Measuring the competition level in Belawan Container Terminal region
Belawan Container Terminal (BCT) is a container terminal located in Sumatera island which is operated by PT (Persero) Pelabuhan Indonesia I (Pelindo I), an Indonesian stated owned company. In term of location, BCT has a strategic location since it is close to the Mallaca Strait which is the world trade lane. However, even though it is close to the world trade lane, the container throughput is considered low since most of the container throughput is not transshipment container but only captive container which are coming and going from or to its hinterland that is North Sumatera, Aceh and Riau province. Consequently, all container ships coming to BCT are feeder container ships which are from Singapore, Port Klang and Tanjung Pelepas which are located in the same region with BCT.
Furthermore, it happens not only to BCT but also to other Container terminals in Indonesia, which most of them have to transit in Singapore Ports or Malaysian Ports, in fact BCT is very close to those ports. This is considered as a loss for Indonesian Government since it has to spend additional cost and time for transit in those ports. It seems that BCT are less competitive comparing those ports. Therefore, in order to promote the competition in BCT, it needs an assessment in ports around BCT region about the competition level in that region and so that BCT can follow that port strategy which has succeeded in the region.
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Hence, this paper firstly, will measure the competition level in BCT's region; secondly, will analyses the barrier to entry; and finally will provide the conclusion and recommendation in order to promote the competition for BCT.
Measuring the competition level in BCT's region.
According to Loo and Hook (2002) which is mentioned in Cullinane and Song (2007), there are three sub regions in Asian container ports: Northern, Central and Southern Asia. The ports located in Northern Asia as follow: Tokyo, Kobe, Busan and Dalian while ports located in Central Asia are: Shenzhen, Hongkong, Kaohsiung and Manila; and ports located in Southern Asia are Indonesian ports, Malaysian ports, Thailand ports, Vietnam ports, Cambodia ports, Myanmar ports and Brunei ports. Therefore, according to that classification, BCT is classified in Southern Asia port region.
In order to know the competition level, the steps which are used here are: measuring : degree of horizontal and vertical integration, the port technical efficiency, level of tariff and port performance and the port strategic location in term of the distance to main ports destination.
Degree of horizontal and vertical integration in Southern Asia ports
Degree of horizontal integration is measured by the tools called Herfindhal Index (H) and Hefindahl Hirschman Index (HHI) (Cariou, 2008a). The steps of measuring the H and HHI are as follow: calculating the total container throughput in Southern Asia, classified the throughput based on port and terminal and calculating the market share of each port or terminal and finally calculating the H and HHI. According to Cariou (2008a), if H = 1 it means that there is monopoly in the market, if H = 0,5 means that there is duopoly and if H = 1/n means that the market share is equal; while if HHI below 1000 means that the market is un-concentrated, if HHI between 1000 and 1800 means that the market is moderately concentrated and if HHI more than 1800 means that the market is highly concentrated.
H and HH which measured in this paper started from 2003 until 2006 and the Southern Region countries included in the calculation are Indonesia, Malaysia, Singapore, Thailand, Brunei and Cambodia. While Myanmar is not included is due to the lack of data. In addition ports which are put into the calculation are the ports which have throughput more than 225.000 TEU except Sihanoukville which has to be included due to it represent Cambodia.
Step 1, calculating the total throughput. From 2003 to 2006, the total container throughput in Southern Asia ports grows 9,4% per year which was in 2003 the throughput was 41,4 million TEU and in 2006 it became 54,1 million TEU (look appendix: table 1). It is mostly because of the emerging economy in South East Asia country where more and more developed countries outsource its production activity due to cheap labor and close to the raw materials.
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Step 2, classified the throughput based on port and terminal and calculating the market share of each port or terminal. From table 1, based on the country, in 2006, we can see that the container throughput are dominated by Singapore (45,78%) and Malaysia (24,65%) which are most of them are transshipment. According to the throughput classification based on terminal operators (look appendix: table 2), we can see that horizontal integration happens in Southern Asia port where there are four operators which have terminals in some countries those are: PSA International (1 port in Singapore, 1 terminal in Laemchabbang, Thailand and 1 terminal in Muara, Brunei) with market share in 2006 of 45,4%; Hutchinson (1 terminal in Tanjung Priok, Indonesia 1 terminal in Port Klang, Malaysia and 2 terminals in Laem Chabbang, Thailand) with market share in 2006 of 11,61%; APM terminal (1 terminal in Port of Tanjung Pelepas, Malaysia, and 1 terminal in Laemchabbang, Thailand) with market share in 2006 of 10,22%; and DP World (1 terminal in Tanjung Perak, Indonesia and 1 terminals in Laem Chabbang, Thailand) with market share in 2006 of 4,32%.
Most containers throughput which are acquired by four terminal operators mentioned above (except Tanjung Pelepas, West Port and Singapore) are coming from port hinterland. Therefore, we can get the conclusion that in Southern Asia Port the port competition is not only in transshipment market but also in captive market since many Port Operators acquires ports which are not transshipment ports.
The last step is calculating H and HHI and the result of the calculation shows that H in from 2003 to 2006 is still below 0,5 which means that there is no duopoly in market, however, the index tends to increase which means that the degree of horizontal integration is increasing. However, Herfindhal index is not enough to know exactly the degree of horizontal integration; therefore it is used Hirschman Index (HHI) in order to know whether there is a market concentration or not. From the calculation (table 3), it indicates that HHI in 2003 to 2006 were increasing and it is considered high since it is more than 1.800. It means that there is a high degree of concentration in container terminal in Southern Asia which means the competition level become less and less. Therefore if a terminal operator which has the biggest market share want to take over another terminal operator, it has to be firstly assess whether the acquisition will lead to increasing market power or not since the more market power owned by terminal operator, the more possibility the terminal operator to behave as monopoly.
Beside the degree of horizontal integration which is high according to HHI, the vertical integration also happens in Southern Asia region in which APM terminal operating some terminals is belong to a Shipping Line (Maersk Line). The market share of APM terminal from 2003 to 2006 is increasing from 9,82% in 2003 to 10,22% in 2006. It means that the degree of vertical integration is also increasing. The vertical integration will lead to transfer pricing in which the company set the price of service to their group below than they offer to other company (in this case can be their competitor) so finally they will win the competition.
Based on the regional competition assessment above, if we look at BCT, it seems that the market share of BCT in Southern Asia region tend to decrease. Based on appendix table 4, 5, 6, and 7, the market share of BCT in 2003 was 0,57% and in 2006 was 0,56% it is because BCT only expect the throughput from its captive market (its local hinterland) and BCT doesn't implement both horizontal and vertical integration strategy since Pelindo I; which operate BCT, doesn't have any container terminals except BCT and doesn't have any cooperation with shipping line or forwarding company in term of vertical integration
Measuring Port technical efficiency
The tools which is used here is by Data Envelopment Analysis (DEA) which calculating the technical efficiency by comparing the usage of certain amount of input (decision making unit (DMU)) to produce certain amount of output. There are two type of DEA calculation which is applied here: Constant Return to Scale (CRS) and Variable Return to Scale (VRS). CRS assume that input and output has the same proportion so that the increasing a certain unit of input will lead the increasing of certain unit of output proportionally; while VRS assumes that the increasing of input and output are not proportional since it considers the economic of scale (Cariou, 2008b). The port is considered technically efficient if the CRS and VRS equal to 1. If CRS less than 1 it doesn't mean that the port is not pure technically efficient as long as the VRS equal to 1, maybe it because of the small size (small port).
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Technical efficiency which is measured here is not the technical efficiency of a terminal in a particular ports but the technical efficiency of each port in the region in which 1 port can consist of some terminals. Therefore the number of DMU is the accumulation of DMU of terminals located in each port and the number of output total of those terminal.
The DMU which include in the calculation are : area (Ha), storage capacity (M2), berth length (M), depth (M), ship-shore crane, yard equipment, tractor, trailer, refeer point, CFS (M2), forklift; while the output is throughput (TEU) (look appendix: table 8). By using excel DEA add in software, CRS efficiency and VRS efficiency and the slacks are calculated.
According to table 9, From 15 ports, there are 7 ports having CSR equal to 1, those are Tanjung Priok, Tanjung Pelepas, Pasir Gudang, Penang, Jurong, PSA Singapore, and Ho Chi Minh. It means that those ports are pure technically efficient. The other ports have CSR less than 1. However, it doesn't mean that those ports are not technically efficient since we have to take a look the result of VRS.
After calculating VRS (look appendix: table 11), now it's only 4 ports which are not technically efficient from 7 ports before those are Tanjung Perak, Port Klang, Bangkok, and Laem Chabbang. From appendix: table 13, we can see that 4 ports which are not technically efficient based on VRS for instance Tanjung Perak where it's CRS of 0,383 and VRS of 0,878. It means that the technical inefficiency is not only explained by the input and output which are not proportional but it is more explained by the scale. It also happens to Port Klang (CRS of 0,940 and VRS of 0,942), Bangkok (CRS of 0,673 and VRS of 0,834), Laem Chabbang (CRS of 0,774 and VRS of 0,829), therefore they can adjust their input number based on table 12.
While other ports (Belawan (where BCT located), Muara and Sihanoukville) which are previously not pure technically efficient according to CRS result now it become technically efficient according to VRS score, for instance Belawan (CRS of 0,855 and VRS of 1), Makasar (CRS of 0,535 and VRS of 1), Muara (CRS of 0,379 and VRS of 1) and Sihanoukville (CRS of 0,787 and VRS of 1). It is because their size is small so that they can not enjoy the economic of scale.
From the figure mentioned above, the solusion for Belawan in order to increase their level of competition is that the size of container terminal has to be increased by increasing their throughput. Therefore, Belawan have to attract the shipping line to choose them as a hub in Southern Asia region like PSA Singapore and Tanjung Pelepas or at least to choose them as a hub for Indonesian container throughput and the same time have to increase their capacity (input).
If we look further at the ports (big port) which have pure technically efficient, mostly they have only single port operator in that ports for example: Tanjung Pelepas (APM terminal), Pasir Gudang (Johor Port Bhd), Penang (Penang Port Sdn Bhd), Jurong (Jurong Pte Ltd), PSA Singapore (PSA international). It is probably if only one single operator in one port, it would be easy to manage the capacity so that in that port it won't be excess capacity and insufficient capacity which both lead to technical inefficiency. From this finding, we can get conclusion that if we want to increase the size of BCT we can set only one single operator in BCT.
However, technical efficiency is not enough to be a port in order to win the competition in its region; therefore next explanation will discuss another factor such as tariff, port performance and distance from a particular port to the destination.
Level of tariff and port performance
Even though a port is technically efficient, it is not always true that the tariff which is charged by the port is cheap since technical efficiency doesn't reflex the overall cost in operating port. Sometimes, the ports want to charge tariff more expensive than the others if they have competitive advantage comparing to other ports for example strategic location.
Due to the limitation of data, port tariff which will measure here is only container handling charge (CHC) in US$ for full container load (FCL) and the performance is only crane performance (box/crane/hour).
We can see that Bangkok and Laem Chabbang (which are not technically efficient) offer the CHC very cheap among the other ports. After those ports is Vietnam, Tanjung Pelepas, Cambodia, Port Klang, Indonesian ports and Singapore port. From this figure, we can get conclusion that if there are many terminal operators in a port, the tariff offered tend to be low for example Bangkok, Laem Chabbang and Vietnam while there are limited terminal operators, the tariff offered is high (Singapore, Port Klang, Tanjung Pelepas)
If we look at the crane productivity, Singapore and Laem Chabbang are the highest one (25 - 30 b/c/h) and the second is Tanjung Pelepas and Port Klang (20 - 28 b/c/h), the third is Bangkok (20 - 25 b/c/h) and the last is Indonesia and Vietnam (18 - 20 b/c/h), this figure actually is not enough since we have to know how many cranes serve for 1 ship so that we can get the figure how many box/ship/hour. However, from this limited figure, we can get some clue that between the expensive port and cheap port the crane productivity is more or less the same.
BCT like other Indonesian port (Tanjung Priok, Tanjung Perak) is different case here since the tariff is set by government so that the container handling charge for all Indonesian port is the same. This is not good actually, since in order to increase the competition among ports, government has to let the port set their own tariff, but the only thing that government can do is to set the ceiling tariff (maximum tariff which port can charge). In term of productivity, BCT has to increase the productivity (box/crane/hour) in order to increase its competitiveness by providing the reliable equipment since the 3 container cranes which are now operating are quiet old.
However the cheap tariff is not enough to win the competition since the main cost of shipping line is bunkering cost which is reflected from the distance between a port to the main destination. Therefore, next section will discuss the ports distance to the port main destination
Distance to the main ports destination
In measuring the distance, there are some port destinations which are chosen here: Europe is Rotterdam, in Middle East is Dubai, in West Coast America is Los Angeles, East Coast America is New York, Central Asia is Shanghai Northern Asia is Tokyo, Australia are Melbourne and Sydney. The distance from Southern Asia ports to those port destinations can be seen in appendix: table 14. For the trade to East Coast America, Europe and Middle East, Belawan is the shortest one to that destination. While to West Coast America is Muara, to Northern Asia is Muara, to Central Asia is Vietnam, to Australia: to Melbourne is Tanjung Perak and to Syney is Makasar.
As we can see that the ports which offer cheap tariff (Bangkok, Laem chabbang and Vietnam) have distance farther than other ports; therefore maybe that is their reason offering cheap price.
From this figure we can get conclusion that Belawan has the strategic location for the trade to and from East Coast America, Europe and Middle East.
Analyzing barrier to entry by looking the port management model
According to World Bank (2001) there are 4 types of port management model: Public service port, tool port, land lord port and private port (look appendix table 15). Mostly port which apply public service port management model has high barrier to entry for private to participate; therefore, nowadays, more and more ports management model change from public service port to landlord port since the government want to reduce the burden to finance the port and increase the participation of private in operating the port in order to increase the level of competition in port. In southern Asia, Malaysia and Thailand apply land lord port model; while Singapore, Vietnam, Brunei and Cambodia apply public service port. Indonesia before 9 April 2008 was public service port and after that is landlord port.
As we can see in table 1 and table 8 that most of public service port (except Singapore) have low throughput because it's difficult to expand the port considering the financial burden of government and less competition so that port doesn't need to compete to others to attract the cargo. Therefore to change the model to landlord can open the barrier to entry in port industry.
Belawan is facing the same thing like other land lord port in Southern Asia, where the throughput is small and also no tendency to expand. Thanks to Indonesian Government which released the new regulation so that Belawan can be more competitive among Southern Asia Ports
Conclusion and recommendation
In conclusion, the level of competition in Southern Asia region (the region where BCT located) is getting low it can be seen from degree of horizontal integration and degree of vertical integration. From degree of horizontal integration, it is indicated that HHI from 2003 to 2006 were more than 1.800 (level of highly concentrated) and this figure is increasing. From the degree of vertical integration, it shows that the market share of APM terminal is increasing for the last three years. This is not good signal since ports or terminals which are the leader can use their market power to control market.
If we look at the technical efficiency, only 4 ports in the region which are technically inefficient (Tanjung Perak, Port Klang, Bangkok, and Laem Chabbang) the other are consider efficient after considering the VRS score. The finding here is that the ports which are pure technically efficient mostly operate by one single operator.
If we look at the behavior of ports in the region, it seems that there is a competition in price as explained before and as indicated in table 13 and it seems that port which are farther from main port destination apply the tariff cheaper than other and also try to follow the performance of the market leader.
Another interesting finding here is that the government which apply public service port management model (except Singapore) has lower throughput than the ports which apply landlord port management model. It is because by landlord model, the ports can make the flexibility of doing investment and also it open barrier to entry since private can participate in running the ports.
The recommendation for BCT in order to increase their level of competition as follow: based on DEA calculation, the size of container terminal has to be increased by increasing their throughput and the same time by increasing the capacity (input). In addition it is suggested that to operate BCT can be performed by single operator only since more terminal operator lead and the private can be invited to participate in expanding the terminal. Another recommendation is that the tariff can be set by the port while government can set the ceiling tariff so that it can make the flexibility for port to compete.
The last recommendation, by considering the strategic location of BCT, government can make the regulation to concentrate the containers export from Indonesia to East Coast America, Europe and Middle East in BCT so that at least BCT can be a domestic hub port for Indonesia.
- Cariou, P. (2008a). Port Economics Part II. Port Competition. Unpublished lecture handout, World Maritime University, Malmo, Sweden.
- Cariou, P. (2008c). Port performace Indicators and analysis. Part II. KPIs for yard operations. Unpublished lecture handout, World Maritime University, Malmo, Sweden.
- Cullinane, K and Song. DW (2007). Introduction. In Asean container ports: development, competition and cooperation (PP. 3 - 8). New York : Basingstoke Hampshire: Palgrave Maxmilan
- World Bank (2001). Port Reform. Retrieved on 20 April 2008 from http://www.worldbank.org/html/fpd/transport/ports/toolkit/mod3.pdf