11.13: Transportation

Transportation

An important contributor to geographic thinking regarding industrial locations was Alfred Weber (1868-1958). Weber took the concept of using lowest overall cost for the locations of industry and expanded it. He developed models that held many inputs to manufacturing constant in order to demonstrate the importance of transportation in determining least cost.

Weber believed that transportation costs were the most relevant factor in determining the location of an industry. The best way to minimize the cost of transport depends on the raw materials being transported. There are two kinds of raw material, things that are more-or-less everywhere (ubiquitous) and local raw materials. For the ubiquitous material (e.g. water), you have more freedom to locate, because it’s commonly available. In this case, you should build your facility near your market, then you won’t really need to transport much. We see examples of this in the locations of breweries and soft-drink manufacture.

On the other hand, if the material is only in a particular place (like bauxite), then you have some calculating to do. First you need to figure out if your manufacturing condenses, distills or otherwise shrinks your material. We call these processes bulk reducing. If you aren’t doing that, but instead took small pieces and assembled them into something that was harder to transport (like a tractor) then it is called bulk-gaining. In order to minimize transport costs for bulk-reducing activities, you want to process them as close as possible to their extraction site. Examples of this are metal smelters and lumber mills.

Bulk-gaining processes are a little more complicated. You need to find the least cost point between your source materials (which may be numerous) and your market. Remember that the goal is overall lowest cost, so that involves many calculations to determine which is the cheapest location, meaning your location might be in between several your inputs and/or market. A general rule of this is that these sorts of businesses tend to be fairly close to their final markets.

There were two last considerations that Weber discussed, agglomeration and deagglomeration. Weber called them secondary factors, because they were less important than the previously mentioned characteristics. Agglomeration is related to the idea of economy of scale. Sometimes there are advantages to having similar industries near one another. Consider the manufacture of computers. Computer manufacturers don’t make their own components, they buy them, and they use similar tools to put them together, and they use similar labor, and so forth. When industries concentrate in a place they can share some resources and split the cost. This is not to say that this is a conscious process, in many instances it just develops on its own. Degglomerative factors produce diseconomies of scale and are responsible for redistribution of industry. Examples of this could be escalating prices for land or labor which drive production away from an area.

Figure | Mills and Mines This is a photo of a lead mine in South Dakota in the 19th Century. Notice the large piles of waste material left behind. Author | John C. H. Grabill Source | Library of Congress License | Public Domain

Reducing Transportation Costs

Containerization has greatly changed the nature and cost of transportation. In the past, transporting goods required large numbers of people to move goods around. People loaded and unloaded goods at break-of-bulk points. Break-ofbulk points were places like railroad terminals, where goods were loaded onto trains, or ports, where goods were loaded into ships. Break-of-bulk points had large numbers of people loading and unloading items. Containerization changed that process tremendously. Goods are now packed into large metal boxes, then the bokes are moved from point to point. Cranes move the boxes from trucks to trains to ships, then reverse the process the process at the shipping destination. Intermodal transportation assumes that a container will seamlessly be transported by any number of different shipping methods. The number of people necessary to ship goods plummeted. The speed at which goods moved increased tremendously, since the bottlenecks were removed from the system. Containerization is a good example of an innovation that did not require a large technological shift, it simply required rationalizing a system that was labor intensive. Logistics, the commercial activity of transporting goods, is the glue that holds the global production network together. Without relatively inexpensive shipping, many offshored industries would not be able to make goods in distant factories, ship them to other places, and still make a profit.

Figure | Shipping Containers Uniform size and shape allow for rapid transport and sorting at minimal cost. Author | Frank McKenna Source | Unsplash License | CC 0

Reducing Capital Costs

Operating an industry has more costs than materials, labor, and shipping. Other factors such as taxes, regulatory compliance, and financial incentive packages can either attract of repel manufacturing. These factors increased tremendously in importance. It has become possible for many industries to ignite a “bidding war” in order to secure increasingly advantageous incentives to locate in a particular place. Tax breaks, construction allowances and other benefits will be paid by the places that desperately struggle to attract industries. This has triggered what has been described as a race for the bottom as places promise more than they can afford in the hopes of securing outside investment.

Another consideration is access to capital. Businesses often need investment funds, or short-term credit. Being unable to secure capital prevents many businesses in developing countries from starting or continuing. Countries without banking infrastructure find it nearly impossible to raise sufficient money to develop their own industries. Companies in countries like this are forced to hunt for financial backing in other countries.

Risk

Industries have large sunk costs. Corruption can take advantage of this to demand bribes, protection money, or other expenses that siphon off profit. High levels of corruption inhibit investment. Industries are risk averse. Places that are politically unstable will also have difficulty industrializing, since companies will be reluctant to build in places where any investment could be lost in a revolution or other political violence. This doesn’t mean that industry requires representative government. Many places have experienced tremendous economic development without democracy. It just means that companies have to feel that any money that they invest in a place is safe.

Accessing a Market

One of the interesting examples of this concept is the number of foreign companies that establish themselves in the United States. Companies such as Foxconn (Taiwan), Hyundai (Korea), and BMW (Germany) build products in the United States. A good question to ask yourself would be “Why do they do that?” It turns out that locating in the United States is advantageous for them. First, they can reduce shipping costs, we have already addressed that. Second, although labor in the United States is relatively expensive, it’s not appreciably different than in their home markets. Third, they may be able to avoid tariffs on imports. Finally, being in the United States places these products near a large market. The North American market is very large, being embedded in it can be advantageous for some companies.