China's port dominance puts damper on global supply chain fragmentation

While talk of supply chain fragmentation and "friendshoring" has picked up pace amid heightened US-China tensions, Jasper Verschuur points out that the speed and breadth with which supply chain fragmentation might occur, particularly in Asia, is constrained by the ability of the maritime and port system to adapt. In that respect, China’s dominance is hard to weaken.
This aerial photo taken on 19 April 2023 shows shipping containers stacked at Zhoushan port in Ningbo, in China's eastern Zhejiang province. (AFP)
This aerial photo taken on 19 April 2023 shows shipping containers stacked at Zhoushan port in Ningbo, in China's eastern Zhejiang province. (AFP)

Amid the global economic turmoil, speculations of a new era of global supply chain fragmentation have emerged. In particular, a potential for “friendshoring” of supply chains, reflecting increasing trade dependencies between geopolitically-aligned blocs of countries, is a likely prospect — and one which will create winners and losers. 

For instance, a recent Boston Consulting Group report highlights that India and Southeast Asian countries could become large beneficiaries of this fragmentation due to increasing trade flows with Russia and China, and Western companies diversifying supply chains away from China.

Multiplier effect of fragmented supply chains on maritime transport

Such shifts in manufacturing activity will increase demand for maritime transport, which accounts for 80% of global trade in volume, and port capacity to accommodate this. However, the container shipping sector, which underpins the global manufacturing sector, has proven unable to adapt to short-term demand changes.

This was exemplified by the Covid-19 pandemic, which resulted in disruptions at many ports and routes, while causing major congestion issues at other ports, most prevalently the almost 100 vessels queuing outside of the port of Los Angeles in 2021.

Even longer-term change needs to be accompanied by major port expansions, beyond what is currently planned for, with large inherent financial risks given uncertain trade outlooks.

port LA
This file aerial photo taken on 14 October 2021 shows the Port of Los Angeles, in Los Angeles, California. (Robyn Beck/AFP)

As such, the speed and breadth with which supply chain fragmentation might occur, particularly in Asia, is constrained by the ability of the maritime and port system to adapt. More specifically, the dominance of China within the global container industry, and the rigidity of the maritime system will likely put a strain on the extent of supply-chain restructuring over the next few years.  Even longer-term change needs to be accompanied by major port expansions, beyond what is currently planned for, with large inherent financial risks given uncertain trade outlooks.

Generally speaking, the demand for port capacity is shaped by the demand for trade. However, as recent research by the University of Oxford has outlined, changes in the structure of manufacturing supply chains can cause a multiplier effect in terms of the demand for port traffic.

In the most extreme case where companies shift some of their production to factories elsewhere but have to import all components to assemble a product, this would mean that every kilogram of manufacturing export also requires a kilogram of manufactured imports, a multiplier of two. In other words, there is a potential steep rise in the need for port capacity with shifting supply chain structures.

At present, almost one of every three container movements takes place in Chinese container ports...

The dominance of China’s port sector

It is exactly this port capacity that China has proactively focused on over the last two decades, after a state-led push for rapid expansion. In contrast, other countries have struggled to keep up with the demand for additional port capacity and modernisation of terminals.

According to data from the Global Infrastructure Hub, Chinese investments in the national port sector averaged almost US$20 billion per year between 2010 and 2020, which is equivalent to the spending of the seven largest economies following China (United States, Australia, Japan, South Korea, Brazil, Spain and Italy).

This investment push has resulted in Chinese port capacity far outweighing that of any other country in the region, accommodating the steep growth in terminal throughput (i.e., the amount of goods handled) it has experienced over the same period. At present, almost one of every three container movements takes place in Chinese container ports, according to data from the UN. This number is larger than the total container movements in East and Southeast Asian (excluding China) countries combined, and close to the total for all of South Asia. 

port
This file photo taken on 7 March 2023 shows a cargo ship powered by LNG (Liquefied Natural Gas) loaded with containers at a port in Qingdao, in China's eastern Shandong province. (AFP)

And it is not only in terms of absolute numbers that Chinese ports outperform their competitors. For instance, the size of the container vessels that can be handled at ports is a key constraint for the potential to restructure maritime shipping routes.

According to data from Drewry Maritime Research, 76 ports in China could accommodate so-called Ultra-Large Container Vessels (which can carry >14,000 20ft container equivalent) in 2022, which is critical for long-haul container shipping, compared to only 31 ports in the rest of South and Southeast Asia. 

...planned container capacity in South Asia and Southeast Asia might fall short of projected port traffic in 2030, even without additional traffic demand associated with increasing fragmentation.

The slow speed of port expansion

In contrast to expected overcapacity over the next ten years at Chinese ports, a report by the International Transport Forum, a think tank of the OECD, showed that planned container capacity in South Asia and Southeast Asia might fall short of projected port traffic in 2030, even without additional traffic demand associated with increasing fragmentation. In other words, even minor shifts in maritime transport away from China to regional competitors needs to go hand in hand with an ambitious upgrading, modernisation and expansion of port infrastructure, at significant investment.

While several countries have announced major port investment programmes, for instance, the US$82 billion of seaport investments as part of the Indian Sagarmale project (to be implemented by 2035), these investments are likely to fall short of the required investment needs if a fragmented global trading network becomes reality.

Even if governments decide to push for a China-like port expansion programme, the long lead times involved in expanding port capacity will delay trade shifts while adding additional uncertainties to the financing of these expansions. For instance, the construction of the Maasvlakte 2 project, a 2,000 hectares expansion of the Port of Rotterdam, took six years to complete, with terminals becoming operable two years later (2015). Similarly, the 2012-announced Tuas Mega Port project in Singapore only finalised its first phase (out of four) in 2022.

While reflecting some of the most extensive port expansion projects globally, the length of these projects underlines that it may take years to scale up port capacity and even longer for new port terminals to become fully operational. Given the current uncertainties in terms of future trade projections, investors will likely scrutinise such expansion plans, putting a significant cap on the speed with which countries’ port capacity can realistically expand.

Chinese dominance across national borders

The dominance of China in the global shipping industry extends beyond its national jurisdiction, and locks in long-term dependencies between China and foreign ports and maritime routes. For instance, the state-owned COSCO Shipping company currently operates 11% of the world fleet, and connects over 500 ports across 140 countries with one another.

According to data from the Linear Shipping Connectivity Index (LSCI), a measure of the integration of ports within the global container transport network, China’s LSCI has grown by 65% between 2006 and 2020, a much faster rate than some of its regional competitors (e.g., Singapore, South Korea, the US and Malaysia). This emphasises the growing share of foreign throughput linked directly (via imports or exports) or indirectly (via liner connections which also serve Chinese ports) to Chinese ports. 

...the deeply ingrained dependency between Chinese maritime actors and foreign ports locks in spatial patterns within the global maritime transport network.

port
Cranes and shipping containers are seen at Lianyungang port in China's eastern Jiangsu province on 13 April 2023. (AFP)

This foreign influence reaches beyond maritime connectivity alone. Under the umbrella of the Belt and Road initiative, Chinese state-owned enterprises (SOEs) have made significant investments in foreign port projects, ranging from construction contracts, acquisitions and (long-term) concession contracts.

According to one estimate, the total value of these deals adds up to almost US$70 billion between 1979 and 2019. While a range of maritime actors is engaged in such foreign investments, the scale of Chinese investments is unmet by others and will likely contribute to the geopolitical influence of the country for years to come.

In other terms, the deeply ingrained dependency between Chinese maritime actors and foreign ports locks in spatial patterns within the global maritime transport network. As such, shifting away from Chinese production regions will involve major transaction costs, which may prevent such changes from happening.

An era of uncertainty

The near future will likely see major uncertainties in the port and maritime sector. While pressures to divert supply chains away from geopolitical contested regions will probably increase, the costs associated with doing so might be significant, and may put additional strain on the maritime transport sector.

Although maritime transport is only one factor that influences the supply chain structure, one thing that became clear from the Covid-19 pandemic is that maritime transport can be an amplifier of supply chain disruptions and will continue to be a key constraining factor for the evolution of future trade patterns.

As such, businesses should proactively evaluate how maritime transport fits within their supply chain restructuring, instead of assuming maritime transport flows will follow. Similarly, governments that are planning for port expansions should track early signals of fragmentation such that they can incorporate this into their short- and long-term port planning strategies.

Related: How China’s export surge left the shipping industry with a hangover | Demand swells for Chinese shipping crews amid global shortage | Why China’s exports are in the doldrums