LOS ANGELES — The stakes are high for the apparel industry when it comes to the ports of Los Angeles and Long Beach, the largest in the U.S., which annually process cargo valued at about $200 billion, or 40 percent of shipments entering the country.
As the shipping season for holiday merchandise accelerates, cargo and trucking companies, vendors and retailers all have a vested interest in eliminating the congestion that plagued the Southern California ports last year, delaying the appearance of goods in stores and affecting the bottom line.
The challenges are long term because trade volume is projected to triple during the next 20 years, spurred by the dismantling of quotas and a new generation of ships capable of carrying almost 40 percent more cargo. That means the number of containers coming through the ports, which has increased to almost 13 million from 5 million in the last decade, will vault to about 40 million. The twin ports handle about 88 percent of all apparel imported from Asia in terms of wholesale value, or $13.52 billion a year, according to the U.S. Commerce Department.
The coping mechanisms include shifting the transport of cargo to nonpeak hours — the first program of its kind in the U.S. — hiring more dockworkers to unload ships and potentially spending several billion dollars to improve systems that cycle goods from ships to rail yards or terminal warehouses and trucks. Even with these initiatives, some shipping already has migrated to alternative ports. In addition, major retailers, such as Wal-Mart Stores Inc., are hedging their bets by opening distribution centers elsewhere and bypassing California altogether. Wal-Mart’s new 4 million-square-foot facility is near Houston.
“Two-thousand-five is the year of infrastructure,” Doug Tilden, chief executive officer of Oakland, Calif.-based Marine Terminals Corp., which operates five terminals in Los Angeles and Long Beach, said during a peak-season forecast meeting in June. “We’re five to seven years behind in infrastructure.”
The administration of Gov. Arnold Schwarzenegger has established a Cabinet-level team to implement ways to improve the movement of merchandise in and through California. The team backs a plan to identify projects such as $2.5 billion in rail upgrades to better connect the ports and warehouses, and an $86 million expansion of the Port of Long Beach rail yard. Final proposals are to be submitted to the governor by the end of the year. Financing is an unresolved issue, but options include federal and private-sector investment and public-private partnerships.
A report prepared by the Los Angeles County Economic Development Corp. in partnership with the Southern California Association of Governments proposed a $10.5 billion plan called the West Coast National Freight Gateway. It would focus on 10 rail and highway projects, including improvements in rail capacity and highways. The program would be financed by $5 billion in revenue bonds issued by the state, which would be responsible for the interest payments, and the private sector would repay the principal in the form of container fees. Another $3.5 billion would be generated by federal government Customs revenue collected from West Coast ports. Local governments and private business would pay the $2 billion balance.
Wally Baker, executive project manager of the development corporation’s consulting practice, said he is in talks with Sunne Wright McPeak, secretary of the state’s business, transportation and housing agency, and Alan Lloyd, secretary of the California Environmental Protection Agency, as well as retailers and others in the private sector. He said he is encouraged by the response, as well as recent congressional approval of a transportation bill that earmarked $23 billion for California highway projects.
“This is a pretty broad-based initiative with an eye down the road,” Baker said.
A 49-page study by the Waterfront Coalition, an alliance of retailers, including J.C. Penney Co. Inc. and Target Corp., on how to cope with the growing demands facing the West Coast transportation infrastructure has made recommendations such as encouraging ocean carriers to use other ports for their first call and easing vessel bunching — ships departing Asia tend to arrive on the same day and strain the ports.
The move toward other ports is gaining steam with shippers. Since last year’s congestion crisis, which delayed dozens of ships, activity has surged at neighboring ports. The volume of cargo grew 16 percent last year at the Port of Oakland and is up this year, including a 29 percent increase in May. In the Port of Seattle, cargo from Asia is 35.4 percent higher this year. Both ports are making infrastructure investments. Oakland is deepening its channels to accommodate bigger vessels and Seattle is spending about $20 million to improve its pier, container yard, utilities, truck gates and buildings.
“We’ve been targeting lifting up our international trade,” said Marilyn Sandifur, a spokeswoman for the Port of Oakland. “We hope to serve as a release valve for the congestion in Southern California.”
As a result, the Los Angeles and Long Beach ports may have lost some business long-term. Activity at the Port of Los Angeles is down 1.35 percent this year, while rising 19 percent in Long Beach.
Rivals to the ports say there is more than enough for everyone to thrive.
“Trade is growing so fast at the West Coast ports that they won’t see a decrease — we’ll just simply see an increase,” said Tom Kornegay, executive director of the Port of Houston Authority. The port plans to finish construction on a $1.2 billion terminal expansion project next year.
Distribution centers are popping up in alternate locations as retailers and manufacturers spread out the sourcing chain. In addition to Wal-Mart’s Texas facility, Target Corp. also is considering the area for a distribution center, Kornegay said. So far, 11 centers have opened in the five-county Los Angeles metropolitan region.
VF Corp., one of the world’s largest apparel companies with sales exceeding $6 billion, chose Visalia, north of Los Angeles, as the site of a new $43 million, 817,000-square-foot distribution hub. Scheduled to open next June, the facility will service the company’s VF Outdoor subsidiary.
Diversifying options for importing is the smart way to do business, said Robin Lanier, the Waterfront Coalition’s executive director.
“Nobody is putting all their eggs in one basket, which is a foolish way to go,” she said. “With congestion and security problems plaguing ports, you don’t want your business shut down when logistics fail.”
Still, many importers say the West Coast offers them the best route to getting product in stores as quickly as possible.
“No port offers a risk-free scenario, and there are no alternatives to the West Coast when it comes to container size,” said John Joseph, senior manager of transportation services at Limited Brands Inc. “Southern California, by our metrics, has executed well in these first six months and we hope it will continue in the busy season ahead.”
In an effort to reduce congestion, the Los Angeles and Long Beach ports on July 25 instituted a program called OffPeak, which is intended to shift the transport of cargo to nights and Saturdays. Terminal operators who had closed gates at 5 p.m. are keeping them open from 8 a.m. to 3 a.m. weekdays and 8 a.m. to 6 p.m. Saturdays. Containers leaving the ports at other than off-peak hours will have to pay a surcharge of $40 to $80.
Operators of the ports hoped to shift 20 percent of cargo traffic to evenings and Saturdays in the first season, up from about 10 to 15 percent. In the first week, however, expectations were exceeded, as almost 30 percent of cargo trucked from the complex shifted to off hours.
“It’s our first step toward 24/7,” said Tom Teofilo, managing director of maritime services for the Port of Long Beach. “When do we go there? I can’t tell you.”
Paul Sherer, a spokesman for PierPass, the nonprofit group that administers the program, said about 6,000 companies have registered with OffPeak, including Sears Holdings Corp. VF is also participating, starting with its Vans and Nautica businesses, said Tim Dye, VF’s vice president of distribution for North America.
“We believe this is not only a necessity, but will positively affect our business, enhance our internal operations and improve speed and service,” Dye said in a written statement.
However, for Anaheim, Calif.-based Pacific Sunwear, which generated about $1.23 billion in sales last year, OffPeak “doesn’t go far enough,” said Joseph Harris, vice president of sourcing and product development. “Sometimes we don’t have the luxury of waiting to pick up goods at night, and we’ll have to pay the $80 to deliver product as quickly as possible.”