Editor's note: With the onset of Sino-US trade frictions and geopolitical tensions, global trade and supply chain operations have become fragmented. This has had far-reaching consequences for Hong Kong's trade and logistics businesses. The third of a series of China Daily's articles on the topic examines how the city can provide high value-added input for supply chain functions, given that supply chain management is a dynamic concept.

Thriving on burgeoning offshore trade in the past few decades, Hong Kong has long been a trade and logistics pivot. The city exports most of the goods it does not produce, and imports goods it does not consume.

With the Chinese mainland doing more direct international trade since its accession to the World Trade Organization in 2001, the special administrative region's role in intermediate trade has gradually diminished, causing its container port rankings in sea freight trade to decline. Hong Kong was the world's busiest container port for much of the 1980s and 1990s - a position it held until 2005 - but dropped out of the top 10 busiest global port rankings for the first time last year. Hong Kong Port slipped to 11th place in 2023 amid growing competition from ports on the mainland, notably in adjacent Guangdong province.

The SAR may have lost the accolade of being the busiest sea freight hub, but this does not mean it is no longer a trade and logistics center. Its lackluster performance in the sea freight business contrasts with the brilliant performance of air cargo business, with Hong Kong International Airport (HKIA) remaining the world's busiest cargo hub for 13 years through 2023.

The city can contribute high value-added input to world trade. In the 2024-25 Budget unveiled in February, the SAR government vowed, for the first time, to make Hong Kong a multinational supply chain management hub in consultancy services, trade financing, and corporate training.

A simplistic representation of a supply chain involves five stages - from suppliers to the final customer (with manufacturers, distributors and retailers in the middle). Supply chain activities involve the flow of goods from suppliers to the ultimate customer (physical supply chain) and the flow of monetary transactions from them back to suppliers (supply-chain financing). Distinct from the concept of a trade and logistics hub, which involves the physical flow of goods into and out of Hong Kong, a supply chain management hub can relate to supply chain activities and functions that may not take place in the city.

Logistics integration

"For Hong Kong to succeed as a global supply chain management hub, it must fulfill the two key functions of providing supply chain financing and facilitating data transfer," says Cheung Wai-man, a professor at the Chinese University of Hong Kong's Department of Decisions, Operations and Technology.

"With finance now being increasingly digitalized, Hong Kong should leverage its advantages in the financial infrastructure and connections with mainland and overseas financial systems to play a role in supply chain financing," he tells China Daily. "Every stage in the physical supply chain process creates the need for monetary transactions and financing. Supply chain financing is the flow of monetary transactions in the physical supply chain process."

Project mBridge, initiated by the Hong Kong Monetary Authority, Bank for International Settlements and the central banks of the mainland, Thailand and the United Arab Emirates, is a multi-central bank digital currency platform geared to fostering cross-border trade settlement. The project has reached the minimum viable product stage in which the basic version of the product can be launched and used by early adopters. When the platform gets into full gear, Hong Kong's capability in cross-border trade settlement can be further bolstered.

The second criterion is that Hong Kong must create a blockchain-powered data transfer platform that can digitalize and integrate the data of all supply chain activities, hence cutting the costs involved in trade financing. "When data transfer is made accessible, we will be in a better position to be an international supply chain management hub," says Cheung.

Hong Kong's logistics players still apply digital solutions in a fragmented way, as their digital information systems usually only link up with their customers and the system lacks horizontal integration with other logistics systems which is vital for business optimization, according to the "Action Plan on Modern Logistics Development", published by the Transport and Logistics Bureau last year.

"Due to global economic uncertainties, limited land supply, and short rental warehouse contracts, most small and medium-sized logistics enterprises are reluctant to invest in technology," says Winnie Lo Wai-ling, senior research manager at Fung Business Intelligence of Fung Group - a privately-held group of companies spanning the entire global supply chain for consumer goods, including trading, logistics, distribution, and retail.

In making long-term logistics land planning for the Northern Metropolis, Cheung suggests the SAR government consider leasing some of the logistics land earmarked for SME logistics players, guaranteeing them to have five to 10 years tenancy agreement. "This would make them more willing to invest in technology and ESG (environmental, social and governance) reporting."

The SAR government will launch a consultancy study this year to develop a logistics data platform connecting HKIA, Hong Kong Port and other logistics information platforms to facilitate the interconnection and sharing of logistics data. Eventually, the platform will facilitate the interconnectivity and interoperability of logistics systems with its counterparts in the Guangdong-Hong Kong-Macao Greater Bay Area or other parts of the mainland.

In October 2021, Airport Authority Hong Kong launched the HKIA Cargo Data Platform linking major stakeholders in the local logistics and supply chain ecosystem, as well as other logistics and supply chain platforms worldwide. The Port Community System - the digital maritime data-sharing platform initiated by the Hong Kong Maritime and Port Board - has been operating on a trial basis in phases since last year and is slated for wider use by 2025. These platforms should form the basis of integrating logistics and supply chain platforms between Hong Kong and the mainland.

"The information platform can act as a catalyst for digitalization and ESG compliance, but the reluctance of individual companies to share operational data poses a challenge, because companies may have concerns about sharing the information," Lo warns.

"Since logistics movement is a global economic activity, it will not be of much great value when logistics data are digitalized and integrated only in Hong Kong. The future trend should be that Hong Kong integrates its own set of digitalized logistics data with those of other regional economies to harness maximum business potential," says Ivy Tse Hoi-ching, co-CEO and co-founder of logistics technology startup, FreightAmigo Services.

ESG compliance

In adopting supply chain financing and technology, whether home-grown logistics players comply with ESG reporting is also important for Hong Kong as a supply chain management hub. As more upstream companies require their service providers to comply with ESG rules, local logistics companies without an ESG reporting mechanism may not secure orders from clients.

ESG compliance calls for digitalization of logistics operations, such as how to reduce unnecessary routing, and collect data on the electricity consumption of warehouses. Through digitalization, information generated from warehouse management systems, automatic identification, sensors, tracking and tracing, as well as robotic operations, can be gathered.

Hang Seng University of Hong Kong's Department of Supply Chain and Information Management conducted a survey last year with the Chartered Institute of Logistics and Transport, interviewing 200 industry practitioners, including freight forwarders, manufacturing and trading companies, as well as terminal operators. The poll showed that nearly 50 percent of the respondents were uncertain whether to promote in-house environmental-friendly practices because they do not have clear guidelines, standards or benchmark data on ESG practices in transport and logistics. About 80 percent of those interviewed said they were not sure whether the SAR offers incentives or subsidies for ESG compliance, while about 90 percent were not aware of any stimuli being offered in other cities in the Greater Bay Area and overseas.

"Some respondents said there is a gap in the awareness of greenhouse gas emissions, sustainable sourcing, fair labor, and diversity and inclusion, as well as product safety between multinational logistics enterprises and SME logistics players. The gap is that when a client has an ESG requirement, the surveyed practitioners feel that their operations cannot support such a requirement," says Eugene Wong Yin-cheung, associate professor and associate head at the HSUHK's Department of Supply Chain and Information Management.

Hong Kong must continue to emphasize the benefits of adopting sustainable practices, especially to SMEs, to raise their adoption rate, urges Henry Wei Haomin, an assistant researcher at homegrown think tank, Our Hong Kong Foundation. "We encourage SMEs in the logistics sector to develop the habit of recording their ESG-related data, especially climate-related data like direct greenhouse gas emissions originating from sources that are owned or controlled, as well as indirect greenhouse gas emissions associated with the consumption of purchased electricity," he says.

"By diligently documenting these data points, SMEs can potentially attract more partnerships and funding opportunities with large-cap listed companies, which will be required to start disclosing the data of their indirect greenhouse gas emissions in the value chain from 2026 under Hong Kong Exchanges and Clearing's latest ESG code," says Wei.

He believes companies can leverage existing research and development funding programs focused on innovation and technology to promote green logistics solution applications, such as the application of new zero-carbon energy and hydrogen fuel cells, as well as energy-efficient cooling systems.

Cheung hopes the government will formulate a road map in ESG compliance for Hong Kong's logistics business. "The road map should show the current gap of ESG compliance performance of the local logistics industry, compared with other regions, and ways of making improvements to align with international standards."

If Hong Kong logistics companies perform better in ESG reporting, suppliers will be more willing to ship merchandise goods to Hong Kong, and they will be tempted to relocate their supply chain activities to the city.

The SAR plans to switch to using alternative fuels in air and sea transport to make the city a green logistics hub. Hong Kong is the first port in Asia to mandate oceangoing vessels to switch to low-sulfur fuel at berth. Together with the Guangdong provincial government, the SAR implemented a domestic emission control area in the Pearl River Delta in 2019, requiring all vessels to use low-sulfur fuel or liquefied natural gas, irrespective of whether they are sailing or berthing. In the aviation sector, Airport Authority Hong Kong will formulate an action plan to promote the use of sustainable aviation fuel in the city.

The SAR administration is expected to promulgate an action plan this year on the construction of bunkering facilities and development of supply chains to make Hong Kong a green methanol fuel bunkering center. It will also step up preparatory work, including technical studies and installations, on providing liquefied natural gas bunkering for oceangoing vessels.