"Amidships on the left bow.” Speaking into a walkie-talkie, Warren Merritt delivers the command in a soft North Carolina drawl. Ten stories below the flying bridge of the 844-foot container ship, the Cap San Lorenzo, two red tugboats struggle hard to comply. A squall is blowing up with liver-colored scud clouds. Wind hammers the Cap San Lorenzo’s massive hull as the Moran Towing tugs ease the vessel laden with a thousand brightly painted containers toward the Portsmouth Marine Terminal.
Merritt, a Moran docking pilot clad in a trim blue windbreaker, gently gives instructions to Winieyusz Grabowski, the ship’s chief mate. Dodging rain pellets, Grabowski, a Polish national aboard the vessel owned by Hamburg Süd, a German line, deftly works the flying bridge’s controls, steering in unison with the tugboats.

As the vessel inches closer to the wharf, an odd chirping grows louder, like frogs on a spring pond. On the wharf, warning bells are sounding on five-story-high mobile hoists that dash about spotting containers. Speed and precision are essential. The Cap San Lorenzo’s turnaround time will be quick. Just in from Baltimore, the ship sails again in 12 hours. In a few minutes, dockhands have lashed the ship to the dock.

Scenes like this are repeated many times around the clock at the giant port of Hampton Roads, the second largest on the U.S. East Coast. And if an extensive, 12-year-long upgrade of port facilities — including two brand-new container facilities and other renovations — continues as planned, more ships and thousands more 20- and 44-foot-long containers will pass through, cementing Virginia’s key position in the global economy.

All in all, the Virginia Port Authority plans more than $3 billion in expansions over the next 15 years — the largest on the East Coast. More than $260 million is included for dredging channels to 55 feet, making them the deepest from Boston to New Orleans. Some $515 million is budgeted to strengthen wharves and erect larger cranes at the 811-acre Norfolk International Terminals (NIT). Another $130 million is intended for three other VPA facilities.

A site just across the busy Elizabeth River from NIT will see the biggest expansion of all. Some $2 billion is earmarked to turn Portsmouth’s Craney Island, a 2,500-acre spoil depository, into yet another big container facility with new rail and highway access. When it opens in this century’s second decade, it will nearly double the container capacity of Hampton Roads from 1.3 million container units to 2.3 million container units. Eventually Craney Island’s expansion could increase the VPA’s total container capacity to 3.8 million. What’s more, Danish firm A.P. Moller plans a new container port on a 568-acre tract in Portsmouth once slated for an oil refinery.

The expenditures are big, but the prizes promise to be much bigger — the riches of a vastly changed world economy. Free trade allows manufacturers to assemble products in one country from parts made in myriad other nations. Then they are packed up and distributed around the world with military-style, just-in-time precision. Free-trade pacts, such as the North American Free Trade Agreement with Canada and Mexico and other agreements, are speeding this global integration by eliminating tariffs, changing work rules and slashing manufacturing costs. Corporations, meanwhile, are becoming stateless as they operate 24/7 in a virtual, digitized way around the globe.

The most significant global trade development yet is China’s entry last November into the World Trade Organization (WTO). This breakthrough will unleash the slumbering Asian giant with immeasurable impact on Virginia, the U.S. and the world. A flood of new Chinese products, many of them consumer goods, is U.S. bound. Since most of China’s market is east of the Mississippi, many will enter through Hampton Roads. Situated at the middle of the East Coast, the Virginia ports have direct rail and truck access to the Midwest, Mid-Atlantic and Northeast. As part of the WTO deal, China is agreeing to open its markets and allow more foreign ownership of factories. That could offer Virginia companies investment opportunities on the Chinese mainland that could lock in trade directly beneficial to the Old Dominion.

China trade is the hottest thing going on the docks at Hampton Roads. Since 1998, imports from the Middle Kingdom have increased at a compound annual growth rate of 45 percent. VPA officials tout the fact that its exports to China have grown about 33 percent a year in the same time frame, although total tonnage is almost half that of imports. Old Dominion products heading to China: mostly low-end materials such as pulp, scrap paper and scrap metal.

China’s emergence as a powerful new player coincides with other important shifts in the market. Not long ago, the harbor was known chiefly as an exporter of rich, Central Appalachian coal and as a big importer of Japanese-made cars. Today, the most important cargoes are locked inside metal containers. These modest boxes can contain anything from wood pulp to polyester pants to pharmaceuticals to machine parts. Refrigerated containers can handle lamb from New Zealand or oranges from Israel. “The biggest changes I’ve seen,” says J. Robert Bray, VPA executive director, “are the size of ships, the trading partners and the changes in what we export. We used to export the high-priced stuff then and break-bulk (items not in containers). It’s all fundamentally different now.”

Taking advantage of Hampton Roads’ proximity to Eastern U.S. retail markets, big retailers such as Wal-Mart, Dollar Tree, QVC Network, CostPlus and Dollar General have set up major supply chain centers throughout the state — many in Southeastern or Central Virginia. In the past five years, some 13 million square feet of new warehousing space at more than 30 new distribution centers have been added, replete with automated inventory control systems designed to get foreign-made merchandise into stores within days of arrival. The latest announcement: Gov. Mark R. Warner said that mass marketer Target would locate a 1.5 million-square-foot distribution center worth $65 million on a 162-acre tract in Suffolk. The center could bring hundreds of new jobs.

Such new distribution centers represent a radical departure from the past, says Carroll N. Harris, senior managing director of marketing services at the VPA. Several years ago, mass marketers like Wal-Mart accounted for only about 9 percent of containerized imports, meaning the goods were unloaded and consumed locally. The proliferation of distribution centers and other facilities doing value-added work in Hampton Roads has increased the total to about 40 percent. “You are attracting major companies to stay. They can and do attract more manufacturing for Virginia,” says VPA executive director Bray.

Yet, the expansion of the discount store trade goes far beyond the Old Dominion. The proximity to CSX and Norfolk Southern rail lines, coupled with a nexus of interstate highways, makes the area attractive to many other companies that need to reach Midwest markets. Presently, container lines ferrying goods from Southeast Asia and China tend to use Long Beach and Los Angeles ports as primary U.S. gateways. Trains then transport the goods to Midwest markets.
Problem is, it’s a lot cheaper to ship the goods by water to the East Coast than rail them in from the West. Each container railed cross-country adds another $1,200 in shipping costs, while sending them by water costs about $400, says Joseph A. Dorto, general manager and chief executive officer of Virginia International Terminals, the operational arm of the VPA.

Because most mass marketers sell consumer goods from T-shirts to boom boxes at a discount, pricing is critical. Most goods are made overseas where labor is much cheaper. To keep prices competitive on the store floors, transportation costs must be kept to a minimum. Eschewing traditional cargoes such as coal and autos, Hampton Roads port officials are positioning themselves to capture the China trade and the distribution center/mass-market retail business.

Strong marketing and the infrastructure improvements are strengthening their hand. VPA officials are quick to note that the West Coast ports of Long Beach or Oakland in California are clogged and given to labor strife. Unions there have so much muscle that crane operators can make $150,000 a year — what a veteran ship pilot can make in Virginia — driving up West Coast transport costs. Tensions are running high since union contracts on the West Coast are due to expire in June. All of this smells like opportunity to the VPA.
On the East Coast, the VPA strategy has already chalked up some victories. Virginia’s ports have trumped the archrival port of Baltimore, which has seen its tonnage decrease while Hampton Roads’ has increased. Hampton Roads has beefed up its container-handling ability by adding four new and larger cranes at Norfolk International Terminals. The cranes, made in China, are double the size of existing ones and can handle larger ships. More are on the way as part of the NIT expansion.

Also helping are the dozens of larger mobile hoists called “Straddle Carriers.” These vehicles can place a container on a truck bed in less than a minute, cutting the time it takes to get a truck container on the road. When a third bridge-tunnel crossing is erected across Hampton Roads, both NIT and the new facility at Craney Island will have access lanes at the border of the dock area.

Taken together, these improvements have exposed Baltimore’s Achilles heel — its location is another 12-hour sail up the Chesapeake Bay that can add $50,000 a day in operating costs for larger ships. Also, labor peace in Baltimore is problematic. “That was our strategy. Any ship that goes to Baltimore has to go past us,” says Dorto of VIT.

Bashing Baltimore is one thing. But taking a bite out of the Big Apple is another. Hampton Roads will likely never bypass the huge Port of New York and New Jersey, the largest on the East Coast, which boasts of a huge Northeastern market immediately outside the ports’ gates. Big container ports at Elizabeth and Newark, N.J., likewise pose serious rail and truck challenges for the big Midwestern markets and manufacturing powerhouses such as Detroit and Chicago.

Still, Virginia can nibble on the Big Apple’s market share. Labor there is a problem and channel entrances are relatively shallow. Their sharp turns are hard to negotiate. When Hampton Roads dredges its channels to 55 feet, the monster ships of the future will call here, rather than New York and New Jersey.

Indeed, Virginia’s most serious competitor might be to the south. For years, the dark horse challenger was Charleston, which handled as much container traffic as Hampton Roads. But Charleston’s port, located near rich historic districts such as the Battery, has provoked outcries from conservationists. That’s giving rise to another Southern contender: Savannah, Ga. The city’s ports are conveniently located away from its charming historic areas (see story). Savannah officials have a larger manufacturing base than Hampton Roads and faster rail connections to large Southeastern U.S. markets.
Like the Virginians, the Georgians are pursuing mass market distributors. Savannah has snared much of Kmart’s trade, though that business may be a curse now that the bankrupt retailer is closing many of its stores.

For an idea of just how important supply chain logistics and low transportation costs are to discount chains, consider Steve White’s pristine office at the Chesapeake headquarters of Dollar Tree Stores Inc. Little multicolored pushpins — representing new Dollar Tree stores — adorn a map of the U.S., with a heavy concentration along the northeast corridor and California.

The map is running out of space. White, senior vice president of logistics, cheerfully acknowledges that Dollar Tree, known for selling items for just $1, has been growing so rapidly that it has challenged his cartographic abilities. He’s keenly aware that growth and expansion cost money. That’s why Chesapeake-based Dollar Tree is looking forward to cost-savings from the massive upgrades in infrastructure, new equipment and expansion underway at Norfolk International Terminal. The comprehensive work should help drive down costs for importers by boosting the port’s efficiency and luring a more diverse array of shipping lines and other services there. “Driving more volume into this port will give us more choices,” says White, amid making arrangements for an overseas business trip. “The number of all-water carriers here has been very small. If more carriers come here, it will drive the prices down. That’s what drives prices in this business: supply and demand. When you sell every item for a buck, that’s important.”

Dollar Tree expects to ship the equivalent of nearly 5,500 20-foot-long containers through NIT this year, more than a third of its total nationwide. The company imports about half of the items it sells; China accounts for about 90 percent of Dollar Tree imports.
As a homegrown Hampton Roads firm, Dollar Tree has been using the local port for years. The company uses only one other East Coast port — Savannah — where it opened a new regional distribution center about a year ago. Dollar Tree expects to tally the equivalent of about 5,200 containers through the Savannah port this year. It chose the historic Georgia city over other ports, such as Baltimore and Charleston, because it lowered Dollar Tree’s distribution costs and provided better movement of goods, White says.

Even with Savannah providing stiff competition for container traffic, Hampton Roads is winning a lot of new business. Since the mid-1990s, Lillian Vernon Corp., QVC Network Inc., CostPlus furniture, Sysco Food Systems, Gateway, Wal-Mart and other companies have erected distribution facilities in Hampton Roads, seeking to capitalize on the state’s comprehensive network of ports, terminals, rail lines and interstate highways. These facilities, while not doing much to boost Hampton Roads’ annual per capita wages, have been a quiet driver of the regional economy.

Distribution facilities, in fact, have fueled port-related employment during the past two decades, according to economists at Old Dominion University in Norfolk. While employment directly tied to the movement of cargo has not produced large gains during the past two decades, the number of port-related jobs has nearly tripled since 1979. The lion’s share of the growth came from the proliferation of distribution facilities: In 1979, only about 3,300 people worked in these sectors. By 2000, distribution facilities accounted for about 19,000 of the 27,550 port-related jobs in Hampton Roads.
Another factor that could boost Hampton Roads is the volatility of labor unions on the West Coast. Importers are hedging their bets against a looming work stoppage in Long Beach and Los Angeles by the International Longshore and Warehouse Union. The union’s contract expires June 30, and a new deal is expected to be in place by then.

Should a strike disrupt West Coast shipping, however, Hampton Roads and other East Coast ports would get an unexpected boost. Another positive is that labor relations in the Old Dominion are less testy. The International Longshoremen’s Association handles the movement of containerized cargo in Virginia. In fact, a lot of non-containerized cargo in Gulf Coast and East Coast ports is handled by non-union labor.

Not all East Coast ports enjoy good labor relations, however. Dr. Wayne Talley, an economist with Old Dominion University, notes the woes of the Port of Charleston, which tried to use non-union labor to move containerized cargo for Columbus Shipping Line. Predictably, the move created a union-management catfight and those wounds are still visible. Virginia’s unionized labor is not as hostile to management, says Talley, partly because of the state’s right-to-work laws, which do not require workers to be union members. Also, unlike the ILWU, the ILA has individual contracts with East Coast ports, including Hampton Roads, so it can’t threaten to strike an entire coast’s ports.

While Hampton Roads has emerged as the strongest East Coast competitor, some of the VPA’s actions might raise questions. In the mid-1990s, for example, the VPA embarked on a strategy of replacing its container cranes with larger and more expensive ones that could handle wider ships capable of traversing the Suez Canal. At the time, VPA planners theorized that many mass-market goods sold by discount retailers would originate in Southeast Asia and migrate to manufacturing centers in Indian and Pakistan. Accordingly, they posited, larger, wider container ships could take advantage of the Suez Canal, which could accommodate larger ships than the Panama, and make an easy sail to Hampton Roads. Such vessels can hold 8,000 to 12,000 containers, compared to the 4,000 containers typical now. That would cut shipping costs even more.

To serve the larger ships, the ports would need bigger cranes capable of reaching containers on the wider hulls. In the mid-1990s, VPA planned on replacing NIT’s cranes with Chinese-made cranes that rest on stands twice as long as traditional ones. Four such cranes arrived in Norfolk in 1998 and eight more are on order at a cost of $6 million each.

Since then, however, collapsing currencies and political tensions have stymied the South Asian manufacturers while the Chinese have come on strong. China is a straight shot across the Pacific to ports on the U.S. West Coast. Ships heading to Hampton Roads and other East Coast ports need to transit the Panama Canal, making NIT’s new cranes less essential than expected. Nevertheless, VPA officials say, wider ships will become commonplace eventually and, when they do, the cranes will become a competitive advantage.

Meanwhile, success is breeding success. For the first time in years, the Hampton Roads ports are attracting large private investments in container infrastructure. APM Terminals, the port terminal operating company of Copenhagen-based A.P. Moller Group, plans to build a new terminal in Portsmouth capable of handling several of the world’s largest container ships simultaneously. Moller Group is the parent of Maersk Sealand, which runs the largest shipping line in the world. Maersk officials acknowledge they have plans to build the terminal but are divulging few details. The project is slated to encompass about 200 acres of a 568-acre tract of land known as the Cox property, once the proposed site for a highly controversial oil refinery.

The flurry of activity at Hampton Roads also is drawing new ship lines. Zim-American Israeli Shipping Co. last year relocated its headquarters to Norfolk from the World Trade Center in New York City. Zim operates a large fleet of owned and chartered container ships on three global services and 36 regional services that calls on hundreds of ports worldwide. Company president Shaul Cohen-Mintz says the company relocated because Virginia offered a good cost of living, infrastructure and quality of life for its employees. The fact that NIT was nearby was a nice coincidence, he says.

Zim vessels call weekly at NIT, running along trade routes from North America to South America. Zim also is buying slots and swapping shipping lanes with other vessels, a common practice nowadays as liner companies seek to reduce costs and boost slim profit margins. Zim has been calling on Hampton Roads ports since the 1980s, when cargo volume was low, and Shaul-Mintz says the local port should benefit from increased import-export activity along both U.S. coasts. “The volume (of goods) coming into the U.S. is exceeding projections. The improvements at the Hampton Roads port are similar to what Savannah did, and it should help attract big companies here,” he says.

By thinking big, VPA officials are solidifying Hampton Roads’ seemingly unshakable position as the No. 2 port on the East Coast. Their ability to shift strategies in response to new market conditions has helped the port bypass historic contenders such as Baltimore and Philadelphia. Meanwhile, success breeds new challenges large and small.

On the bridge of the Cap San Lorenzo, docking pilot Warren Merritt and state pilot John North say that the big changes in the origins of crews sometimes presents a language barrier. “Not that long ago, just about everybody spoke English,” says Merritt. “Now, they might be from China or Indonesia or who knows where.”

The maritime industry also has to cope with increased demands for security. Since the September 11 terrorist attacks, both the Navy and Coast Guard have augmented their harbor patrols. Toting machine guns on their bows, gray Navy patrol boats with outboard motors race from wharf to wharf. The VPA is putting radiation-detection devices on all of their container cranes. There’s good reason for concern: NIT is next door to the home of the Navy’s Atlantic fleet. A primitive nuclear device hidden in a container could cripple the Navy. So far, the extra caution hasn’t hindered shipping, says Bill Cofer, head of the Virginia Pilot’s Association.

Down the road, there are concerns that paying for the massive port expansion could strain state finances. Improvements for the NIT are already well funded — this year’s General Assembly just approved $135 million in revenue bonds. Yet it’s uncertain how the giant Craney Island project, with its huge price tag, will be paid for. There, materials dredged to deepen channels will be packed down, forming a useable landmass that will be twice that of the existing NIT facility. Rail and highway connections will be added for the project that should satisfy growth demands by 2020. Even with an AAA bond rating, the commonwealth has limited capacity to issue debt. Craney Island may compete with other state priorities for a share of indebtedness.

Future trends for continued global trade, which seem so powerful now, must continue before the state and financiers take the $2 billion plunge. Although the smart money expects a bigger role for China in the U.S. economy, some analysts believe that its influence will be much less than meets the eye. Despite its enormous advantages with cheap and hard-working labor, China’s economy is still bound by Communist-style central administration that could stifle entrepreneurship and bog down businesses in bureaucracy. Also, China faces pressure to liberalize its political system. Maintaining stability is a delicate juggling act. Should social unrest spread, it could scare off investors. By betting so heavily on the China trade, Hampton Roads may find itself dependent on the whims of apparatchiki in Beijing, World Trade Organization or not.

For now, global trade marches on undaunted. Investors continue to pour billions of dollars into Chinese manufacturing capacity, and the ruling elite appears to retain firm control. The odds look good that Virginia will find a safe harbor in the 21st-century global marketplace.

Return to Virginia Business - May 2002