Taiwan as the Western Pacific Cargo Hub?

For American Chamber of Commerce in Taipei 

by JENS KASTNER

The logistics industry sees big opportunities for growth in the years ahead.

Last year the Port of Kaohsiung ranked 13th internationally in terms of container throughput, a drop of 10 places in just about as many years. Although the volume was still substantial – just under 10 million TEU (twenty-foot equivalent units, the standard measure of container traffic), the decline in the ranking is largely attributable to the relocation of many Taiwanese manufacturing facilities to China, as well as successive governments’ emphasis on developing the IT industry with comparatively little attention paid to the logistics sector.

But lately there has been growing optimism that Taiwan can more effectively leverage its strategic geographic position in between China (the “world’s factory”), the United States, the Association of Southeast Asian Nations or ASEAN (set to become the world’s biggest common market in 2015), as well as other dynamic APEC member countries. The primary beneficiaries of a potential cargo boom, however, would be Taiwan’s supporting industries, such as freight forwarders, warehouses, and custom brokers, and not necessarily the island’s shipping lines and airlines.

“Our business has been fine despite the weak global economy, but that of the shipping lines less so because demand and supply are unbalanced,” says Michael Tai, chairman of the International Ocean Freight Forwarders & Logistics Association, Taiwan’s biggest logistics industry association. “They have lost big money in the past three years because they focused on enlarging capacity by building ever bigger vessels, with the global economy then not doing as well as they had expected.” Tai is founder and CEO of Taipei-based Transworld Transportation, which he describes as the second-largest logistics company in trans-Pacific trade after Expeditors International of the United States.

While Taiwan’s major container shipping lines – Evergreen, Yangming, and Wanhai – thus largely face a challenge of overcapacity for their port-to-port services, logistics companies benefit from increasing requests from importers and exporters for additional services, such as trucking. Cargo has to be picked up at the factory, moved to the port, and then handled by a customs broker before being shipped out. On the other end, after it again clears customs, it is stored in a warehouse and eventually distributed to retailers. In industries such as consumer electronics, where products come in ever greater varieties and colors, and with thousands of spare parts involved, these processes have become so complicated that neither seller nor buyer nor shipping line could possibly take on the task with just their own resources, even if they had the necessary licenses.

According to Tai, the Taiwan government’s new plan to develop Free Economic Pilot Zones (FEPZs) – to include Taoyuan International Airport and the six major ports of Kaohsiung, Keelung, Taipei, Taichung, Anping, and Suao – may greatly boost demand for these types of services, provided that authorities remove regulatory hurdles as promised. “Singapore, South Korea, and Hong Kong have been clearing cargo electronically for more than 10 years, but here the law hasn’t been changed in the past three decades,” he says. “While all that the regional competitors require is a single code, every shipment coming into Taiwan for transit still has to submit import documents, which then have to be changed into other documents for export.” If the effort to simplify procedures in the FEPZs is successful, for example, a company operating in one of the zones could repair smartphones and send them back on the same day or the next, a crucial ability if the Taiwan zones want to compete with other regional zones.

Stage 1 of the FEPZs began last year. Stage 2 requires legislative approval, and the necessary bill has not yet been enacted by the Legislative Yuan. “We have been lobbying hard for many years for easier customs clearance, but now it is 90% through [with respect to the FEPZs], and President Ma Ying-jeou is strongly supportive of the issue,” Tai notes. “Once the law is changed, it will be very helpful for the Taiwanese economy since cargo to Shanghai from different Western countries can all be combined together with Taiwan export cargo in the same container in our FEPZs,” he says. Given the exodus of so much manufacturing from the island, Tai considers that the only option for Taiwan’s economy to improve is to further develop its trading and transportation capabilities.

Labor conditions ease

Bert Lim, president of the Taipei-based World Economics Society think tank and an economic advisor to President Ma, notes the quiet elimination in recent years of a major obstacle preventing FEPZ ports from becoming attractive to logistic companies: labor conditions at the ports. “Taiwan had in the 1990s already tried its luck with free trade port pilot measures, but the labor recruitment situation in the ports used to be very unattractive for investors due to the ‘heritage system,'” Lim says. “Taiwanese port jobs were handed down from father to son with few exceptions, and that was a major hindrance, particularly to foreign companies who wanted to efficiently repackage their goods before reshipment to other places, such as China.” In effect, the heritage system meant that companies could not handle their own port-area operations with personnel chosen on merit alone.

The scrapping of this heritage system was facilitated by a reorganization in 2012 that brought about the establishment of the Maritime and Port Bureau (under the Ministry of Transportation and Communications) and the Taiwan International Ports Corp. The former is now the government body in charge of all maritime- and port-related public administration, while the latter is an independent, though still government-owned company in charge of harbor management and development. Previously, the four port authorities of Keelung, Taichung, Kaohsiung and Hualien were separate jurisdictions. The revised organizational structure provided an opportunity to change various operational practices, including the heritage system.

Lim adds, however, that a large question mark still hangs over the future potential of Taiwan’s ports. In China, transportation-related departments had shown interest in expanding cooperation with Taiwanese harbors, and the cross-Strait Service Trade Agreement signed last year was intended to provide a framework under which the two sides could enter into further agreements on shipping cargo services. But objections from the opposition Democratic Progressive Party have kept the agreement bottled up in the Legislative Yuan. “Because the pact remains stalled in the legislature,” says Lim, “we don’t know how service charges, regulations, and monitoring mechanisms between cross-Strait authorities might eventually work out.”

Nevertheless, port officials on the two sides of the Strait are diligently upgrading their relations at the working level. According to Port of Kaohsiung Harbormaster David Cheng, Taiwan port officials have been traveling to China on a monthly basis to inspect ports, including river ports located far inland. “We’re still in the stage of introducing ourselves to one another and signing MOUs [memorandums of understanding],” he says. “This is good for both sides. The overall idea is that in the future smaller Chinese vessels can carry cargo from China to the Taiwanese ports for further trans-Pacific shipment on vessels operated by Taiwan’s shipping lines, which are reliable and efficient,” Cheng says.

He adds that without much fanfare the Port of Kaohsiung late last year already took a step toward restoring its old glory. Cheng is referring to a decision by the London Metal Exchange, the world’s largest non-ferrous metals exchange, to designate Kaohsiung as one of its delivery ports in this region. Following its inclusion in the network, various types of metal mainly destined for China will go through Kaohsiung Port, greatly boosting the warehouse business there. None of China’s own ports are designated as a delivery location, even though China is among the world’s largest metal importers. (Shanghai reportedly turned down the opportunity because it would have necessitated some operational changes). “A new port area to accommodate the warehouses in Kaohsiung will be completed in Q3,” Cheng says. “Automatically, the financial industry will pay more attention to us, as they are very interested to invest in this field.”

As to the prospects of the other FEPZ ports, Chiu Rong-her, professor of shipping and transportation management at National Taiwan Ocean University, predicts that the Port of Taipei will draw substantial vessel traffic from the Port of Keelung, which is too small, and that the Port of Taichung, originally designed for bulk cargo, will reorganize its container terminal. “Meanwhile, the Port of Hualien, which is not to become an FEPZ port, may launch roll-on/roll-off ferries for passengers, cars, and trucks, connecting it to China, focusing primarily on tourism,” he says.

Aviation sector

Generally, Taiwan’s airlines make good money on passenger business but take a loss on the cargo side. One reason is that computers and mobile phones, which in the past were virtually all shipped by air, are not being replaced by consumers as frequently as they used to be, meaning rapid delivery by air freight has become less important than the cost advantage of shipping by sea. “A few years ago, if you had the money, you got yourself a new cell phone every three months,” says Tai. “But nowadays I am still happy with my iPhone 4 and don’t see why iPhone 5 is so significantly better.”

Besides the continuing relocation of Taiwanese electronic production facilities to China and Southeast Asia, another factor in the decrease in the cargo business is that 3C products are getting smaller and lighter, which erodes carriers’ margins because cargo is charged by weight.

The size of aircraft has also been increasing, aggravating the oversupply problem. “On the demand side, air trade showed only slight growth in 2013,” says Anita Wang of China Airlines’ Media Affairs office, adding that CAL’s forecast is in line with those of the International Monetary Fund, International Aviation Transport Association (IATA), and Boeing that world air-cargo volume will see 3% to 4% growth in 2014. “But on the supply side, growth in global wide-body belly capacity is predicted to remain at around 5% in 2014, which will result in capacity continuously outpacing global demand.”

In terms of strategy for 2014, the Taiwanese flag-carrier will focus on cargo revenue management, which aims to optimize revenue through “re-mixing” cargo origins and destinations, cargo products, and customers, Wang says. The company plans to introduce more temperature-controlled containers to enhance its “cool chain” service, and to pay increased attention to emerging markets such as Vietnam, Indonesia, and Latin America. Moreover, CAL will seek to gain a firmer foothold in the booming cross-Strait and global e-commerce business and express mail service (EMS), she says.

“China Airlines carried 4,854 million ton-kilometers of cargo in 2013, up 6.9% in tonnage from the previous year,” Wang notes. “But given the combination of slow global economic recovery, overcapacity, and volatile oil prices, achieving air cargo growth will remain challenging in coming years.” While CAL for the time being expects to stick with the 18 B747-400F freighters it currently has in service, EVA Airways, Taiwan’s second- biggest carrier, announced in late 2013 that it will reduce its freighter fleet by more than a third in the face of overcapacity.

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