An object’s center of gravity is a matter of physics. In matters of business, by contrast, there are man-made centers of gravity. These are governed by the desire to make money or, at least, to avoid losing money. Logistics is the study of the constraints of time, physical space and location that arise when moving freight/people/information from origin to destination. Interestingly, those logistical constraints can be matters of physics too. In particular, transportation costs can make or break a sales transaction.
This is especially true when the buyer and the seller are some physical distance apart with challenging terrain and/or bodies of water in-between. The terrain and/or bodies of water will determine the nature of the infrastructure available to for-hire carriers. The buyer-seller transaction is possible if a carrier is available to move the item across the available infrastructure. But the transaction is not possible if the cost of carriage, when added to the item’s sale price, is simply too high for the buyer. This may be due to lack of competition in the for-hire carrier market or to the physical constraints of the distances involved given the current state of technology.
Logistical constraints need to be managed in order to control the costs of doing business. Centers of gravity exert the force of attraction. When market conditions change by a large enough magnitude, business activities will be attracted to a new center. Only an equal and opposite force can fight this gravitational pull. What happens when these centers of gravity change and what does it take to maintain current ones in the face of such change?
Consider the current U.S.-China trade war. The United States has chosen to fight this war primarily with import tariffs. As a result, all U.S. supply chain managers who deal with the inbound flow of China’s tariff-targeted imports know that the landed cost of these items will be higher. It is not just the tariff-adjusted sale price of the item that is higher, but also the cost of customs compliance.
Some supply chain managers have already adjusted away from China, choosing instead to source from nearby Taiwan, Vietnam and/or South Korea. On the export side, U.S. food and agricultural products are good cases in point. From a peak of $25 billion in 2014, China-bound exports fell to about $9 billion this year. The slide accelerated beginning in 2017 when the first serious talk of a trade war began. U.S. tariffs on China were met by countervailing tariffs by China on U.S. food and agricultural exports.
In a similar fashion to outbound China supply chains the inbound China supply chains of food have been shifting away from the United States to other countries in this hemisphere such as Canada for wheat and lobster, and Brazil for soybeans.
The effect of this shift can be seen sharply at the Port of Oakland, since about half of its export volume is in agricultural products. With its proximity to California’s farm sector it is an important exit point to Asia’s food markets. The port has seen a rise in shipments to Taiwan, Vietnam, South Korea and Japan as U.S. farmers sought to avoid China’s tariffs on their products.
A consequential shift in the center of gravity might occur should enough manufacturers of low-cost consumer goods move beyond the Far East into countries like India and Bangladesh. If these countries replace the Far East as the manufacturing center of gravity, it is possible that some transport routes might avoid the Malacca Strait heading to U.S. West Coast ports and use the Suez Canal and the Mediterranean Sea heading to U.S. East Coast ports. If the new pool of low wage workers is to be found in and around India this possibility must be considered. In fact, A.T. Kearney’s report this year on U.S. trade policy and reshoring noted that the move of manufacturers from China toward India has been in motion long before the current trade war.
Ted Stevens Anchorage International Airport (ANC) is another logistical center of gravity. In this case it is a gateway to the United States for outbound Asia air cargo. About 80% of this traffic lands at the airport for refueling. Why should that be when these air cargo planes are quite capable of overflying Anchorage? It comes down to what ANC’s management team calls keeping their airport “sticky.”
Anchorage has both geographic and operational advantages that are unique along the “great circle” between Asia and the lower 48 states. Great circles are the shortest distance between two points on a sphere. Geographically, Anchorage is just about the distance (i.e., 4,400-4,800 nautical miles) a fully loaded jumbo or wide-body U.S.-bound air cargo plane can go from, say, Hong Kong. So, if the intent is to fill the planes in Asia with more revenue-earning cargo and less cost-inducing fuel, it makes sense to land and refuel in Anchorage. It also helps that ANC works hard to keep its landing fees and fuel charges very low by industry standards. ANC is centrally located at 9.5 hours flying time to 90% of the industrialized world. This makes it an excellent air cargo trans-shipping point.
This operational advantage is accentuated by ANC’s innovative air cargo transfer program. Belly-to-belly transfer of U.S.-bound cargo between a foreign air carrier’s planes or between those of two different foreign air carriers is illegal at any other airport in the continental U.S. In fact, ANC’s management team has had to work hard to convince skeptical Asia-based carriers that this quasi-cabotage activity is quite legal.
What makes it hard to believe at first is why the United States would offer such a unilateral trade benefit to countries like China and Japan. Basically, Alaskans can thank the advocacy of the late Sen. Ted Stevens when he wrote this unique operation into a re-appropriation bill for the Federal Aviation Administration (FAA) back in the mid-1990s. At ANC, airport managers know that their air carrier customers can literally fly away, so they must be imaginative to maintain the airport’s center of gravity against other U.S. and Canadian airports looking to attract Asia-U.S. traffic.
Strategy is typically informed by some vision of the future. The further into the future the more the uncertainty. But uncertainty needs to be confronted and not avoided by simply limiting mission statements and strategies to five- to 10-year timeframes. Sticking with Alaska and thinking ahead over the next few decades, consider the fact that the Arctic is steadily warming and its ice cap is melting. Therefore, imagine the day when the Northwest Passage between the Beaufort Sea and Baffin Bay becomes navigable to deep draft ocean vessels on a year-round basis. Centers of gravity for ocean freight may well change. In this scenario, ports along the Aleutian Islands archipelago (e.g., Adak and Dutch Harbor) may become strategically important as bulk and container trans-shipping points. Ocean vessels heading along the “great circle” between Asia and U.S. West Coast ports could stop at such a port and switch cargo with vessels traveling routes between Asia and Europe via the Northwest Passage.
Singapore’s importance in trade began in the early 19th century when the British East India Company established it as a port of call in the spice trade. It has worked hard to maintain its center of gravity in container trans-shipping. The strategic question for the future is “will global climate change give Alaska a new place in the sun?” Who knows – one day a port out in the lonely Aleutians just might become the “Singapore of the North.”
Tim Feemster
This is very well done to allow the non-supply chain professional to understand how the “center of gravity” for freight works. I am going to print this article and use it for my lay connections as backup to what I try to explain to them as my experience has taught me. Thanks again for posting.