FHKI Releases “Made by Hong Kong – The Way Forward for HK Industries” Interim Research Report

Refining the understanding of “manufacturing” drives industrial policy reform for the longer term development of Hong Kong’s manufacturing business

Federation of Hong Kong Industries (FHKI) releases the Interim Research Report of “Made by Hong Kong – The Way Forward for HK Industries” (the “Research”) today (26 January). Funded by the Trade and Industrial Organisation Support Fund under Trade and Industry Department, the Research is a project in celebration of the 60^th Anniversary of FHKI which aims to outline the latest development of Hong Kong manufacturers, and the challenges they face in the rapidly changing business environment and respective strategies they adopt to cope with such challenges. The Research is supported by integrated research methods such as big data analysis, surveys, focus groups, and so forth. FHKI suggests the Government revamp the coverage of “manufacturing” in its official statistics to reflect the significance and contributions of Hong Kong’s manufacturing sector in an all-rounded and refined approach. The Government ought to take specific measures to address the difficulties encountered by the local manufacturers undertaking transformation initiatives, in a bid to pave the way forward for Hong Kong industries. 

Refining Statistical Methods to Reveal the Far-reaching Economic Impact of Manufacturing Industry

According to the Research, official statistics upon the industrial sector currently available was unable to reflect the end-to-end economic contributions created by Hong Kong manufacturers throughout the supply chain, within and outside Hong Kong. In accordance with the analyses derived from databases across China and Hong Kong, it is projected that the output contributed by the Hong Kong manufacturers in China was roughly HK$500 billion in 2018, equivalent to about 17.6% of Hong Kong’s Gross Domestic Product (“GDP”) that year. The actual economic contributions by the manufacturing industry in Hong Kong have been indistinct, as the “manufacturing” sector in Hong Kong is confined to manufacturers with factory registration locally, and the aggregate value added by many producer services occurred during production processes, such as design, R&D, operation management, brand management, quality control, trading and logistics, after-sales services, etc., falls under the industrial classification of “service industry”.

Dr Daniel Yip, Chairman of FHKI said, “The importance of manufacturing to Hong Kong’s economy and employment has been rather underestimated. Adding other producer services, the total value added related to manufacturing in Hong Kong is substantial and considerable. To better reflect the contributions of the manufacturing sector, there is a pressing need for the Government to augment the scope of manufacturing-related economic activities being measured in the official statistics, refine the industrial classification of the services sectors to isolate “producer services” from the rest, review the “Hong Kong Standard Industrial Classification” timely to ensure statistics collected are in line with the ongoing economic activities in the City, and collect data upon offshore industrial activities. This will unleash the true impact of manufacturing in Hong Kong and lay a foundation for setting strategies and long-term performance indicators for re-industrialisation over time.”

Four Key Transformation Strategies Adopted by Hong Kong Manufacturers Require Forward-Looking Policies to Fill the Gap

Through surveys and focus groups, the Research sheds light on the shifts in business strategies of Hong Kong manufacturers, as well as the outlook upon R&D investment and relocation of manufacturing operations. Collectively, there are four major transformation strategies adopted by Hong Kong manufacturers in the face of changes in the China-Hong Kong policies and the global business environment.

Strategy 1: China-Plus-One

In light of the ever-rising production cost and growing tensions in international relations, 23% of the respondents intend to or have started to deploy the “China-Plus-One” strategy, of which 80% prefer to set up production lines in ASEAN countries in addition to China. Yet, labour supply, logistics costs, regulatory control and rudimentary business networks in the ASEAN countries can pose stumbling blocks to manufacturers. It is hopeful that the signing of the Regional Comprehensive Economic Partnership (RCEP) may help offset some trade barriers, but in a longer term, the Government is expected to take a more active approach in creating favourable conditions for manufacturing firms in Hong Kong to make investment in ASEAN countries with no fuss. 

Strategy 2: Business Repositioning

Business repositioning is more viable strategy for small and medium-sized Hong Kong manufacturers. It is observed that originally production-focused manufacturers have started off expanding their businesses to producer services along the value chain. In contrast with the surveyed result in 2015, there were surges in the proportion of respondents who look for strengthening technology R&D (57%), strengthening product design (59%) and brand building (47%). However, setting up the R&D division in the Mainland is still more preferable for Hong Kong manufacturers given the proximity and convenience to communicate with production facilities and suppliers.

Under the continued China-US trade disputes and the COVID-19 pandemic, over 50% of the respondents stand ready to expand to China’s domestic market in spite of their original market focus. 35.9% of the China-focused manufacturing firms, and 28.9% of the manufacturers with orientations towards the European and US markets, are planning to tap into the ASEAN market, as Hong Kong manufacturers realise the consecutive rise of the middle-class populations and purchasing power in China and Southeast Asia.

Strategy 3: Upgrade and Transformation

Most of the surveyed Hong Kong manufacturers are in the production phase between Industry 2.0 and 3.0. Those being in the more advanced production stage are more inclined to strengthening technology R&D, and innovative management with applied technology (hard innovations). On the other hand, traditional manufacturing enterprises are relatively in favour of product design and brand building (soft innovation) that are generally of lower cost. Regardless of manufacturing operations in the Mainland or Hong Kong, seeking the right talent is the greatest constraint for Hong Kong manufacturers in their transformation. Facing the global shortage for skilled talent, Hong Kong must bolster both education and vocational training to build a resourceful supply of industrial talent in the long run.

Strategy 4: Establishing Production Lines in Hong Kong

26.8% of the respondents have already set up production lines in Hong Kong, and around 10% in addition are interested in relocating part of their production to Hong Kong. Of them, manufacturers that are more technologically advanced revealed stronger interest in establishing manufacturing operations in the City. The major impediments to building factories in Hong Kong include a lack of manufacturing-related suppliers along the value chain, the scarcity of industrial land supply, high labour cost, and limited scope of producer services available. The Government should focus on addressing these obstacles, such as gradually increasing the land supply for high-end industries during policy-making processes, so that Hong Kong manufacturers can take advantage of our City’s competitive edge to groom their high value-add production lines in Hong Kong.

Steve Chuang, the Deputy Chairman of FHKI and the Research convenor remarked, “The Research serves as a key reference for the positioning of re-industrialisation in Hong Kong and corresponding policy development. As a gateway between different industries and the Government, FHKI aspires the Research to reveal the perspectives and needs of different industries in a more refined and multifarious approach, and thus providing the Government with insights into addressing the pain points faced by the practitioners, especially in the areas of talent development, infrastructural support in manufacturing, relocation of production lines and expanding to ASEAN markets. As long as well-planned industrial policies are put in place, the manufacturing ecosystem in Hong Kong will continue to prosper, allowing home-grown manufacturers to extend their reach and thereby soaring Hong Kong industries to new heights.”

 

Photo 1: FHKI released "Made by Hong Kong - The Way Forward for HK Industries" Interim Research Report. (From left) Steve Chuang, Deputy Chairman of FHKI and the Research convenor; Dr Daniel Yip, Chairman of FHKI; and Sunny Tan, Deputy Chairman of FHKI.

Photo 2: Dr Daniel Yip, Chairman of FHKI suggested refining the current statistical methods to reveal the far-reaching economic impact of manufacturing. The interim research report also addressed the four key transformation strategies adopted by Hong Kong manufacturers to cope with the increasingly challenging and rapidly changing business environment.

 

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