Port competition in Southern China for a share of the liner shipping business is fierce. Hong Kong and other south China ports compete not only among themselves, but also with northern rivals like Shanghai and Ningbo. Now with terminal overcapacity and a softening Chinese economy, that competition is destined to heat up even more.
Ports in Southern China compete fiercely for business - among themselves, with neighboring Hong Kong and with ports north, including giants Shanghai and Ningbo. This Southern China port system remains one of the most important in the world today. But competition is mounting and should only get worse as overcapacity collides with a softening Chinese economy, stagnant trade flow and migration of manufacturing inland. Tough times loom ahead.

Too many ports vying for less business is only part of the story, however. Port strength depends not only on the business itself, but as well on an ability to move goods to and from the terminals quickly, efficiently and, increasingly, over longer distances. While Shanghai, for one, is making some strides especially in terms of inland river transport and inland terminals, China as a whole lags way behind the US, Europe and many parts of Asia in terms of efficient and integrated intermodal transport. An unhealthy dependence on truck transport continues. Investment in better rail transport has been especially paltry. With the exception of ocean-to-highway linkages, modern intermodal facilities are surprisingly few and far between. Those that do exist are often poorly linked to the overall logistics system.

In Southern China, it’s especially complicated and troubling. Inland river transport has languished and rail never got off the ground. But because industry developed very close to the ports, trucks could handle container hauling. Now that a combination of government policy and economics is forcing more industry to migrate further inland, the problems of that unbalanced intermodal system are emerging.

When it comes to moving containers in South China, “the trucking industry has a stranglehold,” said Brian Slack, distinguished professor emeritus geography, planning and environment at Concordia University in Montreal. And as the infrastructure developed, “the configuration does not facilitate anything but truck.” But as manufacturing moves away from the Pearl River Delta, hauling containers by truck becomes increasingly difficult, more costly and less economic, Slack pointed out. “It’s a significant constraint on South China,” he said.

Port Overcapacity – Future Winners… and Losers

China now boasts seven of the world’s top ten container ports, including three in the south: third-ranked Shenzhen, fifth-ranked Hong Kong and seventh-ranked Guangzhou. (Shanghai is the world’s largest.) But this apparent dominance masks serious worry about the future of the country’s ports. In June, Wang Shouyang, director of the Center for Forecasting Science at Chinese Academy of Sciences, warned that over the next five years, “overcapacity in the port industry is a headache we must deal with.”

Numerous studies underscore this concern. Last year, Moody’s Investors Services released a report detailing the problems. “Chinese ports will continue to face pressure in throughput growth in the next two years, on the back of economic rebalancing and ongoing capacity additions,” the rating agency wrote.

In the south, Shenzhen and Guangdong ports dominate and it’s hard to see how smaller ports in South China such as Xiahai or Shunde can survive and compete, except by cutting the price.

Hong Kong, for its part, is feeling that heat more than ever. For the first half of this year, its container traffic dropped 10.5%. That follows an almost 10% decline in 2015.

There are fears this decline could accelerate, with Deutsche Bank predicting Hong Kong cargo volume could drop by as much as half over the next decade. Nearby ports, especially Shenzhen, continue to undercut Hong Kong in terms of pricing, while investing heavily in expansion and terminal equipment capable of servicing the new generation of container ships. Hong Kong terminals are crowded and lack land for spreading out. They are becoming more costly and less efficient.

Add to that some possible changes in current laws that prohibit container transshipment in China by foreign-flagged carriers, but exempt Hong Kong. This is a major advantage Hong Kong enjoys and accounts for a majority of its container business – and accounts for a dependence on barges transporting containers through the Pearl River Delta system. Now, Shanghai and local other governments, as well as foreign carriers, are pressuring Beijing to relax those restrictions.

Yet despite all its pricing advantages and capital expenditure, Shenzhen port traffic itself has been essentially flat for the past 1½ years. In February, for example, the volume dropped by 13%, sounding alarm bells and demonstrating just how difficult business has become.

Pressure on the ports in China has been years in the making. Local governments saw ports as a great way to boost local economies and lavished money on their development. In boom times, enough cargo was being loaded and unloaded to keep many ports busy. But as soon as the economy showed signs of weakness, it became obvious too many berths were competing for the same ships. One estimate last year put that surplus at more than 20%. That figure, if anything, understates the problem as ports have cut fees in desperate moves to maintain business.

Problems of a Lengthening Supply Chain

Add to this a shift of manufacturing from the coasts into the interior. This lengthens the supply chain and puts more stress on logistics networks.

“Road transport is only efficient and reliable over short distances,” said Slack. “Sooner or later it will reach the point when it’s not economic,” he said. “There will be a time issue. There will be a cost issue.”

Moody’s was especially pessimistic when it came to bulk commodity ports in Northeast China, which have been hard hit by a severe downturn in iron ore and coal and are fiercely fighting each other for shrinking loads. It painted a more optimistic picture for the Yangtze and Pearl rivers deltas, with a much more prosperous and diversified economic base.

But the agency emphasized that the softening economy and a shift to higher value-added goods will impact all ports. How they respond will determine their ability to turn a profit.

While governments have been pouring huge amounts of money into ports, intermodal infrastructure is quite another matter. With the exception of road links, it’s been both scant and helter-skelter. A US Department of Transportation study a few years back faulted port development for almost never incorporating rail access into port planning. Urban congestion makes any subsequent rail links extremely difficult, if not impossible.

Shenzhen’s Yantian International Container Terminal is one example. It has constructed an ambitious network of tunnels, highways and interchanges over the past 20 years.

Rail is a different story. Pingyan Railway opened a daily, dedicated freight service in 2009 from Yantian to nearby Dongguan, where containers are loaded onto trains that move westward to Kunming and northwestward to Chengdu and Chongqing. There were promises of more frequent and expedited service. That hasn’t happened. A few single-stacked containers make the trip each day, but can languish for days waiting for transshipment.

As Yantian demonstrates, intermodal transport in Chinese commerce is decidedly unbalanced. Trucks dominate. They account for more than 80% of all container traffic in the country.

Inland Transport

Truck transport in China is laden with problems, however. Trucking is completely fragmented and highly unprofessional. Poor service, undependable scheduling and slipshod safety all mark the industry. Road congestion is a perennial concern. Local authorities hold truck drivers ransom through highway tolls. All this adds up to high cost and inefficient movement, which grows as distances increase.

Rail links are the weakest and government promises to improve traffic flow remain unfulfilled. Barely more than 1% of all containers were transshipped by rail, according to a 2012 Asian Development Bank study, despite Chinese official targets to boost rail intermodal to 10% of total traffic by 2011. That 1.3% has barely moved since.

China developed a rail system that, in terms of freight, was completely oriented toward bulk commodities, notably coal. That system, both slow and unreliable, was completely ill-suited to moving containers, which depend on short lead times and reliability.

China poured hundreds of billions of dollars into rail over the past decade. However, development was completely skewed toward high-speed rail passenger lines and ambitious rail links with western China and the rest of Asia. Ostensibly, official thinking went, passenger-only lines would free up freight traffic, but there’s little evidence that has been the case.

What’s worse, the government’s rail authority continues to give priority to coal and food commodities over containers when it comes to freight train traffic scheduling, dampening what little incentive there might be.

Intermodal rail terminals are a problem as well. CRIntermodal, for example, is a high profile, $2 billion joint venture between China Railways Corp. and four other shareholders from Hong Kong and Europe. It’s built a network of nine terminals in the north and central parts of the country, but plans for Shenzhen and Guangzhou remain just that.

Inland Waterways

Traditionally, Southern China commerce relied heavily on inland water transport to ship cargo to and from the coastal ports, with the Pearl River Basin a busy network of thousands of small ships and barges moving goods over thousands of miles. Hong Kong continues to rely on barge traffic for transshipments.

But in terms of inland ships, while size of the vessels has been growing, the number of ships dropped by more than 75% since 1990 until 2008, according to data quoted by the Hong Kong University department of geography James Wang and colleague Jin Yu Li. That traffic accounts for only about 10% of all freight moved in Guangdong province. Inland water transport “is the weakest link when seeing it as part of a multi-modal transport/supply chain,” wrote the two in a 2012 paper.

That contrasts with the Yangtze River Delta system and Shanghai, where inland water transport effectively moves goods hundreds of miles inland.

In the south, investments in inland water transport systems have been minimal. According to Wang’s research, during one two-year period, it amounted to 1/80th that invested in highways in Guangdong province. Add to this a fragmented and unprofessional ownership and management, which resisted efforts to make shipping more reliable.