The Challenges and Opportunities Facing theHong Kong Airfreight Industry

Presented by

Ir Dr Anthony Lau

Pacific Air Limited

19 June 2013

Pacific Air Limited

Logistics refers to the process of planning, implementing,and controlling the forward and reverse flow and storage ofgoods, services, and related information from point of originto point of consumption while conforming to customerrequirements (Council of Supply Chain Management, 2005).

Logistics activities can be broadly divided into asset‐basedand non‐asset‐based logistics. The forwarding industrysector is a subset of the logistics industry (Markides andHolweg, 2006).

Definition of Logistics  

lOGISSCM

SC

Logistics

Logistics

SCM

Logistics

SCM

Logistics SCM

Traditionalist

Unionist

Re-labeling

Intersectionist

Relationship of Supply Chain Management and Logistics

Source: Halldorsson and Larson, 2004

5PL EB

4PL

3PL Forwarding/Contract Logistics

2PL Asset-based logistics

1PL producer

TCERBV

Location Theory

Hierarchy of the Logistics Industry

Rise of Freight Forwarder Share of International Trade 

Source: MergeGlobal 2008

Relationship between 2PL, 3PL and 4PL

Source: Halldorsson and Larson, 2004

ROCE by Industry Segment

Source: MergeGlobal 2008

Actual Weight

VolumeWeight

Shipper A ships a shipment of shirts with Destination X at HK$20 per kilo

2,000 kilos 3,000 kilos

Shipper B ships a shipment of watches with Destination X at HK$20 per kilo

2,000 kilos 1,000 kilos

By consolidating shipment A + B

4,000 kilos 4,000 kilos

An example of how IFFs achieve lower costs

Value Creation by Freight Forwarder

Value Creation by Freight Forwarder

Source: Stan Shih, Acer Computer Taiwan 1992

• GDP Growth• Globalisation• Outsourcing• Hong Kong’s Freeport Status

Drivers of the Hong Kong Airfreight  Industry

• China,  ending a 110 years long US leadership as the World’s top manufacturing nation in 2010 (research by US‐based consultancy IHS Global Insight, accounted for 19.8% of the world’s manufacturing output

• Strong interest in import consumer products from the newly created affluent middle class has created a strong import airfreight market

Recent Developments

Catchment Area of the Hong Kong’sAirfreight Industry

• Hong Kong Airport• Port Governance in Hong Kong• Hong Kong Logistics Development Council (LOGISCOUNCIL)• Creating a Pro Business Environment

‐ Low corporate / personal tax‐ Zero‐tolerance of corruption‐ Efficient customs services‐ Transparent legal system‐World class financial services‐World class IT service support

Impact of Hong Kong Government onAirfreight Services Providers

How the Hong Kong Airfreight Industry Supportsthe External Trades in Hong Kong and the PRD

Year In Million Kgs

2008 3,627

2009 3,347

2010 4,128

2011 3,938

2012 4,025

Air Cargo Throughput of Hong KongSource: Civil Aviation Department

Year In Million Kgs

2003 2,641

2004 3,094

2005 3,402

2006 3,580

2007 3,742

SO

WT

Competition from the Airfreight Industry in China

S T

R E

N G

T H

S HKG airfreight industry PRD airfreight industry

Infra. Facilities World class   Improving

Airfreight  professional

Increasingly drawn by the PRD airfreight industry 

Lagging behind & attract    airfreight professionals from Hong Kong

Government support

Strong support  Strong support  through     regulations

Air connectivity Reaching out to 120       international cities  Catching up very fast

Customs services Transparent & efficient Unpredictable

S T

R E

N G

T H

S HKG airfreight industry PRD airfreight industry

Overseas salesnetwork Extremely strong  Catching up very fast 

Regional officestatus

World class Lagging behind

Legal system Transparent Needs improvement

Tax system Simple and low tax System

Attractive in SEZs

IT/financial support Strong support for SCM Needs improvement

W E

A K

N E

S S

E S

HKG airfreight industry PRD airfreight industry

Location from mfg centre Less favourable Very favourable

Operating costs High Low

Airfreight professional Succession problemAttract airfreight professional from Hong Kong & catching  up

O P

PO

R T

U N

I T

I E

S HKG  airfreight industry PRD airfreight  industry

Political stability   Very  stable Stable

WTO  Increase airfreight demand    Increase airfreight demand

Closer Economic Partnership Agreement

Lessen one major licensing constraint

Lessen one major protection

Export airfreight demand in China

Close to the world’s manufacturing power house 

Right in the world’s manufacturing power house 

Import airfreight demand in China

Gateway to one of the largest import airfreight market

Sitting on one of the largest import airfreight market

Export to emerging markets

Lack of competitive advantages 

Supported by manufacturers  in the PRD 

e Commerce e AWB by CX Lagging behind

T H

R E

A T

S

HKG airfreight industry PRD airfreight industry

Skyrocketing fuel  prices Dampen airfreight demand  Dampen airfreight demand 

Sluggish world trades in the last few years

Weaken airfreight demand Weaken airfreight demand

Nearsourcing sourcing Weaken airfreight demand Weaken airfreight demand

Mode‐shifting from air to land/ocean

Weaken airfreight demand Weaken airfreight demand

Security issues Increase  costs Increase  costs 

Sino US relationship Amicable Cautious

Competition from other production centre Not immediate Not immediate

RMB appreciation Weaken airfreight demand Weaken airfreight demand

New labour laws Not significant Not significant

Labour supply in Hong Kong/China Getting difficult Getting difficult

• CIS• Middle East• Africa

The Challenges and Opportunities created by the New Markets

Recommendations to Strengthen Hong Kong Airfreight  Industry’s leading position

Questions and Answers