Hong Kong as the World’s Leading Port

December 1999

Integrating e-commerce and the trading sectors

There is a potential for Hong Kong to lead the world by developing into an information technology based port and trading hub, through integrating e-commerce and logistics. This potential is underlied by a number of factors.

(1) Industrial policy and Hong Kong’s positioning

For the past few years there has been a debate within Hong Kong about a so-called “industrial policy” in relation to the development of the manufacturing industries especially of the higher-technology nature, versus the development of Hong Kong as an international financial centre. Thanks to this extremely useful debate, we have now moved beyond the simplistic arguments between, on the one hand, a “Silicon Valley” replica and on the other, a financial centre. Instead there has now emerged, we believe, a concensus that Hong Kong should position itself as the world-class city of Asia by, inter alia, making better and more sophisticated use of technology. The latter should not be developed for its own sake but as an important ingredient in the integral development of Hong Kong as a world city.

(2) The development of e-commerce

There is an ever growing interest in the application of information technology and telecommunications in day to day business through e-commerce. As businesses are increasingly globalised, e-commerce will become more and more a competitive edge.

At present, there seems to be limited applications in e-commerce in Hong Kong. As a small economy the potential of business-to-consumer (B2C) e-commerce may be limited. However, we believe a concensus is emerging that a great potential exists for Hong Kong in business-to-business (B2B) e-commerce. The Chamber is inaugurating an e-committee next year for the purpose of bringing together IT professionals and business people to see how IT can help their business.

(3) Hong Kong as a trading centre

Trade has always been an important basis, some say the most important, of Hong Kong’s economy. A whole range of other service sectors, including significantly the modern financial services sectors, are driven by Hong Kong’s trade.

Hong Kong’s trade has undergone major restructuring, from an exporter of domestically made manufactures to re-exports of goods made in the Mainland. As direct trade between the Mainland and its trading partners increase, more and more trading activities are going through Hong Kong in the form of transshipment and offshore trade. Hong Kong does not just trade for itself, it acts as a global trading hub. The challenge is to strengthen this hub role.

In taking up this challenge it should be recognised that there are numerous inefficiencies in the trading system. Globally, free trade is stifled by protectionism. As a result of efforts by the WTO, however, world trade in general, and Mainland China’s in particular, will be much more smoothly conducted. Within Hong Kong, a lot of constraints and inefficiencies exists as a result of high port charges and inefficient transport between Hong Kong and Shenzhen. The result is high cost and inefficient delivery for the Hong Kong trader and shipper. An indirect impact arising from that is the destruction of the countryside by the proliferation of container yards. For Hong Kong to continue to lead as a world trading centre, a solution should be found to resolve such inefficiencies.

(4) Development of logistics

Lately the modernisation of supply chain management within the distribution industries has been a major theme promoted by organisations like the Hong Kong Article Numbering Association. It is another private sector effort to improve productivity and efficiency of a major service sector of Hong Kong.

Two developments merit particular mention. First, distribution is not a service sector on its own but one which is intimately linked to the trading sectors. Development in supply chain management is therefore closely associated with that of e-commerce. Secondly, the higher value added activities of the distribution industries are increasingly converging into what has become known as the logistics industry. The latter is an “efficiency business” consisting of the service elements of distribution, namely, information, storage, processing and transport.

(5) Business parks

Government has recently commissioned a study on the need for and feasibility of business parks for Hong Kong. We are not certain if any conclusion has been drawn but and it remains to be seen if there exists a big need for any particular service industry for a dedicated land use to be zoned for their purpose. Having said that, the large amount of port backup land for open storage of containers may well be considered a kind of “business park” run in an extremely inefficient and environmentally damaging way. They also demonstrate that there may be a need for a rationalisation in industry-supporting land use, including the industrial estates, to facilitate logistic-related operations.

(6) The China advantage

The advantages to Hong Kong of geographical and cultural proximity to Mainland are well known. With China’s entry into the WTO there will be even bigger opportunities. However, Hong Kong must not consider these opportunities to be Hong Kong’s by right. Instead the business environment will be more competitive, so Hong Kong needs to strengthen its competitive edge and find new ones in order to stay ahead.

Convergence: Hong Kong as World Class Logistics Centre

If all the above developments are put together, we believe a strong case can be made of developing Hong Kong into the world’s leading logistic hub of a global scale.

Briefly, the vision is that of an e-commerce based logistics centre serving not just Hong Kong and China but the world. Such a centre will revolutionise the way Hong Kong’s external trade is conducted. Hong Kong will be a centre for direct B2B trade via the Internet, which will facilitate just-in-time management as well as smooth, seamless transport and distribution of traded commodities. This will reduce stock wastage, transport and processing to a minimum, thus enhancing efficiency of the trade process. There would only be container traffic where it is needed; storage of empty containers would be reduced to a minimum.

The best illustration of such a logistic operation is the Hong Kong Air Cargo Terminal (HACTL). There operations are fully automated and inefficiency is kept to a minimum. It has developed as a result of the commercial pressures facing the air cargo business, but it sets an example of how inefficiencies in the trading process can be overcome through a fully technology driven operation. In a seamless operation HACTL is able to service traders in other countries, airlines, forwarders, shippers, transport operators and endusers.

One important reason for HACTL’s success is the nature of the aviation industry which puts enormous pressure for service providers to compress their operations. With the development of e-commerce, a similar pressure for compression is building up for the mainline trading sectors. Going e-commerce and doing logistics may be the answer to these traders.

Technologically, the capability for such a fully IT-driven trading process already exists. What it takes will be for the technologies to be applied and the infrastructure to be provided. There are two elements to such infrastructure.

The first is the provision of suitable land infrastructure for the physical “logistic parks”. They should be fully automated establishments, perhaps more sophisticated than the current HACTL in order to handle the vastly bigger amount of goods going through for processing. Such logistics centres will be very different in nature from the property-based “logistic centres” in other countries. Rather, they will be run like the existing container terminals, only in a more sophisticated manner. In a way, they are a progression from the container terminals, which are also highly automated but which process only boxes. A proper logistics centre will be processing centres of the contents of the boxes, not just the boxes themselves. Nor do these centres have to be dominated by big players. There is certainly an element of economy of scale in a logistics park, but by definition the whole logistics and distribution business need to be versatile and flexible, so there must be room for plenty of smaller scale service providers occupying different niches in the whole supply chain process.

The other infrastructure will be the technology platform for e-commerce. Indeed, the volume of trade handled by e-commerce should be much greater than that going through Hong Kong. While the development of e-commerce should be a matter totally for the private sector, government will have a role in providing the information infrastructure as well as the regulatory framework and common standards to ensure that e-commerce transactions with the world can truly flourish.

One crucial element in the development of Hong Kong as a global logistic centre is to forge a division of labour with the Mainland to the benefit of both. The Mainland can, for example, provide room for complementary logistics operations, cargo village and container yards which can all be related to the technology-driven logistics operations in Hong Kong. To the extent that this is a political and institutional issue which can only be properly addressed by the government, perhaps this can be regarded also as another “infrastructural” issue to be tackled.

Next step

This paper is submitted to the HKCSI Executive Committee for discussion. Subject to the Committee’s comments, it may be taken further to the Chamber, other industry bodies or relevant government departments for further consideration.