Five questions and answers about Hong Kong protests' impact on supply chains

Departing flights are beginning to resume at Hong Kong International Airport after demonstrations led to hundreds of flight cancellations earlier this week.

Protesters filled the airport's terminals, causing the airport to cancel all departing passenger flights Monday and suspend all check-ins on Tuesday. Violence erupted as police used pepper spray and batons to disperse crowds. 

Reports indicate relative calm and a resuming of operations on Wednesday — not because the protesters' demands have been met, but rather due to stricter security in the airport terminals. 

"The Airport Authority has obtained an interim injunction to restrain
persons from unlawfully and wilfully obstructing or interfering with the proper use of Hong Kong International Airport," a notice from the airport reads. "Persons are also restrained from attending or participating in any demonstration or protest or public order event in the Airport other than in the area designated by the Airport Authority."

Even as flights resume, the ripple effects and repercussions of the delays will continue to affect operations, and in turn global trade and supply chains, according to Brandon Fried, executive director of the Airforwarders Association.

"Disruption is bringing uncertainty, which has a drastic impact on
trade," he told Supply Chain Dive.

1. How did we get here?

Protests in Hong Kong started in June over a bill that would allow
extradition to mainland China. While the bill has been shelved, the ongoing demonstrations symbolize a larger issue: mainland China's political influence in Hong Kong, which operates as a semi- autonomous state.

Only recently did mass protests spread from the city to the airport. CNN reported demonstrators handed leaflets in various languages to tourists traversing the airports, in an attempt to get their message out to a global audience.

For a deeper dive into the politics and the demands of the protesters, check out this explainer from The New York Times, this video from Vox and this piece from CNBC, which shows the parallels of Hong Kong's protests to the Boston Tea Party movement.

2. What role does Hong Kong play in global supply chains?

Hong Kong International Airport is the busiest air cargo hub in the world. Last year it handled 5.1 million metric tons of cargo. The hub serves as a major transit point for intra-Asia flights, as well as Transpacific travel between Asia and North America.

A wide variety of goods, from electronics to textiles to machinery, flow by air cargo in and out of Hong Kong's airport, Fried said. "Everything and anything transits through Hong Kong."

Hong Kong has also played a vital role in serving manufacturing hubs in Southeast Asia, which have grown in light of the ongoing trade war between the U.S. and China, Fried said.

3. Only passenger flights were delayed, right?

Yes. For the most part, freighters have been departing on schedule this week. A spokesperson for FedEx told Supply Chain Dive, "Since the Hong Kong airport closure mainly affected passenger flights, we did not experience any significant impact to our operations." A DHL spokesperson similarly said the company's business divisions in Hong Kong "have business contingency plans in place to minimize impact to our operations and customers."

Still, cargo transported in the belly of the passenger planes was no doubt impacted. About 40% of air cargo volume through Hong Kong goes in the belly of the planes, Fried said, typically in wide-body aircraft used for long-haul Transpacific flights (think Boeing 777).

"You can't overlook the value of passenger belly cargo," Fried
said.

In the short term, the protests won't have a significant impact on air freight capacity, but it's a different story if the protests resume after the expiration of the injunction, which is still unclear, and flights are cancelled once again. In such a scenario, Fried said shippers and freight forwarders would likely look to reroute belly cargo onto freighters, which in turn could strain capacity on freighter flights. That could also result in rolled cargo due to a lack of available supply. 

Increased demand could push up rates on the spot market, though freight forwarders manage most air freight through Hong Kong and have long term contracts with airlines, preventing too much rate volatility, Fried said.

4. Are the supply chain disruptions limited to air freight at Hong Kong?

For now, disruptions are relatively localised and contained within belly air cargo. Longer- term, if air cargo becomes less dependable due to the aforementioned capacity issues, shippers may reroute to ocean freight, creating increased demand for container ship space, Fried said.

Local trucking supply chains have seen some rippling effects, Charles Brewer, CEO of consulting firm Click and Connect and former global CEO of DHL eCommerce, told Supply Chain Dive. "Road closures around the airport are affecting cargo carriers’ ability to get freight to and from the airport," he wrote in an email.

Brewer said major forwarders and carriers operating in the region likely have alternative scenarios in place. "Those would include re-routing via other facilities, all of which would be very costly and cause transit delays," he said.

More broadly, Hong Kong's role as an international financial hub could spell trouble for markets worldwide. Economists are concerned Hong Kong is headed toward recession, according to Bloomberg. A bigger concern is that Hong Kong's place as a global commerce hub may be in jeopardy as the current situation erodes its reputation for safety and reliability.

5. What happens next?

Mitigating risk from the Hong Kong protests is much like risk management for any other political risk event. 

"Companies with outbound cargo from Hong Kong International Airport are advised to work with freight carriers to deploy contingency plans," Shehrina Kamal, Director of Risk Intelligence at Resilience360, told Supply Chain Dive in an email. 

In an advisory to customers, C.H. Robinson said it has "contingency plans in place if additional capacity is required in South China."

The situation appears to be calm at the moment, but the airport authority did not say how long the interim injunction may last. 

Kamal said the "ambiguous circumstances" surrounding the extradition bill, coupled with outstanding grievances from demonstrators, mean unrest is likely to continue in the coming days. 

"If it worsens, we'll continue to see cancellations," Fried said. "That's a vital concern. We're talking about a profound impact on air cargo shipments." 

Read the original article on Supply Chain Dive.