Supply Chain

Panama Canal Expansion a Boon for Midsize Companies, Too

It's not only multinationals that will benefit from the canal's new capacity, accommodating ships more than twice the current maximum size.
Doug DavidsonJanuary 5, 2015
Panama Canal Expansion a Boon for Midsize Companies, Too

When the much-anticipated expansion of the Panama Canal is completed late next year, cargo ships the size of aircraft carriers will ferry goods from Latin America and Asia directly to East Coast ports and back. These ships — up to two-and-a-half times bigger than those currently allowed — will uproot trade patterns developed over the last century and will affect nearly every sector of the U.S. economy.

Construction in progress at the Panama Canal

Construction in progress at the Panama Canal.

Obvious economic winners will be multinational corporations that will be able to quickly and more easily move vast amounts of raw materials and finished products across markets, as well as the companies and enterprises directly tied to transport, from state port authorities to warehouse operators and distribution centers.

In fact, some estimates say the new trade routes will put shipping companies in reach of nearly two-thirds of the nation’s population, opening significant opportunities for another important sector: Middle-market companies in the United States.

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The shifting path for global trade opens up chances for expanded international trade and for greater market share in the United States, as ports along the East Coast and the Gulf of Mexico take on greater importance for commerce. But to capitalize on the changes, mid-sized companies should take steps now to evolve their businesses and set new strategies.

Shifting Global Trade

It is hard to understate the scale of the Panama Canal expansion. The $5.25 billion project will add a deeper and wider third lane and a new system of locks so as to accommodate massive “post-Panamax” vessels (the term refers to today’s regulation-sized Panamax vessels that can navigate the 100-year-old canal system).

Just as important, a growing number of ports along the Gulf of Mexico and East Coast are being upgraded to handle the post-Panamax vessels, which require at least 50 feet of draft in freshwater harbors and massive cranes to move containers from the ships.

Projects across the East Coast ports are now under way, including deepening projects for numerous harbors, such as those in Miami and Charleston, S.C.; improvements to container-handling equipment in Savannah, Ga.; and a significant dredging project for New York. All of this will mean more efficient movement of the goods from the ships to trains, trucks or even airplanes.

Ultimately, the completion of the project will make the U.S. East Coast competitive with the West Coast in trading with Latin America and Asia – a shift that will have tremendous implications for nearly all industries.

Upgrading Ports and Surroundings

But the upgrades to the ports are just the beginning. Consider the complicated patchwork system that transports goods first from ship, then perhaps by train or semi-truck to warehouses, stores or other businesses. Many of the steps along those paths must be overhauled or enhanced to handle the increased amount of goods coming in from the Panama Canal.

For instance, in Miami, the Florida Department of Transportation has constructed a tunnel for trucks to transport cargo directly from the Miami port to an interstate highway, which makes it easier for the trucks and passenger cars to get around. In Norfolk, Va., officials are improving road access and rail capacity as part of a key terminal expansion. Also in Virginia, a private container terminal has opened in Portsmouth, while the Virginia Inland Port near Front Royal has been turned into a major hub with the Norfolk Southern Railway.

Private companies have been moving operations to be closer to the new hubs. Such companies include Porsche and Kia, which relocated operations to Georgia, and Caterpillar, which began building a $200 million construction-equipment plant in Athens, Ga. All of these moves are triggering new growth in trucking and other shipping industries — areas where middle-market companies have historically been able to thrive.

Exporting Opportunities

At its core, the Panama Canal expansion is about increasing global trade — and mid-sized companies should explore their options for exporting. According to a recent study from the Florida Trade and Logistics Institute, companies that export grow 15% faster than the average, pay wages that are 15% higher than average and are 12% more profitable than average.

These figures solidify the existing opportunities of expanding abroad. And thanks to the great interest in the opening of the Panama Canal expansion, there are a number of resources for companies looking to research their options.

Consider partnering with business groups and chambers of commerce in the major port cities, which often have networking events or informational sessions to discuss international trade. In addition, there are a number of federal programs that encourage smaller companies to sell their goods overseas. And business bankers and other professional service providers, such as attorneys and accountants, may be able to provide information on how to access those resources.

Growing Opportunities in Port Cities

At the same time, port cities offer a new path to growth domestically. As the movement of goods shifts from West Coast to East Coast harbors, numerous suppliers of goods and services will also move geographically. That means a shift in location for suppliers of products ranging from concrete to cranes, as well as professional services companies offering IT to staffing services to insurance.

Middle-market companies that provide needed services or goods should explore the port cities and their opportunity for expansion as a way to grow their domestic market. Consider that Dynacraft, one of the nation’s leading bicycle suppliers, has chosen the Port of Savannah as its new East Coast gateway. The company is betting on a newer, more reliable shipping network to reach its East Coast customers faster. Other companies will similarly site locations near the newly enhanced port cities, as a way to drive more reliable, faster trade — and over time, more revenue.

Focus on Business Infrastructure

This is an exciting time for middle-market companies looking to expand into the southeastern part of the United States and into overseas markets. But in addition to determining a sound business strategy, company leaders must undertake a thorough review of their business systems, to make sure they are prepared for exports and expansion.

Bankers, attorneys and accountants can provide specific information on necessary products and services. But in general, all companies looking to expand into the new territories must make sure they have the proper business insurance, export and import letters of credit, international treasury services, foreign exchange services and treasury management services. Adding new countries of operation or trade adds some complexity, but it does not have to stress day-to-day business management. In fact, a number of new banking programs and products allow for real-time visibility into all global accounts, making international business operations more seamless.

The expansion of the Panama Canal is already benefiting a number of middle-market companies, as a number of public and private infrastructure projects are being completed. But the end of the expansion is just the beginning of the opportunity for mid-sized companies, as they look now to scale or evolve their businesses to take advantage of the new markets.

Doug Davidson is a global commercial banking market executive for Bank of America Merrill Lynch.