FCR: How does the local air cargo industry fit into the APROC plan?
C.H. Lee: Import-export cargo is a major portion of the local airfreight forwarding business. Taiwan has laid solid foundations for the manufacturing and export industries, and that orientation has now focused on high-tech products. But no matter how productive Taiwan’s manufacturers are, the export air cargo market has its limits, especially since many companies have moved their manufacturing bases to other countries because of increasing production costs here. At the same time, Taiwan’s population of 21 million people also limits growth of the import air cargo market, no matter how generous these consumers may be. But there are no such limits on the transshipment market. Developing Taiwan into a transshipment center will increase the volume of products we forward. When this market expands, more job opportunities will be created, and the revenue generated by transshipment services will remain in Taiwan.
Currently, local cargo carriers handle import and export operations that involve sea transport, air transport, and sea-air transport. But for many reasons, local companies are not involved in the transshipment business. Primarily, this is because administrative procedures for transshipment, particularly customs clearance procedures, are so complicated and time-consuming that no one wants to deal with them. The APROC plan’s goal of establishing an express cargo transportation center on Taiwan, which will expand the market to transshipment for air cargo operators, is by all means the right way to go. But regretfully, the wrong approach is being taken to achieve that goal. If you’re fortunate enough to start with a blank slate, you can structure things as you please, but when there’s already something in place, as is the case in Taiwan, you first have to either fix it or find a way to work around It.
What is wrong with the present approach?
Singapore is an example of a successful air cargo transshipment center. The Singapore government does not give privileges to certain integrated operators. Instead, it provides a well-established soft ware and hardware environment that naturally attracts operators. That’s the right way to do it: set up a sound environment that promotes fair competition.
The operating environment in Taiwan does not have this kind of infrastructure. To the contrary, what should be standard services, like round-the-clock customs clearance for express shipments, are instead privileges. These privileges are currently being given to UPS [United Parcel Service]. In the designated cargo zone, they will enjoy 24-hour customs service, a bonded transshipment warehouse, and other advantages. The problem is, no matter how good this zone’s operating environment is, local operators won’t benefit because they aren’t allowed to use it—it’s for UPS, and UPS only.
This is the government’s first step in establishing the air transport hub—but I believe they’ve gotten off on the wrong foot. Fortunately, the government has realized its mistake, and will correct this as the plan develops. Where hardware facilities are concerned, the government intends to establish an air cargo center and a cargo city. Currently, the airport’s 4,000-square-meter express cargo zone has been given over entirely to UPS. But in the next stage, the zone will be expanded to nearly 40,000 square meters. Since land acquisition is not involved, there should be no problem.
But the cargo city plan will face serious difficult, because it will require acquisition of private land. We have to move quickly, or other would-be Asian air transportation centers will get a big jump on us. In terms of software, beside adjusting laws and regulations, we also need to adjust the mindsets of the people involved, particularly those who refuse to acknowledge the necessity of round-the-clock customs and other cargo-related operations. If we can't provide 24-hour service, we won’t be able to attract businesses to use Taiwan as a regional cargo hub.
The government is under a lot of pressure on this issue. There’s a timetable to be met, and the second and third stages of the project are still in the planning stage. Extending these operating privileges to ups seems to be the government’s way of giving people the idea that the plan is moving ahead.
How do local businesses feel about the competition from foreign integrated air cargo operators?
We understand and appreciate the fact that foreign operators are attracted not only by Taiwan’s geographical advantages, but also by its strong manufacturing industry. Particularly because of its emphasis on high-tech goods, the manufacturing industry needs the services provided by air express cargo carriers more than ever, and there is no shortage of goods for import and export that need express handling. It was with this in mind that foreign carriers got into the Taiwan market.
But now, to protect local operators, the government has set a quota for foreign integrated operators. It stipulates that 75 percent of their express cargo business must be in the form of goods for transshipment, and only 25 percent can be goods for import or export. This regulation prevents foreign operators from dominating the profitable express import-export business for products manufactured by Taiwan’s high-tech SMEs [small and medium-size enterprises]. FedEx wouldn’t agree to these restrictions, and since it had been negotiating this issue with the government for a long time, it probably felt that the government would eventually acquiesce. But FedEx miscalculated. UPS agreed to the terms, got the contract, and now FedEx is filing a complaint with the US Department of Transportation.
Anyway, making Taiwan a regional transshipment center is supposed to be beneficial for both foreign and local operators. If we can ensure that every cargo flight to Taiwan comes and goes fully loaded, the airlines will come. And with increasing demand, and more frequent flights, cargo rates will drop, more companies will be able to afford express handling of their products, and there will be more cargo to be shipped.
But the real demand is still in import and export cargo. That’s the area of the business where most local firms are involved. But growth of this market is limited, as I’ve already explained, and the introduction of foreign competition is forcing a reallocation of market shares. It’s going to be very hard for most local operators to hold on to what business they have when they’re going up against more efficient and experienced foreign integrated operators who have already grabbed a significant part of the market.
How can local operators stay competitive?
In this business, you don’t have to be an integrated operator to get the job done efficiently. Take DHL, for example. Although it's one of the so-called integrated operators, it doesn’t use its own air craft in Taiwan. DHL has realized that it’s cheaper and as efficient to use commercial airlines. Commercial airline cargo service combined with its integrated pickup, processing, and delivery services world wide, allows DHL to maintain a very high level of efficiency here, even though by the government’s definition it’s not technically operating an integrated service. So what’s the difference between DHL and local operators? There’s no difference. Both provide door-to-door service, and rely on a third party for air transport services.
Can Taiwan support its own integrated carrier? No way. SMEs make up 98 percent of Taiwan’s industries, and they define our business culture. It would be impossible to merge these small companies into a huge operation like DHL. Thus far, Taiwan’s large corporations have shown little interest in getting into the express delivery business. China Airlines, for example, doesn’t want to become an integrated cargo carrier. It provides the aircraft and air transport service and lets other people take care of pickup, customs, and delivery. As long as there is strong logistical coordination between each company involved in the process, formal integration simply isn’t necessary.
The entrance of international integrated operators here is unavoidable. Open markets are the way of the future, and competition will stimulate local operators to upgrade the quality and efficiency of our services. At present, although local air cargo firms divide the services provided by an integrated operator between several companies, together we function as an integrated carrier. And we are strengthening the operational links between our companies.
Global Sky was the first local company to be formed by the merger of several airfreight forwarding companies, and through an agreement with China Airlines it has established an essentially integrated operation. There are plenty of local companies that understand this business, and understand it well. We have no problem with competition, but it has to be fair competition. Foreign operators should not be offered privileges that give them an unfair competitive advantage.