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  May 7th, 2014 | Written by

Special Report: Supply Chain Epicenter

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When Liz Claiborne Inc. decided to offload its manufacturing and distribution business to Hong Kong-based Li & Fung Ltd., a Chinese powerhouse engaged in managing supply chains for retailers and brands worldwide, the move marked an innovative shift that still impacts suppliers in the Pearl River Delta (PRD) region of China today.

“Companies are now taking their entire supply chains and selling them off to someone else,” comments C. John Langley, clinical professor of supply-chain management, Penn State University. “Li & Fung sources the materials, makes the clothing and handles the logistics. This frees the customer to focus more on merchandise and product design.”

Li & Fung’s location in Hong Kong offers the company a host of advantages. Considered part of the greater PDR region, Hong Kong is a good source for capital, management, technology, market knowledge and access to international markets. Plus, Hong Kong’s proximity to PRD’s Guangdong Province—the economic heart of the PRD—has facilitated that region in becoming a major world player in light-manufactured and technology-based goods.

“After 20-plus years of manufacturing for the world, PRD has amassed nearly every kind of supplier that would be needed in a world-class supply-chain system,” says American Chamber of Commerce (AmCham) South China President Harley Seyedin. “One of the reasons PRD offers the best opportunities for companies wishing to produce value-added services for the Chinese market is this amazing capability.”

Apple Inc. has particularly benefited from the strong supplier base in the PRD. Contract manufacturer Foxconn performs the final assembly and customization of Apple’s iPad at its 1.16-square-mile factory in Shenzhen, its largest factory within the company’s network. Its location is critical given the many intricate parts needed for the assembly that arrive either by suppliers in the PRD or via the excellent transportation links to the PRD. There, Foxconn customizes the iPad according to market needs. Shipments are then consolidated, brought to a local distribution point, then shipped overseas by air freight.

Hong Kong International Airport (HKIA) has been ranked as the busiest airport for international air cargo since 1996. “HKIA is the world’s busiest international air cargo airport, handling around 4.1 million tonnes of cargo annually,” says Gregory So, secretary for Hong Kong’s Commerce and Economic Development.

The PRD’s Guangzhou Baiyun International Airport is the third-busiest airport for cargo traffic in China. It serves as the main hub of China Southern Airlines and is a focus city for Shenzhen Airlines and Hainan Airlines. Shenzhen Bao’an International Airport is a hub for China Southern Airlines and also serves as an Asian-Pacific cargo hub for UPS.

In addition, the Port of Hong Kong is among one of the world’s busiest container ports with nine container terminals and 24 berths. It handles more than 23 million containers annually and is ranked by the World Shipping Council the second-busiest port in China behind Shanghai. The PRD seaport of Shenzhen is ranked third; Guangzhou is ranked fourth.

“With these advantages, Hong Kong is a leading center for the movement of goods and an ideal converging point for freight forwarding and logistics business,” So says.

Seyedin notes that the PRC also has the best network of high-speed rail systems which are seamlessly connected to subways and other modes of transportation, the best state-of-the-art telecommunication and fiber optics network, the best logistics, a highly sophisticated supply chain, skilled labor and educational institutions.

Seyedin admits that there has been a shift in business in the PRD from producing goods for export to supplying products to the Chinese market. While some of that shift has been the result of reshoring production back to the U.S. due to rising labor rates, reports of poor working conditions and concerns over intellectual property rights in China, some executives cite worker flexibility and speed to production as reasons to retain supplier relationships in the PRD. Some also contend that they need suppliers there to keep costs low and profits high to pay for product innovation.

“We have watched the transformation of the PRD in the past 10 years from being the factory of the world to a value-added production center for the Chinese market,” Seyedin comments.

This shift, he adds, particularly enables American companies to use the PRD as a platform for producing value-added goods and services for China. “In fact, three-fourths of American companies in the PRD are now primarily producing goods and services for the Chinese market and not in the export business,” he says.

A particular benefit for cross-border trade flows is the Closer Economic Partnership Arrangements (CEPA) that Mainland China has with the special administrative regions (SARs) of Hong Kong and Macau. A free trade agreement, CEPA offers qualifying products, companies and residents of Hong Kong and Macau preferential access to the mainland Chinese market.

Hong Kong itself is world renown for trading and logistics. In fact, in 2011, these sectors employed more than 770,000 people and accounted for 25.5 percent of Hong Kong’s GDP.

Helping to further develop and promote logistics is the Hong Kong R&D Centre for Logistics and Supply Chain Management Enabling Technologies (LSCM R&D Centre), which was recently established with funding from the Innovation and Technology Commission of the HKSAR Government and is hosted by three leading universities in Hong Kong: the University of Hong Kong, Chinese University of Hong Kong and Hong Kong University of Science and Technology. The goal of LSCM R&D Centre is to be a leading world center of excellence in logistics and supply-chain management R&D by developing and promoting logistics and supply-chain-management-enabling technologies.

By May 2013, LSCM R&D Centre had already approved 47 projects that will help increase the productivity and competitiveness of the logistics and supply-chain industries in Hong Kong.

Meanwhile, China’s National Development and Reform Commission (NDRC) is putting together an outline to reform and develop the PRD between 2008-2020. Plans call for creating three super-metropolitan areas comprising Guangzhou and Foshan, Hong Kong and Shenzhen, and Macao and Zhuhai with the goal of improving infrastructure and promoting Guangdong as a world-class logistics center. Included in the plans are a number of hub-type modern logistics parks, including those at Guangzhou Baiyun International Airport, Bao’an International Airport and the ports of Guangzhou and Shenzhen.

In that plan, NDRC calls for developing the outsourcing-service industry, developing a series of specialized conventions and exhibitions, fostering creative industry business clusters and increasing the innovation capacity of the region. This includes building 100 new R&D centers and developing three to five high-tech industrial clusters.

NDRC also plans to create a series of industrial clusters based on the internationally influential brands that have flocked around certain cities in the PRD. For example, Foshan is known for its many suppliers of home electric appliances and building materials, Dongguan for garments, Zhongshan for lighting, and Jiangmen for papermaking.

Rounding out the logistics equation is the number of new infrastructure links that are planned to better connect the greater PRD with the overall PRD region. They include the Zhongshan-Shenzhen passage across the estuary of the Pearl River; the Hong Kong-Zhuhai-Macao Bridge (scheduled for completion in 2015); the eastern passage between Shenzhen and Hong Kong; express rail from Guangzhou via Shenzhen to Hong Kong; the development of a coastal railway system (the Guizhou-Guangzhou railway and the Nanning-Guangzhou railway); urban rail transit systems of Guangzhou, Shenzhen, Foshan and Dongguan; improvement of the modern functions of the ports of Guangzhou, Shenzhen and Zhuhai; and expansion of the Baiyun Airport in Guangzhou.

Suppliers and shippers alike will benefit from these transportation links as they will facilitate faster and more efficient movement of goods throughout the PRD.