From conventional to automated terminals : the optimal upgrade decision under demand and technological improvement uncertainties

Abstract

The age of automation and intelligence requires upgrading conventional terminals (CTs) with automated ones in the port industry. This paper examines how to optimally decide the size and timing of this upgrade under demand and technological uncertainties. We use the real options approach to derive the optimal upgrade decisions for two options: the upgrade option when the port decision maker upgrades CT by building a new Automated Terminal (AT) without interrupting the operation of CT and the upgrade option when the port decision maker abandons the capacity of existing CT and replaces the exited capacity by investing in AT. We then conduct numerical experiments to analyze how uncertain technological improvement and demand affect the optimal solutions. The results suggest that in the additional replacement option, high technological improvement and demand uncertainties will delay the AT investment but will not change the capacity investment choice for the AT. In the replacement upgrade option, high technological improvement will postpone the investment for AT and enlarge the exit capacity choice for the CT and the investment capacity choice for the AT. However, the exit capacity choice for the CT first increases and then decreases with increasing demand uncertainty. Finally, we extend our study to the public ownership of the port that adopts the upgrade option. Our study provides practical guidance for upgrading the CT and investing in the AT. It also contributes to the theoretical literature on automated technology adoption under uncertainty.