Hong Kong Manufacturing SMEs: Preparing for the Future

31Failure to DifferentiateMany Hong Kong SMEs have not identified aspecific niche and differentiated themselves tothe extent that customers view them as havingsomething unique and valuable. The absence ofdifferentiation leaves a company open to pureprice competition and to customers constantlydemanding lower and lower prices regardlessof costs. The key to differentiation is to identifyspecific customer requirements and then meetthose requirements better than the competitors.If successful, such differentiation usually leads toat least a limited amount of pricing power, whichprovides some insulation against difficult economictimes. Many Hong Kong companies have yet todevelop truly distinguishing capabilities. As a result,they are vulnerable to competition from other HongKong companies as well as those from the ChineseMainland.Limited Scope of ManagementMany Hong Kong SMEs have a limited scope ofmanagement in terms of numbers, geographicscope, activity scope, and market scope. HongKong SMEs generally have one or a small numberof senior managers that are the driving forces of thecompany. A small number of managers means thatthe companies suffer significantly when new rules,regulations, and administrative requirements comeinto effect. In geographic terms, many Hong KongSMEs appear to be able to manage within HongKong and perhaps in certain cities in Guangdong,but have a hard time managing activities elsewhere.This limits their ability to react to rising costs andshifting policies, and limits their potential to takeadvantage of newly emerging manufacturinglocations elsewhere in China, elsewhere in EastAsia, or elsewhere in the world. In many cases,Hong Kong SME managers that have operated inGuangdong for many years still do not really knowGuangdong, the local officials, the local suppliers,and the local competitors nearly as well as newlyemerging Chinese counterparts. While this maynot have been an issue when there were relativelyfew capable Mainland Chinese managers andcompanies, it is less and less the case.In terms of activity scope, many Hong KongSME managers are comfortable producing forOEM customers that provide the orders and thespecifications, and then distribute the products.Far fewer Hong Kong SMEs are comfortabledeveloping their own designs, getting their ownorders in overseas markets, and then distributinginternationally. This of course limits the scope ofwhat they can do in good times or bad. Finally, asrelatively few Hong Kong SMEs have engaged insignificant market development, they are reliant onothers to carry out this process. This means thatmany SMEs are not in regular contact with endcustomers and therefore have a more difficult timeanticipating or leading industry trends.Gaps in SuccessionMany Hong Kong’s manufacturing companieswere founded in the 1980s or earlier and rapidlyexpanded with the growth in South China in the1990s. In many cases, the founder or proprietor isnearing retirement age with no apparent successor.In some cases, there are no children that can takeover. In other cases, the children are pursuing otherinterests, or careers in industries that are consideredmore prestigious and less difficult, and do not wishto take over. Since the vast majority of Hong KongSMEs are family firms with members of the familyas managers, this creates a difficult situation. Withno obvious successors and with difficulty in sellinga company that has often been built around asingle individual, for many SME owners there is noclear exit strategy. The risk is that otherwise strongcompanies with good franchises may fall on hardtimes and cease to contribute to Hong Kong and toSouth China.