The Hindu Business Line : Cost analysis port to port

BARREN rock. That is how Hong Kong was described over 150 years ago. It has no natural resources, except one of the finest deep-water ports in the world. Also, one of the busiest, because an estimated $150 billion goods flow in and out of HK.

In terms of total container throughput in 2002, HK scored 19.1 million TEUs (that is, 20-foot-equivalent unit), while it was only 6.5 millions for Rotterdam and 4.8 millions for Antwerp. It derives 20 per cent of its GDP and employment from trade sector.

Interesting facts, but the problem is that it is facing competition, from nowhere else but its own parent, mainland China, observes the latest issue of The McKinsey Quarterly, through a cost analysis between doing business through HK versus ports in mainland China.

A paper by T. C. Chu, Alan Lau, and Nicolas C. Leung notes that though HK has played a historical role in linking the manufacturers of greater China with the consumers of developed nations, its dominance is being eroded by ports of Yantian and Shekou-Chiwan in southern China's Pearl River Delta, across the border from Hong Kong. With lower costs and improved service, those ports are attracting shippers.

A neat study for cost watchers, because there are cost elements that are uniform, and the ones that vary.

An obvious candidate for HK to trim is trucking costs, "from a typical factory in Dongguan — the Pearl River Delta's largest export-oriented manufacturing area."

For HK it is $370, which is more than double of what it costs to truck to the other two ports. McKinsey points out that this disparity accounts for "almost two-thirds of HK's 8 to 9 per cent cost disadvantage."

Though there are non-addressable issues such as wage because regulations prevent mainland China's truck drivers from entering HK, the authors offer a few suggestions to tackle at least a chunk of the cost difference.

Vehicles headed to HK from Dongguan make but one round trip a day, while the ones going to Yantian or Shekou-Chiwan can make two or three. Reason: Long waiting times at Customs and heavy traffic, consuming almost a third of the total trip time.

To overcome these, the paper offers a few suggestions. These include the establishment of 24-hour Customs operations for increasing capacity utilisation, and improving the efficiency of the barges used to transport some of the containers down the delta to Hong Kong.

These measures have a cost-saving potential of $90 per container. "If the Guangdong authorities were to forgo licensing revenues and cut cross-border registration fees, an additional $30 per container per trip could be saved."

Subtract from the $220 gap (between $370 and $150 of trucking costs), $90 and $30, still you would have a $100 hole.

Such a cost chasm can easily tilt one's decision in favour of southern China's ports, but there are other advantages where HK scores. Such as: Easier Customs clearance, fewer inspections, more consistent demands for documentation, and more destinations served more frequently (4 to 20 times more trips to other places in Asia and 3 times as many to Europe and the US).

"Moreover, Hong Kong's status as a duty-free port makes it attractive as a regional warehouse for high-value goods, while its sophisticated legal and financial systems facilitate trade," states the paper while reiterating, "Nevertheless, Hong Kong needs to reduce trucking costs to maintain its competitiveness."

A focus on reducing terminal charges or expanding the port's capacity by building new container terminals — something the government and Shippers' Council are occupied with — is not the key, according to McKinsey, because "terminal charges account for only 10 per cent of total logistics costs".

Commonsense message, therefore, is to make existing terminals more efficient rather than creating additional capacity. And get the goods to port by streamlining logistics.

A cost-analysis model that can be ported on to closer home.