12 December 2016

Hong Kong: Leading the way to higher-value logistics

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Whether it’s the ability to fill customer orders faster, or to demonstrate a sustainable network of suppliers to potential investors, many of the factors that now give businesses a competitive edge depend on the strength of their logistics and supply chains.

As a well-established trading hub and one of the most connected cities on the planet, Hong Kong already provides a strong logistics foundation for companies. But a bigger issue, particularly for small and medium-sized enterprises, is that transformational logistics initiatives – the kind that take advantage of connected technologies and management software to track production or delivery processes to identify trouble spots or areas of inefficiency – don’t come cheap.

This is where the Hong Kong R&D Centre for Logistics and Supply Chain Management Enabling Technologies (LSCM), one of several R&D facilities under the government’s Innovation and Technology Commission, comes in. The Cyberport-based organisation uses government funding to research and demonstrate relatively low-cost logistics and supply chain solutions for use in the public and private sectors, focusing on outcomes that help companies make the most of Hong Kong’s strategic location and trade networks.

SMEs play catch-up

LSCM CEO Simon Wong says while Hong Kong is home to some of the world’s most sophisticated supply chain operations – such as global supply chain managers Li & Fung and shipping platform CargoSmart – many smaller firms have yet to bring their logistics practices into the connected era. “This is one huge catch-up game,” he says. “SMEs need to embrace new technology-based business models, and quickly, or risk getting left behind.”

According to Mr Wong, the key technologies powering ‘smarter’ supply chains include cloud computing, which makes vast pools of data accessible virtually anywhere; robotics that automate the movement or processing of goods; the Internet of Things (IoT) or connected devices; and location-based technologies such as RFID, which enable the real-time tracking of shipments or products.

Using local research and tapping into the vast network of electronics manufacturers in the Pearl River Delta region, LSCM bundles these technologies into effective logistics solutions that, thanks also to the centre’s non-commercial nature, don’t necessarily require significant investment. A low-cost wearable RFID reader produced by the centre, for example, costs around HK$500 (US$64), while standard commercial versions typically go for US$1,000 and up.

LSCM’s flagship solution is an electronic lock that’s currently applied to most of the trucks that ship goods between Southern China and Hong Kong. Once a lock is applied, customs authorities in both jurisdictions can track the vehicle and control the lock remotely, and are alerted immediately to any attempts to open or tamper with it. This has cut shipping times on key routes between China and Hong Kong by up to an hour, as customs authorities no longer need to stop and make random inspections of as many vehicles when they pass through control points. But even if they’re not shipping goods to or from China, according to Mr Wong firms can still upgrade their logistics and supply chain capabilities by making a few judicious investments.

Focus on ‘soft’ skills

One often-overlooked area is software. To work with supply chain management tools like cloud-based platform GT Nexus, for example, enterprises often need to upgrade their IT systems; LSCM has developed programs to help companies accomplish these upgrades at minimal cost.

Limited physical space, meanwhile, means Hong Kong firms need to make the most of warehouses and storage facilities. While vast automation systems like those seen in the warehouses of US e-commerce giant Amazon are squarely out of the reach of most local companies, LSCM has developed stripped-down robots capable of quickly shifting goods, as well as electronic labels and wireless sensors that can be fixed throughout warehouses to help companies monitor stock and atmospheric conditions. These solutions can be deployed almost “immediately to upgrade a traditional warehouse to an e-commerce grade operation,” Mr Wong says.

Another major hurdle to logistics is the still almost entirely paper-based – and therefore sluggish – nature of trade documentation, such as bills of lading, and the lag associated with traditional payment methods. LSCM is attempting to tackle both by working with the Hong Kong Monetary Authority to encourage enterprises to switch to electronic cheques. Around 200,000 have been issued so far, and as they can be e-mailed to recipients in an instant and already enjoy rapid clearing in many cities in China, Mr Wong is predicting they will “become a major tool for B2B Internet transactions.”

As a centre for logistics and supply chain management, Mr Wong sees Hong Kong as possessing both unique advantages and formidable challenges. A lack of physical space and the high costs of land are the city’s most visible limitations; manpower shortages are also an issue, since much of the logistics labour supply has migrated to construction in recent years in search of higher wages – though the LSCM is also attempting to tackle this, using virtual reality training to show logistics is increasingly technology-based and no longer classed as ‘unskilled’ work.

Hong Kong’s changing role

The volume of trade through Hong Kong will also inevitably decline as mainland ports take more shipments and the city’s airport reaches saturation point. What the city does have, however, is China as a neighbour and a wealth of expertise thanks to its experience in international maritime law, finance and trade, Mr Wong says. High broadband speeds and Internet penetration rates mean Hong Kong is also well equipped to support more technology-dependent supply chain networks, and institutions such as the Customs Department and Hongkong Post, receive high marks from business in terms of trust and efficiency.

This makes Hong Kong an ideal base for Chinese e-commerce firms targeting global expansion, or international firms dealing in relatively expensive or delicate goods that need to be tracked or managed carefully, such as agricultural products or pharmaceuticals. “Trading volumes will be lower, but we can continually increase shipment values,” Mr Wong says. “We may not be the actual mover, but we will be the best hub for controlling and giving integrity and credibility to shipments.” 

Mr Wong believes China’s One Belt, One Road initiative could add to this opportunity, enabling Hong Kong to leverage its logistics experience to become a nexus for the trade in halal food and medical goods to the largely untapped markets of Central Asia and beyond.  “We need to focus on innovation and technology – but history proves Hong Kong people can always answer that kind of call.”

© 2016 The Economist Intelligence Unit Ltd.  All rights reserved.

Whilst efforts have been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd. nor its affiliates can accept any responsibility or liability for reliance by any person on this information.

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