Shanghai's Yangshan Port

In my previous post, I presented the statistic that Shanghai is expected to become the world's largest port by 2007. This is in large part due to the expansion of port capacity through the Yangshan Deepwater Port development project. On January 12, Logistics Management issued a comprehensive article, "Shanghai's new Yangshan port could challenge Busan, Hong Kong-analysts," on the details of Yangshan development plans and primary issues affecting its progress.

If you have trouble accessing the above article, readers can find out more regarding Yangshan here.

Introduction

According to many analysts and industry observers, "the commissioning of Yangshan will likely lead to major changes in the port industry in Northeast Asia, especially for the port cities of Hong Kong and Busan, South Korea."

However, the strength of this statement can be qualified by the same analysts and industry observes, who add that "the immediate impact will be most felt by Shanghai's own existing facilities, notably the Baoshan and Waigaoqiao terminals, and that for the Yangshan facility to be competitive it must invest in its management and processes as well as its infrastructure." In other words, logistics professionals are going to be busy in making Yanghshan #1 not only is size but #1 in terms of operational efficiency when compared with more established, albeit smaller, port locations. (Click on image for location of Yangshan).

Yangshan Capacity Plans

Capacity at Yangshan is being developed in phases. "Phase I of Yangshan deep water port, which has five container berths with a designed annual capacity of 2.2 mln twenty-foot equivalent units (TEUs), officially started operations on Saturday," January 7th. Furthermore, "the Shanghai municipal government plans to invest a total of 120 bln yuan to construct 33 deep-water berths on Yangshan Island, which sits 27.5 km to the south of the city."

In terms of overall Shanghai port capacity, "with the addition of the Yangshan facility, the ports in Shanghai are expected to handle more than 20 mln TEUs (20-foot equivalent units) of cargo next year, narrowing the gap with world number one Hong Kong and number two Singapore, the Shanghai government said." In 2005 Shanghai came in third place, "shipping out 14.5 mln TEUs. Its ports are expected to top 18 mln TEUs this year, compared with Hong Kong's 21.9 mln in 2004 and Singapore's 21.3 mln, according to data from the Shanghai government." (See image for TEU growth through 1999).

Chinese Officials are Optimistic

""Shanghai will become the world's biggest container port. Yangshan will play an important role as an international transfer hub and help Shanghai secure its position as an international shipping center," Chen Xuyuan, president of operator Shanghai International Port (Group) Co said at the facility's opening." (Click on the image to see Shanghai's development zone).

In terms of trade-inducement incentives, "China's state council has approved Yangshan's status as a free-trade port, the first in China, meaning operators can offer companies total exemption from import tariffs and commodity and business taxes, as well as use simpler rules for the entry and employment of foreign personnel."

Analysts Weigh the Strengths and Weaknesses

""Shanghai is going to be a threat to Hong Kong as a port because there is much more capacity coming out and the tariffs and handling charges in Hong Kong are higher than those in (China's) domestic ports so we will see more boxes shipped and exported from China directly rather than Hong Kong,"" said Alan Lam, analyst with Guotai Junan Securities in Hong Kong."

""Yangshan has a bright future, especially as a transshipment center. Many goods from China are shipped to Busan and moved to the US, but in the future the ships can use Yangshan port and directly export through the US. In the future Yangshan will be the centre for transshipment in Northeast Asia,' Lam added."

Furthermore, "Lam noted that the Shanghai authorities are looking for a major shipping company to join in the second and third stages of investment, which would help them build the port into a transshipment center and provide a direct challenge to Busan."

In terms of other analyst input, "Niu Yuming, an analyst with Haitong Securities, said the cargo throughput demand in the affluent Yangtze River Delta justifies the port's construction, saying that there is unlikely to be an overcapacity problem at any time in the next five years."

In terms of the port's financial prospects, "Niu expects the first phase of the project to break even for the next year if it can run at full capacity and to become profitable after that."

Industry Leaders Explain their Interest

Of course, any ports future success depends on the demand of its facilities by the worlds shipping and logistics firms. "Shippers Hutchison Whampoa, COSCO Pacific, the port unit of Danish AP Moeller-Maersk, APM Terminals and Oriental Overseas Container Line, have reportedly expressed interest in the second-phase operation."

The article introduces "Max Henry, founder of the China Supply Chain Council (CSCC). When asked about the impact of Yangshan's development, he "agreed that the port could significantly alter the face of the shipping industry in the future, although he said it will need to ensure it has adequate software, personnel and processes, as well as infrastructure hardware."

Expanding on this point, he states "If they are going to be positioning and doing a good job in running operations very smoothly and very professionally - and I think they have the ability to do so because they can learn from Baoshan and Waigaoqiao - and bring some real expertise into this, they definitely have a real advantage over Busan and over Hong Kong as well."

Basically, Henry emphasizes the vision of Yangshan and the reality of Yangshan are too very different things at this point. "When it comes to Yangshan deep port it's really too early to say anything. Having a port and having the facilities is one thing, but getting the operations to run smoothly is another story. What Korea has built, and I have not been to the Busan facility, but they probably have an edge in operating that the Chinese don't have yet."

Impact on Existing Port Facilities

The article very liberally uses Mr. Henry's quotes:

In the immediate term - and until the facilities and its management are tested and shown to be of the same standard as those in Hong Kong and Korea - he said the port will mostly be a challenge for existing Shanghai facilities, as authorities seek to redirect routes from existing Shanghai facilities to Yangshan.

"The big question, and one of the top questions that comes to mind for shippers and freight forwarders, is what is going to happen with the Baoshan and Waigaoqiao facilities," he said.

"The government has been saying that there should be no competition between ports, but at the end of the day looking at what they are doing with Yangshan port it's obvious that the Baoshan and Waigaoqiao facilities are going to be in jeopardy over the next few years."

Impact on Routing Shipments

The article qoutes Mr. Henry as further saying, "some routes, notably Europe-bound shipments, are likely going to be moved to Yangshan while other routes will have to stay in Baoshan and Waigaoqiao...That's an issue for most of the freight forwarders today because most of them had to already spend a lot of money and build their operations and now they are being told that they have to move."

Mr. Henry, in commenting on the CSCC's members' view of the situation added:

"The determination that the Yangshan port will be the gateway to Europe has already caused concern among the CSCC's membership, which includes around 10,000 logistics managers and related professionals in industries such as electronics, automotive, consumer goods.

"Right now the new port is causing a lot of logistic problems, even for freight forwarders...if you are looking to ship a cargo from downtown or the western suburbs of Shanghai and you now have to use Yangshan port it is adding to the distance and adding to the time."

Although the port is officially a Shanghai port, it is still a good distance from the core of Shanghai. The logistics of transiting this distance have yet to be fully developed in terms of efficiency and cost:

"From what we have heard there can be an addition transportation cost of up to 50 pct if you have to use Yangshan port," Henry stated.

"It's adding to local logistics costs to get a container out through Yangshan Port, it's not the most convenient or most cost-effective place to get a container out, and if you are shipping from Zhejiang province it is more cost-effective to use Ningbo (see map) rather than Shanghai."

Justification for Establishment of Yangshan

There seem to be doubts about the timing of Yangshan and the reasoning behind it, but "part of the justification for the Yangshan port has been China's growing exports and the Yangtze River Delta's role as a global manufacturing centre."

Henry is quoted here as saying that:

"Next year I believe the growth in container throughput will be more than 15 or 20 pct, although the overall growing rate will be lower than this year given the high base that will still be an extraordinarily large number."

At the same time he says further:

"I don't think there is any capacity issue in Shanghai at this point in time, things seem to be fine. That's why so many people are scratching their heads about Yangshan port because if you are a shipper or a freight forwarder you can get, most of the time, space on routes."

Crunching the Numbers in China

Mr. Henry also brings up doubts about the statistics used to justify the port's development, critically attacking China's ability to produce reliable statistics:

"Some of those are here to support the new project and as you know there are no real statistics in China. Those guys who are investing money in Yangshan port have to somehow justify their investment. There have been a lot of numbers and statistics about the growth of traffic and so on but our members are the shippers and they are the ones who actually send goods.... and you don't get your containers stuck in port, so it's working very smoothly for Baoshan and Waigaoqiao at this point."

My Comments

As with any strategy, execution is key in making it successful. Assuming the Yangshan strategy is sound, a debatable notion as illustrated in the comments above, the ability of Yangshan to become not only the largest port but also one of the top operating ports in the world will depend on how well Shanghai can deploy its resources to develop a comprehensive, capable and innovative logistics hub. Only this type of hub will survive when growth is not as high as it is now, flat, or even worse decreasing.

The development process is not likely to be smooth at all, and those utilizing Yangshan will need to be quite agile in managing their supply chains when and if the port experiences any "growing pains." If forced by the government to use Yangshan as the primary port station in routing through Shanghai, I am sure its customers will hold it responsible for any failings by finding ways to pressure the pace of reform. This site will keep an eye on any significant issues that arise along the way.

Comments

[Daniel Wong]

The bridge link to the port is prone to accident and terrorist attack. What security measures are taken ? The bridge is build solely for the port,which is added cost to the port.Is the investment worthy or just to gain status ?

[Shawn in Tokyo]

Your right, the bridge would be prone to accident, terrorist attack, natural disaster, etc.

Without yet having done any research, my first reaction is that it will likely be heavily guarded including patrol by the Chinese version of the coast guard (which I admittedly know nothing about at this point).

Even under normal conditions, the bridge is likely to be a bottleneck of sorts, adding to the total cost of logistics.

The biggest worry from my perspective is runaway spending on infrastructure projects that may not have been fully analyzed and are just built because the money exists, combined with political influence.

Japan's infrastructure includes a lot of such projects that have never realized true efficiency and cost effectiveness.

I will look into this more. I also plan on doing a post in the future on the security planning that now parallels a lot of supply chain management.