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Building the Shekou of East Africa
2017-03-27, DENG YANZI in Hong Kong

The view of Victoria Harbour from Li Xiaopeng’s office in Sheung Wan is breathtaking. The district, an early cargo hub on Hong Kong Island, still serves as a reminder of the transformative power of ports.

Hong Kong and neighboring Shenzhen, in southeastern Guangdong province, share a similar growth story, noted Li, president of China Merchants Group. Originally both small fishing villages, they grew into bustling trade hubs that welcome cargo ships from around the globe.

Li now looks forward to scripting the success story of these two ports across other trading destinations. 

The State-owned conglomerate’s port in Djibouti is a trial project in the making. Located on the coast of East Africa, the country is of strategic significance as a main channel for international maritime cargo. 

China Merchants Group aims to use the model of Shenzhen’s Shekou Industrial Zone, dubbed Port Park City, or PPC, as a template for development in Djibouti.

Following the company’s investment in port construction from 1979, today the village of Shekou, at the southern tip of Shenzhen, has grown from an area without basic infrastructure into a modern metropolitan hub.

“Making full use of Djibouti’s geographical advantages, we are in the process of making the country the Shekou of East Africa — a hub for regional shipping, logistics and trade,” Li said.

Djibouti’s most valuable assets, its ports as well as related industries, account for more than 80 percent of the African country’s GDP, according to China Merchants Group.

China Merchants Port Holding Co, the group’s port and logistics arm, invested in the Port of Djibouti in 2012. It has completed the construction of a new port facility with an improved cargo-handling capability, which will start operating later this year.

The Port of Djibouti is further expanding along the lines of the Shekou port development model. In November, the group invested $400 million in the development of a 48.2 square-kilometer free trade zone in Djibouti. 

Infrastructure at the free trade zone in the African country will include a trade and logistics park, an export-processing zone, as well as the provision of financial services.

Djibouti also expects urban development in the old port area to accelerate after the operation of the new port commences, and aims to build a new business district with commercial and tourism facilities.

“More than the construction of a port, we offer a ‘whole package solution’ to our local partner,” Li said.

Local conditions

The same concept will be applied to the company’s port projects in other countries. “We will use our experience in Shekou and adjust the model to local conditions,” Li said.

With the majority of its port projects in areas along the Belt and Road Initiative, China Merchants Group now owns a network of 46 ports in 18 countries. The group’s investment in overseas ports has reached $2 billion. 

The China-led Belt and Road will facilitate the construction of modern infrastructure to connect more than 60 countries along the ancient Silk Road routes.

China Merchants Group has increased investment in overseas port businesses, especially in emerging markets, amid overcapacity in China’s port sector and sluggish global trade.

“China’s port capacity has already surpassed demand, which has led to problems of overcapacity in this industry,” Li said. 

The nation’s port sector, which enjoyed rapid growth as some local governments relied on port construction to boost local GDP data, was hit hard by the global financial crisis in 2008. The sector has gradually rebounded as the world economy still struggles to recover.

China’s trade activities have also suffered from a continuous decline in recent years, leading to weak demand for the domestic port industry. 

Data from China’s General Administration of Customs showed that the country’s total import and export value in 2016 decreased 0.9 percent year-on-year to 24.33 trillion yuan ($3.52 trillion).

Seven of the world’s top 10 container ports are in China, but the growth rate of container throughput is declining, according to a 2016 report by the Center for Forecasting Science at the Chinese Academy of Sciences.

In the first half of 2016, container throughput in nation-scale ports rose 2.5 percent, down 3.6 percent from the same period in 2015, data from the China Container Industry Association showed.

Li urged the sector to look for growth opportunities abroad.

“China’s port industry should export its capacity to overseas markets where the demand for port construction is strong. It was our decision to venture overseas that opened up new market opportunities for us,” he said. 

“Developing global markets can also solve the problems of low growth rate and insufficient demand in the domestic market.”

Li revealed that while China Merchants Group’s ports in China grew at a modest rate of 1 percent in general, with declines in some ports in terms of throughput, its overseas ports have enjoyed rapid growth.

He cited the Colombo International Container Terminals (CICT) in Sri Lanka, the group’s first ever greenfield project in 2011, as an example. 

With a $550 million investment, CICT started operations in 2014 and became profitable the next year with 1.5 million 20-foot-equivalent unit containers, and grew rapidly to 2 million TEUs in 2016.

“Even though the operation scale and revenue size of our ports along the Belt and Road is relatively small compared to our domestic port business, the growth rate is significantly higher,” Li said.

“Our new overseas ports will be a strong engine for China Merchants Group’s business growth.” 

International cooperation

However, Li emphasized that the process of exporting industrial capacity involves international cooperation to build advanced industrial capacity, rather than the disposal of excessive resources in less-developed countries. 

Founded in the late Qing Dynasty (1644-1911) as China’s first business enterprise, the 145-year-old China Merchants Group has always been a trailblazer in opening up the country and exploring overseas businesses.

Li stressed the importance of Chinese companies bringing benefits to the local communities they operate in abroad. “As a Chinese company we pay extra attention to our social responsibilities in our overseas projects,” he said.

As the return on investment at the Port of Djibouti has increased, the income of the local workforce involved in the project has been growing steadily at 8 percent, and the company is also investing $2 million in providing training opportunities for local staff over a three-year timespan, according to Li.

The Belt and Road not only offers opportunities for Chinese companies, but also leads to value addition for countries that benefit from the initiative, Li said.

China Merchants Group will continue to expand its global network, including further investments in Asia, Africa, Latin America and Europe. 

According to Li, the company will complete the takeover of Hambantota port in southern Sri Lanka and use the facilities to explore opportunities in South and Southeast Asia. 

In Africa, apart from the Port of Djibouti, the group also expects further progress at its projects in Togo, Ethiopia and Tanzania. 

With an eye to exploring potential opportunities in Brazil, Panama and Mexico, China Merchants Group hopes to conduct in-depth research in Central and South America.

“Compared to the slowdown in ports at home, we expect bigger growth potential from our investments in emerging markets,” Li said.

 

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