Could disruptive technologies in container ports and terminals be a game-changer?
Capacity expansion programmes (such as increasing berth length, installing additional quay cranes and extending yard facilities) and vertical integration strategies (such as offering end-to-end services) are aimed at supporting the topline. However, the introduction of game-changing technologies, such as automation and digitalisation, are focused on reducing operating costs below those associated with conventional operating modes.
There is no standardised technology solution in the real world. The level of automation varies from terminal to terminal as it depends on a number of factors including labour costs, market perception / desire to adopt the advanced technology, available resources (financial and technical) and the size of the terminal. Large terminal operators are more likely to adopt automation, but many smaller players with high labour costs are adopting it as well.
While a few fully automated terminals are in operation, the more common approach has been the targeted adoption of automated processes and/or equipment to solve specific problems. For many terminals the initial focus has been on automated gates, where the introduction of optical character recognition (OCR) and high-resolution digital imaging technology (1) improves the speed of truck check-in / check-out processes, (2) provides a robust damage inspection process (resulting in reduced claims), and (3) results in material labour cost savings. Other smaller-scale technology interventions, which are focused on assisting rather than replacing equipment operators, are also moving the sector towards a more automated future, albeit in more manageable steps which can reduce operational disruption and help overcome resistance from labour unions.
We believe if more opensource code architecture is adopted (wherein the source code of the automation is available to everyone), the industry will be able to combine these smaller automations into larger, more integrated systems, which can then result in seamless interaction across various terminal operations (vessel loading / unloading, ship-to-yard transfers, receipt, and delivery and gate operations).
To explore further, we will be looking at this from a cost perspective, highlighting recent examples and key future drivers.
1. Labour cost savings can result in improved and more stable EBITDA margins
Automating a brownfield project is potentially more expensive than a greenfield one. While both require significant initial capital outlay, the upgrading of existing systems is not only complex but could also require temporary halting of the current operations, adding to the overall cost of automation. Despite the initial outlay, the main driver for automation (for brownfield and greenfield projects) is to reduce the operating cost per container handled.
This leads to the question: To what extent should a terminal operator automate the existing equipment, systems and processes? This will depend on the long-term gains from automation, (reduction in operating cost / higher productivity vs the initial capex outlay). Our research indicates that larger terminals with higher volumes and high levels of utilisation have taken a more positive stance on automation compared to smaller terminals with limited volumes which have focused more on digitalisation of administrative processes.
To ascertain the financial impact of automation, we looked into APM Terminal’s (APMT’s) 2020 cost structure. Labour, at 48%, is the highest component of APMT’s operating cost (see Figure 1). Terminal automation has the potential to lower this cost significantly as automated terminals require less labour to operate. To quantify the impact, we ran three scenarios on APMT’s labour cost, wherein we reduced the cost by 30%, 40% and 50%, respectively. Every 10 percentage point reduction in labour cost, added 320 bps to the EBITDA margin. Therefore for 30%, 40% and 50% reduction in labour cost, 2020 EBITDA margins increased to about 41%, 45% and 48%, respectively (vs reported EBITDA margin of ~32%).
Additionally, lowering labour cost (which is generally inelastic) will also make the cost structure more variable, adding to the resilience of the company’s margins. In other words, a higher proportion of variable cost lowers the operating leverage, which in turn translates into higher stability of margins. However, lowering labour costs, via pay-cuts or job-cuts, unsurprisingly leads to friction between the company’s management and labour unions as roles are re-defined. An automated terminal typically employs fewer manual grade workers, but creates additional higher skilled IT-focussed roles, which can result in job losses for workers that are unwilling or unable to upgrade their existing skills.
2. Port congestion is a driver for change
It has been a challenging year for the ports and terminals industry, with supply chain disruption resulting in an unprecedented level of port congestion around the globe. One of the issues that has been highlighted is the negative impact that congested storage yards have on overall terminal performance – contributing to reduced vessel productivity and increased gate turn times.
DP World (DPW) is committed to technological innovation across its portfolio of terminals and its joint venture BOXBAY System provides an innovative container stacking system which can scale-up the capacity and efficiency of its yard storage system, resulting in material improvement in terms of moves per hour of containers in and out of the storage stack.
BOXBAY – An innovative container stacking system
BOXBAY is a joint venture between DPW and German industrial engineering specialist SMS group. It was built on the High Bay Storage (HBS) system, which was originally developed by SMS group’s subsidiary AMOVA for handling metal coils that can weigh up to 50 tonnes each in racks that can be as high as 50 metres. SMS group altered the technology according to the requirements of the container port industry before installing it at the new Terminal 4 facility in DPW’s flagship port of Jebel Ali.
The key features of the BOXBAY system are:
It is an HBS system where containers are stored in slots of a steel rack which can be constructed up to 11 tiers high, while in a conventional yard, containers are stacked between three and six boxes high.
The higher stack height means that the BOXBAY operated yard would typically operate in an area of approximately one-third the size of a conventionally operated RTG/RMG terminal.
A fully automated system improves the efficiency of terminal operations as the individual container can be accessed without moving others.
The system is designed to be fully powered by solar panels on the roof, which also reduces the operators’ carbon footprint
In August 2021, DPW announced the trial test results of the BOXBAY storage mechanism with capacity of 792 containers. The company confirmed that more than 63,000 container moves have been completed since the facility was commissioned in early 2021.
The six-month pilot indicated higher-than-expected performance levels across the terminal:
Average 19.3 moves per hour at the waterside (between BoxBay cranes and automated straddle carriers)
Average 31.8 moves per hour for the landside truck cranes.
The pilot study also generated better-than-expected operating cost savings with energy cost savings of almost 30% and significantly reduced maintenance costs.
Despite the high upfront costs associated with the BOXBAY structure and system, capital cost savings can be realised with the high levels of productivity will likely reduce the number of automated straddle carriers needed and the reduced footprint will lead to material savings in land preparation. This will be key for DPW where future phases of expansion at Jebel Ali will require costly reclamation.
We believe BOXBAY technology can easily be replicated across ports and terminals. Moreover, the flexibility to increase / decrease the stack size makes the idea highly adaptable and a fit within the varied requirements of different ports. We understand that building such a system requires a high initial capital outlay but efficiency gains and associated cost savings (lower labour, energy and maintenance costs) should outpace the initial investment in the mid-to-long term.
3. Higher appetite for automation by terminal operators
BOXBAY is not the only example as many such automation projects are being tested / implemented by leading global terminal operators. In 2020, Cosco Shipping Ports Limited (CSP) announced the successful trial runs of its automated driverless container truck operating system at the port of Xiamen. The technology is being developed jointly by CSP, Dongfeng Commercial Vehicle Co and China Mobile (Shanghai) Information Communication Technology Co.
Similarly, China Merchants Ports (CMPorts) has deployed the digital perception radar in a fleet of autonomous trucks operating in its Mawan Smart Port in Shenzhen. The system ensures that an autonomous truck arrives in the correct position, within 5 cm, for automated container movement between the ship and storage or departure areas.
Large regional operators are also beginning to explore new technologies. Westports Holdings is expected to procure automated cranes and trucks for its planned expansion project – berths CT10 to CT17).
4. Tightening of port capacity should further support the automation drive
According to Drewry’s estimates, the global container port capacity is projected to increase by 2.5% on average per year to reach 1.34 bteu in 2025, about half the projected average 5% increase in global demand over the same period. To accommodate higher global demand, average utilisation rates are forecast to increase from the current 67% to over 75%.
Under normal operating conditions, 75% utilisation at a port or terminal is not very high. However, in the present stressed situation where the sector is still struggling with congestion, tightening of port capacity is expected to support the drive towards automation and digitalisation which could be key for enhancing productivity and capacity of existing terminal assets.
Rising equipment orders is indicative of a strong automation drive
In the current scenario of lower interest rate and booming international trade, terminal operators are considering automation as an option to strengthen their operating profit. Cargotech, a leading port equipment provider, recently announced that its Kalmar business segment received record orders worth EUR 600mn (USD 507mn) which is up 105% YoY in 2Q21, translating to an orderbook of EUR 1.3bn (USD 1.1bn) at end 2Q21 (+42% YoY). Kalmar offers cargo handling equipment and automated terminal solutions, software and services used in ports, terminals, distribution centres and other related industries. The record orderbook is a further indicator of the current favourable market conditions for port equipment and automated solutions. Overall, the company estimates that the current size of the global terminal equipment market is EUR 1bn (USD 845mn), which is expected to double in the next decade.
Emerging trend of port operators acquiring companies that facilitate automation and digitalisation
While some terminal operators are directly investing in innovative automation projects, others are using inorganic means to move ahead, acquiring specialist firms to take a leap in the automation space.
Earlier in 2021, HHLA announced the acquisition of a majority share (80%) of automation specialist Industrial Software Application Manufacturing AG (iSAM AG), a German company founded in 1983. iSAM AG is a specialist in automation technology with a long history of working with HHLA, and is currently working on an automation prototype for the rail operation at Container Terminal Altenwerder. With this acquisition, HHLA will get direct access to technological developments in the automation of industrial processes.
Automation is a broadly defined concept which may start with simple digitalisation of the paperwork of the port and extend to a fully automated operating terminal with very little human intervention. Higher automation reduces labour costs, which in turn lowers operating leverage and can make the operating profit more resilient. However, this may lead to strained relations with the trade union. Currently, terminal operators are opting for varying degrees of automation, depending on their financial and technical resources. Also, there is a marked difference between the automation strategy adopted by various terminal operators. While some are building on their internal capabilities, others are acquiring companies with some level of automation to quickly gain the lead. The automation drive has got the required push from the favourable lower interest-rate environment and increasing risk appetite of terminal operators (backed by the robust increase in the international trade). Analysing the associated risks and potential benefits, we are of the view that in the long run, the efficiencies generated by a properly installed automation system will outweigh the potential associated risks. We are optimistic about the current automation drive and believe that even though little automation adds to financial and operational resilience, a more integrated solution, could prove to be a game changer for the port industry, which is presently facing post-Covid operational bottlenecks.