Coming amid an international trade slump, it will hurt Singapore badly: For the first time in two decades, PSA Corp. will see a decline in container traffic, estimated by analysts at 10% for 2001. Next year, Pelepas could snare up an extra 1 million containers in new trade--if speculation that Evergreen, the giant Taiwanese shipping line, will relocate there from Singapore comes true.

 

Much of it is because of price. "Clearly, Malaysia has a 30%-40% cost advantage in operations at a labour base and at an infrastructure level--not just in shipping," says Jonathan Messinger, Singapore-based chief executive for Southeast Asia at Cap Gemini Ernst & Young. "That is a serious cost advantage that has hurt Singapore."

 

The intense interport rivalry is rooted in the structural changes taking place in international shipping in the wake of the global economic slowdown. As trade shrinks, ship owners are struggling with poor cash flows amid vastly expanded capacities, so cutting costs has become urgent. "The issue is, at what price do I not choose the efficiency that PSA offers?" says Charles de Trenck, a shipping analyst at Salomon Smith Barney in Hong Kong. "We think Evergreen could save as much as $30 million annually by shifting to Pelepas."

 

The Malaysian ports story is also one of the few successes of its privatization policy. Pelepas was commissioned only in 1997, after the mid-1990's success of Westport, next to Port Klang. Both Pelepas and Westport were driven by private capital. They soon had takers and more came after both ports hooked up with credible foreign partners--Westport with Hong Kong-based Hutchison Port Holdings and Pelepas with Maersk. "Westport became a substitute for Singapore," says G. Gnanalingam, Westport's controlling shareholder and its executive chairman, "but Pelepas could become an alternative."

 

Going forward, this success could force a relationship change between the rival ports from competition to co-operation. It's already being suggested. In early September, for example, Teh Kok Peng, the president of GIC Special Investments, the Singapore government's investment arm, said that the state-owned PSA and Pelepas could be merged "quite easily" after the former was privatized.
But for now, the competition will only intensify. That's not to say that the Malaysian ports could imperil Singapore any time soon. The republic's throughput is expected to top 15 million containers this year and it's widely considered one of the world's most efficient and innovative ports.

 

Meanwhile, PSA, which manages it, is hugely profitable (2000 net profit: about $455 million) and cash-rich (2000 sales of $3.2 billion).

 

Indeed, PSA seemed to have anticipated the competition and began internationalizing in the 1990s. Today, though Singapore port comprises 85% of its total business, it owns and manages ports in five countries and plans to buy four more. "By and large our overseas operations are profitable, "says Vincent Lim, deputy president of PSA's Container Terminals. In 2000, he notes, PSA handled 8%-9% of the world's container traffic and he forecasts passing the 10% figure in the next couple of years. Global container trade exceeds 200 million boxes a year.

 

But perceptions of an aggressive Malaysia have hurt PSA. Analysts say that's manifest in its delayed privatization via a public stock offering. "It falls into the general camp of lack of investor interest for new IPOs," says Salomon Smith Barney's de Trenck. "But specifically, they need to reverse the negative Singapore volume story that comes from the Malaysian [ports] story."

 

It's been a long time coming for Malaysia. As the 17th-largest trading nation in the world, Malaysia exports and imports goods worth more than 300 billion ringgit ($78.9 billion) annually, and more than 90% of that is moved by sea. But the inefficient Malaysian ports couldn't cope and by the early 1990s, the country's traders were shipping over 3 million 20-foot equivalent units, or teus, the standard unit of measurement in the container trade, through Singapore annually. At the time, it was more than the overall capacity of all Malaysia's domestic ports. Kuala Lumpur has been anxious to claw back some of that trade.

 

Gnanalingam blazed the trail in 1994 with Westport, west of Port Klang and the first port to be built and operated entirely by private money. Aided by government low-interest loans, his privately-held Klang Multi Terminal built a new 1.4-billion-ringgit facility without a customer in sight. It began operations in 1996 and, five years of frenzied marketing later, handles around 1.5 million containers annually and is profitable (60 million ringgit in estimated net profits this year).

 

Even so, that wasn't worrisome to Singapore until last year, when Hutchison Port Holdings, an international port operator controlled by Hong Kong tycoon Li Ka-shing, bought 30% of Westport's stock. When it began operations Westport undercut the competition: It offered rates of around 55-70 ringgit per container. In contrast, Singapore's port rates in 1997 ranged from S$90-150 ($50-83).

 

This year, however, Westport doubled its rates, a telling indicator of its newfound confidence.

 

HEROIC SCALE

 

Pelepas took the Westport tale into a new dimension. While the latter was built with a capacity in mind of 2.5 million containers annually, Pelepas was designed to handle 4-5 million containers a year. Everything was done on a heroic scale: 1,953 acres of mangrove swamp on the southwestern tip of Peninsular Malaysia were set aside for port development. "New ports were necessary because trade growth over the years was significant, resulting in the need for larger vessels," says Mohamad Sidik Shaik Osman, Pelepas's chief executive. "With larger vessels, established ports would have to expand. That can be difficult due to city and hinterland growth around the port. But Pelepas, as a greenfield area, has no such limitations."

 

The first phase of the port was completed in late 1999, six months ahead of schedule, and Pelepas handled 418,000 containers in 2000 from clients that included Singapore's national shipper, Neptune Oriental Lines. Still, no one really took it seriously until August 2000 when it announced that Maersk had purchased 30% of its stock and would shift its operations there. The purchase price was never disclosed but most analysts think that Maersk, which secured management rights in the port, paid about 730 million ringgit for its stake. For its part, the Danish line said that shifting its operations to Pelepas allowed it to "control our own destiny."

 

Why did Maersk shift? The Danish line isn't telling and PSA has never commented but shipping analysts say that one reason for the departure was that the Singapore port was so used to the lack of serious competition that it may have started taking its customers for granted. "Maersk is looking for control over berths," explains Alan Greene, a credit analyst at Barclays Bank in Singapore. "They think they were getting second-best service from Singapore." Greene estimates that Maersk took about 12% off Singapore's business, which makes potential future defections a major headache for the republic.

 

That's entirely possible, as Pelepas continues to build capacity up to an annual 5 million containers from 2.5 million currently. "With this capacity we are aggressively wooing mainline operators, regional lines and feeders," says Sidik. That's why all eyes are on Evergreen, one of the world's biggest shippers. "People in the industry talk about Evergreen having 99% decided to move to Pelepas and the economic rationale is that it is in a difficult position right now," says Salomon's de Trenck. "It's pretty evident that cutting port-handling costs in Singapore is a key component of their lower-cost strategy."

 

The competition has made port services much less transparent. Singapore stopped publishing its tariffs in 1997, while Sidik blandly declined to comment on his port's tariffs, saying it was "confidential." What seems clear is that the competition isn't going to disappear. In an otherwise glowing October report on PSA, Standard & Poor's had only one caveat: "Over the longer term, PSA's greatest competition will come from neighbouring Malaysian ports due to their proximity and the expertise expected to be provided by new investors."