UPS is decamping to China, leaving the Philippines wondering about its burgeoning economy

o lose one integrator hub may look a trifle careless, to lose several suggests a problem. China's gravitational pull is drawing UPS to the Pearl River Delta to set up a new hub for intra-Asia traffic.

As the epicenter for Asian express traffic follows the dragon, the Philippines are drifting further to the periphery of air trade lanes. Ironically this is happening after their strongest year of growth.

After six years at the former Clark Air Force Base, where it has been running its $300 million intra-Asia hub, UPS announced this spring it is going to establish a new hub facility for traffic flows within Asia at Shenzhen. The integrator's future Asian center, which has a price tag of $180 million, is scheduled to be fully operational by 2010. It is going to occupy a million square feet and will be able to process up to 18,000 pieces per hour in the initial stage, with expansion capacity to twice that amount.

The integrator cited several reasons for the move. For one thing, transit times will be shorter, as its intra-Asian flows have shifted west over the years.

According to UPS international spokesman John Flick, management expects to shave a full day off transit time on almost 200 city pairs and anticipates later cut-off times for 150 city pairs. For 45 city pairs delivery can shift from afternoon to morning.

"UPS is now working on the routings and we do not expect increase in transit times for any major lane pairs," Flick said.

Extensive air rights for UPS operations and access to common carriage were two other factors that appealed to the integrator.

In addition, the proximity to Hong Kong means that UPS will be able to truck intra-Asian traffic to and from that metropolis, with better cut-off and delivery times.

This is where Shenzhen trumps Guangzhou in the eyes of UPS management. "Guangzhou takes too long to truck to Hong Kong to allow all ground movements," Flick said.

Bigger Brown

Perhaps more than anything else, it was the robust growth of traffic to and from China itself that prompted Big Brown to opt for the Pearl River Delta.

The decision was driven by the buoyant express package sector, but air cargo is also a strong magnet. "Since UPS began flying direct to China in 2001, we have watched the region grow exponentially, not only from a small package perspective but also in heavy airfreight," said Flick.

Over in Manila, the Filipino government felt compelled to approach UPS to discuss keeping some activities at Clark, perhaps even to relocate some functions from elsewhere in the region. According to reports citing an aide to the president of the Philippines, UPS has been asked to change the set-up at Clark to offer "logistics and supply chain solutions patterned after its facilities in Louisville."

UPS said it was exploring placing alternative facilities at Clark, adding, "the country continues to be an important market for us. We will maintain our presence in Clark and Manila and continue to use Clark as our gateway for imports and exports in the Philippines."

The worries in Manila are understandable.

A few years ago, the Philippines were the center of the Asian express world, boasting the regional hubs of UPS, FedEx and DHL. Deutsche Post's express arm has since decamped to Hong Kong, and FedEx this year is shifting its Asian hub to Guangzhou, where it has spent $150 million to set up a facility with twice the capacity of its operation at Subic Bay.

Outbound Freight

The exodus from the Philippines also extends to regular freighters. Korean Air concluded late last year that volumes in the Philippines did not justify a full 747 freighter service and combined Manila with a freighter service from its home to Singapore and Jakarta.

Lately there have been rumors that Intel is looking to move out of the Philippines.

What adds to the frustration is that all this is happening after a record year of growth. Having fallen behind many Asian rivals with annual growth of around 2 percent, the economy grew by at least 5 percent per annum for the past four years and recorded a record 7 percent increase in 2007.

Recent developments have been less inspiring, however. High fuel costs have further undermined the viability of garment exports to North America, which were already sagging as a result of the exchange rate.

According to Global Cargo Carriers, an outfit established to promote development of air cargo and logistics industries in the country, many garment exporters that used to rely on the U.S market have closed shop. On the ocean side, the Philippine International Seafreight Forwarders Association reported a visible decline in cargo volume headed for the United States during the past six months.

Shortly after the UPS announcement, the Philippines and Canada concluded a new aviation treaty that ushers in greater access for passenger airlines and unlimited cargo flights and fifth freedom rights for freighter operators.

The air cargo community in the Philippines welcomed the agreement, but they would be more delighted if international carriers were to make use of existing traffic rights.