News & Events
Chamber chairman calls for refocus
September 11, 2009
HONG KONG: The battering of Hong Kong's overseas export markets is a clear signal about what needs to be done, says Jonathan Choi Koon-shum, Chairman of the Chinese General Chamber of Commerce (CGCC).
It's time to aim for markets closer to home, including domestic markets, Choi told China Daily in a recent far-reaching interview.
Citing the key sector of Hong Kong manufacturing, he suggested, "Hong Kong-operated factories have to switch from being export-oriented to being domestic-oriented."
He noted that Hong Kong's companies, with factories based in the Pearl River Delta (PRD) region, have experienced a nightmare in their operations since the collapse of US investment bank Lehman Brothers in September 2008.
Grim statistics support this assessment: It has been estimated that more than one-third, or around 16,000, of the Hong Kong companies in the PRD region had no choice but to close down their businesses on the mainland amid the financial turmoil.
"The end of last year was the most difficult time for Hong Kong-operated mainland factories, especially for those in Dongguan and Huizhou," Choi said. However, in the current phase of recovery, Choi says, "other than running export manufacturing in the PRD, factories should also explore business opportunities on the mainland."
The mainland, which used to be the manufacturing area for many Hong Kong companies, now possesses significant business potential backed by the strong domestic consumption and demand there.
Sketching the background of the problem, Choi noted that starting from the 1980's, many Hong Kong companies moved their factories to the mainland, attracted by the lower operation and labor costs. The PRD region, with its very favorable geographical location, has nurtured many relocated Hong Kong factories.
"When the global economy was prosperous, the Hong Kong companies with operations on the mainland received many orders from the US and Europe," Choi said. "These factories were usually involved in manufacturing and exporting goods."
Good times, however, evaporated as the global financial crisis devastated purchasing power in the West. Hong Kong's export rate dipped into the red starting from November 2008, and then plunged 23 percent in February 2009, a record fall in almost half a century.
"The slump in export rates (see table) has resulted in a series of problems," Noting the "trickle-down" effect that spread the misery, Choi said, "Factories doing packaging and transporting businesses in the PRD have also been affected because of the collapse of the big factories."
Depending heavily on the orders from the US and Europe in the past few decades, Hong Kong companies have found their export orders inexorably shrinking amid the financial crisis.
Getting very specific about his recommended regional marketing refocus, Choi encouraged CGCC members to consider integration with the entire country, not only in Shenzhen or Guangdong province, but also in Shanghai, Beijing and Tianjin.
"Until now, we have been conducting business mostly in the coastal cities. Now we need to further develop the northeastern and northwestern parts of the mainland," he added.
Since he became the chairman of the Chamber in November 2008, Choi has been encouraging members to explore business opportunities in the inner regions of the country, including Anhui, Tianjin, Jiangxi and Ningxia.
"Companies in Hong Kong can also plan to transfer their factories into these regions, where the costs for land, labor and resources are much lower," Choi said.
He also noted that sales networks in the relatively less-developed parts, such as Sichuan, Henan, Shandong and Shaanxi, will also be quite significant, because of the high population densities in these regions.
As an example of the determination of and the opportunities for CGCC members to shift the focus of their efforts, one anecdote stood out in the interview: "One of our members has just invested in a thousand hectare vegetable field in Ningxia, while delivering vegetables to Hong Kong every day, 45 hours by road transportation," Choi said. "It's just like driving from New York to Los Angeles," he remarked.
Despite the distance and time involved in cases like this one, he said the road, railway, port and airline facilities on the mainland are not lagging behind those in the US and Europe, while the country's infrastructure can also facilitate the development and investment in the inner regions.
Promising business prospects on the mainland notwithstanding, Hong Kong companies may also have to make changes in their business models before taking further steps into the mainland market.
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CGCC Chairman Jonathan Choi Koon-shum. Edmond Tang |
"Most of the goods being exported to the US and Europe are made according to the standards and tastes of those markets," Choi said. "Therefore, the entire production lines in factories may have to be adjusted (before they start producing for the mainland consumers)."
He added that many Hong Kong-operated mainland factories are prepared to sell their products to both the West and the mainland, in order to secure export orders.
However, Choi said even if the products are popular in Guangdong province, companies may still need to do more research to win over consumers in other parts of the country.
"That also involves changes in business plans, production lines and sales channels, if the local companies are going to cope with the domestic market development on the entire mainland," Choi said.
This also means adapting to or overcoming regional regulatory obstacles and impediments. At present, mainland-manufactured products can generate tax rebates when exported to the US and Europe. Yet the tax payment may vary when goods are sent from Hong Kong to the mainland consumer market.
"The Chamber is now in talks with the Ministry of Commerce, State Administration of Taxation and the Customs on the tax rebate," Choi said. "So far we have made some significant gains, including winning a large number of tax exemptions."
Taking into account that a comprehensive recovery strategy must factor in the impact of changes in labor laws on regional marketing, Choi noted that the Chamber is holding discussions with several mainland officials regarding the implementation of the new labor contract law, which took effect in January 2008.
"The direction of the regulation is good," he said. "Yet, it is being implemented during the financial crisis, which imposes extra burdens on the mainland-based Hong Kong enterprises."
The new law, primarily targeting domestic companies that do not have labor contracts, requires employers to contribute to employee's social security accounts and set wage standards for employees on probation and for overtime work.
Employees with at least ten years in the workplace are also entitled to contracts that protect them from being dismissed without cause.
"The general direction should not be changed, but we hope the execution of the regulations can be more flexible," he added.
Choi offered his observations about the local stock and property markets, in light of this year's trends. Despite the sluggish economic environment in the first half, local stock and property markets have shown a rapid jump in the last few months.
The benchmark Hang Seng Index surged to over 20,000 points by the end of July from 11,344.58 points on March 9, thanks to the recent influx of "hot money" into the Asian equity markets.
"The investment sentiment seems to be quite exuberant, yet the export, trade and unemployment figures show that the actual economy is not having such a speedy recovery," he said.
Choi says the local economy is on the way to recovery, with most Hong Kong export enterprises recording a 10 to 20 percent improvement in export orders.
Choi believes the mainland economy can succeed in maintaining 8 percent GDP growth by the end of this year, supported by the massive fiscal and economic stimulus packages.
However, sounding a cautionary note regarding this stimulus spending, Choi said, "it has to be ensured that the money will be used to support the actual economy, including retail and services industry, other than being used in the stock and property markets."
"Speculative investment in stocks and property will easily result in economic bubbles," he warned.
He hopes that significant bank lending can be allocated to small and medium enterprises as well as to big corporations, so as to provide sustainable growth for the local economy.
As for his prognosis for the ailing export sector, he said, "local exports may have already hit bottom in the first quarter, while showing a slight recovery in the second quarter," adding that, "We hope the export rate can improve further in the third and fourth quarters."
Choi, however, noted that consumption in the US may remain constrained even after emergence from the global economic recession, suggesting that sagging consumption in the West may cast a shadow over the recovery and growth prospects of the local Hong Kong export economy.
"In the past, people in the US usually spent liberally," he said, "but now they may prefer to save more after the crisis."
On a positive note, he added, "Unlike other external economies, Hong Kong has been a beneficiary of the economic growth on the mainland."
He added that the 7 trillion yuan bank lending and 4 trillion yuan economic stimulus package, together with the individual travel scheme, and factories' tax rebates were all giving a boost to the local economy.
"Some people are quite pessimistic about the local economy, yet I do not share their negative sentiments," he said.
Summing up the lessons to be learned and the moves to be made, Choi said that as they pass through the global financial thunderstorm, Hong Kong enterprises should learn to be more practical in their real business.
"They should avoid making any speculative investments, or doing something much beyond their ability," he cautioned, presumably including not depending on markets much beyond their home region.
