The supply chain lines that extend into and from East Asia are fed primarily by transport by sea and air. This is not surprising given that the region is separated from most of the developed world by ocean or fairly difficult overland terrain where efficient and reliable supply chain networks require rail and road infrastructure that: 1) does not yet exist, 2) is too suspect in terms of quality, speed and cost, or 3) stretches across regions difficult to secure at costs competitive with sea and air alternatives.
Since the nodes for sea and air transport lines are ports and airports respectively, it is also no surprise that supply chain professionals managing operations in East Asia will gravitate towards locations with ports and airports in relative proximity. The April edition of Air Cargo World showcases an article by Ian Putzer, who leads off his story "Where to Hub?" by saying:
"The prospect of accessing the explosive Chinese cargo market and tapping into growing intra-Asian freight traffic has operators throughout the world dreaming of air hubs in the Asia-Pacific region. Many carriers are swooning over Shanghai, but others see Seoul as a more viable option. Some carriers are focused on Hong Kong and Guangzhou, while others are still banking on Tokyo."
For a sense of where these hubs are located, I have created the below PowerPoint page highlighting the above mentioned cities:
Positioning a hub in terms of location and timing, as somewhat illustrated in my previous post regarding Caterpillar's hub strategy for China, is obviously critical because it constrains any long-term strategic decisions:
"Carriers and forwarders' decisions in the next several years could play a big part in determining long-term air shipping patterns in Asia. It appears that the biggest airports in the largest markets, such as Shanghai, have the advantage in courting the world's cargo players."
Shanghai: Everybody's Going!
Since the end of October 2005, I have flown into Shanghai's Pudong Airport four times. The city seems to be a business black hole, sucking in supply chains for not only larger, global firms but also smaller firms sourcing a variety of products through the Shanghai corridor. This influx of investment is driving further investment up the Yangtze River into mainland provinces, first and foremost Jiangsu--China's richest province. (See the China province guide at Asia Times). In light of this phenomenon, how do air cargo firms view this hub?:
"Jack Boisen, vice president of cargo for Continental Airlines, also wants a bite out of the industry's favorite cherry. Having mounted Beijing flights last year, Continental now is in pursuit of traffic rights to Shanghai. "We're waiting impatiently to see if we're going to get Shanghai," said Boisen.
"UPS is taking its investment in Shanghai a giant step further. The integrator announced plans last year to build its Pacific hub at the city's Pudong airport. Designed to handle up to 200,000 tons a year, the facility is expected to open in 2007, when the U.S.-China air services treaty allows American carriers to set up hubs in China.
Of course, jumping on the hottest business trends is always going to rub the wrong way those who don't see "following the crowd" an appropriate strategic move. Putzer reports on why DHL takes this approach:
"With Shanghai the focal point of international companies' drive into China, Pudong's facilities are bursting with cargo originating at its own doorstep. Propelled by a 14.5 percent surge in tonnage, the airport leapfrogged sites such as Paris and Miami to jump from 14th place in 2004 to No. 8 in the global hierarchy last year, according to Airports Council International figures.
"For this reason, DHL does not envision a hub role for Pudong. "Shanghai is full," said Charles Kaufmann, DHL Global Forwarding's director for North Asia. According to one airline executive, problems with transloading and issues with customs add to drawbacks that could disqualify Pudong as a hub for many carriers.
But once the herd gets going, it is hard to slow it down:
"Several U.S. carriers are flying to Shanghai, preparing to fly to Shanghai, or hoping to get traffic rights to Shanghai soon. The latest entrant is American Airlines, which was to launch flights to the Chinese metropolis at the end of March. Polar Air Cargo, which entered Shanghai last year, plans to add three weekly frequencies this year."
Seoul: The Perfect Middle
Aside from being regularly irritated by its troubled brother to the north, South Korea has come a long way in building an infrastructure that enables it to market itself as an advantageous hub location.
"South Korea has pursued a multimodal expansion policy with ample investment in port and airport development. Incheon, which opened in 2001 with the capacity to process 2.7 million tons of air freight annually, is due to boost capacity to 4.5 million tons in 2008 and 7 million tons by 2020.
"The first phase of a foreign trade zone located on a plot adjacent to the airport opened its doors last month. The enormous "Airport LogisPark" covers 10 million square feet, with room to double that.
I discovered an interesting video online highlighting the Songdo Techno Park at Incheon. It is all in Korean, but visually entertaining. Technology parks like this are put into context regarding the entire Incheon Free Economic Zone (FEZ) complex. Be sure to check out the English PR materials. It seems Mr. Kaufmann of DHL has been sold on the Seoul-Incheon hub concept:
"To Kaufmann, Seoul is a better option for regional hub status. "As a hub, Korea definitely plays an important role," he said, pointing to the presence of strong air and ocean carriers, a well-developed infrastructure and its location. "We use Korea very much as a hub. We have a lot of cargo from Southeast Asia going through Incheon."
"That's music to the ears of Ken Choi, president of Korean Air Cargo. He describes the development of Incheon as a regional hub as the essence of KAL's strategy, reflected in the fact that 65 percent of the carrier's volume going through the airport is transit traffic. KAL is in the process of expanding its cargo terminal at Incheon, adding nearly 50 percent more capacity. Rival Asiana Airlines completed its third cargo building at the airport last year.
Putzer describes the concept behind what I call "the perfect middle:"
"KAL and Asiana's transit ambitions enjoy the enthusiastic backing of the South Korean government, which foresees Incheon as a logistics hub in a triangle with Japan and China. In this view, China provides the manufacturing and Japan the design and development expertise while Incheon serves as the ideal hub for cargo movement. (my emphasis italicized)
This concept is visually illustrated in the PR materials mentioned above, or can be imagined by referencing my PowerPoint file above.
Tokyo: Pain in the Ass
Air cargo firms have never really liked flying into Tokyo's Narita International Airport. This was clearly evident to me when I attended a logistics committee meeting at the American Chamber of Commerce Japan (ACCJ) in Tokyo during the summer of 2003. The bulk of the conversation by executives from all the major cargo companies regarded how expensive it is to land a plane at Narita, how the government justified landing fees, and how the government stonewalled any attempt by foreign firms to push reform. Thus, it is no suprise that Narita gets not only a brief mention in this article, but also a fairly negative one:
"With its grandfather traffic rights in Tokyo, Northwest Airlines is using Narita as a hub and actually gave up fifth freedom rights between Seoul and Hong Kong last year. But other operators prefer Seoul to the major Japanese airports. Proximity to China is one factor and the higher costs in Japan are another.
"Equally important to DHL is that, unlike Narita, there is no curfew at Seoul. For its part, Japan Airlines intends to overcome that obstacle by slotting affected flights though Haneda, Tokyo's domestic airport, which is due to open to some international flights in 2009 with the opening of a new runway."
Guangzhou: Up and Coming?
I have never traveled to Guangzhou, which can be seen on my map above to be at a nexus with Shenzhen and Hong Kong. It seems that Shanghai has pulled many business' center of gravity from Hong Kong, but the mainland counterparts of Guangzhou and Shenzhen must obviously not be ignored:
"While UPS picked Shanghai as its regional hub, FedEx opted for Guangzhou in the South. The integrator will invest $150 million at Baiyun airport, which will replace its present regional hub at Subic Bay in 2008. The planned 882,640-square-foot facility will be able to handle 24,000 packages per hour, twice the capacity of Subic Bay.
"Guangdong Airport Management Group intends to spend some $290 million on infrastructure development at Baiyun. Another $50.7 million is earmarked for a third cargo terminal. Slated for completion in 2007, the three million-square-foot building will be able to handle up to 800,000 tons of cargo a year. The new facility will be dedicated to international cargo, while the existing two freight terminals will handle domestic shipments.
"Some 50,000 tons of international cargo moved through the Guangzhou Baiyun International Logistics Center in the first five months of last year. The center projects its international freight throughput could double over the coming five years. In 2004, the airport's overall freight throughput increased 16.2 percent to 632,000 tonnes.
As a foreign firm aggressively pursuing access to the China market so as to strengthen one's regional supply chain capabilities, the presence of Chinese cargo haulers is a significant consideration. Although these firms' strategic decision-making is still improving on a global scale, the decisions they make regionally can deliver clues as to how a foreign firm should shape its market entry:
"However, the airport's biggest cargo player to date, Guangzho-based China Southern Airlines, shows little inclination to push cargo activities in a similarly aggressive fashion. A few years ago, senior China Southern executives were declaring plans to build a fleet of 10 large widebody freighters, but the airline now seems content to keep its current freighter line-up level of two 747-400s. Instead of acquiring more cargo planes, the carrier concentrates on the regional freight market with "quick-change aircraft," which operate in passenger configuration during the day and are reconfigured for overnight freighter activities, said Jeff Ruffolo, a spokesman for China Southern.
"He noted other Chinese carriers have likewise eschewed large orders for freighters even as they have made massive deals for passenger planes. "Cargo ex-China is gigantic; the problem is the back end," said Ruffolo. "That's the quandary for Chinese carriers: How do you position a freighter so it's not half empty on the return leg?" China Southern's two freighters do not operate out of Baiyun. Instead, they fly out of nearby Shenzhen, halfway between Guangzhou and Hong Kong. "Baiyun is great, but Shenzhen gives us other opportunities," Ruffolo said." (added emphasis italicized)
Other firms' positioning in this corridor varies:
"Northwest Airlines is doubling its freighter flights to Baiyun this April from two to four frequencies a week. Jim Friedel, Northwest's president of cargo, said he expects better opportunities there than in Hong Kong. "I don't see any significant challenges or changes in Hong Kong, but growth is in Guangzhou," he said.
"Polar Air Cargo, on the other hand, has no intention of mounting service to Guangzhou. Kirsti Krepp, vice president for the Asia-Pacific region, said per-kilo costs in Baiyun are lower than in Hong Kong, but she cited operational and capacity issues. "The infrastructure in Baiyun is not adequate yet," says Friedel. "It's maturing."
Both Northwest and Polar are convinced there's enough cargo coming out of the Pearl River Delta to fuel growth in Hong Kong and Baiyun as well as in Shenzhen.
Hong Kong: Oldy but Goody
With Hong Kong, Guangzhou, and Shenzhen so proximate to each other, there is bound to be a back-and-forth dynamic in terms of cargo handling that ensures growth for the entire Pearl River corridor as suggested above. But it seems that strategically a foreign firm is better off focusing in on one facility for the bulk of its core services:
If anything, DHL is even more bullish on Hong Kong. Last year, the integrator unveiled a $110 million investment to expand its regional hub at the territory's Chek Lap Kok International Airport. This almost doubles DHL's footprint at the airport to 376,736 square feet and boosts its processing capacity from 20,000 parcels per hour to 35,000.
That DHL would expand its hub at some point was bound to happen, but it wasn't expected to materialize so soon. The decision came six years ahead of schedule, just 14 months after the integrator opened its regional hub in Hong Kong.
Scott Price, chief executive officer of DHL Express Asia Pacific, said the earlier expansion of the hub was the result of rapid growth in the area. More than 70 percent of the integrator's traffic to and from China moves through Chek Lap Kok, which handled an estimated 30 million shipments last year.
Having increased its regional airlift capacity in Hong Kong through additional aircraft and the launch of direct overnight connections to several key Asian markets between April and November, DHL added a trans-Pacific link last December. The connection came courtesy of Malaysian freighter airline Transmile, which has since been running MD-11 freighter flights from its home market via Hong Kong to Los Angeles and DHL's North American hub in Wilmington, Ohio.
DHL handles its own traffic at Chek Lap Kok, but even without that volume, 2005 produced record tonnage for HACTL, which handles the lion's share of Hong Kong's air freight. The handler processed 2,432,759 tons last year, up 7.5 percent from 2004.
Chinese Competitors: Upstarts On the Way
In terms of strategic planning and operational sophistication, Chinese carriers are behind that of international carriers. But knowing the local scene ensures that they will still have a leg up in navigating business procedures and markets for domestic cargo links. At the same time, joint-ventures will be leveraged with foreign firms to help mutually feed this links:
The Chinese airlines may have left much of the cargo initiative to international carriers, especially the express operators, but new players are emerging. Over the coming years, three Chinese airports stand to enjoy bigger roles in international cargo traffic as the hybrid cargo carriers born out of joint ventures between Chinese and international carriers take off.
The first of the lot, Shenzhen-based Jade Air Cargo, is expected to commence operations in July, according to stakeholder Lufthansa Cargo.
Great Wall Airlines, the venture driven by Singapore Airlines, is expected to be the next out of the starting blocks. It will make its home in the crowded Shanghai market.
And Okay Airlines, the planned cargo offspring of Korean Air and China's first budget airline, still has some hurdles to clear, according to Choi. Like the passenger carrier, it will operate out of Tianjin.
China's Military-Market Nexus: Managing Access to Air Space
This is sort of an addendum to my discussion of the above "Where to Hub?" article. In today's Wall Street Journal Online, there is an article on China titled, "China Clears New Lane for Planes," by Bruce Stanley. I have discussed before how supply chain logistics in quickly developing regions of the world often squares off the interests of the private sector against the interests of the military sector. In this scenario, the question is how to maintain regional security while allowing the private sector access to an increased number of supply chain routes--in this case air routes.
"After six years of talks, China has agreed to open a new corridor through its tightly restricted air space that could save airlines a total of $30 million in annual fuel costs and trim an average of half an hour off flight times between China and Europe, according to the International Air Transport Association, the main trade group for the world's airlines.
"The savings is important but not huge, given the blow that high fuel prices have dealt airlines. Still, creation of the new route is the first of several steps the IATA wants Chinese authorities to make to unclog the country's sparse network of air corridors and prevent lengthening delays in flights to and from China's biggest cities."
As the Air Cargo World article above illustrates, "the need to ease restrictions on China's air space has gained urgency, the IATA says, because of the profusion of foreign airlines flying to the country and the torrid growth of China's own carriers."
The article does an excellent job of describing the nexus where the military sector and private sector meet and develop compromises (added emphasis italicized):
Although Chinese aviation authorities generally support the liberalization the IATA has been seeking, China's armed forces, which have ultimate control of the country's air space, have been more reluctant. They perceive foreign airlines as a possible threat to national security and prohibit them from flying over military bases and other sensitive installations.
Only 30% of China's air space is open to civil aviation, making it one of the world's most restricted countries. Airlines flying over Chinese territory must follow rigid and often meandering routes replete with doglegs and 90-degree turns, each of which means that flights take longer and burn more fuel than if they followed a straighter line.
David Behrens, the IATA's director of safety, operations and infrastructure in the Asia-Pacific region, helps put this decision by the Chinese in a global context:
Although military control of air space isn't unusual elsewhere, armed forces in most other countries have cooperated more readily with the IATA to improve access to air space, Mr. Behrens said. India, Pakistan and Iran took just two years to approve new air routes, while in China, a wait lasting four to six years "is not uncommon," he said.
Still, Mr. Behrens welcomed approval of the new route across western China as a sign of a new, more accommodating approach. "That's the good news. I think that China as a whole is realizing that things are changing rapidly and that's going to require changes in air space," said Mr. Behrens, who helped lead the IATA's negotiations with the Chinese. "We are having more dialogue with the military than we have had in the past."
The fact of that final sentence illustrates not only the critical nature of the military-market nexus, but also having the personnel capable of managing this nexus successfully in developing supply chain logistics strategy and resource deployment.