The container ports and terminals sector is witnessing increased adoption of innovative technologies especially after the recent consolidation in the liner industry which has intensified competition among terminal operators. This has encouraged them to use disruptive technologies to lower their per-unit handling costs.
Capacity expansion programmes (such as increasing berth length, installing additional quay cranes and extending yard facilities) and vertical integration strategies (such as offering end-to-end services) are aimed at supporting the topline. However, the introduction of game-changing technologies, such as automation and digitalisation, are focused on reducing operating costs below those associated with conventional operating modes.
There is no standardised technology solution in the real world. The level of automation varies from terminal to terminal as it depends on a number of factors including labour costs, market perception/desire to adopt the advanced technology, available resources (financial and technical) and the size of the terminal. Large terminal operators are more likely to adopt automation, but many smaller players with high labour costs are adopting it as well.
While a few fully automated terminals are in operation, the more common approach has been the targeted adoption of automated processes and/or equipment to solve specific problems. For many terminals the initial focus has been on automated gates, where the introduction of optical character recognition (OCR) and high-resolution digital imaging technology (1) improves the speed of truck check-in / check-out processes, (2) provides a robust damage inspection process (resulting in reduced claims), and (3) results in material labour cost savings. Other smaller-scale technology interventions, which are focused on assisting rather than replacing equipment operators, are also moving the sector towards a more automated future, albeit in more manageable steps which can reduce operational disruption and help overcome resistance from labour unions.
We believe if more opensource code architecture is adopted (wherein the source code of the automation is available to everyone), the industry will be able to combine these smaller automations into larger, more integrated systems, which can then result in seamless interaction across various terminal operations (vessel loading / unloading, ship-to-yard transfers, receipt, and delivery and gate operations).
To explore further, we will be looking at this from a cost perspective, highlighting recent examples and key future drivers.
1. Labour cost savings can result in improved and more stable EBITDA margins
Automating a brownfield project is potentially more expensive than a greenfield one. While both require significant initial capital outlay, the upgrading of existing systems is not only complex but could also require temporary halting of the current operations, adding to the overall cost of automation. Despite the initial outlay, the main driver for automation (for brownfield and greenfield projects) is to reduce the operating cost per container handled.
This leads to the question: To what extent should a terminal operator automate the existing equipment, systems and processes? This will depend on the long-term gains from automation, (reduction in operating cost / higher productivity vs the initial capex outlay). Our research indicates that larger terminals with higher volumes and high levels of utilisation have taken a more positive stance on automation compared to smaller terminals with limited volumes which have focused more on digitalisation of administrative processes.
To ascertain the financial impact of automation, we looked into APM Terminal’s (APMT’s) 2020 cost structure. Labour, at 48%, is the highest component of APMT’s operating cost (see Figure 1). Terminal automation has the potential to lower this cost significantly as automated terminals require less labour to operate. To quantify the impact, we ran three scenarios on APMT’s labour cost, wherein we reduced the cost by 30%, 40% and 50%, respectively. Every 10 percentage point reduction in labour cost, added 320 bps to the EBITDA margin. Therefore for 30%, 40% and 50% reduction in labour cost, 2020 EBITDA margins increased to about 41%, 45% and 48%, respectively (vs reported EBITDA margin of ~32%).
Figure 1: APMT cost spilt (%, FY2020)
Table 1: Scenario analysis on APMT’s labour cost (FY 2020)