For years a gateway to the mainland, the Port of Hong Kong faces an uncertain future as the mainland has aggressively built up its own gateways across the Pearl River Delta. Lee Perkins takes a look at the Fragrant Harbour's prospects

Hong Kong has served as an entrep?t for southern China for many years, blessed as it is with a superb deep-water harbour in close proximity to the Pearl River Delta (PRD) region and a world-class container port. But ever since China embarked on its programme of reform and opening up, the mainland has been frantically developing its own gateways to the outside world, many of them across the border in Guangdong province. So could competition from cheaper mainland terminals undermine the traditional role of Hong Kong in the region?

A one-hour ferry ride from Hong Kong Island, where a sleepy Canton fishing village once stood, now stands Shenzhen, the fourth-largest port in the world and a testament, if ever it was needed, to the speed and determination with which China is taking on the world. Rapid construction and aggressive expansion throughout the PRD has led to double-digit growth in cargo throughput in recent years. According to Carl Shem of Chiwan Container Terminals in western Shenzhen, more is yet to come. "I don't have a crystal ball. I don't know if Shenzhen will have double-digit growth in 10 years, but for the next few years it can certainly maintain double-digit growth year on year."

And, in many ways, the younger ports across the water do have advantages over the former colony. "You see we are here", says Shem, pointing to an enormous map of Southern China beneath the glass of his boardroom table. "And this," he says with a flourish, casting his arm north, "is the largest production base in China. As you can see we're just closer to the cargo origin."

Many think the new Western Corridor will open up more cargo to Hong Kong, Shem says, referring to the new bridge that will link western Shenzhen with the Special Administrative Region (SAR). "But if you look, they still have to pass through us to get there." So is Hong Kong resigned to decline?

Not in the opinion of many across the water. In spite of recent growth and competition from younger upstarts, many in Hong Kong are upbeat about the future. "A major portion of the PRD's export cargo continues to flow through Hong Kong," explains Simon Galpin of Invest Hong Kong, an agency of the Hong Kong government. Indeed, Hong Kong continues to offer services that many of its mainland competitors are unable to. For instance, as Galpin points out, Hong Kong as a multi-modal hub is unrivalled by anyone else in the PRD. While Guangzhou and Shenzhen both sport brand new airports, neither one is fully integrated into the logistics chain.

On the other hand, Galpin points out, Hong Kong International Airport is the largest international air cargo handler in the world with a throughput of 3.4 million tonnes in 2005, serves 75 scheduled airlines, provides over 5,000 flights a week to more than 140 destinations, "and half the world's population live within five hours' flight time". Advantages like this lead many to claim Hong Kong remains a prime choice for regional distribution, especially in terms of high-end goods partly sourced from the mainland and partly from the wider region. "Hong Kong's strengths as an RDC (regional distribution centre) include chiefly its free-port status, excellent transport connectivity, and customs and cargo management efficiency."

Galpin contends that Hong Kong, contrary to its perceived high costs, can actually save distributors money as an RDC for high-value goods that have to be moved quickly through the supply chain like specialised spare parts, semiconductors, plasma TVs and luxury fashion goods. "Cost savings of using Hong Kong compared with places like Tokyo, Shanghai and Singapore are in the range of 9 to 33 percent for aviation spare parts and 21 to 45 percent for semiconductors."

Hong Kong also benefits from its legal and administrative transparency. "The problem on the mainland is often accountability," explains Patrick Wong, a senior underwriter for TT Club, an insurance and risk management firm. "It's not as clear-cut as the mentality you have in the West ... Controls are not always as strict as you might think." It is a big reason that so many global operators still choose to base their operations out of Hong Kong.

Rado Antolovic, CEO of Asia Container Terminals Limited, which operates Terminal 8 of Hong Kong's Kwai Chung Port, argues that relative pricing is a minor issue next to Hong Kong's edge in advanced services. "Hong Kong has many natural advantages over the mainland," he explains. "We have one of the highest-skilled labour forces in Asia. This means we can be more efficient than the mainland. We average 40 moves an hour, and that's every hour. We don't ever have to stop. I can count stoppage time this year in hours." It is this pool of expertise, and streamlined legal and customs procedures that has let Hong Kong move into the transhipment market in a way that many of its mainland rivals have been unable to.

Transhipment advantage

One major Kwai Chung terminal operator's predicted estimates showed plenty of room for Hong Kong's growth in the long run. According to one senior figure, who asked not to be named, operational utilisation in the PRD as a whole is likely to fall in the short term to around 90 percent, but demand and supply would equalise at maximum utilisation by 2013. "If you compare Hong Kong and Shenzhen, you can see that whilst Hong Kong's share of the PRD import-export trade decreases in relative terms, it is compensated for by the increase in transhipment trade. At present 55 percent of Kwai Chung's trade is transhipment. We predict 70 percent of business will be transhipment by 2013. It's basically the same rate but you're asked to do two moves per box."

Illustrating this potential for transhipment traffic, Hong Kong has seen rapid development of barge-bound transhipment traffic from western Shenzhen in recent months. Antolovic goes on to explain: "Some Hong Kong operators are even going so far as to open terminals invested in the Delta, joint venture small river terminals and consolidatory hubs. I'm not sure if it's already started, but that's the plan. That would let them go directly to the factories. This is the logical extension of the logistics hub."

Hong Kong companies now employ more workers in the PRD region than the entire population of Hong Kong. With more and more businesses in the PRD straddling Guangdong, Hong Kong and Macau, China's central government has established the Greater Pearl River Delta (GPRD) Economic Cooperation Zone, whose role is to integrate Hong Kong and Macau into the wider Chinese economy by streamlining investment regulation across the entire region and integrating logistics development in the GPRD Area. Included in the zone are Hong Kong, Macau and nine Guangdong municipalities. The infrastructure projects spearheading integration include improved roads, the construction of the Guangzhou terminus of the national inter-modal rail network that will incorporate 18 full containerised rail hubs nationwide and increased air freight integration between Hong Kong and Guangzhou's Baiyun Airport.

In an effort to stretch the benefits of that investment further into southern China the government has also established the Pan-PRD Economic Zone. With economic growth and prosperity in the coastal regions far outstripping the west, the government, and business, is keen to move production further inland. As Shenzhen increasingly becomes a victim of its own success and land and wage rates rise, moving manufacturing further into China's low-cost hinterland makes sense. The hope is that integrating the logistics infrastructure in the eight provinces surrounding the GPRD will encourage investment into the wider south China region by extension. Hong Kong, which remains China's biggest investment conduit, will surely continue to play a key part in the transformation.

Ports by numbers: Hong Kong and Shenzhen

In 2005 Hong Kong's seaport handled a total of 22.42 million twenty-foot equivalent units (teu) of cargo, a figure estimated to rise to over 40 million by 2020. In an effort to bolster its position and make it more competitive against upcoming mainland facilities, Hong Kong is spending vast sums of money on building and improving both logistics and cross-border transportation infrastructure. Under China's 11th Five-Year Plan, China's southern provinces will cooperate with Hong Kong and Macau on some 237 projects at a cost of RMB1.6 trillion (US$200 billion). Some of the more ambitious of these already bold projects include the Western Corridor, the Guangzhou-Shenzhen-Hong Kong express rail link and the Hong Kong-Zhuhai-Macau Bridge.

The Western Corridor, already more or less completed, will connect Shekou to Hong Kong across the bay and is expected to be operational by July 1. As such, the project is intended as a gift to Hong Kong for the 10th anniversary of its return to mainland control. This will be the first border between Hong Kong and China that will have only one set of customs. To accelerate transit times, Hong Kong immigration and customs will be stationed in Shekou.

On average, some 220,000 ships, comprising both ocean and river vessels for cargo and passenger traffic, visit the port of Hong Kong yearly. The port is served by some 80 international shipping lines providing over 450 container line services per week connecting to over 500 destinations worldwide. Hong Kong remains one of the few major international ports in the world where port facilities are financed, owned and operated by the private sector.

In the first quarter of 2006, Shenzhen Port container throughput reached 3.9 million teu, an increase of 11.7 percent over the same period the previous year. Container throughput the previous year reached 16.2 million teu, an increase of 18.61 percent over 2004.

As part of the 11th Five-Year Plan construction of port infrastructure facilities in the area is also accelerating and wider area integration is being encouraged as part of the Ministry of Communications' macro development strategy. Under the plan, two new berths were launched at Shekou, one at Chiwan and two at Mawan raising total potential throughput capacity by 1.91 million teu.

In addition, Yantian Port's enlargement project and Dachan Bay Phase One, projects totalling RMB 18 billion of investment (US$ 2.25 billion), have both been approved and are under way. Shenzhen's Dachan Bay project, of which Phase One is currently being developed by MTL, is intended to be operational by 2008 leaving western Shenzhen with three container terminals.

By 2010, Shenzhen Port will have completed 10 more special container berths. The Ministry of Communications hopes that increased cooperation and integration of logistics infrastructure between Shenzhen and Hong Kong will in time pave the way for the formation of the Asian International Shipping Centre project.