Ports need to work together 'as a team'

For ports in the Chinese mainland, it was a volume growth story till the 1990s and the 2000s. Now, they are entering a more mature phase when growth is more built out among mid-size ports and where leading mainland ports have "taken back" cargo from Hong Kong, Taiwan and South Korea.

An international consultancy was recently quoted as calling Asia's ports "the most efficient in the world". This was not the surprise. The real surprise was that people still have to say this, just like how some analysts and brokers keep using the term "Far East" instead of East Asia or just Asia.

For more than a decade, Asia has had the most efficient of ports. It is not only Hong Kong and Singapore, arguably the most efficient ports around, Shenzhen and Shanghai are also dealing with incredible concentrations of outbound cargo efficiently, and at good value. The only "new" development of the past few years is a gradual change in leadership - a shift from Hong Kong to Shenzhen as the leading partner in the relationship, for instance. And interestingly, this changeover has been smooth, partly because shareholders are more or less similar on both sides of the border.

In a larger China-all-ports context, we've seen larger ports gradually lose some market share to smaller ones with our count of top China ports, excluding Hong Kong, projected to decline from about 83-85 percent market share in 2003-04 to about 75-77 percent by 2011.

The most significant development is that Hong Kong in 2010 failed to get back to its 2008 peaks, while Shenzhen in August 2010 managed to scale its peak month of August 2008. Singapore, similar to Hong Kong, in 2010 did not manage to get back to pre-crisis peaks.

By the numbers, the apparent theme is change of leadership. But for us this is just the surface of the story. The broader theme is twofold. First, ports need to work together (as in Hong Kong + Shenzhen or Shanghai + Ningbo) as a team; and second, China needs to re-orient itself for more growth inbound and higher price points for cargo moves.

The issue of China needing to re-gear for more growth inbound will be a theme for years to come. When I came back to Hong Kong in 1992, this was already one of the main long-term themes I picked up. And it is one which still tops the agenda. It is in China's interest to develop inland transport hubs and increase economic development inland paired with transport strategies that we need highly networked and stable supply chains throughout inland China, not just high-speed trains for passengers only.

If there is one thing we recommend for China in a shorter-time context is the need to raise prices and standardize prices at higher levels- to do less for more. Historically, the idea of promoting trade growth through low costs was a central theme at many levels of the supply chain for China and some other Asia ports, whereas Hong Kong and Singapore to some extent went the direction of highest price point.

In China manufacturing costs were low, taxes for exporters were low (or close to zero effectively) and transport costs out of a location close to a big port like Hong Kong/Shenzhen or Shanghai were very low. Businesses like Walmart fell in love with China, for they could sell more products at lower costs and generate huge gains from high volumes on low margin products.

But for the past few years, more and more decisionmakers have discovered this is no longer needed. Additionally, it has not been the consumers that have entirely benefited. In a secondary function, low prices have also accompanied global leveraging of debt - at first of US consumers, and then the commercial banking system for properties and later government liabilities to bail out the banking system.

Yes, the perception that containerization, on top of low-cost manufacturing in China and many parts of Asia, has lowered costs for western consumers is true enough. Consumers clearly benefited from the rise of the container box.

But there is another little secret in addition to the ultimate increased leverage of governments - port costs have been in some or even many cases improperly built into container shipping costs in many instances.

The problem is that the port costs that have been built in are not necessarily the real costs. Generally, shipping lines have benefited in Shenzhen by building in Hong Kong-type port costs into shipping costs, when in fact many costs, especially in west Shenzhen, are lower. So what is needed is transparency.

China raising port handling charges closer to developed world prices - especially given the higher efficiency levels - might be a wake-up call. In any case, we have seen higher costs in Shenzhen gradually take hold. But there is much more to go. At the same time there is a continued need for Hong Kong to lower prices.

Charles de Trenck is former head of transport at Citi Investment Research and analyst for Transport Trackers.