Hamburg or Free is the name of the game

Hamburg holds a special place in my heart not because it is a major hub for the world tea trade but today we will only focus on this aspect (sorry for those too curious about me).

I will first call everyone knowledgeable about this topic to tell me when I am wrong as it is a complex matter and information is few and people are not really ready to answer questions (or perhaps I didn’t ask the right persons or the right questions. Who knows?).

 

English tea box by Hannes Grobe (published under Creative Commons Attribution-Share Alike 2.5 Generic licence)


First, here is an extract of the website of the Port of Hamburg.

The Port of Hamburg has been the leading European trade centre for tea for many years. The major exporters are India, China, Sri Lanka and Indonesia.

Hamburg’s docks handle about 50 to 60 percent of the worldwide trade. Around 70 percent of the tea sold in Germany passes through Hamburg.

Imported teas are also blended and flavoured in Hamburg, before being exported worldwide. Great Britain and France are among the traditional destinations. About half the tea is shipped to the USA after being processed in Hamburg. The Russian market has also been gaining in importance recently.

Source: http://www.portofhamburg.com/en/content/tea

If you read the first paragraph, you might not understand why this happens since Germany is not known for its tea consumption (0.23 kg per capita and per year in 2009 according to the Food and Agriculture Organisation, which is even lower than the USA and far beyond the average yearly tea consumption per capita in the European Union (0.48 kg)).

However reading the second and third ones, you might begin to understand there is something as:

  1. the Port of Hamburg is not only the major European tea port but also the biggest one at the world level

  2. there seems to be a lot of further shipping (I won’t comment on the half of the tea shipped to the USA since I don’t have enough data for it).

Obviously, tea like other commodities is a trade where economies of scale is the name of the game for most companies (some won’t follow this strategy but most will).

Why? Because when you are big enough, you have more bargain power (look at articles on the Glencore-Xstrata merger) during the whole buying, transportation and processing chain.

This explains why once these companies have selected a hub, they are more than likely to put all their eggs in the same basket.

However this really quick analysis doesn’t help us to understand why Hamburg and why not Antwerpen or Rotterdam or Southampton.

Obviously, if a lot of companies involved in the tea business are there, it helps but it is not the only reason as companies move around, markets evolve…

So the explanation for the concentration lies not in the sole existence of what we could call a tea industry cluster (even if I think I might be exaggerating with the cluster thing).

In order to get a major tea port is adding to a tea industry cluster some historical background enough?

“Northern Germany as far as the Bavarian and Austrian Frontiers; Handbook for Travellers” by Karl Baedeker. Fifteenth Revised Edition. Leipzig, Karl Baedeker; New York, Charles Scribner’s Sons 1910. “Courtesy of the University of Texas Libraries, The University of Texas at Austin.”

 

The development of Hamburg in the colonial goods trade (coffee, tea, spice, cocoa, tobacco…) has its roots in the immigration of Protestant and Jews traders fleeing the religious conflicts of the 16th and 17th centuries.

These people came from different areas but also from the Netherlands and they brought with them their knowledge of these markets, their relations and their money.

Such was their success that in 1747, you could find in this town 246 coffee and tea traders and 267 in 1777.

The opening of the Chinese ports following the Opium War in 1842 and the end of England’s Navigation Acts in 1857 gave new opportunities to the tea business in Hamburg (If you want a more in depth analysis on Hamburg, its history and globalisation, you should read Capitalising on change in a globalising world by Wolfgang Michalski).

We now know that the tea industry has been concentrated in Hamburg for a long time.

But this is not enough as the following two examples will show.

Hamburg was the centre of Europe’s beer industry between the 14th and somewhere between the end of the 16th century and the middle of the 17th century. It was also the centre of Europe’s sugar industry between the end of the 17th century and the beginning of the 19th century.

Conditions and competitions changed and this two industries went away.

There is one final advantage provided to the tea industry that might explain it all. It is something that companies are always looking after, i.e. a financial incentive.

By financial incentive, I don’t mean subsidies but something more “subtle”, customs rights.

Yes you read it right, one of the main reasons behind Hamburg position is simple: part of it is a free port and it has been so since 1888 when the Free and Hanseatic City of Hamburg became part of the German Empire.

view from Poggenmühlenbrücke at Speicherstadt in Hamburg, Germany by Thomas Wolf, www.foto-tw.de.(published under Creative Commons-Lizenz Namensnennung-Weitergabe unter gleichen Bedingungen 3.0 Unportedc license)


This is a legal thing and the European Commission has approved it and published a list (http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2002:050:0016:0018:EN:PDF).

The idea is simple: when you import goods in a free zone, you only pay import taxes when the goods leave this area.

When you apply this to a yearly stock, you understand why it is really interesting in financial terms.

To say it with other words, you imported 1,200 tons of tea at once, since you had a good price thanks to your bargaining power. You sell each month for 100 tons in the European Union. Thanks to the free zone status, you will only pay each month the import taxes for your monthly consumption.

You might then say that it explains the importance of the Port of Hamburg for the European Union but not for the rest of the world since everyone can do it in its own country and you would be right.

What I must add to this explanation is that when you re export our of the EU goods from a free zone after some allowed transformations (e.g. improving the live span of your product or putting it in a new packaging…), you don’t pay taxes at all.

Let’s use another example. You have bought 1,000 tons of tea and you imported them in the free zone part of the Port of Hamburg. You change their packaging to meet your customers needs and re export to the USA for 1,000 tons worth of tea in teabags. At the end of the year, you won’t pay any import or export taxes for the EU (not even on the raw teabags).

When you add all this, you can understand why Hamburg has such a dominant position in the tea world as the industry is there and the customs “easiness” too.

For any company with a focus on the economy of scale approach (remember I said most companies in the tea business are following this model whether they are in the bag tea business or in the loose leaves one), this is a winning situation.

Will this ever change?

YES because the status of part of Hamburg as a free zone will end in 2013.

Because of this, we might see some changes in the manufacturing, transportation and pricing strategies of the whole tea industry.

I told you in the title “free is the name of the game” but soon, it might become “we are living interesting times”.

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Category: Analysis, Industry
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15 Responses
  1. Profile photo of thedevotea thedevotea says:

    Another wonderfully interesting post.
    A couple of observations:
    (1) most merchants who import containers of mixed flavoured teas into Australia whom I have met import them from Germany. Hamburg, I am now assuming.
    (2) London used to have a concentration of tea businesses near the docks. During WWII, tea was moved all over the place to avoid the kind of damage that could have been done by bombing if it was all in one place. It never came back together, and has often been cited as a factor in the quality decline of the British Tea Industry
    (3) I don’ t know the reason why Hamburg is special to you, Xavier, but I’m guessing you were found there as a baby, abandoned on the doorstep of an orphanage in a tea chest, wrapped in only a calico sack, with only a teapot and a china cup, a strainer and a small bag of Fresian blend. One day, you’ll return, buy the now-abandoned orphanage, and turn it into Hamburg’s finest teashop. Orphans drink free!

    • Profile photo of xavier xavier says:

      Thanks @thedevotea

      1. If your tea containers come from Germany, they come from Hamburg.
      2. I didn’t know that but I think London is/was lacking the free zone status.
      3. You are both right and wrong or is it wrong and right ;)

      • Profile photo of thedevotea thedevotea says:

        I don’t believe London ever had that status. But I think London and Hamburg each had a concentration that made the tea industry a real community, not a disparate group of traders who never see each other. This disappeared in London around WWII.

  2. Profile photo of riccaicedo riccaicedo says:

    Great post Xavier, thanks for the info. I had no idea about the importance of Hamburg in the world of tea trade.

    • Profile photo of xavier xavier says:

      @riccaicedo I discovered it after going to Hamburg but I had never the intel on what or why. So I decided to go ahead.
      I might be wrong in some parts of my analysis but as I said, I would like if someone came and explained it right to us.

  3. Profile photo of jackie jackie says:

    Your reply Robert aka @thedevotea made me giggle. I guess Xavier can only thank his lucky stars that he was found in a tea chest wrapped in a calico sack and not hastily packed into a tea bag complete with label. I fear you would have insisted that he be discarded without further delay.
    Xavier your post requires more serious thought than my little comment but I will come back to it later when I can give it my undivided attention.

  4. Profile photo of peter peter says:

    Fascinating. Though I wonder many things about this – the expiration of Hamburg as a free zone is rather an event of historical magnitude since its been a declared free zone for over 100 years. I can’t imagine that sort of decision was undertaken lightly. Did it come about because all the other ports in Europe were busy complaining about the special status that Hamburg has and how it draws all the really big business?

    What about competing free zones in Asia and Southeast Asia? Start with Hong Kong and work out from there, Dubai has two (and they are currently and actively courting the tea industry), I think Saudi Arabia has one and there is another I developing in Qatar. What impact on global trade are these going to have when the Hamburg port goes into decline (and it will once the tax free status is removed – though I can’t imagine that the beaurocrats are not prepared for the consequences).

    Though, in reading the press release, it appears that the Hamburg Senate has more in mind regarding changes in EU and German customs laws than the global impact of increased taxes in the zone. From the press release, it appears that for the benefit of no taxes, businesses did not get customs support and inspections inside the free zone. The press release cites a “changing world” and altered “security” security conditions – it seems that the Senate is willing to give up its tax free status for better national/EU protections and customs rights.

    • Profile photo of xavier xavier says:

      @peter I know it is quite a change and as you can imagine, it will be one for the tea industry.
      I don’t think they stopped the free zone thing because of the other ports since 1. it was limited in space and 2. other ports have also these zones (check the link in my article).

      As mentionned in the press release and I hope in my post is that not all the harbour is under this free zone rule. Most of it isn’t, so it won’t change a lot except for our tea business.

      And I think the real reason for this decision is not really costs or better protection but urban planning.
      This area seems quite interesting since it is old and really close to the HafenCity (http://en.wikipedia.org/wiki/HafenCity). I don’t know what they plan to do but I am sure the urbanists have lots of ideas.

  5. Tea Moment says:

    I’m so glad you wrote this! I was meandering my way toward some research on the subject because I found it so bizarre that so much tea should be blended and packaged in Germany – of all places! [see Nov. 16 Tweet: "True or False - Much of the world's #tea blending takes place in Germany (Please respond only if you know the answer: I'm researching.)"] Absolutely fascinating. I wonder what will happen now.

    • Profile photo of xavier xavier says:

      @TeaMoment this is a topic that had me puzzled since I first went to Hamburg and as I said, finding answers or people willing to share the info wasn’t easy.

      I am glad that two tea people gave me the same informations (one of them gave me an answer for the tea industry and the other one for the car industry).

  6. Profile photo of bram bram says:

    Something tells me that over time either a new city will rise as the tea harbour of the world or it will all be divided over several harbours.

    Did not realize the London tea merchants stayed divided after WWII.

    I also did not realize that my only visit to Hamburg so far was in a historical year. I.e. the last year it was free.