Industry braces for challenging times
For key players in the logistics and supply chain sector, the flip side of offering global coverage and end-to end services is that problems are never far away. Anything from port congestion on the US west coast to slackening consumer demand in Europe can have an impact on the business, feeding through in terms of higher operating costs or the need to chase after additional volumes.
With the world economy teetering on the brink of recession, industry executives are steeling themselves for tougher than usual challenges. Foremost among them is the knock-on effect of the fluctuating price of crude.
'There is no doubt about it, every carrier is struggling with it,' said Walther Nahr, chairman of the Hong Kong Association of Freight Forwarding and Logistics (Haffa). 'Oil prices may be down a bit, but they are seriously affecting the business.' He noted that the impact on third-party logistics providers - as opposed to the airlines and ocean carriers - was less direct because any fuel-related surcharges were passed straight on to customers. However, the fallout was evident in numerous other ways. Factories in South China were quieter as recession-hit customers trimmed orders and, with less pressure to get goods into stores, shippers were opting for lower cost transport alternatives with longer transit times.
'We may have higher turnover [because of the surcharges], but there is no margin in that,' Mr Nahr said. 'You can see the trend to sea from air in the throughputs, with growth rates for Hong Kong airfreight now in the low single digits. Factories are not full, so they can produce in time and ship by sea, but capacity on the seafreight side has grown so much that the rates there have been dropping.'
He indicated that this scenario had doomed attempts to impose a mid-year general rate increase for ocean cargo between the Far East and Europe. Competitive pressures had depressed some rates by as much as 50 per cent, and thoughts of applying a peak season surcharge had fallen by the wayside. The situation on transpacific routes was not as dramatic in view of the contractual terms between freight payers and carriers, but there was little cause for short-term optimism.
'The only thing we are hearing is that the rates are going down,' Mr Nahr said, adding that this would almost certainly leave the door open for further mergers and acquisitions within the sector.
He pinpointed the European Union's (EU) anti-trust ruling as the issue likely to have the most wide-reaching implications. Set for implementation next month, it will bar shipping lines from acting in concert when fixing surcharges for currency and bunker adjustment fees and terminal handling charges. Rather than applying standard trade-wide figures as in the past, operators will now have to negotiate each of these items separately with individual customers.
'It will be a ... mess in the market, and will make life very difficult,' Mr Nahr said. 'There will be no other way but to negotiate with individual clients, and it will be impossible for carriers to have informal agreements.' There was no doubting the EU's intent to push through the reforms, something made plain by recent investigations of freight forwarders and industry bodies in Europe and Japan.
Mr Nahr accepted there was a need for greater transparency. Through Haffa, he had been involved in consultations about industry reform and, in particular, framing effective competition laws in Hong Kong.
'We have made our comments and will have to see what the outcome will be,' he said. '[In some areas], everything will have to be relearned.' Despite such concerns, Mr Nahr emphasised that there was still cause to be upbeat about the sector's medium-term prospects, and Hong Kong's chances of further developing as a regional logistics hub. He cited the success of the e-freight pilot project as an instance of how the city was able to give an international lead. The project involves six countries, including Britain, Sweden and Canada, and seven airlines, and should do away with the need for hard copy airway bills to accompany airfreight consignments. As more countries come on board, all such documents could be handled electronically.
'There were some teething problems we have identified with the carriers, and we are overcoming them,' Mr Nahr said. 'The advantage in the long run is that closing times at airports can be drastically reduced.' He added that it was vital for the government to designate an area for development as a true logistics centre. 'I still believe Hong Kong has good prospects as far as being a logistics hub is concerned, not just for South China, but for the region,' he said.