Picture this scenario: a fast-growing nation of nearly 90 million people has 70 percent of its containerized goods unloaded at 15 river berths, none of which can handle a ship larger than 1,000 TEUs.
That is the current reality in Vietnam. The future is bright for this Southeast Asian nation, but while waiting for that future, the country's logistics infrastructure is beset with problems.
As American Shipperchronicled in its December 2007 issue, the hurdles to growth in Vietnam come primarily from a lack of infrastructure development. Those problems manifest themselves in two ways: a lack of funding for large-scale projects, and a lack of coordination in the construction of goods movement infrastructure.
In the year that's passed, not a whole lot has changed on that front. At the end of 2008, American Shipper toured the areas in and around Ho Chi Minh City, where nearly three-quarters of Vietnam's containerized cargo arrives or departs.
What we found is a country in transition. Ho Chi Minh City, Vietnam's commercial hub, is a vibrant, prosperous place. It's loaded with young people, full of pulsating streets and aided by an air of hope.
Much of that has to do with Vietnam's fairly recent arrival at the table of the world's largest exporting nations. Vietnam's cost advantages over China became the stuff of legend the past few years, enticing some companies to diversify their sourcing strategies to include more than just China. It led others to concentrate wholeheartedly on Vietnam.
All this excitement has brought benefits. Foreign logistics companies have been allowed to drag the country's supply chain industry into the 21st century. One would be hard-pressed to tell the difference between the inside of an APL Logistics facility on the outskirts of Ho Chi Minh City and one in the Inland Empire of Southern California.
An improbable number of new roads and container terminals are being built (more on that in the March issue of American Shipper) and foreign retailers, as of Jan. 1, are now allowed to have wholly owned subsidiaries in Vietnam – a development expected to drive supply chain sophistication.
But that doesn't change the fact that 2009 will still be a difficult year for shippers, carriers and logistics providers in Vietnam.
A host of issues confronted Vietnam last year – a global slowing of demand, serious inflation (as high as 25 percent in the summer months), and currency issues that drove the Vietnamese dong to levels so low that some carriers refused to transact in the denomination.
The issue of infrastructure constraints – by far the largest issue the first half of the year – seemed to recede for the second half, as more short-term issues gripped the country.
For instance, Barry Akbar, APL's general director for Vietnam, suggested the severe port congestion that struck the country's terminals in summer had as much to do with the implementation of a new port management system at the country's biggest container terminal, Cat Lai, as a demand spike or long-term storage in Ho Chi Minh City's port container yards (another chronic problem).
But in the background, Vietnam was continuing its inexorable march into the future. Foreign direct investment still poured in, though maybe not at the level that the government suggests .
The main problem today is that the country's importers and exporters are exceedingly reliant on the 15 or so container berths in four terminals in Ho Chi Minh City, and those terminals are not exactly state-of-the-art. Only one is privately operated – the Vietnam International Container Terminal, the second-busiest terminal in Ho Chi Minh City and third-busiest in the country – and all handle only feeder services that connect to mainline services in Singapore and Kaohsiung.
VICT was the first dedicated container terminal in Vietnam, opened in 1998 on a 40-year concession from 1994. It's owned by a consortium of NOL (48 percent), MOL (15 percent) and the government-owned Southern Waterborne Transport Corp. of Vietnam (37 percent).
VICT handled 572,000 TEUs in 2007. (Data for 2008 container volume in Vietnam's terminals wasn't available at the time of writing, but was expected to be much the same as 2007.)
The terminal can't handle vessels larger than 20,000 tons as the draft is only 10 meters, said Joseph Wann, general director of VICT. That means 700 1,000-TEU vessels are all that can call at the terminal.
That's not the only issue VICT faces.
The terminal operation sits on a relatively small footprint of 200,000 square meters, with three berths and quay length of 486 meters. Another berth of 192 meters was due to open at the end of 2008, one that will allow four vessels to berth at the same time. The terminal has five gantry cranes but that will expand to seven when the new berth is completed.
There are 370 reefer plugs at VICT, a key feature since shrimp and catfish are major exports out of southern Vietnam.
'We want to increase our capacity,' Wann said.
From 1999 to 2006, throughput at the terminal increased from 44,000 TEUs to 447,000 TEUs. In 2007, volume shot up another 28 percent to 572,000 TEUs, but VICT officials said they expected 'minimal growth' in 2008.
While VICT sits quite close to Ho Chi Minh City's central districts along the banks of the Saigon River, the biggest terminal in the country, Cat Lai, is a few miles away on one of the other rivers that weave through southern Vietnam.
Cat Lai, operated by the Vietnam Port Authority through the government-owned Saigon Newport Co., handled 1.8 million TEUs in 2007. A crude measure of its relative inefficiency, compared to VICT, is that it handled three times as many containers as VICT but on four times the amount of terminal space. Then again, Cat Lai only has twice as many berths as VICT.
There's a limit to how productive these terminals can be, given their size and draft restrictions. Ho Chi Minh City sits several miles upriver from the South China Sea, meaning that ships calling at its ports have to be small and shallow enough to navigate rivers. It's a 45-mile journey from the sea to Ho Chi Minh City, one that takes about four hours.
Either way, 55 percent of the country's containers move through these two facilities alone, while another 13 percent is handled at two other multipurpose terminals owned and run by the government, Saigon Port and Ben Nghe Port, both near VICT.
The only terminal in the country even close to Cat Lai and VICT, in terms of throughput, is Haiphong, which handled 683,000 TEUs, or roughly 16 percent of the 4.28 million TEUs moving through Vietnam in 2007. Haiphong is the closest port to Hanoi, Vietnam's capital and northern population hub.
The extent to which southern Vietnam controls containerized cargo movement shouldn't be understated. Development is occurring apace throughout the country, but Ho Chi Minh City is, by far, the more westernized of the country's two major cities. As such, there's a legacy of foreign companies investing in the South the past two decades that hasn't yet been matched in the center or north of the country.
That's certainly changing, with new terminals being developed in Da Nang (at the midpoint of Vietnam's long north-south coastline) and Haiphong, huge manufacturing sites in the north being built, and the logistics facilities to serve them rising alongside.
But from a containerized cargo standpoint, things still tilt markedly to the south. For one, industries in Vietnam are still largely clustered around Ho Chi Minh City. And only 19 percent of Vietnam's roads are paved.
While the government has put development of highways at the top of its priority list, the current cargo movement situation demands better roads now, not at some point in the future. According to statistics provided to American Shipper by APL, two-thirds of domestic freight in Vietnam moves by road, compared to 20 percent by inland waterways, 10 percent by coastal shipping and only 3 percent by rail.
Without proper conduits to get goods from factory to city, or factory to port, it doesn't matter how much container capacity is coming online. And there are also policy roadblocks.
Anyone who has been in Ho Chi Minh City knows that the city is overwhelmed with scooter traffic. Veritable armies of neatly lined up two-wheelers seem to occupy half of the city's roads at any time of the day. Conscious of the need to keep the city center's roads as clear as possible, the government has prohibited 40-foot containers from being trucked into Ho Chi Minh City's central districts during peak rush hours – 6 to 9 a.m. and 4 to 9 p.m. That severely hamstrings terminals and container depots that are working with limited space to begin with.
To get around that hurdle, VICT, for example, works with two inland container depots upriver from the terminal from which containers are barged to VICT. The terminal operates 15 24-TEU barges.
'If the government doesn't build the inland infrastructure, (shippers) will have to barge,' Wann said.
Barging is an option around Ho Chi Minh City because the region's two large industrial areas – Bing Duong and Dong Nai – are both relatively close to the many rivers that wind through southern Vietnam.
On a tour of a logistics facility in the sprawling industrial area of Dong Nai – one where APL was handling thousands of boxes of Nike shoes destined for U.S. markets – officials told American Shipper that the problem with building infrastructure is primarily the price tag.
As with most developing nations, the list of needs far surpasses the government's ability to financially meet them. By some estimates, $4.5 billion is being sunk into Vietnamese ports the next five years, but a commensurate amount, at least, is needed for landside infrastructure.
To be fair, while traffic was quite congested in the city center, in Ho Chi Minh City's outlying districts it didn't seem too bad. But those on the ground insisted it can get quite bad, so shippers and service providers persist, knowing (or at least hoping) that things will be better in the future.
There are intangible ways cargo movement can be bettered in the short-term. Productivity levels at terminals are low and terminal handling equipment is not modern. To upgrade capacity, VICT is bringing in new rubber-tired gantry cranes that will allow the yard to be stacked one over six instead of the current one-over-four arrangement. Its new berth will fill in the gap between two existing berths, giving the terminal a continuous stretch of quay that will make yard operations more efficient.
The productivity problems are exacerbated at the state-run terminals. There's chronic truck congestion out of Cat Lai as well as VICT, and not all of it can be blamed on the rush hour truck ban.
All this congestion, of course, is because of the volume of containers already pouring into Vietnam, never mind the anticipated growth in the next decade.
'Container volumes are impacted by factors including the increase of empty repositioning requirements, barging from inland depots and transshipment cargo opportunities – all of which will increase demands at Vietnam ports,' according to APL.
Containerized cargo in Vietnam grew at a rate of nearly 20 percent year-on-year from 1995 to 2006. Then it grew further in 2007, with Cat Lai seeing 25 percent growth and VICT 28 percent. Prior to last year, the talk was whether Vietnam's containerized cargo would continue to grow at 20 percent a year, or even higher. With the downturn in demand, that talk has quieted for the moment, but the country's long-term growth prospects remain high.
To the United States, Vietnam's third-largest trading partner and its largest export market, the biggest commodities are easily furniture, apparel, footwear and refrigerated goods. In 2007, U.S. two-way trade with Vietnam was $12.5 billion. Worldwide, Vietnam's top export is crude oil, while its top import in refined petroleum (the country doesn't have a single refinery yet). While apparel and footwear are the second and third-biggest exports, electronic and computer components are sixth and creeping up the list.
The costs of continued port congestion, according to APL, might stifle the growth in these export categories. For carriers, there are vessel delays, and missed connections from feeders. For shippers it's longer and unreliable transit times. The worry is that sourcing could shift away from Vietnam if its cost advantages in labor don't outweigh the supply chain headaches.
But then again, there's always a silver lining. The American Chamber of Commerce in Vietnam suggested in December that an expected drop in exports from Vietnam to the United States may be a blessing in disguise this year.
'The expected drop in exports from Vietnam may offer an opportunity to 'catch up' in infrastructure development, even though project financing has become more challenging,' the chamber said. 'We also note that China and other neighboring countries have announced increases in government spending on key infrastructure projects as a means of increasing competitiveness, as well as sustaining economic growth despite falling levels of foreign investment.'
While help is on the way this year and next, 2009 could seem a lot longer than 365 days.