Ocean bid tip: diversify your carrier alliances!

With so many container lines out there to choose from it’s easy to forget that despite their numbers there really are fewer choices than it seems when you consider carrier alliances and vessel sharing partners. If you are large enough to deal in direct carrier contracts with container lines, then you would be wise to consider the various alliances and vessel sharing agreements when choosing carriers. As carriers’ fortunes (or misfortunes) become increasingly volatile the bonds of cooperation become even closer and decisions about capacity withdrawals and service changes are increasingly being made at the alliance level and not at the individual carrier level. More than a few Trans-Pacific importers learned this the hard way back in 2009-2010 when alliances suspended or withdrew capacity completely on major trade lanes. Those importers who only contracted with carriers of the same alliance were distressed to find that NONE of their contracted carriers were servicing the particular lane they needed. I have heard stories like this again and again, where an alliance made a significant change leaving the importer out to dry because they failed to diversify their carrier base beyond a single alliance.

So the first thing we need to do is identify: What is the difference between an alliance and a vessel sharing agreement?

• Vessel Sharing Agreement (VSA): Member carriers simply agree to share space on each others vessels in particular trade lanes. Space is allocated to each carrier on each others vessels at an agreed upon price on specific trade lanes.
• Alliance: Member carriers agree to not only share space on each others vessels but also jointly operate and decide on major service routes, new services being introduced, transit / service levels, and capacity controls. Each member carrier agrees to contribute a certain amount of resources (vessel size and number of vessels, space on each vessel, equipment distribution, etc.)

Obviously carrier alliances are a much tighter-knit group then casual vessel sharing agreements (VSAs) and the impact of their decisions will be greater on the individual carriers and their customers than would be under a VSA. The next question: who are these alliances / VSAs and which carriers belong to them? Based on current information (December 2011) here is a list of the various carrier alliances and vessel sharing agreements in the Trans-Pacific market:

New World Alliance: APL, Hyundai Merchant Marine (HMM), and MOL (Mitsui OSK Lines)

To the best of my knowledge, the dominant member and largest contributor to the alliance is APL. MOL is the smallest carrier of the three but offers some of the fastest and most direct services from Asia that the other two piggy-back on. APL has, in my opinion, the best network and fastest connections from Southeast Asia. From my personal experience, the New World Alliance has the fastest transits from Asia to the West Coast.

Grand Alliance: Hapag-Lloyd, NYK Line, and OOCL

To the best of my knowledge, the largest contributor to the alliance is Hapag-Lloyd, although all 3 lines are much closer in size (from a Trans-Pacific perspective) than the New World Alliance. Strong and dependable service from the Trans-Pacific and good transits overall.

CKYH Alliance: COSCO, K-Line, Yang Ming, and Hanjin

This alliance is the easiest to remember thanks to their generic name – the first initial of each carrier makes up the alliance. To the best of my knowledge Hanjin is the largest contributor to the alliance but COSCO, Yang Ming, and Hanjin are all somewhat similar in size and each has their unique strengths and weaknesses depending on the trade lane. From a financial standpoint, probably the riskiest alliance based on the individual carriers’ Financial Z-Score, a financial benchmark developed by Drewry. With the exception of K-Line all of the alliance members are in the Z-Score distress zone with Yang Ming and Hanjin near the bottom of the zone with low scores. I should note this is based on data on/about September 2011 and is obviously subject to change. And I am sure the individual carriers involved would dispute some of the figures used going into that Z-Score.

All that being said, the CKYH is a big alliance and has a wide variety of Trans-Pacific services to both coasts.

VSA – Evergreen and China Shipping

The two companies share vessel space to and from China and a few other major trade lanes. Evergreen is easily the much larger of the two and with far more reliable service. Quite honestly, I do not know what Evergreen’s benefit in this is, while China Shipping gets to market reliable Evergreen service with China Shipping rates.

VSA – CMA-CGM, Maersk Line, and MSC

The three largest carriers in the world in terms of global capacity, and also, ironically enough, all of European origins, this VSA has the largest capacity and import volume into the United States from Asia. That being said, they also tend to have longer transits to the East Coast than average and MSC lacks 45′ high cube containers. They also tend, in my experience, to be a bit more bureaucratic and sometimes difficult to deal with. However, they have a lot of capacity to share with each other and hence can often provide space and rates that people need.

These 3 carrier alliances and 2 VSAs cover over 80% of the import container volume coming into the U.S. As a general rule, you can worry about VSAs less than Alliances.

With alliances, they can, and will, withdraw services as an entire group, completely ending a specific trade lane to a specific U.S. port. Now if you do all of your importing into Long Beach / Los Angeles, or possibly New York for those of you on the East Coast, you probably have little to nothing to worry about. But any other port in the U.S. – Oakland, Sea/Tac, Savannah, Charleston, or any inland inter-modal, etc. – and you should be aware that the possibility of one of the alliances ending, temporarily or permanently, services to your port / CY from one or more of your origins is possible. One company I knew had contracts with Hapag, NYK, and OOCL back in 2009 into Oakland only to be completely screwed when the Grand Alliance made a decision to completely stop calling Oakland out of Shanghai. Did they diversify their carrier base? Absolutely. But they made the mistake of unintentionally choosing carriers who all cooperate with each other in the same alliance.

Now, if your volumes are somewhat small and your origin lanes limited. this may not be a concern; you’d actually be doing yourself a disservice from a relationship and rate perspective to try and split up your cargo amongst too many carriers. However, for any large import shippers out there with multiple carriers and significant volume from key lanes, you absolutely should consider carrier alliances when making carrier decisions.

For example, if Yantian to Seattle and Savannah are two of your top lanes and you have a choice between 3 carriers, all within $100 in price of each other, but two of them belong to one alliance and one of them belongs to another, you’d be better off splitting some of your volume to the carrier in another alliance rather than assigning it all to one carrier or to all the same carriers in alliance.

Another thing you could do would be to allocate to the best value carrier but make sure you give some other origins to another carrier in another alliance whom you can rely upon as a backup should the other carrier alliance make decisions that would affect your business.

My general rule of thumb, if you have the volume, is to make sure you have contracts with carriers from at least two different alliances and one of the VSAs. Not only that but, if possible, try not to commit too much volume to one alliance or VSA over the other. That’s not always possible, but to the best of your ability you don’t want to do that. It’s difficult to count on a backup carrier to suddenly absorb a huge increase in volume when you only have a small MQC committed to in the contract.

For my company’s current contracts I think we fared very well from this standpoint, which we weren’t always able to do in the past because the numbers were not economically feasible. We have at least one carrier from each of the 3 alliances and 2 VSAs. So from a network coverage we truly have all our bases covered from a diversification standpoint. However, two of the carriers are small contracts so if we do run into trouble with the others and need to call on them to pick up the slack, we could have a problem. But with such a diversified carrier base the risk of that is very low.

We’ll try to keep this post updated from time to time as the Alliances and VSAs change. Bookmark this post as a handy guide to who’s-who in the Alliances and VSAs and remember to keep that in mind when negotiating with carriers and deciding which carriers you are going to do business with. Remember: you can easily diversify your carrier base and yet still put all your eggs in one risky basket if they are all of the same alliance.

Understanding Bunker Fuel: is there a relationship to crude prices?

Unless you work for an ocean container line, there seems to be a lot of confusion regarding bunker fuel costs and how they play into ocean container costs and BAF (Bunker Adjustment Factor – fuel surcharge for container lines).  This is especially compounded when folks look at the headlines in regards to crude oil prices and start asking questions about how those crude oil prices will affect bunker fuel.  While at the end of the day all petrol and fuel oils come from the same source, the way they are priced and handled are very different. This makes quick and simple comparisons and forecasts based on published crude prices very difficult. But that is, in fact, exactly what I am going to try to do in this post.

Firstly, the headlines you see on Bloomberg or CNN with the ever-changing prices on crude reflect oil futures. Basically, these are mostly large financial deals in multiple contracts between buyers and sellers who agree to buy and sell a specified amount of oil at an agreed upon price at some date in the future. In most cases, no actual oil is ever delivered or processed; the transaction is simply a financial one with cash being settled at the end of the day.

Bunker fuel, on the other hand, is a derivative of crude oil. In the simplest and crudest of terms, bunker fuel is the gunk that is leftover after refineries have processed all the more valuable fuels from the crude source. It is thick and heavy and must be heated before it can be used in an engine. It is difficult to store and transport. And it is ideal for large marine going vessels that have the heavy engines and fuel capacity to handle bunker fuel. Because of this, bunker fuel is not readily available like gasoline / petrol. It is mainly stored at or near major ocean ports and primarily sold and delivered via physical contracts to marine vessel interests. Because of this, bunker fuel prices vary widely from port to port. While there certainly are bunker fuel futures they are mainly utilized by the marine community and unlike crude futures the contracts normally entail actual physical delivery of the fuel. Also, like crude, there are a number of bunker fuel price indexes that the maritime community and their financial interests use.

For the purposes of this discussion I am going to focus on the prices published by the TSA (Trans-Pacific Stabilization Agreement) Carriers and because I reside in the U.S. this will be written from a Trans-Pacific standpoint. The TSA Carriers have agreed to their own index of bunker fuel prices which is a published weekly average based on bunker fuel prices to both the U.S. West Coast and U.S. East Coast. These weekly average bunker fuel prices are available publicly at the TSA website here:

http://www.tsacarriers.org/calc_bunker.html

They then take an average of the weekly average fuel price over the entire quarter and then set the next quarter’s bunker fuel price based on that average. It is this index and formula that most carriers use when assessing quarterly BAF (fuel surcharge) charges to adjust to rising / falling bunker fuel costs.

Because the media and public knowledge are largely geared around crude oil futures and prices, this can cause a lot of confusion when supply chain / logistics managers start talking about bunker fuel and what kind of BAF (fuel surcharge) they will have to pay. It’s only natural for others to immediately switch their brains to thinking about crude prices and the headlines for that day / week and try to make a connection to what this supply chain / logistics manager is telling them about future ocean freight fuel cost increases. And it’s also only natural for many supply chain / logistics managers to try and find a link or relationship between the same headlines they see every day regarding crude prices and the BAF charges they will have to pay in the future. So this begs the question: is there a simple and direct correlation between bunker fuel prices and publicly reported crude prices? And can that correlation be used to potentially forecast or understand where bunker fuel prices might be headed in the future?

Unfortunately there is NOT a simple and direct correlation between crude oil prices and bunker fuel prices. That being said, there is a very broad figure you can use to quickly derive a rough bunker fuel price from whatever crude oil price you see published or that someone in your company questions you on. I call this number the “Bunker Fuel Multiplier” and quite simply it is just a multiple of the crude oil price. I came up with this figure because I was constantly being asked within my own company, by multiple people over multiple years, what the bunker fuel was based on that day / week / year’s crude oil price. I was also constantly asked where bunker fuel, and subsequently BAF, was going to be in the following month / quarter / year given crude oil price assumptions.

So what we did was start tracking the TSA Weekly Average Fuel Price (WAFP) going all the way back to January 2006 through today.

Starting in May 2009, the TSA adjusted their formula to establish separate pricing for West Coast vs. East Coast. Prior to May 2009 our figures reflect the old TSA formula. From May 2009 onwards we just did a simple average of the West Coast and East Coast prices to come up with a single number to match the old formula. We then also tracked the average weekly futures price for NYMEX crude as well as the weekly BRENT spot price for crude:

From there we did a simple calculation of where the bunker fuel price for that particular week compared to NYMEX and BRENT from a multiplier standpoint. This is what we found:

Over the past 5 years, Bunker Fuel has been priced at an average multiple of 5.8x the price of NYMEX and BRENT. That means that over the long run you can take the price of NYMEX or BRENT and multiply it by 5.8 to get a rough bunker fuel price. So the next time someone in your company asks “what if fuel hits USD 200 per barrel next year? what will that mean for bunker?” you can tell them that might equate to a bunker fuel price of USD 1,160 per ton (USD 200 x 5.8).

However, while this is a nice, simple, broad indicator it is very broad. As I mentioned, there is not a clear and direct link between crude oil prices and bunker fuel prices. Just look at the Bunker Fuel Multiplier chart above; within that 5-year average of 5.8 there are weeks and months – and years – where the multiplier was anywhere from 4.8 to 8.1 times the price of crude. For example, if we were to break down the Bunker Fuel Multiplier by calendar year:

2007 = 5.4

2008 = 5.3

2009 = 6.1

2010 = 5.9

2011 = 6.3

Also, for 2011 there has been a huge divergence in the bunker fuel multiplier between NYMEX and BRENT. Again, look at the above chart and notice the huge divergence between the NYMEX and BRENT. For 2011 the NYMEX multiplier is 6.8, meaning that bunker fuel has averaged 6.8x the price for NYMEX crude. But for BRENT the multiplier has been 6.3x, meaning that bunker fuel has averaged 6.3x the price for BRENT crude. The reason behind this is because in 2011, for reasons I do not know, NYMEX has been trading at a 10-20% discount over BRENT over the course of the year. Whereas prior to 2011 the two prices were nearly identical. If there was a change in how the BRENT spot price is calculated and published, I do not know it.

Because of the volatility in oil and bunker fuel prices, not to mention the variances between NYMEX and BRENT, the Bunker Fuel Multiplier can vary widely from month-to-month and year-to-year. With that in mind, I always provide a range when folks ask me where bunker fuel will be in the future based on crude oil assumptions. For example, if someone asks me where bunker fuel might be at USD 100 per barrel, I would tell them “probably in the range of USD 580-630 based on historical averages”.

So to wrap it up:

• Bunker fuel is a derivative of crude and therefore there is some correlation between crude oil prices and bunker fuel prices.
• By comparing current and long term prices of the TSA Weighted Average Bunker Fuel Price against NYMEX and BRENT crude prices we can determine a simple “bunker fuel multiplier” that makes it handy to at least come up with a rough estimate of where future bunker fuel levels will be based on any crude oil price assumption.

Why would being able to roughly forecast bunker fuel prices be useful?

• Bunker fuel is a prominent component of ocean carriers’ actual vessel operating costs.
• Base ocean container rates fluctuate based on the actual cost of bunker fuel the carrier thinks they will have to pay.
• BAF (Bunker Adjustment Factor, or fuel surcharge) charges are configured and added onto the base rate you pay for ocean freight once bunker fuel levels exceed a certain amount for that quarter.
• BAF charges are additional / on-on-top-of the base rates you will pay to carriers.
• Therefore, understanding when and how your carrier will asses quarterly BAF charges, not to mention how much they actually pay for bunker fuel configured into your base rate, allows you to actually plan and forecast for future rate increases.
  • Or to help you when putting together your freight spend budget for the next year.
  • Or to help you understand where container freight rates might be headed when it comes to negotiating new ocean carrier contracts.

For too many companies, BAF surcharges and actual bunker fuel costs are little thought of or not understood at all. Too often companies simply defer to whatever their carriers tell them and go along with whatever the consensus is. And as lengthy and technical as this post is, this is actually a very simplistic way of looking at and calculating potential future bunker fuel and BAF costs using the simple price of crude oil. There are certainly other, probably better, ways of looking at and trying to forecast future bunker fuel costs and plan for potential cost increases or decreases. Regardless, the more control you have over understanding what affects the carriers’ costs and bottom line and how those costs may or may not affect you will only help you plan better for the future, as well get a handle on your total supply chain costs. I hope my simplistic methodology can perhaps help others to think along these tracks so they can be better prepared during ocean contracts season.

Exploring Logistics in Developing Markets of China, India and Vietnam – By Mark Millar

In developing markets, logistics activities involve a range of challenges and opportunities:

Opportunities revolve around the fact that the developing markets are experiencing rapid economic growth and the resulting increase in trade and commerce drives increasing demand for logistics services. Challenges are many and varied, with the top three consistently being limitations in infrastructure, bureaucratic regulatory procedures and skills shortages.

Let’s explore three specific markets – China, India and Vietnam:

	China	India	Vietnam
Population (millions)	1,339	1,210	87
Land mass (1,000 km2)	9,640	3,287	331
GDP/Capita (USD)	7,536	3,586	3,130

A broad indicator of the efficiency of a market’s logistics sector is the Logistics Costs as a percentage of GDP. In developed markets this is generally less than 10%, however in developing markets the percentage is much higher – reflecting inefficiencies in the sector. As we can see below, in our three developing markets China’s logistics represents 18% of GDP, India 13% and Vietnam 25%. As these countries gradually improve and enhance their logistics sectors, we will see these percentages decline over time.

Regulatory Environment
The regulatory environments for logistics in China, India, and Vietnam are somewhat restrictive – compared to developed markets – but are gradually improving. Companies doing business in these three developing markets will often encounter government bureaucracy, onerous paperwork procedures, customs delays, corruption and high duties & tariffs. These barriers to business are costly in both time and money.

China – one of the challenges in China is the variation in interpretation and application of customs regulations. In fact, foreign companies often think that there are different customs regulations in different locations, however this is not true. It is the interpretation and application of the regulations that varies – by location and in some cases by individual officials. This often results in companies being able to process goods a certain way on one port location, but not in another. This results in additional complexities within the logistics component of international supply chains.

India – companies in India often establish warehouse operations in all the different states in which they do business. This is due to the traditional tax system that operates at state level, rather than national level – each state has its own tax systems with different regulatory frameworks. This introduces unnecessary additional complexity into domestic supply chains and whilst companies may save on tax, they spend more on logistics than would otherwise be necessary. After years of debate, a national, standardised tax system is due to be implemented within the next year or so.

Vietnam – the regulatory environment for logistics in Vietnam is similar to how it was in China ten years ago. With Vietnam’s recent accession to the WTO, restrictions on foreign entities will gradually be reduced. Foreign ownership of logistics companies is currently restricted to 49%, but from year 2014, 100% wholly foreign owned logistics businesses will be allowed. Hence during the coming three years, we will see a flurry of merger and acquisition activity – at both local and global levels.

Infrastructure Developments
As a result of China’s four trillion RMB stimulus package initiated in 2009, China has made massive progress in transportation infrastructure development. The highway system now has over 75,000 km of expressways, new airports are being constructed at the average rate of one new airport every five weeks, inland waterways have been developed and expanded, and container port infrastructure developments continue unabated, with Shanghai port handling over 29 million TEUs in 2010. Furthermore, the huge development of the high-speed passenger rail network is expected to free up some of the existing rail infrastructure to be converted for cargo use in the future, including containerised rail freight.

In India, the logistics infrastructure is nowhere near as developed as in China. They have not provided the level of investment and support needed to keep up with modern logistics, leaving them with limited road infrastructure and congested container ports, leading to huge delays and inevitable inefficiencies – costing time and money. A recent article in the Washington Post states “If urgent steps are not taken, experts say, the cost of waste and delays will increase from $45 billion annually to $140 billion by 2020.” One positive step India took in 2007, was to allow private companies to operate on the state railway systems. One major player, Arshiya, is investing heavily in the rail logistics sector in a bid to improve India’s efficiency. Reuters recently reported that Arshiya is to invest 1.5 billion rupees in order to double its rail capacity.

Vietnam – with the support of foreign investment and through several public-private partnership projects, Vietnam has been able to make progress in recent years on infrastructure developments, particularly in southern Vietnam. One example is Cai Mep port — the large, impressive and modern container terminal developments south of Ho Chi Minh City. Other examples are the huge industrial zones and logistics parks built in Binh Duong province, north of the city. However there is opportunity to improve the overall planning and coordination of the logistics infrastructure projects – despite the Cai Mep port container terminals being open, the highway from Ho Chi Minh City to the port is not yet complete. There is also a need to develpop transportation ncorridors – road and rail – to connect the new industrial zones and logistics parks in Binh Duong province to the container ports, both the city terminals and the new Cai Mep facilities.

Talent Shortages
One logistics challenge common to China, India and Vietnam – indeed throughout all developing markets – is the skills shortage. As the economies are expanding, then logistics activity increases, which in turn drives demand for trained, skilled and experienced professionals.

The findings of the Global Chief Supply Chain Officer Report 2011state that “talent acquisition and leadership development” represents a significant challenge in supply chain management, with 35% of respondents listing it as one of their top challenges and a further 56% agreeing that it is an important challenge.

In China the difficulty of recruiting skilled professionals is exacerbated because of its scale and also due to China’s leading role in global supply chains. At the same time, the scale of the sector gives it a larger pool of experienced workers than in other countries.

India’s leadership role in global commerce has developed in areas such as telecommunications and business process outsourcing. This has resulted in a smaller pool of experienced talent to fill the expanding demand in the logistics sector. As India plans to modernise many sectors, in particular the retail trade, there will be increasing need for experienced logisticians.

In Vietnam, the majority of the population are young and well educated, with English spoken quite widely. Thus there is a large pool of potential workers for the logistics sector, however, as in many other countries, there are not enough young people choosing the logistics sector as their career path. Therefore in Vietnam, we are also seeing skills shortages in the logistics sector.

Conclusion
The logistics sectors in China, India and Vietnam have improved significantly during the last five years, and as they continue to do so, we can expect to see gradual reduction in the logistics costs as percentage of GDP. In line with maturing logistics sectors, we will also see an increase in the level of outsourcing, which is good news for the 3PL logistics service providers.

Mark Millar

Mark Millar leverages over 20 years of global business experience to develop and deliver enlightening keynote speeches, and to provide Consulting, Advisory and Recruitment services that create value for clients by improving the performance of their logistics and supply chain activities.

With extensive experience in the mainland China market, Mark has worked with – and for – many leading companies in the Consumer Retail, High Tech Electronics and Third Party Logistics sectors.
Acknowledged as an industry thought leader, clients have engaged Mark as Speaker, Moderator, Conference Chairman or Master of Ceremonies at more than 200 functions in 17 countries, and his articles are regularly published by trade magazines in five languages.

Mark serves as an Advisor to several organisations, including various non-profit associations and his commitment and contribution to the industry has been recognised with several accolades , including being named in the “Who’s Who of Power Players in Supply Chain Management in China”, the “Pro’s-to-Know Thought Leaders in Supply Chain” and as “One of the most Progressive People in World Logistics”.

During his distinguished international business development career, Mark has lived in the UK, the Netherlands, Australia, Singapore, USA, Ireland, China and Hong Kong.
Mark achieved an MBA with Distinction from the University of the West of England, is a Graduate of the UK Chartered Institute of Marketing, holds a post graduate Diploma in Management Studies and is a Graduate of the Australian Institute of Company Directors.
Contact him at mark@markmillar.com

Hong Kong – Leading Global Logistics Hub – By Mark Millar

Hong Kong is one of the world’s leading logistics hubs. Its strategic location makes it both the Heart of Asia – half the world’s population are within a five hour flight, and China’s Gateway – providing access into and out of the world’s second largest economy and fasting growing consumer market.

Business Confidence is High

Complementing its leadership role as a global logistics hub, Hong Kong is also one of Asia’s leading international business centres – with 3,580 regional office and regional headquarters. Hong Kong is the 11th largest trading entity in the world and business confidence levels are high.

The 2010 Business Confidence Survey conducted by the British Chamber of Commerce in Hong Kong found very high satisfaction levels amongst business, with 97% of respondents describing the business environment in Hong Kong as ‘somewhat’ or ‘very’ satisfactory. The major reasons cited for this high level of satisfaction were identified as geographical location, taxation system, communication network, public security and safety, infrastructure and free port status.

Trade and Logistics the largest of the Economy’s Four Pillars

The world class infrastructure and free port status are significant ingredients in Hong Kong’s enduring success as a leading logistics hub. Long established as a regional trading hub and global sourcing centre, Financial Secretary John Tsang recently confirmed that, of Hong Kong’s four economic pillars, “Trade and Logistics” is the largest – accounting for 24.1 % of GDP and 24% of employment.

In the 2010 global rankings of cargo volumes, Hong Kong is the world’s number one cargo airport and the third largest container seaport.

World’s largest Air Cargo Hub

For the last 15 years, Hong Kong International Airport (HKIA) has been the world’s busiest airport for international cargo. In 2010, HKIA handled 4.1 million tons of cargo, enabling Hong Kong to overtake Memphis USA to become the world’s largest cargo airport.

HKIA’s well established global network, accumulated critical mass, extensive connectivity and ecosystem-wide efficiencies all combine to enable Hong Kong’s long standing leadership position in air freight – as both a global Hub and a major Gateway. HKIA hosts 90 airlines operating 5,800 flights per week – linking Hong Kong to 117 international destinations worldwide, plus 40 destinations in mainland China. This global network of airline connectivity far surpasses that of Hong Kong’s closest neighbours – see chart below.

Hong Kong International Airport is an important part of the local economy – over 30% of Hong Kong’s total exports move by air freight, representing over USD$100 million of products. A record 50 million passengers passed through the airport in 2010 and the aviation sector as a whole represents 8% of GDP and employs over 250,000 people in Hong Kong.

The airport runs on a dual runway system providing for 60 air traffic movements per hour, and averaging 880 daily aircraft movements.
Hong Kong has an enviable reputation of providing security, transparency, efficiency, speed, and connectivity, which together with its longstanding free-port status makes it the number one choice of transhipment hub.

Products that are high value, have short product life cycles, are perishable or are needed urgently, have an intrinsic need-for-speed and therefore gravitate to the air-freight mode of transport. Consequently, within complex, global supply chain ecosystems, Hong Kong is the default Global Hub and China Gateway for such critical shipments.

World’s third largest Container Port

Similarly in the ocean freight sector – which accounts for over 95% of world trade – Hong Kong’s far-reaching connectivity and extensive global network make it the largest container port in South China.

Within the South China cluster, the multiple ports process a total of 60 million containers (TEU) per year – of which over 23 million are handled in Hong Kong.

Ranking number 3 in container ports worldwide, Hong Kong’s nine container terminals are all privately owned and operated with a total of 24 berths. Being served by 80 international shipping lines, providing 450 container-liner services per week to more than 500 destinations worldwide, Hong Kong is a major trans-shipment hub.

Even as the expanding China ports handle more direct cargo movements in and out of the mainland, Hong Kong will leverage it’s long and distinguished history as a leading nautical base and continue to expand its role as a leading international trans-shipment hub and regional marine services centre.

Government Support for Logistics Industry

The Hong Kong Government fully supports the trade and logistics sector – the Secretary for Transport and Housing confirmed that the Government has “undertaken a number of measures and studies which would help upgrade our facilities for more efficient freight movements and supply chain activities”.

Hong Kong has recently signed the Framework Agreement on Hong Kong – Guangdong Cooperation which will advance cooperation between the two territories – across many sectors. Financial Secretary Tsang noted that maintaining close ties with the mainland “will further reinforce Hong Kong’s leading position in the global supply chain and enhance our strengths in trade and logistics.”

In his 2011 budget address, the Financial Secretary John Tsang vowed to ensure that Hong Kong can cope with air traffic growth and to reinforce the maritime service cluster.

Investment in Infrastructure Mega Projects

In order to further consolidate Hong Kong’s position as a regional logistics hub and capitalise on our competitive edge in handling high-value goods and providing high value-added services, the government has three infrastructure mega projects in the works.

The Hong Kong-Zhuhai-Macau Bridge – 29.6 kilometres long – is expected to open in 2016. This bridge will enhance the efficient, cost-effective movement of cargo between Hong Kong and the western Pearl River Delta – still very much the heart of Guangdong province’s manufacturing base.

The new bridge “bears strategic and symbolic importance to Hong Kong” said Eva Cheng, Secretary for Transport and Housing and – the improved connectivity will expand our cargo hinterland and open up new consumer markets, bringing new impetus for our freight and logistics sector.

Container Terminal 10 – within the ocean freight sector, much of the container movements are mid-stream trans-shipments, and so the government has commissioned a feasibility study on the development of a tenth container terminal.

Third Runway – at the airport, the current two runway system will be at maximum capacity by 2015 – a new daily flight handling record was set on 30 March 2011 with 983 aircraft movements. Hence, within the framework of the Master Plan 2030 Study, the Airport Authority is now evaluating the feasibility of building a third runway – which is being called for by businesses large and small, throughout both the industrial and the logistics sectors.

Sustainable Competitive Advantage

Hong Kong’s sustainable competitive advantage as a leading global logistics hub will revolve around three pivotal competencies – best in class international transhipment hub, centre of excellence for logistics skills and leadership in e-logistics.

As a transhipment hub, Hong Kong will continue to grow. In 2011, the International Air Transport Association (IATA) forecast that Hong Kong will be the world’s fastest-growing air cargo market, “growing 12.2 per cent annually over the next two years” such that cargo volumes will increase to 5.3 million tonnes in 2014.

From the e-logistics perspective, increasingly widespread adoption of e-freight initiatives throughout the international air and ocean cargo sectors is increasing efficiencies whilst providing environmental benefits such as reducing paperwork. Within the cross border trucking sector, introduction of electronic submission of road cargo information enables seamless customs clearance at the land boundary control points. GPS communications technology is now also widespread in the fleet management of trucking companies, with the On-Board Trucker Information System (OBTIS).

Firmly reinforcing its position as a leading regional centre of excellence for logistics industry skills and talent development, Hong Kong is home to 60 educational and vocational training institutions, offering more than 1,000 programmes and courses related to logistics and shipping. Government funded training allowance s benefit small and medium enterprises.

Conclusion

Looking to the future, I am very confident that Hong Kong will continue its role as a leading global logistics hub – by means of its strategic location, its business-friendly government and its sustainable competitive advantage.

Industry and government together envisage Hong Kong’s future positioning as a global logistics hub providing high value-added services and handling high value products – as well as strengthening its role as the logistics gateway to mainland China, with the support of state-of-the-art infrastructural facilities and trade facilitation measures.

Achieving the number one position of the world’s air cargo hubs and maintaining its position as the world’s number three sea container seaport, Hong Kong is indisputably one of the world’s leading logistics hubs – enabling effective and efficient global supply chain ecosystems.

Mark Millar

Mark Millar MBA, PMHKLA, FCILT

Mark Millar leverages over 20 years of global business experience to provide independent Consulting, Education and Advisory services that create value for clients by improving the performance of their logistics and supply chain activities in China and the Asia Pacific region.

Acknowledged as an industry thought leader, clients have engaged Mark as Speaker, Moderator, Master of Ceremonies or Conference Chairman at more than 200 functions in 17 countries – including Hong Kong, Singapore, China, Macau, Vietnam, Kazakhstan, Dubai, India, Philippines, Malaysia, Thailand, South Korea, England, USA and Australia. His articles are regularly published by trade magazines in five languages in seven countries.

Mark serves on the advisory board of several leading organisations and his industry contributions have been recognised with a number of accolades, including being named in the “Who’s Who of Power Players in Supply Chain Management in China”, the “Pro’s-to-Know Thought Leaders in Supply Chain” and as “One of the most Progressive People in World Logistics”.

Contact him at mark@markmillar.com

Next Page »