Taiwan Today

The decision was post­poned time after time, but in March 1996 the ROC government finally granted an international air express cargo company, United Parcel Service (UPS), the right to operate an inte­grated cargo facility at Chiang Kai-Shek (CKS) International Airport. If all goes well, the move could spur the transfor­mation of Taiwan into a regional air cargo hub, as outlined by the govern­ment’s Asia-Pacific Regional Opera­tions Center Plan (the APROC plan), and hone its competitiveness in the interna­tional air express cargo industry.

The air express delivery market has expanded rapidly in recent years. UPS boasts the largest turnover in the global industry, and in 1995 realized a 35 percent growth from the previous year in overseas shipments from Taiwan. Another key player, DHL, the first foreign air express cargo company in the Taiwan market, and the local market leader, enjoyed a 27.6 percent growth during the same period. International express carriers are now pos­ing a formidable challenge to Taiwan’s domestic air cargo companies, which are handicapped by limited financial backing and less advanced operations. Antonio An (安都), general manager of Lita Interna­tional Express Co., a local air express cargo carrier, says that his firm’s daily deliveries from Taipei to Singapore have dwindled from 500 kg to 100 kg since for­eign carriers entered the Taiwan market. “The route may not last out next year,” he laments.

The war between domestic and for­eign express air cargo companies involves more than competition between carriers. Also caught up in the fray is a network of air transport service firms, forwarding agents, customs brokers, and inland trans­portation and warehousing companies. The question many people in the industry are now asking is: Will Taiwan emerge from this battle with a stronger logistical base and sharper competitiveness in the in­dustry? Or, in its haste to achieve its APROC goals, will the government end up giving away Taiwan’s entire air cargo market to foreign companies?

Air express cargo companies were born in response to commercial need for fast delivery of original documents essen­tial to the efficient, cost-effective opera­tion of a wide range of industries, particularly in finance and shipping. Tai­wan’s document delivery business, how­ever, is near saturation and does not hold sufficient profit potential to satisfy inter­national express carriers, especially the latecomers to the local market—UPS and FedEx. To tap greater profits, foreign firms have opened a new service offering ex­press delivery of consignments weighing over 45 kg, which were previously shipped as ordinary air freight.

Growing enthusiasm for this new service is attributable to Taiwan’s manufacturing orientation, geographic location, and the time factor. Taiwan is far more attractive than many of its Asian-Pacific neighbors as an air express cargo opera­tions hub. According to Adam Tsui (崔震東), marketing manager for UPS in Taiwan, the economies of both Hong Kong and Singapore are dominated by service sector industries, meaning that urgent deliveries are mainly in the form of paperwork, whereas Taiwan’s economy is primarily supported by export-oriented manufacturing industries, particularly in the high-tech sector. Although South Korea also has a strong manufacturing base, it is primarily in heavy industries which, combined with the country’s geographical location, detract from its potential as an air cargo hub. Taiwan’s many small and medium-sized enterprises (SMEs), are mainly dynamic, high-tech goods manufacturers and, according to Tsui, are the client group with the greatest possibilities.

Time has become a key element in the competitiveness of most modern businesses, and the crucial factor spurring rapid expansion of the express delivery market. Taiwan’s largest computer manufacturer, Acer Sertek Inc., for example, has a manufacturing facility in the Philippines’ Subic Bay that produces 150,000 computer motherboards per month. If the components for making those motherboards were flown in from Taiwan via the usual routes, they would have to go first to Manila. Subic Bay is only about a hundred miles from Manila, but delivery of goods is often seriously delayed when heavy downpour turn poorly-paved roads into impassable rivers of mud. Acer now relies on FedEx for chartered air cargo services direct to Subic Bay. Acer Sertek deputy general manager Gen Chang (張錦賢) lauds the efficiency of air express services, but admits that costs are 30 to 50 percent higher than for delivery by ordinary air-freight. This has in turn increased overheads for the computer industry, which is already suffering from dwindling profits.

The growth of industries for which time is money is a gold mine for interna­tional express carriers. But the capital- and technology-intensive requirements for the establishment of an air express operation, combined with the demand for logistical efficiency in integrated express delivery services, have discouraged many busi­nesses from trying to get a share of the express delivery pie.

Currently, only four international ex­press carriers—UPS, FedEx, DHL and TNT—offer integrated air cargo services, in contrast to the cheaper but less time-effi­cient service available from local companies, which first consolidate small shipments before shipping. The big inter­national players provide door-to-door services that include pickup and delivery to the airport, air transport, customs clearance, and freight forwarding facilities that range from inland transportation to ware­ housing. This allows them to control costs, guarantee delivery time, and exploit economies of scale, thus making them far more competitive than airline companies and forward­ing agents. Such considerations clearly explain the differential in shipping rates.

C.H. Lee (李重輝), chairman of the Airfreight Forwarders’ Association (AFA) of the Republic of China, admits that the integrated streamlined operations of international air express companies have put them on an entirely different footing from the rest of the air cargo industry. Forward­ing agents, customs brokers, and airline companies have all been hit by the grow­ing popularity of specialized air express delivery companies. Inland transportation and warehousing services are expected to suffer as well. Consequently, there are fears that the domestic air cargo industry’s chain of upper-, mid-, and downstream businesses may not survive when, as one industry executive describes it, “Taiwan’s skies are served up to others.”

The government’s moves to develop Taiwan into a regional operations center may benefit international air express com­panies, but they have sent a chill down the spine of the local industry. Since a highly efficient air cargo system is essential to a regional operations hub, the Civil Aero­nautics Administration (CAA), within the short span of eight months, has decided to establish both an air express cargo zone, called an Express Handling Unit (EHU), and an integrated air cargo zone, both at CKS airport.

The establishment of the EHU is a positive step toward replacing the nine­ to-five customs operations with a round-the-clock service allowing goods to receive customs clearance regardless of how late they arrive. Even though customs processing in the zone requires only one-quarter of the time previously needed, few clients have shown interest in this special facility. Contrary to ini­tial estimates that a thousand cases would be handled per day, only nine hundred were handled in the facility’s first month of operation. International air express companies have complained of its high fees, stringent restrictions, and the total of thirty-two approval seals that still need to be collected for each shipment, despite allegedly simplified import and export procedures. Publications and home appli­ances cannot pass through the facility, because they have to be inspected by the Government Information Office (GIO) and the Bureau of Commodity Inspection and Quarantine respectively. As one air cargo terminal officer says, “Even videotapes of Snow White have to be inspected by the GIO.” He adds that these unreasonable regulations cause “express delivery” to become “slow delivery.”

In addition to criticisms from interna­tional express carriers, local airfreight for­ warders and customs brokers complain that anyone interested in operating in the EHU must have an electronic data inter­ change (EDI) system, which allows ship­ ping documents to be computerized, and thus processed more quickly and effi­ciently. This requirement was instituted without seeking input from local firms, seemingly with only the interests of inter­national companies in mind. Asking local firms to invest in EDI systems is like “ask­ing someone who can only afford under­ wear to buy an expensive overcoat,” according to Lita’s Antonio An, who says that local firms are not being given a fair chance to compete.

The second facility, for integrated air cargo operations, is expected to set the ball rolling for Taiwan’s transformation into a regional operations hub. But among local air cargo companies, it is regarded as yet another unfair privilege for foreign com­panies. Operation rights in this zone gives UPS an exclusive service area at CKS airport, where it will have its own ground crew and warehouses. Combined with its air trans­ port, forwarding and customs clearance services, and possibly inland transporta­tion service in the future, the arrangement gives UPS an advantage over local, as well as other international, air express cargo companies.

The government has taken these steps with a broader perspective in mind, that is, to sharpen the competitive edge of local industry. Moreover, the Council for Eco­nomic Planning and Development and the Ministry of Transportation and Communi­cations expect these initiatives to have a catalytic effect on the transformation of Taiwan into an air cargo transshipment center, while at the same time strengthen­ing the logistical base for the manufactur­ing, financial, and even media centers called for under the APROC plan.

Through the integration of its local operations, UPS is also hoping to offer cheaper and faster services that will push Taiwan’s industry to new heights. Adam Tsui of UPS insists that the regional distri­bution experience of international express companies, following the establishment of the transshipment center, will spur the development of Taiwan as an exporter of value-added, semifinished products assembled on the island.

“It’s a good idea, but they’re going about it in the wrong way,” says C. H. Lee of AFA. What needs to be changed for Taiwan to become a regional operations center is the environment for the air cargo industry, particularly in terms of upgrad­ing services at its international airports, rather than through negotiations with selected parties, and “creating an operat­ing environment based on special privi­leges” for international air express carriers. “This is good for neither consumers nor manufacturers,” Lee adds.

Critics view the government’s haste to establish an integrated air cargo zone as a reflection of its desire to quickly put a good face on its APROC plan, about which most people are not particularly optimistic. Tsai Ching-yen (蔡清彥), director­ general of the CAA, retorts that if the admin­istration acted with undue haste, then how do critics explain the CAA’s insistence with FedEx in the first round of negotiations that transshipments should account for 75 per­cent of the cargo handled, and imports and exports the remaining 25 percent, as well as the repeated postponement of the facili­ty’s establishment?

But the higher the proportion of imports and exports in this special serv­ice area, the greater the impact on all sectors of the domestic air cargo trans­port industry. Tsai reiterates that the establishment of the integrated air cargo zone is a matter of government policy and, as the agency responsible for im­plementing that policy, there was little the CAA could do to reduce its impact on the local industry. He maintains that the present arrangements are only tempo­rary, and that other companies will be welcome once an additional terminal has been built at CKS airport.

Nevertheless, both academics and industrialists assert that a complete trans­formation of the air cargo industry is more important than making special arrange­ments for Taiwan to become a regional air transport center. Anthony Han (韓復華), a professor at National Chiao Tung Uni­versity’s Department of Transportation Engineering and Management, comments in a recent study that the air transport opera­tions environment, customs clearance, and air cargo terminal operations all need improvement, and that pertinent laws and regu­lations must be revised to meet the industry’s changing needs. As one example of what can be achieved he cites Singapore’s Changi International Airport, which already offers 24-hour customs clearance for all goods, not just express cargo.

“Business opportunities wait for no one,” says Gen Chang of Acer Sertek Inc., who has spent twenty years in Taiwan’s manufacturing sector. He adds that he has seen the rapid evolution of Taiwan’s macroeconomic environment far outpace the implementation of legislation and ad­ministrative measures to cope with those changes.

It is perhaps premature to discuss the positive and negative aspects of the liber­alization and integration of Taiwan’s air cargo operations, but recent developments have certainly gotten international express companies off to a good start. They have achieved a breakthrough in Taiwan’s con­servative and rigid air cargo transport environment. But it may take longer for the domestic industry to take off.

Adapted with permission from CommonWealth Monthly, April 1996, pp.164-170