Hong Kong Ferry: Transforming Its Business from Ferry Transportation Service to Property Development

PATRICIA TSE AMY YIP AILIE TANG HONG KONG FERRY: TRANSFORMING ITS BUSINESS FROM FERRY TRANSPORTATION SERVICE TO PROPERTY DEVELOPMENT

Introduction

Management is doing things right; leadership is doing the right things.

－Peter F. Drucker1

With fast technological advancement and increasingly intensive business competition, business leaders are facing the challenges of strategy planning and implementation. They not only need to prepare for the future challenges created by the constantly changing competitive landscapes but also need to lead and motivate their employees to achieve strategic objectives.

This paper focuses on the case study of Hong Kong Ferry, a well-established Hong Kong- based company which has successfully transformed its passenger ferry business into property development business. By analyzing and learning from this case study, we can have some interesting insights into two important management issues: how strategic planning should help a company grow and why transformational leadership can help to smooth out organizational changes.

Business change does not happen overnight; there is a long transition period.

You need to diversify when you are able to do so. You need to prepare for change when your existing business is still strong.

－Dr. David Ho, Group General Manager, Hong Kong Ferry2

On the whole, Hong Kong Ferry (Holdings) Company Limited (Hong Kong Ferry) was a well-known and stable business corporation with more than 90 years of history.3 From the

1 Drucker, Peter F. (2003) The Essential Drucker: The Best of Sixty Years of Peter Drucker’s Essential Writings on Management, Regan Books. 2 Ho, D. Interviewed by Centennial College (26 November 2015).

To order this case, please contact Centennial College, c/o Case Research Centre, Centennial College, Wah Lam Path, Pokfulam, Hong Kong; website: http://cases.centennialcollege.hku.hk. © 2017 by Centennial College, an Independent College Established by HKU. No part of this copyrighted publication may be reproduced or transmitted, in whole or part, in any form or by any means, whether electronic, mechanical, photocopying, recording, web-based or otherwise, without the prior permission of Centennial College. This case was prepared for class discussion purposes and is not intended to demonstrate how business decisions or other processes are to be handled. Ref. 17/001

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Hong Kong Ferry: Transforming Its Business from Ferry Transportation Service to Property Development (Ref.: 17/001)

1920s to the 1970s, it was the only cross-harbour transportation provider, and the company grew as the post-war population and economy expanded. The 1970s, however, saw the arrival of some difficult challenges for Hong Kong Ferry. With the construction of the Cross Harbour Tunnel and the Mass Transit Railway (MTR), other forms of cross-harbour transport improved significantly. The government, in its long-term transportation plan, saw the MTR as the backbone of the transportation system in Hong Kong. As a result, the importance of ferry services faced an inevitable decline.

Recognizing that the ferry industry would have limited potential for growth, Hong Kong Ferry began to diversify as early as in the 1970s, taking up new businesses in addition to ferry operations. In 1999, it decided to go even further and basically transform its business - by divesting the passenger ferry business and shifting its focus to property development. This was a major change for the company. How did the company prepare itself for this business change? What governed the timing of its transformation? What steps were taken to ensure a smooth transition? And, what could the company leverage on to build its new business?

Industry and Company Background

Hong Kong Ferry began operation in 1923 when a group of Chinese merchants, led by Mr. Lau Tak Po, obtained a franchise from the government to provide ferry services. In 1989, it became part of the listed property developer Henderson Land Development Company Limited (HLD) [See Exhibit 1 for Henderson Land Group structure].

Before the 1970s, the ferry was the only means of transportation across the harbour. Hong Kong Ferry grew with the economy – its annual passenger volume increased 10 times from 20 million in 1946 (after the Second World War) to 200 million in 1970.4 However, starting in the 1970s, the developments in the city’s infrastructure posed a severe threat to the ferry industry. The Cross-Harbour Tunnel was opened in 1972, enabling vehicles to cross the harbour efficiently. The development of the MTR in the 1980s offered another, faster alternative to make the sea journey, causing Hong Kong Ferry’s passenger numbers to fall by 50%. As the city’s land transport network continued to improve, the ferry industry faced a systematic pattern of decline. The Hong Kong government did not have any policy to support the ferry industry through direct subsidies. Consequently, by the mid-1990s, Hong Kong Ferry was subsidizing its unprofitable franchised ferry operations with income from its non- franchised profitable routes and income from other divisions, such as rent from industrial sites [See Exhibit 2 for results of ferry operations (1996-1998)]. 5

In 1998, the company failed to reach an agreement with the government regarding the terms of the Central Piers Development, and decided not to renew the franchise.6 Dr. David Ho, Hong Kong Ferry’s Group General Manager since 1996, recalled: “The government opened up the ferry industry to competition, and put out 12 ferry routes for tender. Hong Kong Ferry won the licences to operate eight routes, in effect downsizing its ferry operations and focusing only on the routes that it found economically viable.” In 1999, the company decided to sell the passenger ferry business. That same year also marked the beginning of Hong Kong Ferry’s push into the property development sector, and laid the foundation of its remarkable business transformation.

3 It was called “The Hongkong and Yaumati Ferry Company, Limited” when it was first established. 4 明報 [Ming Pao Daily News] (18 January 1999) “重奪大部份賺錢航線何志盛: 小輪不靠運氣”, [Regain most profitable routes — David Ho: Ferries do not depend on luck]. 5 Hong Kong Ferry (Holdings) Company Limited, “Annual Report” (1997). 6 The Central Piers Development was to include offices and apartment blocks that could generate income to support franchised ferry operations. The company failed to reach an agreement with the government, as both sides failed to agree on the premium payable. See Hong Kong Ferry (Holdings) Company Limited, “Annual Report” (1998).

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Preparing for the Change: “A Dramatic Restructuring”

How did the company manage this business change and turnaround towards profitability? Dr. Ho believed that business change did not happen overnight. According to him, “the company had prepared itself by diversifying its business since the development of the Cross Harbour Tunnel in the late 1960s.” Using its advantage as a ferry operator, it opened a travel agency and offered harbour cruises and tours to outlying islands. With the opening up of trade with China in the 1980s, it also expanded to provide China tour services. In addition to servicing the company’s own fleet, its shipyard also began to offer repair and maintenance services to external clients.

Dr. Ho revealed, “in terms of the property sector, the company began to develop the land it owned in the 1970s, and built a number of industrial buildings in Tai Kok Tsui.” The company also jointly developed villa houses on Lantau Island with other developers, and leased its industrial buildings in Tai Kok Tsui and Yau Tong, which formed the core of its property investment portfolio.

According to Dr. Ho, “the opportunity for a dramatic restructuring of the company came in 1999.” He believed it was important for the company’s board and management to quickly identify and exploit the opportunities. Specifically, two important opportunities occurred in 1999:

1) The emergence of a credible buyer for the company’s local passenger ferry business:

In November 1999, Hong Kong Ferry entered into an agreement with New World First Ferry (NWFF) for the sale of Hong Kong Ferry’s local passenger ferry business. The agreement covered the transfer of ferry licences of eight ferry routes, together with a fleet of 14 ferry vessels and other ancillary assets that would equip NWFF with the ability to operate those routes, with effect from 15 January 2000. 7 NWFF’s parent, New World Development Company Limited (NWD), was a conglomerate providing infrastructure and transportation services, including franchised bus services in Hong Kong. NWFF was interested in the synergies the ferry operations that could bring to its existing businesses. NWFF also agreed to offer employment to about 400 frontline staff of Hong Kong Ferry, using terms and conditions that gave consideration to their current contracts, and would be no less favourable than those prevailing in the industry.8 This was expected to minimize the financial cost to the company, and offered the best opportunity to exit the local passenger ferry business.

2) The opportunity to spearhead a major redevelopment project in West Kowloon:

In 1999, Hong Kong Ferry also entered into an agreement with the government with respect to a proposed redevelopment project in Tai Kok Tsui. 9 The launch of the Airport Core Programme in the 1990s gave rise to substantial reclamation in West Kowloon.10 Hong Kong Ferry’s shipyard in Tai Kok Tsui would lose its access to the sea, and would have to be closed.11 Instead of returning the land to the government, the company saw an opportunity to redevelop the area. Tai Kok Tsui was then an old industrial area in need of revitalization: many factories moved to China, and housing and social amenities were lacking. The company proposed to pay a land premium to the government to redevelop the site for residential and

7 Hong Kong Ferry and New World Development Joint Announcement, Hong Kong Stock Exchange News, November 2, 1999. 8 Ibid. 9 Hong Kong Ferry (Holdings) Company Limited, “Annual Report” (1999). 10 The construction of the new Chek Lap Kok airport led to the need for new railway and highway linkages between Lantau Island and the west side of Kowloon, for example the Airport Railway and the West Kowloon Expressway. This created a need for reclamation along the coast of West Kowloon. 11 The shipyard was moved to North Tsing Yi, its current location.

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Hong Kong Ferry: Transforming Its Business from Ferry Transportation Service to Property Development (Ref.: 17/001) commercial purposes. The proposal was accepted by the government, leading to the company’s first property development project, Metro Harbour View, which was completed in 2003 and was also the largest development to date.12

Communicating the Decision to Stakeholders

Deciding to cease its local passenger ferry business and to focus on property development and investment, Hong Kong Ferry considered it important to communicate this decision to all its stakeholders. Much work had to be done to reach out to various stakeholders and secure their buy-in, so as to ensure a smooth transition.

Dr. Ho emphasized, “our most important internal stakeholder was our employees.” The employees were represented by a union, and there were concerns about loss of employment. As for the frontline staff that would be transferred to NWFF, it became a priority to assure them that their jobs, and the terms and conditions of their employment, would be unaffected. For staff members who would be terminated, it was important to assure them that adequate and fair compensation would be paid.13 Another important group of internal stakeholders was the individual shareholders of the company. Shareholder meetings were held, and the focus was to help them understand that the disposal of the passenger ferry business would give the company an opportunity to focus on investment opportunities with better returns.

In terms of external stakeholders, the company did much work to communicate with the public and, in particular, the users of ferry services. It was important to let them know that the timetable and the frequency of ferry services, and the fare, would remain unchanged. Dr. Ho pointed out, “this posed special challenges for public transportation companies, as the services ran almost round-the-clock, and the transition to the new operator had to be achieved overnight.” The company also attended many district board meetings and reached out to the mass media to explain how it was going to achieve a smooth transition in service provision.

Cohesion through the Corporate Culture and CSR

Facing the challenges of making fundamental changes to its business operations, the company’s corporate culture served as an important cohesive force that held the organization together. In particular, Hong Kong Ferry’s corporate culture emphasized corporate social responsibility (CSR):

CSR has been implemented in Hong Kong Ferry for decades. Not only did our board of directors support CSR in the strategic level, but also our staff actively participated in CSR initiatives, making CSR an essential part of the culture of Hong Kong Ferry. We made three principles that guided our CSR initiatives and corporate culture: love Victoria Harbor, love Hong Kong, and caring people. － Dr. David Ho, Group General Manager, Hong Kong Ferry14

Dr. Ho mentioned that the main business of Hong Kong Ferry was local, thus the company had the responsibilities to protect the environment, to save energy, and to use environment- friendly materials in its operations to create a better city. Hong Kong Ferry also held a people-

12 The development consisted of 10 blocks of residential buildings (3,520 residential units), a 2-storey commercial arcade and about 1,000 car parking spaces. See Hong Kong Ferry (Holdings) Company Limited, “Annual Report” (2000). 13 In addition to fulfilling requirements concerning notices and compensation under the Employment Ordinance, Hong Kong Ferry also paid an additional month of salary to its staff, which could help them while they looked for another job. 14 Ho, D. Interview by authors (26 November 2015).

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Hong Kong Ferry: Transforming Its Business from Ferry Transportation Service to Property Development (Ref.: 17/001) oriented notion that valued the interests of its staff and customers in its daily operation. Dr. Ho explained further:

Hong Kong Ferry always considered “people” in the first place, a principle that never changed before and after our business transformation. When we were a ferry service provider, we aimed to provide reliable and safe transportation service to passengers; when we were a property developer, we designed and developed properties that provided high living quality and convenience to residents.

In other words, “putting people first” was a core value of the organization since its founding in 1923.15 It was a value that guided its ferry business. For example, in the 1980s and 1990s, the company installed radars and Automatic Identification System on its vessels to enhance the safety of navigation, long before government required to do so. 16 It was also a value that guided its property business, focusing on the company’s commitment to develop properties that met the needs of its residents. Dr. Ho cited the example of the design of Hong Kong Ferry’s first major property, Metro Harbour View, which was situated in Tai Kok Tsui, an old industrial area being redeveloped for residential purposes with severely inadequate community facilities. Therefore, Metro Harbour View was planned as a self-contained neighbourhood, including amenities for indoor sports (bowling, gym, rock climbing) as well as quiet activities (library, study room, piano room). This mix of amenities was specifically designed with various types of residents in mind – those studying, those working full-time, or the elderly.

In addition, the company’s CSR initiatives also served as a continuing force that provided cohesion for the company. Dr. Ho cited environmental protection programmes as an example. As far back as the 1980s and 1990s, Hong Kong Ferry had switched off the engines when its ships were at the pier for a prolonged period of time, thus taking the initiative to adopt environment-friendly practices even before they became mandatory. Later, as a property developer, it worked hard to reduce the environmental impact of its operations both during construction and in on-going management of their properties. Some examples included adoption of prefabrication during construction, as well as promotion of energy saving methods and recycling in its properties.

In recent years, Hong Kong Ferry also used its unique resources to deliver CSR programs. The company integrated CSR initiatives into its core business and mobilized its employees to participate in such programs. Its “Harbour Cruise – Bauhinia” unit utilized its vessels to hold harbour cruises for children of low-income families, many of whom had little opportunity to visit the Victoria Harbour. Hong Kong Ferry’s staff gave talks on the development of the harbour front, organized buffet meals and entertainment for the children on board, and liaised with many supporting organizations to make it all happen. The event was held six times in 2015, allowing its employees to serve the community in a special way. Moreover, Hong Kong Ferry collaborated with non-government organizations such as Wofoo Social Enterprises, Pok Oi Hospital, and Po Leung Kuk and with business organizations such as the Hong Kong Federation of Industries to deliver its CSR programs.

15 Hong Kong Ferry’s ship names started with the word “Man”, which means “people” in Chinese, for example “Man On” (safe and peaceful people) and “Man Lok” (happy people). 16 Automatic Identification System (AIS) was a maritime communications device. It was capable of sending and receiving ship information such as identity, position, course, speed and ship particulars to and from other ships, as well as shore-based stations. The information provided by AIS can assist in effective navigation of ships and improve safety.

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Growing the New Business

It would seem that Hong Kong Ferry enjoyed several advantages when developing its new property business:

Land Resources

Hong Kong Ferry owned blocks of land (for its shipyard, industrial buildings and staff quarters) whereby it could apply to the government for land usage conversion. This was the way in which Hong Kong Ferry’s first few residential properties were developed. From this accumulated experience in developing its own land, it participated in government land auction for the first time in 2010, and was awarded a site in Fanling that would become the development project of Green Code [See Exhibit 3 for Hong Kong Ferry’s property development projects].

Financial Resources

Hong Kong Ferry had a strong financial position and was able to fund its property development.

Support from Parent Company

Henderson Land Development Company Limited (HLD) was one of Hong Kong’s largest property developers, and was highly experienced in different stages of property development. Hong Kong Ferry could benefit from knowledge transfer in areas such as cost control, scheduling and quality assurance of its projects. The new business created new human resources needs. Being a mid-sized company, Hong Kong Ferry hired external professionals in property development, and also leveraged on the resources at HLD in areas such as sales and property management. 17 Dr. Ho indicated, “it was important for Hong Kong Ferry to build up a complete set of capabilities internally, albeit in a smaller scale. As a developer, it had the legal responsibility for its properties and closely monitor different stages of the development process.”

Training was provided for existing managers and staff to help them adjust to the new business requirements. Since residential property sales was highly regulated in Hong Kong, the marketing department, for example, had to come to grips with the regulations on information disclosure on the sales brochure.18 Similarly, the accounting department had to be familiar with relevant accounting practices. These were highly specialized areas and training was required to help staff succeed.

The Company – Now, and Then

As of 2016, Hong Kong Ferry’s business included the following segments:19

1. Property development: the development and sale of properties. 2. Property investment: leasing of properties, mainly commercial arcades in its residential complexes.

17 By comparison, HLD’s revenue from property development and property leasing was HK$15,690 million and HK$5,589 million respectively in 2015. See Henderson Land Development Company Limited, “Annual Report” (2015). 18 The Residential Properties (First-hand Sales) Ordinance for example, required information such as location plan, aerial photograph, outline zoning plan, floor plans etc. to be included in a sales brochure, http://www.srpa.gov.hk/en/ordinance.html 19 Hong Kong Ferry (2016) “Our Business”, http://www.hkf.com/en/ (accessed 26 April 2016)

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3. Ferry, shipyard and related operations: operation of dangerous goods vehicular ferry service, 20 harbour cruise service, 21 and ship repair and maintenance service. 22 According to press reports, the company had a fleet of more than 90 ships, and about 800 frontline employees before handing over its passenger ferry licence in 1999.23 It now retained five vessels for its ferry-related business, and had about 280 employees across business lines. 4. Travel-related services: travel agency services were provided under “HYFCO Travel Agency Limited”. Travel services included local tours, China tours, ship and train ticketing, and hotel reservation. 5. Harbour Cruise – Bauhinia: Victoria Harbour cruise with buffet meals.

The changes in relative sizes of these businesses could be seen in Exhibit 4. Since revenues from the property development business could be boosted substantially by property launches in a particular year, data from 2013 to 2015 were included to offer a picture of the business today. 24 Data from 1997 (the year before the company began to downsize its passenger ferry business) was also included for comparison. Overall, the data showed that property development and investment gradually became the core business of the company over the years. Property development contributed a whopping 62% of the company’s revenues in 2015. Property investment, on the other hand, provided a stable source of income to the company over the same years. Its property development and investment activities accounted for 98% and 92% of the company’s profits in 2014 and 2015 respectively. Ferry-related businesses, on the other hand, were substantially reduced. Revenue contribution from ferry operations in 2014/2015 was about one-fifth of what it was in 1997. However, it was now a profitable segment in contrast to the losses incurred in 1997 when the company had to shoulder the non- profitable franchised ferry services.

Exhibit 5 compares the revenue and profit of the company between the years 1996-2000 (when Hong Kong Ferry was primarily in the ferry business) with the years 2009-2015 (when it was primarily a property development and investment company). It can be seen that while the company’s revenues were not always increasing (as it was subject to the property development cycle), on the whole, the company had become more profitable than before.

20 Dangerous goods vehicular ferry service includes the transportation of petroleum, petroleum gas, and compressed gases for clients such as oil companies, government departments, and hospitals. 21 “Harbour Cruise – Bauhinia”, with four colorful cruise ships converted from vehicular ferries, offered harbor cruises as well as dining services. 22 The shipyard, located in Tsing Yi, provided ship repair and maintenance services. It was equipped with the largest Syncrolift (for lifting ships for repair) in Hong Kong. It serviced 20 pleasure crafts and 100 other vessels for annual maintenance each year. 23 明報 [Ming Pao Daily News] (18 January 1999) “重奪大部份賺錢航線何志盛: 小輪不靠運氣”, [Regain most profitable routes — David Ho: Ferries do not depend on luck]. 24 Revenue from property development was HK$729 million in 2015, HK$3,187 million in 2014, as opposed to HK$110 million in 2013. This was mainly due to the launch of its residential property Green Code.

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Learning Objectives

This case described why and how Hong Kong Ferry (Holdings) Company Limited diversified its business and transformed its core business from transportation service to property development in late 1990s. By reading this case, students will have an opportunity to learn about the background of Hong Kong Ferry’s business transformation and the growth of its new property business from the late 1990s to 2016. This case could be used for class discussion for Master’s and MBA programmes. Student will be required to understand the concepts on strategic planning and transformational leadership, as well as Drucker’s management principles. Student will also be required to critically analyse and critically review Hong Kong Ferry’s business transformation.