VZCZCXRO8315
PP RUEHCN RUEHDE RUEHGH
DE RUEHHK #2600/01 1740737
ZNR UUUUU ZZH
P 230737Z JUN 06
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC PRIORITY 7419
INFO RUEHGP/AMEMBASSY SINGAPORE PRIORITY 2965
RUEHAD/AMEMBASSY ABU DHABI 0086
RUEHBJ/AMEMBASSY BEIJING 8926
RUEHBY/AMEMBASSY CANBERRA 1666
RUEHLO/AMEMBASSY LONDON 0680
RUEHUL/AMEMBASSY SEOUL 2566
RUEHTC/AMEMBASSY THE HAGUE 2283
RUEHKO/AMEMBASSY TOKYO 4133
RUEHCN/AMCONSUL CHENGDU 0852
RUEHDE/AMCONSUL DUBAI 0033
RUEHGZ/AMCONSUL GUANGZHOU 9856
RUEHGH/AMCONSUL SHANGHAI
RUEHSH/AMCONSUL SHENYANG 3339
RUEAHLC/HOMELAND SECURITY CENTER WASHINGTON DC
RUEHIN/AIT TAIPEI 3943
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMFIUU/COGARD INTELCOORDCEN WASHINGTON DC

UNCLAS SECTION 01 OF 04 HONG KONG 002600 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
USDOC FOR 4420/ITA/MAC/MCQUEEN, CELICO, DAS LEVINE 
STATE FOR EB/TRA AND EAP/CM 
DHS/CPP FOR PIZZECK 
 
E.O. 12958: N/A 
TAGS: EWWT ETRD ENRG HK
SUBJECT: HONG KONG PORT'S COMPETITIVENESS AS A SEA-TRADE 
LOGISTICS HUB 
 
¶1. (U) Summary.  In 2005, Hong Kong's port shipped more goods 
to the U.S. than any other, while Singapore overtook Hong 
Kong's position as the world's busiest container port.  Pearl 
River Delta (PRD) ports collectively are much more 
significant than Singapore, but Hong Kong's share of the 
Pearl River Delta shipping market has been declining.  This 
loss of market share is due to higher costs and longer 
distances from PRD's exporting factories to Hong Kong.  Since 
they are also the major operators of PRD ports in the PRC, 
Hong Kong port operators have been indifferent to this market 
share loss.  End summary. 
 
Hong Kong Port's Competitive Difficulties 
----------------------------------------- 
 
¶2. (U) In 2005, Hong Kong's port shipped more cargo to the 
U.S. than any other port in the world.  It is an impressive 
facility, with some 80 international shipping lines providing 
over 400 container liner services per week, connecting to 
over 500 destinations worldwide. 
 
¶3. (U) The logistics industry, the backbone of Hong Kong,s 
role as the "gateway to China," has always been expected to 
suffer as China opened up to the rest of the world.  For the 
past several years, Hong Kong's logistics industry has been 
migrating across the border, just as the manufacturing 
industry has been doing over the past two decades.  Dozens of 
Hong Kong-based logistics companies are also setting up on 
the mainland under the auspices of the Hong Kong-PRC free 
trade agreement, the Closer Economic Partnership Arrangement 
(CEPA).  While Hong Kong firms are maintaining their control 
over the PRD logistics business, their move across the border 
has led to the replacement of Hong Kong jobs with mainland 
ones. 
 
¶4. (U) In 2005, Hong Kong handled a record 22.43 million 
twenty-foot equivalent units (TEUs) of cargo, a 2.02 percent 
increase from 2004.  Growth in Hong Kong's port industry is 
slowing, while that in other PRD ports is rapidly growing. 
In 2004, the number of containers Hong Kong handled increased 
by a faster 7.3 percent.  Neighboring Shenzhen handled 16.2 
million TEUs in 2005, 18.6 percent more than 2004.  Shanghai 
grew by 24.3 percent, totaling 18.08 million TEUs.  Hong 
Kong's share was slightly less than 60 percent of all goods 
shipped out of the Pearl River Delta last year, but this 
market share is shrinking rapidly.  In 2000, Hong Kong 
shipped 18 million TEUs, while Shenzhen handled 4 million, 
which gave Hong Kong an 82 percent share.  Hong Kong had been 
specializing in the higher end of the market, owing to the 
territory's much more intensive use of technology and 
efficient handling of shipments.  Shenzhen focused more on 
low-cost bulk exports.  As exporters have grown used to 
shipping from mainland ports, however, they have begun using 
Shenzhen for more long-distance shipments to Europe and the 
United States, while using Hong Kong for more intra-Asia 
shipments. 
 
¶5. (U) In addition to Shenzhen's three main ports at Yantian, 
Chiwan, and Shekou, Hong Kong also faces increasing 
competition from other PRD ports. 
Guangzhou is upgrading its terminal facilities, while Hong 
Kong investors are developing new ports in Zhuhai (next to 
Macau) and Shenzhen.  The HKG has responded by completing a 
feasibility study for a tenth container terminal on Lantau 
Island, for which it is now assessing the potential 
environmental impact.  The HKG stresses that South China's 
trade will continue to grow, ensuring that Hong Kong Port's 
business will expand, albeit as a smaller share of a larger 
pie. 
 
HONG KONG 00002600  002 OF 004 
 
 
 
¶6. (U) Due in part to Hong Kong's need to share business with 
the rest of the PRD, Singapore overtook Hong Kong as the 
busiest port in the world last year.  In 2006, Singapore 
processed 3.5 percent more containers than Hong Kong, 
totaling 23.2 million TEUs.  Hong Kong had been the world's 
busiest container port in 13 of the 14 years prior to 2006. 
Singapore's large growth in container traffic reflects its 
importance as a transshipment hub, particularly in the 
growing Australian-European trade.  By consolidating 
containers in Singapore, firms save on such shipments. 
 
¶7. (SBU) While mainland Chinese ports are adding capacity and 
growing rapidly, they will not be able to absorb all the 
capacity that currently goes through HK for another decade. 
In the meantime, however, higher costs in Hong Kong are 
driving the Hong Kong port operators to shift more business 
to the mainland.  HIT, Hong Kong's biggest port operator, 
which operates half of Kwai Chung's berths directly, sold 20 
percent of its Hong Kong port operations to the Port of 
Singapore Authority (PSA) in June 2005.  Five months later, 
it announced that it was taking a 65 percent stake in the 
third phase of Shenzhen's Yantian Port in exchange for an 
amount close to what it gained in the Kwai Chung sale.  Hong 
Kong's second largest terminal operator, Modern Terminals, is 
investing USD 568 million to develop Shenzhen's new Dachan 
Bay Container Terminal, envisioned eventually to have 24 
berths.  In addition, Hong Kong's terminal operators are 
arguing against the HKG's plan to build Hong Kong's tenth 
container terminal in northern Lantau Island, claiming that 
demand does not exist for this facility.  In contrast, port 
operators supported the construction of Hong Kong's ninth 
container terminal on Tsingyi Island, which broke ground in 
¶2000. 
 
¶8. (U) Hong Kong is losing market share primarily because it 
is cheaper to ship from the mainland.  McKinsey estimates 
that it costs about USD 300 more to ship a forty foot 
container from Hong Kong than through Shenzhen ports.  This 
cost differential is due to two factors: higher cross-border 
trucking costs and higher terminal handling charges (THC), 
which are fees charged by the shipping lines to shippers to 
compensate them for costs entailed in their use of port 
facilities.  Higher cross-border trucking costs represent 
two-thirds of the cost differential, or USD 200. 
 
Terminal Handling Charges (THC) - A Private Sector Matter 
--------------------------------------------- ------ 
 
¶9. (SBU) The HKG cannot easily solve the THC differential. 
It has consistently said that THC is a private sector 
arrangement in which it will not interfere.  Shipping lines 
charge shippers a uniform THC for the same port, the level of 
which is set at global shipping conferences.  Although port 
operators in Hong Kong have lowered the fees they charge 
shipping lines for using their berths, the shipping lines 
have not passed on all these savings to the shippers.  In 
addition, the Hong Kong port operators (most of whom also 
operate ports in Shenzhen) still charge more for the use of 
their Hong Kong facilities.  A representative from one of the 
port operators told us that the higher charges stemmed from 
higher labor costs and "supply and demand." 
 
Higher Trucking Charges Solvable 
-------------------------------- 
 
¶10. (U) Most of the debate in Hong Kong, however, has focused 
on higher trucking charges, since they account for most of 
the cost differential and policy solutions are clearer. 
 
HONG KONG 00002600  003 OF 004 
 
 
Mainlandtruckers are not allowed to operate in Hong Kong. 
All trucks and containers into which goods are loded 
originate from Hong Kong.  Trucking is therefore expensive 
because of the higher operating costs in Hong Kong.  Not only 
are wages higher, but also parking, insurance, maintenance, 
and other costs are more expensive.  Hong Kong's 8,500 
truckers have seen their salaries slashed by over 20 percent 
since 2001, and trucking companies have replaced fixed 
salaries with compensation on a per-trip basis.  The 
logistics industry is calling for mainland trucking companies 
to participate in cross-boundary trucking.  While this will 
accelerate the decline of Hong Kong's trucking industry, it 
could help maintain business at the port by lowering costs. 
This strategy could help save the 183,000 jobs both at the 
port and in ancillary businesses. 
 
¶11. (U) Cross-boundary regulations add to Hong Kong's costs. 
Currently a trucker has to pay HKD 6,000 (USD 774) per month 
for a cross-boundary license, ten times more than their 
counterparts in Guangdong Province.  The Guangdong Provincial 
Government grants these licenses to joint-venture firms 
between Hong Kong and Chinese companies, which lease them out 
to truckers.  McKinsey estimates license costs represent 
about HKD 300 (USD 39) per trip. 
 
¶12. (U) A variety of mainland restrictions also prevent Hong 
Kong,s truckers from usually making more than one trip 
daily.  Until recently, mainland Chinese regulations required 
that the same trucker, truck, trailer, and empty container 
stay together for the duration of a journey.  Since truckers 
could not drop off an empty container at a factory and pick 
up a full one, they had to spend several hours waiting while 
the factory workers loaded up the empty container.  Trucking 
companies could make two trips a day if they were permitted 
to drop off empty containers and immediately pick up full 
ones.  If more than one driver could drive the same truck, 
that truck would also be able to make a second trip on the 
same day.  In January, the mainland lifted its requirement 
tying containers and trailers to specific trucks, but has not 
yet issued new regulations.  Truckers are afraid to change 
their practices because of the opacity of the new rules.  The 
mainland also announced that two drivers would be able to 
drive one truck, but this also has not been implemented. 
 
¶13. (U) Hong Kong truckers face delays not only at the Hong 
Kong-Shenzhen border, but also at the border between the 
Shenzhen Special Economic Zone and other mainland 
jurisdictions further inland.  This "inland Customs" delay 
often exceeds that at the Hong Kong-Shenzhen border. 
McKinsey noted that the average trip from Dongguan to Hong 
Kong is 13 to 15 hours, and truckers spend an average of five 
to six hours waiting at Customs at the Dongguan-Shenzhen and 
Shenzhen-Hong Kong border crossings.  The HKG is striving to 
minimize time necessary to cross from Shenzhen into Hong Kong 
by improving infrastructure, such as constructing the 
"Western Corridor" bridge from Shekou to Hong Kong, and 
enhancing efficiency. 
 
¶14. (U) Despite the cost advantage of southern China's ports, 
Hong Kong retains appeal among shippers, who say that they 
value the port's easier customs clearance, which involves 
fewer inspections and more consistent requests for 
documentation.  With 4 to 20 times as many trips to other 
places in Asia and three times as many to Europe and the 
United States, Hong Kong also serves more destinations more 
frequently than do the ports of southern China.  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. 
 
HONG KONG 00002600  004 OF 004 
 
 
Unfortunately for Hong Kong's longer term prospects, the 
mainland's improving hardware and software are eroding these 
advantages. 
 
Cunningham