Shipping, Talking Point

Setting up a harbour defence

Hong Kong’s powerful port conglomerates have formed a super-alliance


Once the world’s busiest port, Hong Kong has lost its crown and faces more competition from its neighbours

Even the fiercest business rivals can be ready to talk when the common challenges are big enough.

Hong Kong’s Whampoa Dock and Taikoo Dockyard were two of the biggest shipbuilders in the Far East until the 1970s when the advent of large container shipping set in. The duo merged in 1973 to form Hongkong United Dockyards so as to compete better with rivals in the region. Another consequence: the creation of two of the colony’s leading property conglomerates.

Taikoo Dockyard renamed the shell company left after its restructuring as Swire Pacific and part of its dockyard was redeveloped into Taikoo Shing, still one of Hong Kong’s largest residential hubs (the foundation stone of the dockyard can still be found at the entrance to the complex). Across the harbour, Whampoa Dock was developed by what is today’s CK Hutchison into another massive real estate project in the 1980s, laying the ground for its boss Li Ka-shing to become Asia’s richest man.

United Dockyards still operates at the territory’s container port. And corporate history seems to be repeating itself as the major players there have once again just put their rivalry aside and forged a fresh alliance. It is prompting loud debate about the vested interests driving the united front this time around, as well as news of an antitrust investigation triggered by the four-way pact.

Which players are joining forces?

Four of the major port operators – Hongkong International (HIT), Cosco-HIT, Asia Container Terminals and Modern Terminals – announced last week that they will form the Hong Kong Seaport Alliance, which will commence joint operations “progressively” through this year.

The group is backed by powerful parents, including CK Hutchison, its long-standing local rival Wharf (owned by a leading Hong Kong family) and China’s state-owned shipping major Cosco.

Together, the new group will operate 23 of the 24 berths at the territory’s main port at Kwai Tsing. The Australian-controlled Dubai Ports, which operates the remaining berth has been left out of the grouping.

Seaport Alliance says its collaboration is in direct response to a rapidly changing business environment, including the formation of new carrier alliances, industry consolidation and the dramatic increase in vessel sizes. By adding more flexibility to berth and yard management, Seaport Alliance says its members can operate more efficiently in handling vessels that call on the Hong Kong port and help the city to “thrive as an international hub for decades to come”.

Is such collaboration new?

Combinations like these aren’t novel in the maritime industry, especially given the turbulent times experienced over the past decade.

One example: Shanghai-listed Ningbo Zhoushan Port, which was formed in 2015 by a state-directed merger between port operators in Ningbo and Zhoushan. Since then the government in Zhejiang has pushed for a common platform that brings in other ports in the province including Jiaxing and Wenzhou.

The ports of Tokyo, Yokohama and Kawasaki agreed on a similar collaboration in 2010, mirroring a pact between four ports in Osaka Bay in 2007.

There were also deals in North America and Europe, as operators forged a united front to compete with regional rivals.

The Hang Seng University of Hong Kong (HSU) – the beneficiary of funding from a number of the city’s business groups – published a report last August calling for the Hong Kong port operators to follow the global trend of collaboration so as to maintain their bargaining power. By sharing facilities including berths and technologies, HSU maintained that the port in Hong Kong could eliminate up to 49% of existing ‘inter-terminal transfers’. The upshot: it could offer carriers better customer service through reduced waiting times and charges, HSU concluded.

How is Hong Kong’s port doing?

The former British colony owes much of its past success to its status as a free trade port, as well as its leading position as an international shipping hub. Yet its competitiveness has been on the wane.

Hong Kong was the world’s busiest port as recently as 2004, handling nearly 22 million 20-feet equivalent units (TEUs). In that year, Singapore handled 21.3 million TEUs, while Shanghai and Shenzhen handled a little less than 28 million combined. But Hong Kong lost the top position to Singapore in 2005 and it has slipped further down the ranking since then. According to the Hong Kong Economic Journal, throughput was 20.8 million TEUs in 2017, compared with table-topper Shanghai’s 40.2 million and Singapore’s 33.8 million.

Data from Lloyd’s List Maritime Intelligence ranks Hong Kong fifth globally, likewise trailing neighbouring Shenzhen and the aforementioned Ningbo Zhoushan in volumes.

The world’s busiest ports are resolutely Asian but Hong Kong is the only one suffering a decline in actual throughput: almost 10% of its volumes between 2012 to 2017.

In fact the container terminal hasn’t added any new berths since 2003, reports the Hong Kong Economic Journal, while its regional rivals, many of them state-backed, are expanding their capacities.

Over the longer term rival locations in mainland China have eaten into Hong Kong’s market. Infrastructural spending on ports and free trade zones, interlocked with massive investment in world-class highways and railways, has opened up new gateways along the southern and eastern coasts, that channel the majority of seaborne goods.

“That’s eroded Hong Kong’s role as a transshipment hub, since most goods in the Yangtze River Delta and Pearl River Delta can be exported from Shanghai or Shenzhen directly,” the Hong Kong Economic Journal observes.

Simply put, mainland cargo no longer needs to be moved through Hong Kong like it once was.

An executive at a European container operator made a similar point in the Wall Street Journal last week, noting how Hong Kong has been losing its appeal as a hub. “When we call at Hong Kong, we may need a smaller ship to bring in cargo from the mainland. So, we dock at Ningbo or Guangzhou instead. They are closer to production centres and that cuts off a big chunk of cost,” he told the newspaper.

How about a broader collaboration in the Greater Bay Area?

“The Hong Kong maritime industry is facing severe competition from PRD [Pearl River Delta] ports, as well as other Asian ports. It is on a downward spiral, which is alarming to industry practitioners,” HSU warned in its report. But its researchers also noted repeated calls for more cooperation between the ports in the PRD (including Hong Kong).

Some analysts have gone further and proposed that Hong Kong close its port altogether, and let its counterparts focus on the container trade while it focuses on more profitable uses for the prime real estate around the docks.

Arguments like this have been put forward with greater urgency since the State Council floated the Greater Bay Area (GBA) concept in 2017 (see WiC358 for more on this ambitious plan).

Logistics and trade facilitation is a critical aspect of the GBA plan as the central government wants to avoid wasteful overlapping in investment across the nine cities in Guangdong province that will form the GBA, alongside the two ‘special administrative regions’ of Hong Kong and Macau.

Consolidation in the container terminal sector is already taking place. For instance, China Merchant Group, arguably the most powerful state-owned enterprise in Shenzhen, has just completed the merger of its port businesses into CM Port Group, which officially went public on the Shenzhen bourse late last month.

The ambitious CM Port is readying itself for further consolidation in the GBA, Hong Kong Commercial Daily has noted. However, questions remain as to whether neighbouring stakeholders, including the Hong Kong port operators (CK Hutchison owns 65% of Yantian port near Shenzhen, while Wharf’s Modern Terminals sits on a 73% stake of the Dachan Bay terminals near Shekou) will be willing to put their GBA assets on the bargaining table.

An eagerly awaited planning document for the GBA might provide more insight on some of these questions. Hong Kong’s chief executive Carrie Lam told reporters this week that the central government in Beijing will publish its latest blueprint in “one or two months” (she also insisted that her administration has been actively involved in formulating the document in question).

Are bigger interests at stake?

The powerful trio behind the Seaport Alliance looks to have joined forces at just the right time. Together, the alliance will enjoy more bargaining clout, not only in dealing with shipping behemoths like Maersk, but also with the Hong Kong government should special circumstances arise.

One of the more audacious possibilities: a repeat of what had happened in the 1970s when the dockyards merged and freed up space for much-needed residential land.

The Hong Kong government has already set up a task force to explore a diverse range of options to boost land supply (even potentially absorbing the city’s most prestigious golf course and using it for affordable housing; see WiC405). Following a public consultation, it submitted its final report last month, where it noted that relocating the container terminals at Kwai Tsing would immediately release a sizeable 380 hectares of urban land.

If a plot bigger than New York’s Central Park (340 hectares) could be rezoned for residential use, the government might have more time to consider a more controversial $64 billion proposal to create a 1,700-hectare artificial island off East Lantau (see WiC432). A ‘relocation’ of the port (to a less valuable location), the task force suggests, would also give it a chance to upgrade its facilities and respond to its regional rivals, just like the relocation of the city’s airport in 1998 (from Kowloon’s Kai Tak to Lantau’s Chep Lap Kok).

But then again, Hong Kong’s positioning in the future GBA masterplan will weigh heavily on the final decision.

“The [Hong Kong] government may explore whether it is worthwhile to study the relocation option, taking into account the latest developments in the logistics, maritime and ports industries in Hong Kong, and the mainland especially the Greater Bay Area and the whole region,” the task force advised in its report.

Is the alliance a cartel?

CK Hutchison and Wharf are both powerful property conglomerates with roots in the shipping sector (China Cosco has its own real estate affiliates too). But even if the Hong Kong government was to opt for a relocation of the container port, there’s no guarantee that the incumbents would get the rights to redevelop the Kwai Tsing facility into a residential district.

So for the time being, members of the Seaport Alliance are championing their commitment to their maritime businesses and playing up what the port means to Hong Kong and its economy.

In a statement, they reminded the public that the port and logistics sector still accounts for 3.2% of local GDP and generates more than 174,000 jobs. “The maritime and port industry is a major part of trading and logistics which is one of the four economic pillars of Hong Kong. We will work together to enhance the position of Hong Kong as an international shipping centre,” promised Lawrence Shum, managing director at Cosco-HIT.

But these lofty goals don’t seem to have distracted the city’s antitrust regulators, which announced a probe into the Seaport Alliance last week. Hong Kong’s Competition Commission was spurred into action by monopoly concerns raised by cargo companies and freight forwarders, given that the new alliance will process an estimated 95% market share of container volumes.

Leung Kun-kuen, chairman of the Kowloon Truck Merchants Association, told the South China Morning Post that the alliance could make it harder for his struggling industry to turn a profit. “These operators have been charging many different types of fees on trucks, and we can do nothing at all in future when they operate as one entity and levy more charges,” he said.

Stanley Chiang Chi-wai, chairman of the Lok Ma Chau-Hong Kong Freight Association, warned in the same newspaper that business might be diverted to mainland alternatives if customers of Hong Kong’s port start to suffer from cartel pricing.

Willy Lin at the Hong Kong Shippers’ Council was equally critical of the move, claiming that “with 95% market share, the industry virtually has no choice” and that there was “no mechanism to monitor, not to mention regulate, the competition behaviours of the members of the alliance”.

He also complained that handling charges in Hong Kong were the highest in the world and that shippers “hardly see any justification for the HK$600-plus documentation fee, HK$135 depot fee and many other ridiculous charges”.

Cosco, one of the alliance members, acknowledged that charges in Hong Kong were higher than in mainland China and Singapore. But it said that this made the case stronger for the alliance, which would allow new opportunities to improve the port’s competitiveness, rather than result in a hike in handling fees.

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