Hong Kong Manufacturing SMEs: Preparing for the Future

24Competitive EnvironmentThe competitive environment for Hong Kongmanufacturing SMEs in the PRD is changing inseveral ways. Hong Kong manufacturing firmsoperating in the PRD face increasing competitionfrom Mainland companies, either within the PRDor in other regions of China, such as the YRD,Shandong province, and other areas that are tryingto attract manufacturing companies. 55For the past 30 years, Hong Kong firms havetransferred the factories, management practices,culture, skills, and connections to China and havehelped companies and managers in Mainland Chinato improve their capabilities in communicationand their quality assurance systems. In addition,increasingly Chinese firms are hiring employeesfrom Hong Kong firms as well as consultantsfrom Singapore firms, Korean firms, and otherfirms where they think that this will support thedevelopment of their business. 56 As a result, thegap between Hong Kong firms and Chinese firmshas become smaller and Chinese firms are lesswilling to play a junior role to Hong Kong businessinterests. 57Many Mainland Chinese companiesthat once were partners or contractors to HongKong firms now have the skills, the technology, thecapital, the critical industry mass, the supply chain,the domestic market, the know-how, the contacts,and the government support to go it on their own.Consequently, the main competitors of many HongKong firms are Chinese companies, usually the spinoffsfounded by Chinese managers once hired andtrained by the Hong Kong companies. 58 It is difficultfor Hong Kong SMEs to avoid this phenomenon.55 ESA Project Interview, 2010-03-25.56 ESA Project Interview, 2010-04-09.57 ESA Project Interview, 2010-04-09.58 ESA Project Interview, 2010-04-07.59 ESA Project Interview, 2010-04-07.60 ESA Project Interview, 2010-04-07.61 ESA Project Interviews, 2010-04-07, 2010-04-09.62 ESA Project Interview, 2010-03-26.Since fewer Hong Kong people are interested ingoing into manufacturing, the Hong Kong firmsoften have to hire Mainlanders for managementpositions even if this practice can eventually createcompetitors. In addition, many Hong Kong firms setup supply or subcontractor relations with Mainlandfirms and this too can create competitors.To the extent that Mainland competitors are ableto run a less expensive operation than their HongKong counterparts, they can quote lower prices andwin business from Hong Kong companies. The costdifferentials are such that if Hong Kong companieshave even a few Hong Kong staff then this canalready provide a cost disadvantage that makesit difficult for the Hong Kong firms to competeagainst Mainland counterparts. 59Hong Kong manufacturing company managersinterviewed for this project indicated that Chinesefirms were viewed as being more competitivebecause of their ability to skirt the law withoutincurring penalties. According to the Hong Kongmanagers, Hong Kong companies need to followthe letter of the law and operate in a moreethical manner. As a result, some Hong Kongfirms have seen their profit margins eroded in theface of competition from Mainland companiesthat are viewed as not having to meet the samemanufacturing and business standards. 60Interviewees also indicated that Mainlandcompanies are often more forward-looking andaggressive than their Hong Kong counterparts.They are more likely to take risks and they alsohave more local resources in the form of local banksupport, “free capital,” or government support. 61Several interviewees for the present study indicatedthat indigenous Chinese firms learn very fastto “play the game,” making them formidablecompetitors. 62 Mainland company owners are seenas being increasingly knowledgeable and capable,close to the ground, and closer to local officials.They are also often willing to put up with very lowmanufacturing margins, and will engage in practicessuch as copying the designs of other companies to