Business Beyond the Reef

More news from the DEC Conference in Detroit:

Nic Arena, CEO of Mediterranean Shipping Company (USA, the world’s second largest shipping firm, said that the U.S. shipping lines are nearly gone, despite the protection they have received under the Jones Act.  Remember SeaLand, U.S. Lines and many others?  Arena charges them with lax management and overly high costs.  The top four lines in the world right now are European, led by Maersk, and followed by a passel of Asian shipping companies.  The United States still has the likes of Horizon and Matson, but they are now bit players on the global scene.  Arena commented that most American flag vessels on the high seas are there only because they have contracts from the U.S. Government.  Asked about the Jones Act, he described it as obsolete, protecting only a small number of ships.  The Act raises costs for all Americans, and especially for Hawaii, Alaska, Puerto Rico and the U.S. Virgins – and has led American shipping lines to rely on the closed U.S. markets rather than getting out there and competing.  Pretty damning stuff.

Michal Lorenc, Online Sales & Operations Manager for Google, carried the message that the United States is not the world’s leader in using the Internet, as many of us blithely assume.  The United States has 238 million Internet users, but China has 384 million.  India touts 130 million and Brazil boasts 67 million, and all three are growing more quickly than the vaunted North Americans.  Lorenc also cited a Cisco Systems study that ranked countries by quality of broadband access to the Internet.  South Korea is #1, the United States is #18.  America also ranks 40th globally in the percentage of users who have broadband access.  We’ve got some work to do, folks.

And it’s not just direct Internet access.  3g access only reaches 41% of U.S. mobile phone subscribers.  The equivalent figure for Japan is 90%.  Perhaps some investment is needed?  There is a trade angle to this, too.  Germany leads the world in using the Internet for e-commerce, primarily using B2B to win export contracts.  Think American companies could learn something?

To close on a more positive note, the conference was briefed about Export University.  EU has been in gestation for several years and is an attempt to push export education mainstream.  The program was originally developed by the District Export Councils in Florida and will be in fourteen states by year’s end.  A number of others will launch in 2011.  Essentially, EU is a brand that guarantees high quality training for companies or individuals who want to know how to export.  It begins with Export 101 courses with all the basics,  such as planning strategies and learning the mechanics of exporting, and then offers more advanced courses on increasingly detailed topics.  Courses are low-cost, easily within reach of most small companies, and the faculty is drawn largely from experienced exporters and practitioners in your area.  That means the EU approach is pragmatic and provides you with ready local contacts and mentoring as you move your company into foreign markets.  Look for your local district export council to begin offering Export University.

• Early this week, Chinese Premier Wen Jiabao opened the World Economic Forum meeting in Tianjin.  He used the occasion to defend China’s infamous “indigenous innovation” policies, going to great lengths to assure firms investing in China that they will not be discriminated against in government procurements, saying this meets the WTO’s national treatment requirements.  Wen, however, did not address concerns over requirements to reveal proprietary technology.  Nor did he address the status of companies that don’t invest in China.  Nowhere in any WTO agreement does it say that national treatment is only available if you have first invested millions of dollars in another market.
• I started following the Baltic Dry Indices when I worked for the U.S. Maritime Administration and needed to know shipping trends.  Unlike many analysts, I don’t find the BDI especially useful for making investment decisions.  Most of the Indices concern bulk cargoes, whose trends are increasingly influenced by government decisions on stockpiling, such as a recent increased demand for bulk carriers to move wheat.  What I do find useful are the stats on container shipments.   The Shanghai container indices show a profound drop in container traffic on Asian, North American and European routes since July, accelerating in August and September.  The indices are now back to where they were in April or May, casting doubt on the pace of recovery and the growth in trade needed to drive it.  Not good news.
• It’s not just that United States that is concerned with Chinese subsidies this week.  The European Union has launched an investigation into possible export subsidies used by Beijing to boost export sales of wireless modems.
• The EU is all set to ratify it’s free trade agreement with South Korea – while the United States continues to sit on its hands.  The European Commission in Brussels expects the new FTA could be worth $25 billion dollars to European exporters.  That’s likely to come at the expense of American exporters as long as the Obama Administration and the Democratic Congress fail to act on the U.S./South Korea FTA.  Sad.
• It’s not often that a new shipping route opens up.  Take a look at the New York Times article about how shipments through the Arctic are becoming commonplace.
• Not business yet, but definitely beyond the reef.  Far beyond the reef.  China has entered the arcane world of offshore, deep-diving submersibles, announcing a successful dive by a Chinese craft two miles deep in the South China Sea.  Not of immediate business interest, but this has implications for offshore mineral development, access to communications cables and recovery of all sorts of lost objects including ships and their cargoes.

Just as a surfer can’t catch all the good waves, there is so much trade news every week that I can’t possibly post about all of it.  “Breaking Waves” lets you know about things that have caught Kekepana’s eye, or might be updates on things taken up in past posts.

Business readers in Hawaii are reacting to my posts last week about the Jones Act (here and here), providing even more examples about how the Act hurts their profits.  A good friend, Tom Matthews, who owns Trade West/Nani Makana, a producer, importer and exporter of aloha party supplies, provided considerable detail about his company’s shipping costs.  Tom is also the current president of the Hawaii Tourism Wholesalers Association.  You have seen his products if you have ever entered one of the ubiquitous ABC Stores in Waikiki.  His are the top quality artificial lei.  His company also makes cosmetics, fragrances and plush toys, all with a Hawaii theme.

Ocean-going barge

Tom has shared with me actual recent quotes from his freight forwarder for shipping 8 cubic meters of goods from Shanghai to Honolulu.  The most direct route is to ship by sea from Shanghai to Long Beach, and then bring the shipment back west to Honolulu on a barge that is subject to the Jones Act.  The first and longest leg of the trip costs $440 on international carriers.  The back-haul from California to Hawaii costs nearly four times as much – $1660!  The total for the Shanghai-Long Beach-Honolulu shipment is $2100.  To be fair, we can’t charge all of the cost from Long Beach to Honolulu to the Jones Act.  That is a much thinner route than Shanghai to Long Beach, so you are not going to see the same economies of scale.  Still, a price nearly four times higher does seem a little strange.

Tom’s alternate route is to truck the shipment from Shanghai to Hong Kong ($728) and then ship it directly to Honolulu on NYK Lines ($1552), for a total shipping charge of $2280.  Needless to say, he takes the first route, Jones Act notwithstanding.  But it chafes that the price from Long Beach to Honolulu appears to be egregiously jacked up.

Tom also points out that he can ship a 40′ container from China to Colorado Springs for less than it costs him to ship a 20′ container from Honolulu to China, since the latter generally has to go to California (via Jones Act carrier) before beginning its journey to China.  Again, this isn’t conclusive evidence of the cost of the Jones Act, but it may be indicative.

A second company, an exporter of a Hawaii processed food product, exhibited at the huge ANUGA food show in Cologne, exciting interest from a potential large-scale distributor in Germany.  The Jones Act already hurts the firm’s bottom line by raising the cost of the glass bottles they have to bring to Hawaii from the mainland United States.  And to ship their products from Honolulu to Germany, the first leg of the voyage – from Hawaii to California – must be on Jones Act carriers.  The German customer took one look at the landed price in Germany and killed the deal.  Now the Hawaii company is looking into contract manufacturing on the U.S. East Coast to create products that are affordable to European customers – costing Hawaii jobs.

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On Monday, the Honolulu Star-Advertiser carried an op-ed piece in favor of the Jones Act, useful reading for either side of this issue.  The author is Robert G. Frame, an admiralty and maritime lawyer in Honolulu.  The one surprising thing I saw in his piece was mention of a 2003 study by the Maritime Cabotage Task Force that concluded that the Jones Act costs Hawaii residents only $5.52 each annually – or less than two cents day.  This is, of course, far below any estimates that I have seen by reputable economists, who tend to conclude the cost is upwards of $2,000 per person per year.  It turns out that the Task Force is hardly unbiased, founded by and composed of all the major players in the U.S. maritime industry, including both Horizon and Matson.  Their mission statement is clear enough:

“The Maritime Cabotage Task Force (MCTF) is dedicated to educating America on the economic, national security, environmental and safety benefits of the Jones Act and other U.S. cabotage laws so that domestic waterborne commerce remains a pillar of our national existence.”

Oh, and Mr. Frame’s law firm, Frame & Nakano, proudly lists Hawaii’s Jones Act carriers, Matson and Horizon, among its clients.  The Star-Advertiser apparently did not consider it important to mention that.