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SHIP MANAGEMENT IN THE HEART OF ASiA

Presented by Mr. Harry Gilbert

Managing Director, Wallem Group Ltd, HK

Good afternoon, Ladies & Gentlemen,
I have been asked to speak to you today on the topic of why I think that Hong
Kong makes an ideal location from which to operate a ship management
company.

The Wallem Group has had its world headquarters in Hong Kong for 50 years
and has been operating a ship management business from here for almost 30 of
those years so I hope that you will accept that we do have some experience in
the matter.

Hong Kong has, within the last 5 years, experienced the unusual event of
undergoing a peaceful change in sovereignty after 150 years of colonial rule.

Not surprisingly the period leading up to the handover of Hong Kong to China
was an anxious one, particularly for ship owners and ship managers based in the
former colony. Rumours abounded that assets may be seized, taxes would
change and there may be restrictions upon the ability to transfer capital overseas.
Some countries and cities took advantage of the uncertainty to persuade owners
to transfer their operating companies to different locations. Notably Singapore
and Vancouver beneﬁted from the situation and persuaded some owners and
managers to relocate south and east respectively.

Similarly just before the handover in 1997 many of the industry commentators
were predicting the demise of the Hong Kong register. Citing perceived
difficulties in trading Hong Kong registered ships to Taiwan and therefore
anticipating a reluctance by chaiterers to take on Hong Kong ﬂag vessels. This
nervousness resulted in some vessels moving to other ﬂags and as you can see
from the overhead the number of ships on the register dipped, but not
disastrously so.

This drift away from Hong Kong and the Hong Kong register took place despite
the fact that agreement had been reached at an early stage between Britain and
China that Hong Kong would retain its own shipping register and marine
administration after the handover.

So what is the situation now that Hong Kong has been under Chinese
sovereignty for more than 4 years. One cannot deny that it has been a
particularly difﬁcult period in the history of Hong Kong. Chicken ﬂu, red tide
and problems with pork have meant that one had to be very careful what one ate
and the downturn in the Asian economies has not left Hong Kong unscathed.
But what has not happened is what the rumour mongers predicted would happen.
China’s undertaking not to interfere with Hong Kong’s systems and
administration has been carefully observed, no assets have been seized and there
are no restrictions upon the transfer of capital. Tax has changed but it has been
brought down, not up as some predicted. Indeed some of those who were
tempted into relocation have been tempted to return in order to take advantage
of the beneﬁts Hong Kong has to offer.

As the next slide shows the register has shown a steady recovery over the past 4
years. The perceived difﬁculties in trading Hong Kong ﬂag vessels to Taiwan
and vice-versa have also not materialized. This issue was resolved by the Hong
Kong Shipowners Association and Mr. George Chao in particular acting as an
intermediary between the PRC and Taiwan just before the change of sovereignty
and the solution appears to have worked well. Indeed the handy sized bulk
carriers which Wallem own and operate under the Hong Kong ﬂag have been
taken on the spot and tenn charter markets without any difficulties or
reservations by charterers, though one might add that in today’s market the rates
are less than satisfactory. A reﬂection upon the state of the market, not the ﬂag I
hasten to add.

So what are the advantages and disadvantages of being located in Hong Kong if
you are a ship owner or ship manager or for that matter anyone occupied in the
shipping industry?

Let us get the disadvantages out of the way to begin with and there really is only
one — cost. Unfortunately Hong Kong is still one of the most expensive places
in Asia ﬁom which to operate, no matter what type of business you are in.
Salaries and property prices are still far too high though the fall in the
latter is proving to be helpful to those who are currently in the market to rent or
buy. As an example of the way in which commercial rents have fallen I looked
back some 24 years to when my own company moved into the Hopewell Centre,
then the newest and tallest building in Hong Kong. At that time we were paying
a rent of $8 per square foot per month. This rose steadily and in 1995 stood at
just under $35 per square foot. Today this has again fallen to $13.5 per square

foot. Similarly with the rise in unemployment salary inﬂation is greatly reduced,
and in effect has been at zero for the past 3 years but it will take a long time for
salaries to become competitive with other Asian countries.

During the economic crisis of 1998 the economists predicted the release of the
peg which ﬁxes the exchange rate between the Hong Kong dollar and the U.S.
dollar and that as a result would probably see the Hong Kong currency devalue
by as much as 40%. This would be good news for both owners and managers
who invariably earn in U.S. dollars whilst their overheads are in Hong Kong
dollars. The problem is that currencies have a nasty habit of swinging quite
dramatically in a short space of time and if and when the exchange rate goes the
other way then foreign exchange hedging becomes a yet another skill that the
ship manager has to master.

I have to say that I do not see that as being a problem in the near future as I think
that the economic problems which are afﬂicting the region will take some years
to reverse. In any case the Hong Kong government has vowed to maintain the
peg and therefore any savings will be realised on the back of any deﬂationary
aspects of the economy rather than on devaluation.

No matter where you are in the world estate agents will always quote the same
mantra to you; location, location , location and it is worth looking for a moment
at other locations which have become centres of ship management and why.

The choice of location of the head ofﬁce for a ship manager has usually been
determined by the original location of the parent company though this is by no
means always the case. Glasgow has always been the home of Denholm since
the company was founded over 130 years ago and shares it with Acomarit, now
V Ships, Norbulk and Northenr Marine.

The larger German ship management companies such as Hanseatic and
Columbia have chosen Cyprus as their base whilst Wallem, Eurasia, Univan,
Anglo-Eastern and others have always been based in Hong Kong. With its
infrastructure and repair facilities Singapore has always been a popular location
for ship management, particularly for those companies of Scandinavian origin,
whilst Barber have chosen Kuala Lumpur as their base.

The fact is that every ship manager will have his own idea of what comprises an
ideal location and each will have his own reasons for having his head ofﬁce
located where it is.

So what comprises an ideal base from which to operate a ship management
company? Well the answer is that there isn’t one single location that is ideal but
a few do offer the majority of advantages.

The ideal location would have:-
1.Good Geographical location, especially within Asia.
2.A plentiful supply of good technical and administrative staff.
3. Low staff costs and a stable, low inﬂation economy..

4. A US Dollar currency or one that is linked to the US Dollar.
5.A low tax base.
6.Political stability.
7. Good communications by air worldwide.
8.Good electronic communications.
9.Local availability of marine related services.

So how does Hong Kong measure up to these criteria as the ideal ship
management location? As a matter of routine my own company carries out a
study of possible altemative locations every three years in order to ensure that
all factors that affect our business, or are likely to affect our business are taken
into consideration.

Geographical location is extremely important for a group like Wallem
particularly for business such as ship management and ship owning. In this
regard Hong Kong is ideally located in the Paciﬁc Rim being virtually mid way
between Japan and Singapore. This means that our superintendents can get to
our ships trading ahnost anywhere in the region very quickly.

Most ship managers both in the region and the rest of the world have to some
degree a Japanese client base and Japanese clients can be very demanding. It is
important to have as much of the working day as possible available to
communicate with them and with only one-hour time difference Hong Kong is
ideal in this regard. Tokyo is also only 3‘/2 hours away by air and so it is
possible to leave Hong Kong and have a meeting in Japan in the same day.

Geographical location is also important in that we are able to use the full
working day with all coimtries in the region. It is not of course as convenient
for our shipbrokers who frequently have to Work late into the night in order to
cover the markets in Europe and the USA‘ For the owner trading his vessel in
this part of the world using brokers in the region and with charterers in Paciﬁc
Rim countries Hong Kong is the ideal location.

In my experience Vancouver is probably the least attractive altemative from the
point of view of time zones. There is a 15 hour time difference between Hong
Kong and Vancouver which means that when it is Monday on this side of the
Paciﬁc it is still Sunday there and when it is Friday there it is Saturday here.
This results in virtually a three day working week as I found out myself when,
whilst on holiday in Canada I was dealing with brokers in Hong Kong over the

purchase of a ship. I found myself on the telephone at some very unsociable
hours.

Hong Kong has one other big advantage for those who are based here; it is now
part of a country with the fastest growing economy in the world and this despite
the downturn in the region as a whole. The opportunities which currently exist
and which will exist in the future in China are unsurpassed anywhere else in the
world. Hong Kong is an international city and in common with most other
intemational cities is now a service-based economy as opposed to a
manufacturing based economy. In my view Hong Kong will become, in fact is
already becoming, the equivalent of the Chamiel Islands to the U.K. or Monaco
to France.

One of the most important factors is the availability of good staff and, like sea
staff good superintendents in particular are becoming ever more difﬁcult to
attract and retain. Certain coimtries do however allow imported labour and for
that reason plus its geographical location the Middle East is becoming a viable
alternative particularly for tankers management.

For many years sea staff have been drawn from the Philippines and India and in
future these countries must be contenders for the establishment of head or
regional ship management offices.

Ship owners who are sensible enough to use a ship manager will not usually
need a large teclmical staff and administration staff can also be kept to a
minimum. If however you are a ship manager you will have a requirement for
fairly large numbers of both technical and admin staff.

There is a plentiful supply of the latter in Hong Kong but regrettably there is not
a large pool of well-qualiﬁed marine technical persormel. The alternative is to
employ expatriates in the positions of marine and engineer superintendents and
this has always been a straight forward procedure in Hong Kong, indeed most of
our own technical staff are either European or Indian.

There was a very real concem that after the handover work permits and
residency visas would be very difﬁcult to obtain but I’m pleased to say that that
has not happened and thus far We have not experienced any problems.

We employ around four hundred people with a range of skills in Hong Kong and
when we consider the possibility of relocating we can only consider places
where staff with similar skills are readily available or where the administration
will allow foreign nationals to work. Such places are few and far between and
as long as Hong Kong retains its present policy in this regard then it will remain
an attractive location.

I said earlier that the one disadvantage of Hong Kong is the payroll burden and
whilst salary levels in Hong Kong are high by international standards and high
compared to most countries in the region the workforce are generally very
efﬁcient and diligent. It can be argued therefore that we do get value for money.

The high salaries for most local staff have not been driven by greed but by
necessity and in particular the high cost of accommodation of even the most
modest type. The dramatic fall in domestic housing costs both for sale and rent
combining with low interest rates has eased the pressure on salaries considerably.
To give you some idea of the scale of the reversal, when I arrived here some 7
years ago wage inﬂation was running at 12%; for the last 3 of those 7 years it
has been 0%.

Hong Kong’s tax system ranks as one of the most benign in the world and as
there is no Capital Gains tax the owner who is fortunate enough to make a proﬁt
on the sale of a ship (and sadly these are few and far between these days) can
retain it entirely.

That is surely a very compelling argument to be located in Hong Kong!

As I said earlier the present administration has not changed the taxation structure
signiﬁcantly and it is hoped that that will be the case in the future. The danger is
that as Hong Kong is now a service centre rather than a manufacturing centre
manufacturing having moved over the border into China over the last decade.
Should the present global economic downturn deepen then this could force the
government to look closely at the tax laws and seek new ways of raising revenue.
I think however that this scenario is unlikely in respect of personal taxation as to
raise taxes would leave less money for people to spend thus fuelling wage
inﬂation and potentially slowing down or delaying any recovery.
Political stability is something that Hong Kong has enjoyed for over 150 years
and has been an important contributing factor to its success. Fears that this
would change when the territory reverted to China have proven to be unfounded
and are likely to remain so for the foreseeable future. This cannot unfortunately
be said for some other countries in the region.

China’s entry to the W.T.O. will surely have a very positive impact upon the
fortunes of Hong Kong. Other speakers today will deal with the positive impact
on the port of Hong Kong but I also believe that more service oriented
businesses will establish themselves in Hong Kong as international trade with
China increases.

The world would be a very different place today if aeroplanes and telephones
had never been invented. Unfortimately they have and they have become an
essential part of business life. It is therefore very important to be based
somewhere where both air connections and electronic communications work
efﬁciently. Perhaps the only other city in the region to rival Hong Kong in this
regard is Singapore.

Hong Kong’s air connections to Europe, the USA and throughout the region are
second to none and the travelling time to the airport can be measured in minutes.
Unlike some other locations where a journey to and from the airport can be
measured in hours. If you do not believe me try getting to either Manila or
Bangkok airport late on a Friday afternoon!

Shipping is a 24 hours 7 hours a week intemational business and the ability to
communicate globally at any time of the day or night is no longer a luxLn'y -—it is
essential.

Hong Kong is on a par with almost any modem business city with all modern
communications being available. Not only are they available but most
importantly they are reliable with good back-up and service support and again
that cannot be said for some other locations in the region.

Finally and probably the most important factor is the availability of maritime
related services in Hong Kong, or to put it another way, its importance as a
maritime centre. There are few places in the region that can boast container-
handling facilities on a par with Hong Kong and its importance as a feeder port
carmot be denied. Whilst the ship repair facilities cannot accommodate very
large ships they are more than adequate for most of the vessels that call at Hong
Kong.

The territory has an abundant supply of maritime lawyers, marine insurance
brokers, ship and cargo brokers, average adjusters, surveyors and perhaps most
importantly banks who are willing to extend loans to ship owners. Those ship
owners amongst you may also wish to note that there are also some excellent
ship managers in Hong Kong.

The Lmique status which Hong Kong enjoys — that of being part of China whilst
at the same time having its own register — offers the Hong Kong based ship
owner a distinct advantage. The ﬂag is not considered by the ITF to be a ﬂag of
convenience and therefore Mainland Chinese seafarers can be employed on
Hong Kong ﬂag vessels. The savings in operating costs resulting from this
combination can be considerable and we have now operated up to 14 of our
Hong Kong ﬂag vessels with PRC crew for some time. The savings in crew
costs are signiﬁcant and the perceived shortcomings of PRC crew, mainly that
of language difﬁculties, are quickly becoming overcome.

Several initiatives have been implemented in order to promote the Hong Kong
register and the Marine Department itself conducted an extensive market
research survey to determine what is and what is not attractive about the register.
Obviously cost is an important factor when considering under which ﬂag to
register a vessel and that aspect of the Hong Kong register has received
particular attention.

There is also a concerted initiative to promote Hong Kong as a shipping centre,
not only to ship owners but also to all whom are involved in the industry. The
SAR and the HK register is now being promoted at conferences and exhibitions
world wide and this week is only one element in that promotion. This is
receiving the full support of, among others the Hong Kong Shipowners
Association.

Finally a word about the Association itself. It is not, as so many of these
associations are, just a talking shop. It performs the real function of
representing not only the ship owners in Hong Kong but the broad spectrum of
marine related companies and through its connection with other associations it
presents them on an international basis. It is a very valuable source of
information and perhaps one of the most useful functions it performs is to
provide a forum for its members to communicate and interact thus keeping Hong
Kong shipping business where it belongs — in Hong Kong.

And so ladies and gentlemen, to answer your question “What are the advantages
of being based in Hong Kong?” I have to answer that there are many advantages
and few disadvantages, not only as a ship manager but as any form of shipping
services company. The situation does not look likely to change for the worse in
the near future. So why not come on in, the water’s ﬁne!