High Costs Are Driving Business From Hong Kong Port

When C. Russell Whittle took over early last year as managing director for sourcing at Targus, which makes computer cases and accessories, the company handled the bulk of its cargo made in southern China just as most other manufacturers did: it shipped its products from Kwai Chung, Hong Kong's large and efficient container port.

Hong Kong's share of Targus's cargo volume has now been reduced to a little more than half, and Mr. Whittle is not done yet. He intends to keep moving his business to ports closer to the factories that make Targus products in Guangdong Province.

"We've made a conscious effort to shift from Hong Kong to Yantian," Mr. Whittle said, referring to the largest of several ports in Guangdong, which borders Hong Kong and is home to Shenzhen and other thriving manufacturing centers. "A year ago we were at the forward edge of a trend; now we're in the middle of the pack. More and more companies are going this route.

"Everything that can be done in Hong Kong can now be done in China," he said.

Hong Kong's shipping and logistics industries, long the territory's very reason for being, face what many executives and experts say is a challenge that could prove as serious as any since the British established a port here in 1841.

Southern China's lower costs, improving services at its ports, shorter distances between factories and wharves and increasing port calls from ocean vessels are all eroding Kwai Chung's competitiveness.

Experts who have studied shifts in cargo traffic say Hong Kong is fast approaching a point beyond which business lost to Guangdong's expanding ports will not return, even if the government heeds highly unusual calls in the industry to intervene to enable Hong Kong to compete.

"We're asking how desperate this situation is and getting very pessimistic answers," said Evan Auyang, a consultant at McKinsey & Company, which is studying the cargo industry in the Pearl River Delta.

At a minimum, according to experts, Hong Kong's shipping industry will change as its relative importance in the Pearl River Delta region declines.

Manufacturing migrated northward to Shenzhen and elsewhere in Guangdong in the late 1980's, and with the development of ports along the Pearl River, shipping activity can now follow the factories. "This is a structural change, and no one can stop it," said James Wang, the head of transport studies at Hong Kong University. "Hong Kong used to be the entrepôt, the gateway to China. Now China has its own gateways."

Yantian and other ports in the Pearl River Delta, including harbors under construction, are little more than a decade old.

They now claim more than 40 percent of container traffic in the delta — business that was almost entirely Hong Kong's until the late 1990's.

The most immediate cause of this shift is cost. Trucking charges and the fees levied by vessels calling at Kwai Chung mean that shipping a container from Hong Kong costs roughly $300 more compared with mainland ports.

Hong Kong's longstanding advantages — fast turnarounds at the wharves, sophisticated logistics capabilities, efficient banking — no longer justify its ranking among the world's priciest ports.

As companies like Targus are discovering, mainland ports now provide roughly comparable services. Until recently, two factors appear to have lulled Hong Kong into complacency. For one thing, explosive economic growth in southern China produced large yearly increases in cargo volumes, leaving Kwai Chung and its rivals to share an ever larger pie. For another, substantial declines in direct shipments were masked by increases in transshipping — essentially vessel-to-vessel transfers, a low-value activity that brings relatively little economic benefit.

The wake-up call came late last year, when a steady fall in direct shipments — factory-to-container-to-truck-to-cargo hold — turned into a plunge. Hong Kong is now losing direct cargo traffic from southern China at a rate of 9 percent a year.

Apparently for the first time, shippers, traders and the industries dependent upon them, which account for a quarter of Hong Kong's employment and almost $40 billion in economic output, are facing the long-term implications of a process that began when China first built deep-water container ports near Hong Kong in the mid-1990's.

McKinsey, the consulting firm, estimates that a third of this economic activity is at risk.

Source:World Business