The figures are staggering. China’s trade surplus could top $120bn in 2006, up more than 22% from estimated 2005 figures of $97.4bn, according to China’s State Information Centre.

While manufacturers worldwide are taking advantage of China’s low costs by outsourcing much of their production there, logistics is the expensive part of the equation. Although China is now a manufacturing giant, to a large extent its future growth hinges on more efficient and cost-effective supply chain management.

China’s infrastructure has improved dramatically with airports, seaports, highways, logistics parks, and distribution centres being built at a record pace. In the south, Hong Kong is the major hub for moving cargo, especially for the Pearl River Delta (PRD), thanks to its highly efficient and well-connected air and sea ports. Today, the PRD is home to about 7500 large multinational manufacturers and tens of thousands of small and medium-sized enterprises.

But challenges persist. Goods must be cleared by Customs before crossing mainland China’s border with Hong Kong in both directions and, although waiting times have improved, delays and traffic congestion still cause shipments to miss connecting vessels sailing from the Port of Hong Kong.

Security measures

The port participates in the US government’s Container Security Initiative (CSI), a US Customs anti-terrorism measure, which makes it even more critical that shipments reach port terminals on schedule.

The Hong Kong Special Administrative Region (HKSAR) is trying to relax restrictions for road haulage between mainland China and Hong Kong to ease traffic congestion and waiting times. Under proposal are various roads and bridges, such as the Hong Kong-Macau-Zhuhai Bridge, which is designed to improve cross-border transport and create better traffic efficiencies between Hong Kong and south China. With the PRD’s industrial base shifting to the western side of Shenzhen – where manufacturers can find even cheaper costs – many officials in Hong Kong see this infrastructure development as imperative.

“The problem that many manufacturers are facing is road haulage costs for trucking containers all the way to Hong Kong Port,” says Janice Tse Siu-wa, deputy secretary for economic development and labour for the Hong Kong government.

To offer an alternative, several ports are being developed in the PRD around the Shenzhen and Guangzhou areas, for example, Yantian and Nansha. In December, Hutchison Port Holdings entered into a joint-venture agreement with Shanghai International Port (Group) Company Limited (SIPG), APM Terminals, COSCO and China Shipping Group to develop jointly the port’s Yangshan Deep-water Port Phase II Project.

Still, the Port of Hong Kong, a defining feature of the HKSAR, has world-renowned advantages: its efficiency, large number of vessel calls, and port management and operational expertise. Unparallelled anywhere else, terminal operators can make 40-50 movements per hour.

Shenzhen traffic

New capital investments in ports in Shenzhen are capturing an impressive proportion of traffic, however. Streamlined Customs requirements for ocean-to-ocean transhipment and deep water draughts at Yantian have helped to heighten that port’s competitiveness. Yantian also offers inducements to shippers to help build traffic at the port.

“For companies like Hasbro and Wal-Mart, which can save an extra $100 per container by using the Port of Yantian, the difference is significant,” says James E Thompson, chairman of Crown Worldwide Holdings and chairman of Hong Kong’s American Chamber of Commerce.

The Port of Yantian could overtake the Port of Hong Kong in tonnage handled but for many manufacturers, the inducement is not enough to change ports. HKSAR officials hope not, anyway. “We believe there is enough business to go around,” says Ms Tse.

The Hong Kong government is keen to maintain the port’s leading position. For every ton of direct cargo that flows through the port, HK$195 ($25) filters into Hong Kong’s economy; for transhipped cargo it is HK$130 per ton, says Ms Tse.

Hong Kong International Airport (HKIA) has little competition in the region despite the 2004 opening of Guangzhou’s Baiyun International Airport. When shipments need to move quickly they transit via HKIA, relying on its connectivity, numerous flights and cargo-handling facilities.

“HKIA still has an important role to play – at least for the next four to five years – before Baiyun Airport catches up with the territory’s cargo-handling standards,” says Ambrose Linn, deputy country general manager at TNT Express Worldwide (HK).

HKIA handles 90% of all PRD air freight and is the world’s number one airport in terms of international air cargo throughput, a ranking it has held since 1996. At the forefront is the Hong Kong Air Cargo Terminal Limited (Hactl), the largest air cargo terminal at HKIA. Its wholly owned subsidiary, Hong Kong Air Cargo Industry Services Limited (Hacis), offers supply chain management solutions such as intermodal transport, cargo delivery and information services. Its SuperLink China Direct service provides road connection with the PRD via its customs-bonded air-road intermodal transport services.

To give logistics service providers more opportunity for expansion, the Closer Economic Partnership Arrangement (CEPA) for transportation and logistics was signed into law in January 2005. Now Hong Kong companies can set up wholly owned enterprises to provide logistics services in mainland China.

“We can match any product going to Guangzhou’s Baiyun Airport,” says Warren Bishop, Hactl spokesman.

Businesses must pay tax of between 30%-50% in China, whereas Hong Kong is tax free. For companies that do their billing in Hong Kong to avoid taxes, there are clear advantages.

As a result of CEPA, many Hong Kong companies are investing in Shanghai and Beijing, and some are introducing logistics and distribution schemes. Crown Worldwide Holdings, for instance, is building huge logistics facilities in Shanghai for Germany’s Metro, which has opened a host of supermarkets in Shanghai and other cities in China and is ranked third after US-based Wal-Mart and France’s Carrefour.

Arrival of 3PL

Warehousing and third-party logistics (3PL) operations are still new to China. Until recently, government regulations and a shortage of trained personnel hindered foreign investment – but now their time has come. In December, San Francisco-based AMB Property Corporation announced its first acquisition in China with the $8.7m purchase of a 56,000-square-metre industrial facility in Shanghai. Colorado-based ProLogis announced in December that it will develop a major distribution facility in China for sporting goods maker Adidas. Through a previously announced joint venture, ProLogis will lease more than 197,000 square metres to Adidas at ProLogis Park Suzhou in Suzhou Industrial Park. The facility will serve markets in mainland China.

Some overseas companies are also opening export distribution centres and performing supply chain functions in China before shipping their products overseas. They have found that with China’s increased transportation options to more destinations, they can find extra savings.