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Bridging The Logistics Divide(HKTDC Hong Kong Trade Services, Vol 01,2003)

Vol 1, 2003

Cover Story

Bridging The Logistics Divide

Controlling costs key to integration and growth

Opportunity beckons for local SMEs

Bridging The Logistics Divide

A controversial proposal to build a bridge to link the western section of the Pearl River Delta (PRD) with Hong Kong symbolises the overwhelming importance of logistics to the integration of the two areas.

The proposed bridge could add billions of dollars to service exports from the SAR, a recent report entitled Hong Kong & the Pearl River Delta: the Economic Interaction argues.

It points out that if a bridge were to bolster Hong Kong's trade-related services and transport exports by 10%, this could mean, "US$2.5bn in additional service exports per year (using 2000 figures for employment and trade in services), and 56,000 jobs''.

The 2022 Foundation research further observes that a bridge is an investment for several decades and its value "to the region is likely to dwarf all the figures that have been estimated as the costs of such an undertaking (which have ranged from US$2bn to US$3.7bn, depending on the source and route)''.

The latest study reinforces other economic analyses that have pointed to the advantages of connecting Hong Kong to the western delta. Hong Kong Trade Development Council chief economist Edward Leung notes that exports of the Greater Pearl River Delta could increase by US$40bn, "should the export orientation of the western PRD increase to the existing level of the eastern PRD over the next 10 years''.

"A major reason for the lower export orientation of the western PRD is the weak logistics connection with Hong Kong compared with that of the eastern PRD, particularly in road transport," Leung says.

"Providing more direct and convenient links to Hong Kong will be vital to enhance the export capability of the western PRD. By completing the PRD loop in land transport, the western PRD will be able to improve its connectivity to the international market and enhance its attractiveness as an export manufacturing base and a destination for foreign direct investment. A fully logistically integrated PRD will enhance the competitiveness of the whole region."

If and when they are implemented, efficient road links to the western PRD, comprising Zhuhai, Zhongshan, Jiangmen, Foshan, Shunde and Nanhai, will mean greater demand for logistics services.

This inevitable logistics development will be further accelerated by a raft of associated developments and initiatives including:

  • improved connectivity through road networks, rail lines and bridges, aviation facilities, ports and multi-modal transport links
  • the Logistics Centre at Hong Kong Int'l Airport at Chek Lap Kok
  • a proposed logistics park for high value and time-sensitive goods
  • moves to develop a digital trade and transportation network (DTTN) to reduce inefficiencies arising from the "digital gap" and to facilitate data sharing among trade and logistics industry stakeholders
  • policy initiatives aimed at supporting the development of logistics
  • post-WTO liberalisation of the services sector on the mainland.

Professor Michael J. Enright, of the School of Business at the University of Hong Kong, notes that infrastructure developments such as these inevitably open up additional avenues for business.

"Enhancing physical connectivity will make it much easier to invest in the western part of the PRD," he says. "New infrastructure will result in new investments and entirely new logistics flows.''

However, the 2022 Foundation study cautions that the majority of Hong Kong-based company owners, senior managers, service providers and overseas buyers have indicated they would "only invest in facilities that could be reasonably reached in three hours'' by car from Hong Kong.

"Access creates the potential for substantial trade flows," Professor Enright advises. "In the PRD, access has driven investment, investment has driven trade and trade has driven logistics."

Given this rationale, there are obviously enormous untapped opportunities for Hong Kong logistics operators and service providers - even with this three-hour access limitation.

The mainland logistics market, which is estimated to be worth US$200bn with the third-party logistics (3PL) element valued at US$4bn annually, has been identified as a growth sector in the 10th Five-Year Plan from 2001 to 2005.

According to the China Federation of Logistics and Procurement, there are more than 10,000 companies engaged in logistics, who generated sales of more than US$650bn in 2001 as they fuelled ever-increasing growth.

The PRD is central to this phenomenal growth, not only as a huge manufacturing centre but also as a growing industrial market. "Increasingly, in addition to end products, components and capital goods are being produced locally," Professor Enright notes.

Moreover, the PRD still represents the vanguard of the international portion of the mainland's economy - with a disproportionate role in terms of its trade and foreign investment. "Given announcements in the last four months, it appears that Shenzhen will continue to be a leader in the mainland's economic reforms," Professor Enright adds.

He notes the mainland is relying heavily on the Yangtze River Delta and the PRD to aid in the development of its economy. "In terms of logistics, the national road network will reduce the travel time from the PRD to the interior sharply," Professor Enright adds. "This will increase the catchment area of the PRD ports and airports and dramatically expand the area for investment."

These catchment areas will converge in the central mainland around Wuhan or Chongqing. "Given the advantages of the road network over river and rail modes, a significant part of this area could very much be within the catchment of southern China," Professor Enright says.

More than 60,000 kilometres of highways were built last year alone at a cost of US$36bn, increasing the freeway system to 1.75 million kilometres and laying the foundation for further economic growth.

Anthony Wong, executive vice president of the Hong Kong Logistics Association and a director of International Logistics Partners, says infrastructure such as road and rail connections as well as improvements to existing links are essential to further economic integration and the development of the logistics business.

"There are some procedures that inhibit the fluent flow of cargo, including customs requirements," he notes. "But much has been done to speed up cargo clearance, such as improvements in physical infrastructure. The customs clearance process has been streamlined to improve the whole cycle.''

Customs data shows that re-engineering the processes at the border control points last year led to significant improvements. The average clearance time for a laden goods vehicle has been cut from 45 seconds to 33 seconds, that for an empty goods vehicle has been reduced from 20 seconds to 16 seconds and the average clearance capacity for goods vehicles has been improved from about 90 in 2001 to about 120 per lane every hour.

These achievements have been complemented by the Automatic Vehicle Recognition System (AVRS) installed at the three land-boundary control points since May 2002.

Further improvement is expected once Customs, Trade and Industry and the Census and Statistics departments introduce the Electronic Data Interchange - Manifest (Eman) system this month, providing a single channel for submitting cargo manifests for rail, ocean/river and air transport. An additional bridge is also being considered at the Huanggang-Lok Ma Chau land border crossing to reduce congestion.

"There are plans to move the customs control point to another location, rather than at the boundary, and a pilot project has been undertaken," Wong adds. "This will mean cleared trucks will be able to take an express lane."

He believes continuing improvements are necessary for further integration with the PRD. "The 24-hour opening of the Huanggang-Lok Ma Chau border crossing in January 2003 is a big step in that direction.''

Other developments include the plan to link the Sheung Shui to Lok Ma Chau Spur Line with the Huanggang underground railway, and schemes to streamline processes at Lo Wu and Sha Tau Kok checkpoints to reduce delays that surveys show can cost as much as two million working days annually.

This congestion will be further reduced following the recent decision by Hong Kong and the mainland to set up immigration and customs facilities, on the Shenzhen side at Huanggang and the new control point for the Shenzhen Western Corridor, by mid 2005.

A high-speed rail link between Hong Kong and Guangzhou is also being discussed, while a new Marine Cargo Terminal at Hong Kong Int'l Airport will pave the way for inter-modal connections.

In addition, the construction of the Shenzhen western corridor and the proposed Hong Kong-Macau-Zhuhai bridge will further improve road transport connections.

"But Hong Kong has to build more ports to maintain our status as an international marine transport hub, and we also need to introduce new terminal operators, although we have six operators," Wong says. "Our port is very congested and the terminal area is small.''

The Container Terminal 9 project, now underway, will add six more berths to the 18 existing berths at Kwai Chung and help ease the problem somewhat, but further action will have to be taken if the pace of PRD-Hong Kong integration is to be maintained.

Ongoing logistics innovations such as these are essential if Hong Kong SMEs are to enhance and encourage possible cooperation opportunities, including transfers of skills such as management knowledge to mainland logistics firms.

"Hong Kong SMEs can also explore ways to contribute funding to logistics firms on the mainland," Wong notes. "Already some firms are exporting their IT services, such as software. And one Hong Kong logistics firm is being supported by Guangzhou authorities as one of 12 joint venture operations.''

Cooperation such as this is bound to increase over the long term as Hong Kong continues to explore areas of common interest and draw on the complementarities to support greater development of, and further integration with, the PRD region.

This in turn will directly and indirectly enhance the Hong Kong Special Administrative Region's acknowledged position as the financial and commercial centre of the delta. For, as chief executive Tung Chee Hwa declared in his January policy speech, "The purpose of our initiatives in the Pearl River Delta is to bring the whole region to the world, and the world to the region."


Controlling costs key to integration and growth

Lower labour costs and the growth of the port of Yantian are drawing logistics firms to major cities of the Pearl River Delta, according to a recent study.

Many service providers "ranging from large multinationals to the smallest of firms'' have relocated "mostly into Guangzhou and Shenzhen", according to the research report Hong Kong & the Pearl River Delta: the Economic Interaction.

"For consolidators, for example, it is advantageous to have a single operation in close proximity to the port of shipment. Starting in the mid-1990s, Hong Kong-based consolidators started moving from Hong Kong into Shenzhen, attracted by lower costs and by the growth of the port at Yantian. This movement accelerated in the later 1990s,'' the 2022 Foundation report says.

"By 2002, many consolidation operations had relocated to Shenzhen, mostly near Yantian. A wide range of activities are performed in these consolidation centres, including packing, mix and match, labelling, and the affixing of bar codes to help direct a product to its destination.''

Firms that have shifted their operations from Hong Kong have carved out niches tied to a distinct manufacturing and foreign customer base, which cushions them from direct rivalry with counterparts from the Chinese mainland. Nevertheless, there is intense competition in the sector as large numbers of mainland firms enter the market, the report says.

"The fees charged by mainland-based trucking firms, for example, are falling rapidly and Hong Kong end-users of transport services noted that this dynamic is also driving down fees charged by Hong Kong-owned trucking firms.''

Researchers found that labour costs for running consolidation and warehousing facilities in Shenzhen are much lower than in Hong Kong. "For example, clerical staff for the manual inputting of information can be hired in Shenzhen for the equivalent of HK$1,200 per month, or one-tenth the salary of someone doing the same job in Hong Kong,'' they point out.

"Pearl River Delta warehouse workers are reported to offer the same set of skills as their counterparts in Hong Kong, at substantially lower prices. In addition, some Hong Kong-based managers of logistics firms claim that the PRD region workforce is far more motivated than their Hong Kong workforce.''

Looking into the future, the study predicts that the division of labour between the locations will probably involve Hong Kong and Shenzhen as hubs for international logistics activities.

"Hong Kong will remain an important regional hub for managing and coordinating multidirectional flows of products and components within Asia-Pacific and between Asia-Pacific and the rest of the world. Its world-class hard and soft infrastructure and supporting services are without par on the Chinese mainland. Hong Kong will attract and retain regional and sub-regional operations of multinational logistics firms.''

Shenzhen, the report says, will provide a low-cost alternative to Hong Kong for logistics services close to the PRD's export processing base and the Shenzhen ports. "It will continue to attract and retain consolidation centres serving export flows to the ports.''

The report says that Shenzhen's "cost advantage relative to Hong Kong will lessen somewhat over time, because rental costs of warehouse space in Shenzhen are rising. Wage differentials, on the other hand, are expected to remain significant for at least another 10 years.

"In fact, there is a possibility that Hong Kong and Shenzhen might become almost a single hub with warehousing and consolidation activities taking place in Shenzhen for physical flows through Hong Kong and Shenzhen and with logistics companies setting up a single management structure to manage the flow of goods through Hong Kong and Shenzhen in an integrated manner.

"The various options for physical goods flow through Hong Kong or Shenzhen would become a portfolio of choices managed in an integrated fashion by logistics companies. In all likelihood, this integrated management for many companies would be based in Hong Kong to take advantage of Hong Kong's network of key decision makers and access to international market information.

"This integration of hubs would require significant improvements in the cross-border transport of goods. In order to truly operate as a single hub, there must be flexibility in terms of moving goods back and forth depending on what is optimal at the moment. Failing such flexibility, Hong Kong and Shenzhen still could be viewed by logistics companies as linked, but without such immediate flexibility.''

Meanwhile Guangzhou, the report says, will continue to be a hub for domestic logistics services. "As China opens its distribution and transport industries under its WTO accession agreement, it is likely that Hong Kong and foreign companies that wish to be active in the PRD, and South China in general, will place significant activities into Guangzhou.

"This is likely to be the best place to deal with customers and to deal with the myriad of transport, warehousing, and consolidation activities geared toward the domestic market. Here the Hong Kong and foreign providers will meet indigenous companies that will provide support services and competition.''

The new Baiyun Airport will give Guangzhou a strengthened role as an air hub for domestically oriented logistics as well. The airport, coupled with plans for port development at Nansha could put Guangzhou on the map as a centre for internationally oriented logistics activities, though these are still likely to be dominated by Hong Kong and Shenzhen, the study says.

"This would indicate that it is important that the logistics hubs of Guangzhou and Hong Kong-Shenzhen should be linked as tightly as possible. For goods imported into the PRD, the goal would be a seamless transit from the international logistics hub to the domestic logistics hub and then on into the domestic distribution system.

"In addition, export cargo originating from Guangzhou and surrounding areas could be funnelled into the domestic hub and then linked seamlessly to the international hub for export. Such a division of labour would probably optimise the entire logistics system for the Greater Pearl River Delta region.''


Opportunity beckons for local SMEs

Progressive liberalisation of access to mainland markets for service industries such as trucking, (100% in three years), freight forwarding (100% in four years), storage warehouse (100% in three years) and courier services (100% in four years), will create new opportunities for SME logistics providers.

These opportunities are in addition to other factors including partnerships with overseas and mainland companies, although Hong Kong Legislative Council Transport Panel chairwoman Miriam Lau has cautioned that SMEs would also face threats on the mainland.

These, she noted, were continuing improvements to mainland ports and airports, the expectations of buyers and the ability of SMEs to meet those expectations including IT maturity, value-adding capacity, capability to invest, economies of scale and ability to collaborate with other logistics service providers.

SME logistics firms in Hong Kong include mainly trucking companies, container depot and warehouse operators, barge operators, feeder operators, mid-stream terminal operators and freight forwarders as well as manufacturers.

The Vocational Training Council's Transport Logistics Training Board estimated last year that there were 12,063 establishments in Hong Kong's transport and logistics industry and they employed nearly 79,000 workers (excluding 10,765 administrative and support staff).

The majority of these SMEs (9,354 establishments) are in the trucking and container haulage business and they employ the bulk of the workforce (39,874) in the industry.

The VTC estimates that from 2003 to 2005, the industry will need to train between 361 and 393 managerial level employees, between 637 and 693 supervisors, 916 to 997 clerical employees, and between 2,387 and 2,599 operational-level workers.

Having identified future training needs of the industry in Hong Kong, the study recommended setting up special programmes for SMEs engaged in transport logistics business on the mainland and also suggested that, "course providers include in their programmes knowledge of mainland logistics such as operations, law and regulations, customs clearance and other related areas''.


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