Hong Kong's Logistics Strengths:
Perspectives of Shippers and Exporters

Good morning, Minister Zhang Chunxian; our Financial Secretary, the Honourable Mr. Henry Tang, our moderator on this panel, the Honourable Miriam Lau; Ladies and Gentlemen:

I am honoured to be part of the first Logistics Hong Kong event that aims to showcase Hong Kong's strengths and the further development of the industry.
Logistics, as I see it, is a conglomeration or accumulation of services aimed at enabling the transport of goods through setting up a supply chain and extending to the distribution of the product. Hong Kong's logistical developments have helped businesses like ours, compete in a global economy.

We have excellent air, sea and land connectivity that put Hong Kong within a six-hour radius from half the world's population, some 12-days' sailing from the US, and 17 to 18 sailing days to the European continent.

Most importantly for us, we are practically at the door step of The Factory of the World, three hours away from the manufacturing centres in the Pearl River Delta and just five hours deeper to the hinterlands.

For these reasons, Hong Kong has been a hub port, for both air and sea movements, a logistics centre for the conglomeration of services available in the territory, a financial centre to support the shipping and logistics industries, a service, distribution and sourcing centre.

I like to think of Hong Kong as a 'CAN DO" port. Usually the last port of call for Asian sailings, cargo has been known to be routed through here at the last minute or when the goods failed pick-up at other ports. You can rest assured that Hong Kong has the service available to get your cargo to its destination, and even get there on TIME!

MYTHS
I will start by clarifying some myths that currently prevail in the industry.
Myth 1: Shippers will only use a port that is geographically closest to their factories

While proximity is certainly a very important consideration, shippers, however, make their port choice decisions based on the port which gives them the best VALUE. Shippers will use the ports that best serve their needs and provide maximum economic benefits.

This is why, despite the fact that the Hong Kong port is a bit further away from the cargo source in the Pearl River Delta than the nearby seaports and airports across the boundary, Hong Kong continues to attract cargo and remains the world's number one container seaport as well as airport for international air cargo.

Let me try to illustrate this by using my own company, Milos Manufacturing Co. Ltd as an example. Let me try to illustrate this by using my own company, Milo's Manufacturing Co. Ltd as an example.

In the past, upon confirmation of purchase orders from our buyers in Europe and the U.S., we would then place orders to our Asian and European suppliers for them to ship the fabrics or yarns to Hong Kong for production. However, the old way became increasingly impossible as overseas buyers kept demanding shorter and shorter order lead time. Sea shipment from Italy had already ceased as an option for high value fashion. The other option, shipment by air, not only substantially inflated costs, but was also no guarantee that the materials would get here in time for production that would meet the order lead time.

We resolved the situation by changing our role from being simply a customer of the raw material supplier, to a fully-fledged distributing agent for them in the region. Milo's now provides storage and distribution services for the Italian fabric and yarns producers. We even supply all their other customers in Asia. This saves time and money. The move not only guarantees immediate availability of the fabrics that the trade needs, but we also have become a vital link in the supply chain to the fabric supplier's other customers in the region.

We provide JIT services from Hong Kong which enable local manufacturers to receive the raw material within 24 hours of the order placement. This is at least 3-4 days faster than air shipment directly from Italy. We all know "Time is Money" and the quick supply gives the fabric supplier an edge. The all-important element, time, "makes or breaks a business deal". With our new service of a management and distribution service, we not only solidified our relationship with our supplier but have provided an additional revenue source for Milo's, too.
This new operation would not have been possible without the free port and simplified Customs system of Hong Kong, along with the comprehensive distribution services that are available here. Hong Kong is the only free port, and if I may emphasize, the only REAL free port in the region. The lenient Customs and other government requirements are prerequisites for any operation to succeed.

It must also be stressed that logistic services notwithstanding, the importance of Hong Kong's banking and financial services are key to success. After all, logistics and port services are just supporting functions of international trading. Without international trading, there will be no requirement for transportation, shipping and logistic services. Financial arrangements could only be equally, if not more, important than logistics. The superior and reliable banking and other trade supporting services here are critical factors for shippers to continue using the Hong Kong port. Here, we are certain that we could process shipping and trading documents immediately after shipment. The supremacy of the system is reflected in small matters like banks and carrier offices being open on Saturday mornings while most banks and carriers' offices in the neighbouring cities would be most likely closed.

Similarly, a lot of my fellow businessmen have emphasized the importance of the well defined legal system here. Businessmen would, at some time or another, come across legal issues like fraud or the need for arbitration. No one could ever underestimate the importance of protection provided by an established and transparent legal system. Our overseas trading partners have demonstrated their confidence in the legal system practiced in Hong Kong. In addition, Hong Kong is also an important arbitration centre in Asia.

Rome was not built in a day and it takes time to establish a good system. It is not easy to catch up with the expertise, the know-how, and the wealth of experience built up in Hong Kong. The transportation and logistics industry is still very labor-intensive and how people in the industry handle contingencies could spell success or failure to users. And the failures could be very costly.

Various shippers assign different values to different operational aspects of a port. I myself, in my choice of port as a fashion garment manufacturer, would put emphasis on the shortened transit period provided by the chosen port. Hong Kong is often the last port of call in Asia before ships sail to North America and Europe. Shipping out of the Shenzhen ports take at least an extra two to three days. In addition, using the port here means there is no risk of extended delay arising from Customs complexity when shipping out of Hong Kong. For high fashion, garments and other time sensitive merchandise, unexpected delays could be disastrous.

Because of the cargo nature, I tend to use a lot of air freight. As we all know, competitive freight rates depend on successful cargo consolidation with optimal mix of weight and volume cargo. This calls for a massive cargo throughput and a clustering of freight forwarders. All major international airlines and freight forwarders have set up their operations here. Competitive freight rates are guaranteed with keen competition among the freight forwarders as there is minimal barrier of entry for new service providers to the industry. Shippers certainly benefit from the comprehensive network that provides a lot of choices on flights and routing.

An AA-commissioned report on airfreight through Hong Kong indicates that moving export cargo from the Pearl River Delta through Hong Kong is cheaper than routing it through other airports in southern China. It is said to be 13 per cent cheaper for cargo from Dongguan to be flown out from Hong Kong than from Guangzhou, the US West Coast.

I always ask my suppliers to check with us on which airport and seaport to use prior to shipment. One of my factories is located in Dongguan, the core production area in the Pearl River Delta where thousands of factories are located. We have experienced getting a sudden demand from a supplier who needs to urgently send an air shipment to Dongguan. On the map, it looks perfectly simple as Guangzhou is closer to Dongguan than to Hong Kong. However, what the supplier did not realise was that Dongguan and Guangzhou are governed by two different Customs offices. Customs transfer arrangements must be made accordingly, to both places, before shipment. I was only able to receive the goods a week later, but not till I had completed some very complicated Customs transfer procedures. Indeed, similar arrangements have happened for sea cargo. Therefore, I have asked overseas buyers and sellers to check first with their local partners before deciding which port and airport to use in this region.

Myth 2 : There is always congestion at the Hong Kong/ Mainland boundary
The truth is, the congestion has been relieved. According to the survey done by the Hong Kong Guangdong Cooperation Coordination Unit in September 2003, 95 per cent of south-bound traffic is now able to pass through the boundary in an hour. North-bound is never a problem. I would attribute the sharp improvement to the following:

a. Reform in Mainland Customs
Two years ago, mainland Customs offices at the boundary stopped inspecting shipments unless there are special reasons to do so. Once cargo is cleared at the Customs office where the cargo originated, the container or the cargo van would be sealed and goes through the boundary unimpeded.

b. Application of latest technology in boundary crossing operations
Transmission of data among the mainland Customs offices is now done electronically. The boundary-crossing truck drivers were among the first batch to be equipped with electronic ID cards in Hong Kong. The drivers are making use of their electronic ID cards along with fingerprint identification to enter into or exit from the mainland. The Hong Kong SAR Government is understood to be launching the electronic Road Manifest soon. Application of the latest technology has substantially speeded up boundary crossing operations.

c. 24-hour boundary crossing
The 24-hour boundary crossing was put into effect January 2003. Since then, there has been no more backlog cargo that has been unable to come to Hong Kong due to closure of the boundary.

d. Expansion of boundary crossing facilities
Boundary crossing facilities have been expanded during the last few years. The current capacity at Lok Ma Chau crossing point would be doubled with the completion of the new parallel bridge early next year. Total boundary crossing capacity will increase from the current 33,000 vehicles to 80,000 vehicles a day when the New Western Corridor linking Shekou in Shenzhen and Tuen Mun in Hong Kong is completed in 2005. The new corridor will bypass the Shenzhen urban areas and will be closer to the areas where production facilities in the Pearl River Delta are located. It will be bound to be used heavily as the bridge classifies as a basic infrastructure project and thereby toll-free.

We are not expecting any more congestion at the boundary. Indeed, we understand that the Government is working on further initiatives including inland freight villages and pipelines to further smooth out the traffic. The future challenge over the boundary crossing issue is how to improve productivity further.

Myth 3: Hong Kong is a sunset port
One should not underestimate the growth potential of the Pearl River Delta and in the catchment areas of the Hong Kong and the Shenzhen ports. In addition to the factories in Dongguan, my company is establishing a new factory in the Jiangxi Province, which is adjacent to Guangdong Province in the north. A lot of my fellow manufacturers are also expanding their facilities further inland, especially to the Western Pearl River Delta. The Pearl River Delta continues to attract new investment and is generating substantial re-investments.

A lot of highways linking the Pearl River Delta to the south and south-western part of the mainland are due for completion soon.

When the trunk expressway linking the Pearl River Delta to Zhongqing is completed in 2005, the catchment areas of the Shenzhen ports and the Hong Kong port will well extend into the vast southern and south-western part of China. The market is growing and there certainly would be enough cargo to fuel the growth of the Shenzhen and Hong Kong ports.

CHALLENGES
Abolition of Textiles Quota System in 2005
The current textile quota system would be abolished in 2005 in accordance with World Trade Organization agreements. However, we are still uncertain of what would happen six months after. We are uncertain whether the new quota arrangement would be based on the existing quota distribution system or not. Likewise, with new members joining the European Community, there is uncertainty of whether the EU would move towards further protectionist policies, or the other way round. The arrangement would have a great impact on shippers' routing choices.

Further improvement of Hong Kong port's operating costs
Lowering Haulage Costs
While Hong Kong should provide more value-added services for users, so as to create more value to shippers, it is imperative for the industry to further improve the competitiveness of the port by lowering the operating costs here. Land transportation costs for cargo haulage to Hong Kong is certainly a prime target. Actually, in terms of distance, between Dongguan--Yantian and Dongguan--Hong Kong, it is almost the same.

However, haulage cost to Hong Kong is much higher. Instead of focusing on cost differences alone, shippers need to pay attention to service levels. Basically, Hong Kong hauliers are fully insured--driver and users; the trucks and chassis are properly maintained and subject to annual inspection and certification; and so forth. There is, however, room for further rate reductions. The current driver licensing system, for one, should be reviewed to attract new blood joining the industry. There should be further application of electronic transactions for trading and shipping documents to eliminate unnecessary trips and costs. The current operations should be rationalized to allow truckers to do more round trips and hence able to offer lower rates.

Lowering Terminal Handling Charges (THC)
Hong Kong shippers have been puzzled by the THC issue for so long. Shipping carriers are charging higher THCs for shipments out of Hong Kong than Shenzhen. The differential in THC is certainly a major consideration in shippers' port choice. However, with Hong Kong container terminal operators rapidly lowering their charges in the last few years, we would appeal to shipping carriers to make corresponding reductions in the Hong Kong THCs. According to shipping carriers, THC is a cost recovery exercise. Henceforth, THC should be adjusted when the corresponding cost to the shipping line is reduced.

To shippers, value is most important. There are advantages to using Hong Kong and its port as a logistics hub that cannot be easily substituted or replaced. Hong Kong is moving in the right direction as it continues to maintain its pioneer position in logistics development. It should continue to create new value-added services and maintain a cost competitive structure.

Continuous Government investment in infrastructure and strategic planning of facilities and locations is vital to the development of logistics. Not only is it required for future use, but it is necessary to enhance connectivity and lessen the barriers to the smooth transportation of cargo. Thank you.