Executive Summary of Strengthening HK’s Port and Trade

Hong Kong’s port and sea trade sector has long enjoyed a considerable advantage through its privileged position as the gateway to and from China. Today, however, that advantage is waning. Growing competition from the development of South China ports is slowing Hong Kong’s growth. South China ports in Yantian and Shekou/Chiwan currently have structural advantages over Hong Kong in capturing exports from the Pearl River Delta. Given the importance of the port and sea trade to Hong Kong’s economy, this has serious implications.

In the overall debate on how best to restore Hong Kong port’s competitiveness, however, the issues facing the sector have been oversimplified and a number of  common beliefs have arisen that are clouding judgment on the strategy required. Myths include:
1. High terminal charges are the main cause of Hong Kong’s loss of traffic.
2. More terminal operators are needed since the current limited number lowers Hong Kong’s competitiveness.
3. Hong Kong needs to expand port capacity to capture a greater share of exports; this can be achieved by building Container Terminal 10.
4. Hong Kong will benefit from additional throughput by focusing on transshipment traffic and offering dedicated berths to shipping lines.

Although these beliefs do touch upon some of the key issues, they largely miss the point. The reality is different:

Reality 1: Lowering terminal charges is not the solution. Terminal charges are not the main reason for higher costs of shipping out of Hong Kong. Instead, structural factors such as inefficiencies in crossing the border and higher trucking costs drive the cost differential.

Reality 2: Increasing “competition” by adding more operators is unlikely to have much positive impact on Hong Kong’s port sector. The number of terminal operators in Hong Kong is similar to those in other leading global ports. Moreover it is not clear that adding terminal operators will be beneficial in terms of industry structure, quality of services or level of investment.

Reality 3: Capacity expansion should be postponed unless and until Hong Kong can eliminate its structural disadvantages vis-à-vis Southern China. Before that happens, major investments in new terminal capacity will be risky. Hong Kong should instead focus on maximising the productivity of existing infrastructure.

Reality 4: Trans-shipment is typically used to fill excess port capacity and should not be a primary focus for Hong Kong. Trans-shipment can build port volume but is less attractive to the local economy and more vulnerable to price competition from nearby competitors. While trans-shipment traffic is worth capturing in itself, it cannot justify heavy investment in new capacity. Furthermore, without additional direct traffic, dedicated berth arrangements simply transfer value from local ports to shipping lines.

The physical flow of containers through the Hong Kong port has been the bedrock of the trade sector to date. While continued manufacturing growth in Guangdong will continue to drive overall port and sea trade growth in South China and Hong Kong, the development of ports in South China will increasingly challenge Hong Kong’s supremacy in physical traffic handling. Similar trends will eventually affect the airfreight traffic though Hong Kong’s current position is much stronger. To strengthen the Hong Kong port’s position in South China, Hong Kong needs to integrate itself further with the Pearl River Delta (PRD), position itself as part of a network of South China ports and target specific traffic segments. Simultaneously, Hong Kong should move its focus beyond the physical handling of traffic and capture value from other activities in the import/export sector. In other words, to further its prosperity in the trade sector, Hong Kong needs to move from a dependence on the physical flow of goods to the provision of skillbased value added services.

Reasserting the competitiveness of Hong Kong’s port and sea trade sector will require progress along three broad directions:
1. Build physical and policy bridges with the Pearl River Delta: Hong Kong should pursue cross-border integration both in policy as well as infrastructure to reaffirm its position as a leading player in the network of South China ports. Successful integration should significantly reduce the cost of trucking goods and improve barging services between Hong Kong and the western PRD. Coordination across South China ports on new development, similar to the A5 initiative on the airfreight side, is a forward-thinking step that the port sector can undertake. Such initiatives will also benefit the air freight sector which faces similar issues as well
2. Identify and address “sticky” demand: Not all traffic is equal; some shippers explicitly choose Hong Kong port for its superior port services and are prepared to pay a premium for these. Hong Kong should differentiate these sub-segments of traffic and tailor services to meet their needs. Initiatives such as using bonded trucks to bypass cross border customs and direct marketing to buyers could improve the Hong Kong
port’s attractiveness to imports and high value products.
3. Move beyond the physical handling of goods to capture opportunities in other parts of the import and export value chain: Significant value can be captured in trade activities beyond physical cargo handling and so Hong Kong should think more holistically about the import and export value chain. For instance, Hong Kong should capitalise on global product sourcing trends, which are driving a large number of companies to increase their sourcing activities in Asia. To capture this opportunity, Hong Kong should upgrade its “software” (sourcing network, language skills, overseas market knowledge, etc) and position itself as an Asia (and not only China) sourcing hub.

In summary, Hong Kong can still reassert itself as the leading port in South China, leveraging its distinct advantages that make buyers willing to pay a premium to ship from Hong Kong. However, as the infrastructure and networks of South China ports develop, Hong Kong will urgently need to address structural factors that are currently decreasing its competitive advantage. If this call to arms is ignored, Hong Kong will forfeit the opportunity to reassert its leadership both in South China and Asian trade.

For enquiries, please contact Mr. Kim Wan of The Better Hong Kong Foundation at telephone at (852) 2861-2622, fax at (852) 2861-3361 or by Email: kim_wan@betterhongkong.org

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The Better Hong Kong Foundation is a privately funded, non-profit, non-political organization, formed by leading Hong Kong business people to reinforce Hong  Kong’s role as the leading regional, financial, shipping, trading, communication and technology center. The Foundation also serves to enhance greater international understanding between East and West by facilitating communications between Hong Kong, China and the international community.