At the recent Logistics Conference of Hong Kong, the Chinese Minister of Communications Zhang Chunxian scoffed at the notion that Hong Kong's days as a logistics hub were numbered, making a strong pitch for the Closer Economic Partnership Arrangement (CEPA), a de facto free trade agreement, signed between Hong Kong and mainland China. Hong Kong and the Pearl River Delta (PRD) in southern China, where Hong Kong companies have proliferated, will play a symbiotic role long into the future, claimed Zhang, as the former British colony continues to develop logistics and infrastructure links with China.

Underscoring the need for "Hong Kong and the mainland to cooperate and benefit each other," he noted that 22 Hong Kong companies had already applied to set up logistics operations under the CEPA regulations with more expected by the end of 2004. Indeed, with Hong Kong companies having shown "great interest" to start haulage operations in China, CEPA would bring "even greater opportunities" in shipping and land transport.

While such official blessings are comforting, the question that keeps every China-centric shipper guessing is how long will Hong Kong continue to assert its unique role as a logistics hub in the Asia-Pacific region? Various organizations connected with the logistics sector feel that more work needs to be done to improve transport links between Hong Kong and the PRD region, while at the same time the costs of freight transport must be reduced.

The jury is still out about whether the writing is on the wall for Hong Kong, given the rising costs and mushrooming cross-border competition from ports and airports on the mainland.

Pros and cons

Willy Lin, who heads the Hong Kong Shippers' Council, points out some of the drawbacks on the mainland that might not be immediately apparent to prospective shippers. For example, shipping a consignment of garments from Dongguan through one of the Shenzhen ports in Southern China can take two or three days longer than using Hong Kong, since the shipment has to pass at least two mainland customs posts on its way to Shenzhen.

Hong Kong's dense network of connectivity to foreign ports and airports is another advantage in contrast to the mainland. Over the years, Hong Kong has emerged as the world's largest seaport, handling a volume of 20.6 million TEUs. According to the Marine Department, one vessel arrives or departs Hong Kong every 1.2 minutes, one TEU is handled every 2 seconds and one passenger enters or leaves by ferry every 2 seconds. Hong Kong is also the world's largest cargo handling airport, handling an air-cargo volume of 2.64 million in 2003. These kinds of volumes, say its supporters, bear an elegant testimony to the city's "invincible position" as the world's biggest sea and airport.

While acknowledging Hong Kong's additional shipping links with foreign ports compared to the Shenzhen ports, Maersk Hong Kong's Managing Director Charles Wellins points out its two main disadvantages-cost and connectivity. A bridge linking three cities-Hong Kong, Zhuhai and Macau-which is supposed to ease congestion upon its completion, will help generate "huge growth" in container volumes for Hong Kong in the western part of the PRD region, but further progress would still be needed to make it easier to truck cargo shipments across the boundary.

The fears about Hong Kong losing its cutting-edge advantage to ports and airports in China have been compounded by the release of a government-funded study by the British consulting firm GHK ("Master Plan 2020"), which urgently calls for cutting costs. About 60 percent of the cost difference, according to this report, is caused by regulatory barriers such as restriction on trucking licenses and anachronistic customs procedures, which artificially inflated the cost of using the cargo pipeline.

Nonetheless, Hong Kong remains very much a force to be reckoned with in the logistics sector. "Hong Kong is the world's busiest sea and airport. It has the world's eleventh-largest trading economy with easy access to the 35 million strong consumer population of the Pearl River Delta, which accounts for 35 percent of the mainland GDP," says Simon Galpin, the Associate Director General of InvestHK, a government-funded agency that attracts foreign investment in a number of sectors (including logistics) to Hong Kong.

Hong Kong has a "great commander control advantage," with many big logistics companies controlling their China operations from their regional headquarters in Hong Kong, Galpin recently explained in an interview with World Trade at his office.

This view is also echoed by Andy Weber, the Managing Director of Kuehne & Nagel (Asia Pacific) Management Ltd., a Swiss multinational logistics company, which controls its entire Asia-Pacific operations from Hong Kong. Kuehne & Nagel, which recently acquired the "A" class license, allowing it to open and operate a fully 100 percent-owned company in the mainland, says that Hong Kong will continue to retain its "strong logistics position even though competition from across the borders will get fiercer by the year."

James Thompson, a Hong Kong-based U.S. businessman, who is the chairman of the Crown Worldwide Group, (logistics, relocation and records management) says that the basic reason for any company to have a base in Hong Kong is because of the "excellent facilities" available in the city. "The customs formalities and paperwork is easier here than anywhere else in the world. We have made very good money in Hong Kong." Crown made its move to China first in the 1980s, a time when that country was just opening itself to the outside world. "Hong Kong provided an incredible link between the Western and Chinese mentalities," Thompson observes.

Bridging two worlds

Crown doesn't envision China's ports in Shanghai and in the north of the country as a threat to Hong Kong. On the other hand, Shenzhen in southern China, which is closer to Hong Kong, has posted "incredible growth." However, "the irony" as Thompson calls it, is that the ports in the PRD region are actually controlled by Hong Kong. "These new ports will not be any major threat but will only spread the distribution. The (Shenzhen) ports will merely enhance the competition. Also, don't forget that we are going into an era where vessels are getting bigger and bigger all the time. Hong Kong with its deep-water facilities will be able to accommodate the big ships, which may not be true of other ports elsewhere," he adds.

Thompson has been closely monitoring the port development in Hong Kong, which has added a terminal to meet an additional capacity of 4 million TEUs. Besides having sufficient operating capacity for the next five or six years, "Hong Kong is well positioned to receive the big ships."

He urges U.S. corporations, particularly the small- and medium-sized companies (SMEs) with limited resources, to look upon Hong Kong as a platform for doing business with China. "Hong Kong has this profound wealth of knowledge and information about China. It also has a great financial system and the availability of professionals such as lawyers, accountants and the like who understand China best," he says. The "biggest mistake" made by U.S. companies is to directly enter China and by choosing the wrong partners on the mainland. "The changes occurring in China are best interpreted here in Hong Kong," he says.

Thompson's word of caution about directly entering the China market is echoed by Frank Martin, the President of the American Chamber of Commerce in Hong Kong. "SMEs should be very careful about going directly to China, which can be a difficult market with little transparency for the unsuspecting newcomer. The U.S. Commercial Service in Beijing spends about 70 percent of its time in sorting out problems of U.S. companies," Martin says. He urges U.S. companies to "first dip the toe" in Hong Kong before venturing into China.

Martin dismisses the high-cost argument against Hong Kong, saying that the efficiency and productivity in the city "more than make up for the high prices." While China is a huge and attractive market for U.S. companies, Hong Kong can provide them the cushion they need to enter the mainland market. "Take the Hong Kong route to China," sums up Martin's advice to U.S. companies, whom he urges to do their homework first before venturing into China.

Executives of foreign logistics companies reaffirm their faith in Hong Kong's international airport Chek Lap Kok. The GHK study says that Hong Kong will remain the dominant player in a vastly expanded market, although the majority of the high-value air cargo manufactured across the border will move through the south China airports.

Chek Lap Kok's cargo terminals currently handle some 90 percent of the PRD's international air cargo, but this volume is expected to decline to less than 50 percent by 2020.

The GHK study repudiates the widespread perception that the comparatively high cost of transportation through Hong Kong is undermining the airport's competitiveness. Indeed, transporting PRD cargo through Hong Kong was cheaper than from the airport in southern China. For example, it was 13 percent less expensive to use Hong Kong than Guangzhou for cargo moving from Dongguan to the Western coast of the United States. In addition, it was also faster by an average of two days.

Hans C.A. Bakker, the Commercial Director of the Hong Kong Airport Authority, cites speed, frequency and critical mass as advantages. "Flying out of Shenzhen, for example, is more expensive, thanks largely to its higher landing rates, which are 25 percent higher than in Hong Kong. Also, fuel prices are higher than in Hong Kong where you have competition."

Bakker said that Hong Kong was "constantly working" towards improving connectivity through its multimodal philosophy of transportation by air, sea and road. One trend conspicuous at Hong Kong airport was the steady increase in express cargo traffic, which was growing as fast as the general cargo. Because of the advantages offered by Hong Kong airport, the DHL express cargo carrier is expected to start its operations here very soon. "This will open up more capacity," Bakker said.

However, the study recommends Hong Kong Airport Authority to pursue a strategic partnership in southern China, particularly with Shenzhen's Baoan International Airport-and do it fast while it still has the leverage to look for opportunities in its favor.

"Hong Kong at the moment has phenomenal service advantages," GHK (Hong Kong) Director Jonathan Beard observes. But, that advantage won't last forever. "Now's the time to be making strategic alliances, from a position of strength."