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 Page 1 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). Page 2 Hong Kong Ferry: Transforming Its Business from Ferry Transportation Service to Property Development (Ref.: 17/001) 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.