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Qzone

Hong Kong Enterprise

Vol 5, 2003



Pearl River Delta Update

Lowering Logistics Costs In PRD Region

Lowering Logistics Costs In PRD Region

Lower labour costs and the growth of the port of Yantian are drawing logistics firms to major cities of the Pearl River Delta (PRD).

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

"For consolidators...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 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 product to its destination."

The report says companies 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".

Fees charged by mainland-based trucking firms 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," the report adds.

Researchers found that labour costs for running consolidation and warehousing facilities in Shenzhen are much lower than in Hong Kong and that 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".

Also, PRD 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".

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," it states.

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

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".

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 flows 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 and "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," the report says.

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