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RDC Hong Kong: strengths and weaknesses

Survey on the competitiveness of RDC locations

In assessing the competitiveness of four selected regional distribution centre (RDC) locations - Hong Kong, Singapore, Shanghai and Shenzhen - a questionnaire survey was conducted.i For each location, more than 10 factors were identified, with the respondents then asked to rate them.ii However, respondents were given the option of rating only those locations with which they were familiar. Out of more than four hundred valid responses to the survey, about one-third of respondents provided ratings for all four RDC locations.

Each respondent was asked to rate the competitiveness of each factor on a nine-point scale, where “nine” referred to “extremely competitive” and “one” referred to “not competitive at all”. The responses were averaged to arrive at a consensus for each competitiveness factor. As some respondents might consider a factor more important than another in assessing the competitiveness of an RDC location, thus making it difficult to adopt either a weighted or un-weighted approach to arriving at an overall competitive score for each location, respondents were required to rate, separately and individually, the overall competitiveness of the RDC locations with which they were familiar.

Hong Kong’s Competitiveness

Overall, 396 out of a total of 425 responding logistics service providers (LSPs) and cargo owners (COs) rated Hong Kong, an attempt ratio of 93%. In the stand-alone question on the overall competiveness of Hong Kong as an RDC, it received an average rating of 6.51 out of the nine-point scale on Hong Kong.

There are many factors bolstering Hong Kong’s competitiveness as an RDC. Among the more important ones, respondents picked the legal system (7.6), public infrastructure (7.3), connectivity and connections (7.4) and support services. Hong Kong is less competitive in total costs (4.4), below the mid-point of the nine-point scale. Total costs include land and rental cost, labour cost and operating cost (separate ratings of each of the three cost components was sought but are not shown in the figure below).

Chart: Ratings of competitiveness factors, Hong Kong
Rating factors behind Hong Kong’s competitiveness as an RDC
Source: HKTDC Research (n=396)

Competitiveness of Hong Kong by product group

About half of the responding COs rated Hong Kong’s competitiveness as an RDC by product group. Notably, cargo owners of “higher-value” products such as wine and watches, luxury and jewellery gave Hong Kong relatively higher ratings, with ratings above seven out of the nine-point scale. Contrastingly, cargo owners of lower-value products such as toys and electrical appliances gave Hong Kong relatively low ratings.

Chart: Hong Kong’s competitiveness by product group
Rating Hong Kong’s competitiveness as an RDC by product type
Source: HKTDC Research (n=115)

 

Competitiveness of Singapore, Shanghai and Shenzhen

A total of 126 respondents rated Singapore, which scored very highly when it came to legal system (7.8), logistics professionals (7.7) and support services (7.7), but less competitive with regard to total costs (5.1).

Compared to Singapore, there were almost twice as many respondents who rated Shenzhen (n=234). All success or competitiveness factors rated lower than those of Singapore, with the exception of total costs (6.3). For Shenzhen, the most highly rated factors are geographical location (6.6), connectivity and connections (6.5), and total costs (6.3). Customs and tariff (5.3), taxes and charges (5.4) and legal system (5.4) are lower-rated factors, not much higher than the midpoint of the nine-point scale.

Shanghai, the other surveyed RDC location on the Chinese mainland, rated well in geographical location (7.1), connectivity and connections (6.9), public infrastructure (6.7) and availability of appropriate RDC facilities (6.7). Similarly to Shenzhen, Shanghai rated lower in taxes and charges (5.7) and legal system (5.6).

Chart: Competitiveness of selected RDCs in the region
Competitiveness of selected RDCs in Asia by factor
Source: HKTDC Research

Different RDCs operate under varied conditions

As respondents were given the option of not rating RDC locations with which they are unfamiliar, respective responses for individual locations ranged from a low of 126 for Singapore to a high of 396 for Hong Kong, with Shanghai (178) and Shenzhen (234) in the middle.

Group L and Group S among Hong Kong respondents

A closer examination of responses revealed some distinct features about respondents. Among the 396 respondents who rated Hong Kong, only 123 of them or 31% rated all four RDC locations. For the purpose of subsequent analyses, they are denoted as Group L. Conversely, there were 147 respondents (37%) who rated Hong Kong only, being unfamiliar with the other locations. These respondents are denoted as Group S. Besides Groups L and S, there were respondents who rated two or three locations out of the total four, but only Groups L and S will be discussed in the subsequent analyses.

It is interesting to note that basically Group S comprises mostly small-to-mid-sized companies (SMEs with less than 50 employees). By comparison, Group L mainly consists of large companies. This reveals that those respondents who are familiar with RDC operations at all four locations tend to be employed in larger companies.

Chart: Company size: Group L and Group S
Respondents categorized by the number of ranked locations
Source: HKTDC Research (n=270; Group L=123; Group S=147)

 

In terms of the overall competitiveness of Hong Kong, Group S gave a significantly lower rating (5.88) than Group L (7.02). Generally, companies within Group L tend to be more satisfied with operating conditions in Hong Kong than their peers in Group S who, with Hong Kong as their only rated RDC location, rated Hong Kong lower for all competitiveness factors almost without exception. In short, Group S respondents are less satisfied with operating conditions in Hong Kong than Group L.

Chart: Competitiveness ratings of Hong Kong, Group L and Group S
Competitiveness ratings of Hong Kong by respondent categories
Source: HKTDC Research (n=270; Group L=123; Group S=147)

 

For a fairer comparison of the RDC locations, the results of Group L (n=123) were adopted, as the group consisted of respondents who are familiar with all four locations and rated each of them. As a result, the respondent ratios of those having rated Hong Kong (n=396), Singapore (126), Shanghai (178) and Shenzhen (234) drop to, respectively, 31%, 98%, 69% and 53% of the original responses. In the case of Hong Kong, this is understandable, given that 336 out of a total of 425 survey respondents were classified as either LSPs or COs from Hong Kong.

Operating models of Hong Kong, Shanghai and Shenzhen

The survey results show that Shenzhen and Shanghai were rated at a similar level for all competitiveness factors. This suggests that the two locations are operating under rather similar conditions. Hong Kong, on the other hand, is operating under a different set of conditions in comparison to either. Hong Kong performed poorer than Shanghai and Shenzhen in terms of costs, and similarly, availability of appropriate RDC facilities. However, it performed significantly better in terms of factors related to public service and general environment, such as customs clearance and tariff systems, taxes and charges arrangements, and the legal system.

 

Chart: Competitiveness factor ratings for Hong Kong, Shanghai and Shenzhen
Competitiveness ratings of selected RDC locations in Asia
Source: HKTDC Research (n=123)

 

Operating models of Hong Kong and Singapore

In the same vein, when the competitiveness factors for Hong Kong and Singapore were rated, the two places were found to be operating under very similar conditions. Both are less competitive in terms of costs, but more competitive in other aspects when compared with Shanghai and Shenzhen.

 

Chart: Competitiveness factor ratings for Hong Kong and Singapore
Competitiveness ratings of Hong Kong and Singapore as RDCs
Source: HKTDC Research (n=123)

 

RDC competitiveness by factor

Hong Kong versus Singapore

While both Hong Kong and Singapore are regarded as expensive compared to RDC locations on the Chinese mainland, Singapore is perceived to be more competitive than Hong Kong in terms of total costs. Total costs include land and rental cost, labour cost and operating cost.

After total costs, Singapore is rated better than Hong Kong in terms of government support, logistics professionals and RDC facilities. In particular, the net competitiveness rating (as measured by the pink bar in the figure below) shows that government support is the factor which sets Singapore apart from Hong Kong.

Nonetheless, respondents rated Hong Kong better in eight out of 13 competitiveness factors, including location, connectivity, infrastructure, flexibility, business environment and customs, though the net ratings in favour of Hong Kong are slim.

Chart: Net ratings of competitiveness factors: Hong Kong versus Singapore
Net competitiveness ratings between Hong Kong and Singapore
Source: HKTDC Research (n=123)

 

Hong Kong versus Shanghai

When compared with Shanghai, the leading RDC location on the mainland, it is clear from the figure below that Hong Kong currently leads Shanghai in almost all aspects, except total costs. Hong Kong outperforms Shanghai in a number of factors, with the biggest rating gaps related to public services, such as customs clearance and tariffs, and legal system.

Chart: Net ratings of competitiveness factors: Hong Kong versus Shanghai
Net competitiveness ratings between Hong Kong and Shanghai
Source: HKTDC Research (n=123)

 

Hong Kong versus Shenzhen

Similarly, Shenzhen is considered more competitive than Hong Kong when it comes to cost related factors (see figure below). The biggest gap lies in total costs. On the other hand, Hong Kong outperforms Shenzhen in terms of almost all other factors, especially in terms of customs clearance, tariffs, and legal system.

Chart: Net ratings of competitiveness factors: Hong Kong versus Shenzhen
Net competitiveness ratings between Hong Kong and Shenzhen
Source: HKTDC Research (n=123)

 

Overall competitiveness

With a number of relevant factors grouped into four categories, the survey attempted to assess the competitiveness of these factors as well as the overall competitiveness of each RDC location. For each factor, an un-weighted approach was adopted so that a simple average of all valid responses could be computed. Taking into account, however, that respondents in different places may have very different views on the relative significance of any given factor, respondents were asked to rate separately the overall competitiveness of each RDC location with which they were familiar.iii

Based on the responses to this stand-alone question on the overall rating for the competitiveness of an RDC location, respondents gave the following ratings: Hong Kong (7.02), Singapore (7.15), Shanghai (6.54) and Shenzhen (6.05). Further analysis shows that, though Singapore is rated higher than Hong Kong, the difference in scores is statistically insignificant at the 95% confidence interval. This means that both Singapore and Hong Kong are considered the most competitive RDC locations in the region.

Similar analyses were conducted to test the difference in competitiveness among all surveyed locations. Unlike Singapore and Hong Kong, the competitiveness of Hong Kong, Shanghai and Shenzhen differ: Hong Kong is considered more competitive than Shanghai, which is in turn more competitive than Shenzhen.

The table below summarises the ratings by factor and by location, based on a total of 123 respondents (ie those who rated all four RDC locations), unlike the table at the beginning of the article, which outlined ratings from respondents who rated any RDC location. While Singapore and Hong Kong criss-cross each other in relation to the most competitive non-cost factors, it is interesting to note that Hong Kong’s strengths turn out to be the weaknesses of Shenzhen, and vice versa. Shanghai, however, remains firmly in the middle of the pack, with not even a single factor found to be the most competitive, or any particular factor seen as the least competitive.

Table: Competitiveness ratings: Hong Kong, Shenzhen, Shanghai and Singapore
Competitiveness ratings of selected RDC locations in Asia
HKTDC Research (n=123)

 

Despite their geographical proximity, Shenzhen and Hong Kong operate under very different conditions, implying that there is much complementarity between the two places. In fact, based on in-depth interviews with those Hong Kong companies which have had experience of operating RDCs in both places, Hong Kong is a much preferred RDC location, especially if costs are not rated as particularly important compared to time-to-market. In one case a company relocated its RDC back and forth between Hong Kong and Shenzhen in response to fluctuating market conditions, placing greater attention on timely delivery through RDC services in Hong Kong, and on cost-savings when market conditions were unconstructive.

RDC operators with a China focus

In terms of cargo origins, the majority of Hong Kong-based RDCs have their cargoes sourced from within Asia, with the Chinese mainland being a prime cargo source, in particular South China. For respondents who have cargoes from the mainland (close to 90% of the 307 respondents), more than 60% of them source over 80% of their cargo entirely from the mainland, with some 10% having at least 60% of cargoes from the same area.

Chart: Cargo origins for RDCs in Hong Kong
Cargo origins for Hong Kong RDCs
Source: HKTDC Research (n=307)

 

The analysis below looks into the competitiveness ratings of Hong Kong and Singapore from the perspective of those who have Chinese mainland-originated cargo, mapping the percentage of cargo flow related to the mainland to the net competitiveness rating of Hong Kong-minus-Singapore. It seems that respondents with more than 50% of their cargo flow through the Chinese mainland, consider Hong Kong to be a more competitive RDC location than Singapore. In other words, the more Chinese mainland-originated or -oriented cargo a company has, the more likely Hong Kong is considered to be a favourable RDC location.

Table: China-originated cargo and Hong Kong competitiveness
Competitiveness of Hong Kong as an RDC and relationship with the percentage of China-originated cargo
Source: HKTDC Research (n=71)

 

Competitiveness rating of high-value goods

An attempt was made to investigate how the rating variations related to different products, that is, high-value versus low-value cargo. High-value cargo refers to products such as electronics, watches, luxury goods, spare parts, jewellery, wine and spirits, and pharmaceutical products. By contrast, low-value cargo refers to textiles and clothing, toys, printed materials, electrical appliance, sporting goods and manufactures of metals.

Respondents tended to hold different views towards Hong Kong’s competitiveness as an RDC location depending on the nature of the products involved. It is observed that cargo owners of high-value products rated Hong Kong significantly higher (7.75) than those of low-value products (7.22).

Additionally, cargo owners of high-value products rate Hong Kong relatively higher (7.75) than Singapore (7.57). Owing to the limited sample size, this result may not be as statistically significant as those resulting from the larger samples, but it still serves as useful reference information.

Chart: Competitiveness ratings: respondents with high-value goods
RDC competitiveness in handling high-value goodsHKTDC Research (n=28)

 

The above analyses highlight the areas that Hong Kong should look into to enhance its attractiveness or competitiveness as an RDC. The table below summarises the major findings pertaining to the competitiveness of Hong Kong as an RDC location.

  • Cargo owners of high-value products rate Hong Kong as the most competitive RDC location
  • Hong Kong is rated the best location among RDC operators with 50% or more cargo flowing through the Chinese mainland
  • Hong Kong is considered the most expensive in terms of costs among the four locations
  • Both Hong Kong and Singapore are more competitive than Shanghai and Shenzhen, with the latter competing mostly for cost-sensitive customers
  • Hong Kong retains an edge over Singapore in a number of competitiveness factors, though Singapore is seen as more competitive (based on overall ratings in which the difference is not considered statistically significant)

Source: HKTDC Research


 

i After an initial assessment of the relative competitiveness of seven RDC locations through a small-scale survey, three locations, namely, Guangzhou, Seoul and Taiwan were de-selected in favour of pursuing a more focused comparative study of the top four competitive locations, that is, Hong Kong, Singapore, Shanghai and Shenzhen.

ii A total of 16 factors were identified for the purpose of conducting the in-depth questionnaire survey, namely, (i) geographical location; (ii) connectivity and connections; (iii) total costs; (iv) land and rental cost; (v) labour cost; (vi) operating cost (eg trucking, terminal charges, electricity); (vii) government support and policy regime; (viii) customs clearance and tariff systems; (ix) taxes and charges arrangements for the industry; (x) public infrastructure, (eg seaport, airport, roads); (xi) legal system (eg protection of intellectual property rights), (xii) availability of appropriate RDC facilities; (xiii) operational flexibility; (xiv) availability of logistics professionals; (xv) efficiency of business environment; and (xvi) support services (eg finance, accounting, legal, trading, IT). These 16 factors could be grouped under (a) costs, (b) public services; (c) infrastructure; and (d) general environment. As there are different cost factors for operating an RDC, the questionnaire survey attempted to ask, separately and individually, about the rankings for the total cost as well as other contributing cost factors, such as land/rental cost and labour cost.

iii If an un-weighted approach for each competitiveness factor were to be adopted, it would still be possible to arrive at a simple average signifying the overall competitiveness for an RDC location. Based on this approach, it was found that the order of magnitudes of respective RDC ratings remains unchanged, with Singapore’s overall rating score slightly above that of Hong Kong, which in turn leads Shanghai or Shenzhen by a wider margin.

Content provided by Picture: Dickson Ho
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