Port of Kaohsiung's Container Volume Eclipsed by Mainland

UNCLAS SECTION 01 OF 03 TAIPEI 001937

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DEPT FOR EAP/RSP/TC AND EB/TRA
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CBP FOR CARLOS CORTEZ AND VINCENT HUANG
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FROM AIT KAOHSIUNG BRANCH OFFICE

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E.O. 12958:N/A
TAGS: EWWT ETRD PGOV ECON TW ELAB

SUBJECT: Port of Kaohsiung's Container Volume Eclipsed by Mainland
Port Growth; Struggles to Maintain Transshipment Business

SENSITIVE BUT UNCLASSIFIED


1. (U) Summary. With geographic advantages and new long-term leases
from major shipping carriers, Kaohsiung will likely hold on to its
status as a transshipment hub in the Asia-Pacific region, even as it
continues to fall behind in world rankings. The completion of a
s)QD'Qolume is expected to reach at least 10 million TEUS by
the end of 2007, if not sooner. At the same time, Shanghai,
Shenzhen, Dubai, Qingdao, Ningbo, Tianjin, and Guangzhou have surged
ahead in recent years, boasting annual growth rates between 10% and
40%.


3. (U) Taiwan authorities are undertaking mixed measures to boost
the Kaohsiung harbor area's economy. According to Marco Lin of the
Kaohsiung Urban Development Bureau, the future of Kaohsiung Harbor
will also include leisure and tourism facilities. The redevelopment
initiative comes at a time when traditional industries like
agriculture and manufacturing are moving to China and Southeast Asia
due to lower labor costs. However, harbor-area unions argue that
the selected piers are curretly operating at near full-capacity and
should be reserved for shipping use. Kaohsiung will also soon begin
building its sixth container terminal, set for completion in 2014.
Unlike Kaohsiung's other container terminals, Terminal No. 6 will
have offshore status and be able to accommodate the
sixth-generation, large vessels that require at least 15 meters of
water to dock. Acquiring large vessel capabilities will help
Kaohsiung adapt to changing shipping carrier needs, especially since
most of Kaohsiung's Chinese competitors and Dubai already possess
these capabilities.

Strong Mainland Economic Growth Driving Port Competition
-------------- --------------

4. (SBU) According to National Sun Yat-sen University Professor Hu
Nien-tsu, Terminal No. 6 will help boost Kaohsiung Port's container
volume, but this project is neither sufficient nor timely enough to
compete with the double-digit growth of other ports, particularly on
the mainland. China's lower labor costs, large hinterland,
logistics centers, and booming export market account for the Chinese
ports' explosive growth. Additionally, Dr. Hu believes that
Shanghai's location in the middle of China's coastline, its banking
and insurance sectors, and its previous glory as the hub of commerce
between East and West will enable it to surpass Hong Kong and become
the world's largest container port in the next year or two. On the
other hand, Kaohsiung Harbor Bureau (KHB) Director Hsieh Ming-tui
contends that Xiamen is likely to be Kaohsiung's biggest competitor
for the near future, as Shanghai is both too far away and too
focused on local shipping to directly challenge Kaohsiung. In any
event, Mr. Siew Loong Wong, Managing Director of American
Presidential Lines (APL) Taiwan, believes it is unlikely Kaohsiung
will remain in the top ten rankings for much longer.


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5. (SBU) As China's economic growth continues to catalyze its port
growth, the cross-strait ban on direct shipping is preventing
Kaohsiung and other Taiwan ports from achieving economies of scale.
According to David Chien-Yu Cheng of the KHB, direct shipping would
lower the costs borne by shipping companies, as vessels would no
longer have to go through a third port like Hong Kong or Pusan.
However, Dr. Hu asserts that lifting the ban would be necessary but
insufficient for Kaohsiung to increase its container volume beyond
10 million TEU, even when Terminal No. 6 is complete. Aggressive
mainland tactics may even cause Kaohsiung's container volume to
decline in the future. Mr. Wong informed AIT that mainland ports
are approaching shipping carriers and "poaching" their business from
Kaohsiung.

Local Pressure from New Port in Taipei; Limited Success from FPZ
-------------- --------------

6. (U) Additionally, Kaoshiung Port faces potential local cargo
shipping competition from the new port being constructed in the
Danshui area of Taipei, although AIT interviews indicate that the
port is primarily intended to reduce existing inefficiencies in
local cargo movement, as well as to eventually replace the Port of
Keelung in the north. According to Mr. Hsu of Evergreen Lines'
Investment Division, because most of the local cargo currently
shipped through Kaohsiung comes from the central and northern part
of the island, the Taiwan government's decision to build the Taipei
port is based on a desire to minimize transportation costs, time
delay, and environmental effects of moving cargo across the island
by truck. Indeed, Mr. Chang Ya-fu of KHB's Port Development Section
believes that the new port will not significantly challenge
Kaoshiung for resources, as the central government will find ways to
balance the north and south.


7. (U) However, the new port may put pressure on Kaohsiung by
absorbing new investment. Major Taiwan shipping carriers Evergreen,
Wan Hai, and Yang Ming were jointly awarded investment rights in the
Build-Operate-Transfer (BOT) Taipei port, set for completion in
2009, whereas Yang Ming remains the sole bidder for Kaohsiung's
Terminal No. 6. Attracting shipping carrier investment during a
time of restructuring and comparatively weaker growth remains a
crucial concern for Kaohsiung. Dr. Hu explains that if Kaohsiung
cannot retain big shipping companies for at least ten years at a
time, such companies will see no reason to invest in the port.


8. (U) The designation of 397 hectares of land at the harbor as a
Free Trade Zone (FTZ) in January 2005 has also brought little new
business or investment to Kaohsiung. According to Mr. Hsu, the FTZ
began as a way to get value-added profits from tax-free goods
transshipped through Kaohsiung, but labor costs and exchange rates
in China's favor are diverting such goods away from Kaohsiung.
Meanwhile, logistics warehouses in Kaohsiung remain unused, and the
FTZ's limited area cannot accommodate any additional companies. The
Taipei American Chamber of Commerce also argues that an FTZ outside
this current area makes more sense, as the port is already
duty-free.

Kaohsiung Clings to Natural Advantages; Maintains Business Ties
-------------- --------------

9. (U) Despite these challenges, Kaohsiung still offers the shortest
links to the Asia-Pacific region's five leading ports (Hong Kong,
Pusan, Shanghai, Singapore, and Tokyo) by an average of 53 hours of
navigation time. This strategic position will likely bring
Kaohsiung transshipment business for years to come. Indeed,
Evergreen, APL, Wan Hai, and NYK recently signed new ten-plus year
leases with Kaohsiung. Mr. Hsu of Evergreen told AIT that his
company intends to keep Kaohsiung as its transshipment hub despite
its investment in the Taipei port because there is sufficient cargo
for both areas, and also because Evergreen has previously invested
in Kaohsiung.


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10. (U) In addition to container volume, Mr. Wong of APL claims that
investors also consider the size of a port's hinterland in
determining its vitality. Kaohsiung offers a larger natural port
area than that of Taipei's, translating into more opportunities for
future development. Furthermore, Mr. Hsu of Evergreen claims that
the shipping business has acclimated to globalization, in that
sovereignty issues do not preclude joint ventures between mainland
and Taiwan shipping carriers, even as the direct shipping ban
remains in effect. Locally, Kaohsiung is currently working on
lowering tariffs, rental charges, and streamlining bureaucratic
procedures to retain its shipping carrier business. According to
Ms. Mak of OOCL, KHB has lowered costs for inbound containers
carrying refrigerated cargo, consumer products, and European
products; these are expected to comprise Kaohsiung's new source of
business.

Comment
-------------- -------------- 11. (SBU)
If Kaohsiung continues to sign long-term leases with major shipping
carriers and improves certain efficiencies, its continued presence
as a transshipment hub in the Asia-Pacific region appears viable.
At the same time, Kaohsiung appears focused on attaining the
full-service logistics hubs that currently characterize ports like
Shanghai. The redevelopment projects may also create a more vibrant
local economy that attracts investors, personnel, and businesses
with new capital to invigorate Kaohsiung's harbor area in coming
years.

THIELE

YOUNG