like) result in adequate financial and economic are not yet available. appraisals in support of the planning and development of ILCs on the basis of cargo The extent to which the development of volume expectations rather than supply-driven CRIntermodal terminals was planned in considerations. consensus with local, provincial, and national government agencies, with a focus on joint ILCs should be seen as strategic nodes in the operational planning, and in collaboration with logistics network—not to be confused with the nearby existing logistics parks, is less clear. It more limited clustering extent of more would be beneficial for CRIntermodal and traditional “logistics parks�—and managed government agencies at the relevant levels to accordingly. China has so far developed work together towards maximizing the impact of hundreds of logistics parks, although the true the CRIntermodal terminals, particularly for capabilities and economic viability of these is not those currently at the planning stage. This can well known. Not all logistics parks can or should result in better multimodal connectivity at the be ILCs. In the U.S., for example, it is estimated terminals and a more robust resolution of that there are fewer than 12 full-fledged ILCs. conflicting uses of land. The creation of Local, provincial, and national governments in authorities tasked with overseeing, planning, China should coordinate their efforts towards and regulating the intermodal terminals and managing viable existing clusters as ILCs or their hinterland can be an effective way of developing future ones on the basis of PPPs, promoting the development of the ecosystem of ideally headed by specialized developers. infrastructure and services that can turn isolated CRIntermodal could then be an anchor tenant of assets—such as a rail intermodal terminal—into some or all such centers. integrated logistics centers. Perhaps the most important lesson from North References America applicable to China is the use of AllianceTexas (2013), “Field of Dreams Realized,� privately-held, specialized real estate AllianceTexas Magazine, Volume XIII. developers—overseen and regulated by a designated public authority with aligned CenterPoint Properties (2013), “Joliet Arsenal goals—to develop and manage future ILCs. Redevelopment: A Public-Private Partnership These developers can be the mechanism by Success Story�, Presentation by Eric Gilbert, which limited public sector funds can be Senior Vice President for Infrastructure and leveraged into substantial private sector Logistics, June 13, 2013. investment. They can also facilitate the task of Chen, Feng and Chung-Yee Lee (2013), “Logistics attracting “flagship� shippers and logistics in China,� in Bookbinder, James H. (Editor), service providers to the cluster. International Handbook of Global Logistics, Chapter 1, experience, not least in North America, has Springer Science+Business Media: New York. shown that once 1 or 2 critical tenants join the China Transport Topics No. 13 8 The World Bank, Washington D.C. Envision Freight (2011), “Case Study: The Any findings, interpretations, and conclusions Relocation of Intermodal Facilities,� National expressed herein are those of the author and do Cooperative Freight Research Program (NCFRP), not necessarily reflect the views of the World Transport Research Board (TRB), available at: Bank. Neither the World Bank nor the author http://www.envisionfreight.com/issues/pdf/Jolie guarantee the accuracy of any data or other t_Austell.pdf information contained in this document and accept no responsibility whatsoever for any Geng, Susan (2008), “Too Many Parks Pose consequence of their use. Threat to Supply Chain,� Cargonews Asia, available at: http://www.cargonewsasia.com/ secured/article.aspx?article=17459. Jones Lang LaSalle (2011), “The Emergence of the Inland Port,� Perspectives on the Global Supply Chain, Spring 2011. Porter, Michael (1998), “Clusters and the New Economics of Competition,� Harvard Business Review, November-December 1998. Sheffi, Yossi (2013), “Logistics Intensive Clusters: Global Competitiveness and Regional Growth,� in Bookbinder, James H. (Editor), Handbook of Global Logistics, Chapter 19, Springer Science+Business Media: New York. Steele, Christopher W. et al. (2011), Background Research Material for Freight Facility Location Selection: A Guide for Public Officials, National Cooperative Freight Research Program Report 13, Transport Research Board. ********** Luis C. Blancas is a Senior Transport Specialist in the Transport & Information and Communications Technology Global Practice at the Washington D.C. Office of the World Bank. He is the main author of this note, with contributions from Gerald Ollivier, Senior Infrastructure Specialist at the Beijing Office of the World Bank, and Richard Bullock, Railways consultant to the World Bank. This note is part of the China Transport Note Series to share experience about the transformation of the Chinese transport sector. For comments, please contact Luis Blancas (lblancas@worldbank.org) or Gerald Ollivier (gollivier@worldbank.org).