Crossposted on LA City Watch

The Port of Los Angeles (the “Port”), one of the City’s three proprietary departments along with the Department of Water and Power and Los Angeles World Airports, is the leading container port in the United States.  And along with the Port of Long Beach, they control 72% of the West Coast container market. The Ports of Los Angeles and Long Beach (the “Ports”) are also one of the major engines of the Southern California economy, responsible directly and indirectly for over a million jobs and tens of billions in economic activity.

The Ports have two natural geographic advantages: a proximity to China, the world’s major exporter, and its location in Los Angeles, the country’s second largest metropolitan area.

And these geographic attributes are complemented by a skilled and experienced work force (though strike prone) and a well developed transportation infrastructure that allows the Ports to serve the Southwestern and Midwest (Chicago) markets as well as those east of the Mississippi River.

However, there other ports looking to grab market share in this highly competitive, bare knuckles container industry, where importers and their highly sophisticated logistic departments are looking for the most cost effective means of getting their products to their final destination, whether it is the factory floor or the retail shelves of the country’s major retailers such as Wal-Mart, Home Depot, and Target.

For instance, the Ports are experiencing increased competition from the well managed ports of Seattle and Tacoma.

There is also increasing foreign competition from the Port of Prince Rupert, a Canadian port that is two days closer to Shanghai than the Ports and which is dramatically expanding its capacity and efficiency to better serve the Chicago and other markets in the Midwest and Southeast.

To the south, the low cost Mexican port of Lazaro Cardenas is rapidly expanding its capacity and transportation capabilities to better serve the American market.  Importantly, the operator of this deep water port is controlled by Hutchinson Whampoa, a well connected Hong Kong company that has extensive port holdings around the world and controlled by one of the world’s most successful business tycoons, Li Ka Shing.

The Ports will also be experiencing increased competition in 2014 from ports on the East Coast and Gulf of Mexico when the widening of the Panama Canal is completed.  And these ports (such as Savannah, Charleston, Norfolk, and Houston), while twice the distance from Shanghai, have the advantage of being more efficient and closer to the markets in the Southeast and Midwest. And importantly, they are in cities and states that are very business friendly, unlike the City of Los Angeles and the State of California.

Nor have these competitive ports on both coasts experienced the devastating work stoppages like the Ports experienced in 2002.  This labor unrest cost importers billions as the supply chain was disrupted throughout the country, ruining the Christmas season for many retailers.

There were also threats of strikes in 2007 and 2011, once again damaging the reputation of the Ports and causing importers to divert cargo to other ports.

In response to the increased competition, the high cost Port of Los Angeles has developed a Five Year Strategic Plan with a Five Year Capital Improvement Plan totaling $1.5 billion. But these Five Year Plans appear to be little more than an “arms race” with the other ports with what  appears to be very little emphasis on cost efficiency and the Port’s strategic advantages and distinctive competences in this highly competitive industry where the cost is the driving factor.

Unfortunately, while the occupiers of City Hall may talk a good game, they are more of a problem than part of the solution.

The Port of Los Angeles, controlled by a Board of Commissioners appointed by the Mayor, is burdened by the very expensive LA Waterfront projects that will benefit the San Pedro and Wilmington communities, but will not benefit the shipping industry or provide for an adequate return on invested capital.

The Port also served as a dumping ground for surplus City employees in 2009 when the City was downsizing its General Fund work force … and today, the Port is overstaffed relative the Port of Long Beach.

These projects, as well as the burden of the $2 billion in debt associated with the Alameda corridor, have resulted in a subpar return on capital which may have an adverse impact on the Port’s excellent AA (Double A) credit rating.

The Mayor and the City Council have also done a superb job in alienating key constituencies of the Port causing importers to divert significant amounts of cargo to other ports.

The City infuriated the trucking industry by including the “company employee” mandate in the Clean Truck Program as a favor to the campaign funding Teamsters Union. This threat of increased unionization of independent truck drivers resulted in very costly litigation as the American Trucking Associations sued the Port to invalidate this controversial provision. The courts eventually tossed out this mandate, but only after the Port spent a rumored $15 million for lawyers and related expenses.

By the way, the Port achieved its environmental objectives by just requiring trucks that used alternative fuels … a good lesson for those in City Hall who are supporting the Exclusive Trash Franchises that will cost LA’s business community an additional $150 million a year.

City Hall has also managed to get sideways with Wal-Mart, by far the nation’s largest importer, by taking an aggressive role in opposing the establishment of Wal-Mart stores in the City and County of Los Angeles.

Before the Port embarks on its $1.5 billion capital expenditure program, Angelenos and the shipping community have the right to have a better understanding of the Port and its competitive position in this increasingly cost conscious market.  And like our Department of Water and Power, we need independent outside resources to review and analyze the operations, finances, and management of our Port of Los Angeles.

The Port of Los Angeles is too important to the City and Southern California to be left in the hands of Mayor Villaraigosa, Controller Wendy Greuel, the City Council, and the politically appointed management and Harbor Commissioners.