Hong Kong Manufacturing SMEs: Preparing for the Future

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32Difficulty in Finding Capable ManagersMany Hong Kong manufacturing SMEs are findingit increasingly difficult to find capable managersfor their operations. Most would like to rely onmanagers from Hong Kong who understandthe processes as well as the business side of theoperations. However, several interviewees indicatedthat Hong Kong people are not going into themanufacturing sector nearly as much as in the past.Instead, they are going into the financial service,professional service, or property sectors. Theresult is that the group of Hong Kong managerscapable of managing manufacturing operationsis aging and shrinking. The solution for manycompanies is to try to source managers from theChinese Mainland, where 30 years of economicreform and development is generating a group ofcapable managers. Unfortunately, this group is alsoin demand from major multinational companiesand growing Chinese companies too. In addition,developing a strong group of managers from theChinese Mainland is viewed as potentially creatingfuture competitors should these managers use theknowledge they have gained to shift to a competitoror to open their own company and engage in directcompetition with their former employer. SomeHong Kong companies source managers fromTaiwan, Singapore, Korea, or elsewhere, but find itcan be difficult to integrate several different cultureswithin a small firm.Difficulty in Obtaining FinanceWhile by their nature SMEs do not require hugeamounts of financing, on the other hand SMEsoften find it difficult to find the financing that they80 See Federation of Hong Kong Industries, “Survey Reporton SMEs Credit Status,” (Chinese version only), October2008.do need. Personal and family capital is often usedfor start-up, but working capital and financing foroperational needs often must come from othersources. Banks are the usual sources of financing,but SME managers report that relatively few bankstruly understand the SME operations. Even thosethat do tend to require personal guarantees andpledges of private assets for loans to the SMEs.Reliance on bank capital can create difficulties intimes of economic hardship. In an October 2008survey carried out by the Federation of Hong KongIndustries, one in 10 responding SMEs reportedthat their credit quota had been cancelled by theirbanks and a majority of respondents indicated thattheir credit terms with banks had been adverselyaffected. Although 80 per cent of the enterprisesreported that they were still financially sound, theythought that if banks further cut off their credit andthe external environment further worsened, theywould face difficulties. 80Lack of Knowledge of Support ProgrammesThe Hong Kong Government and related agenciesoffer a wide range of support programmes for HongKong’s SMEs. The unfortunate fact appears to bethat relatively few of the SMEs these programmesare designed to help actually know of theirexistence. As a result, the take up rate is rather lowand the results not as strong as one might hope.Perspectives on Operational and StrategicIssuesAll over the world, the vast majority of SMEs thatare started eventually fail. The most commonreasons for failure are not changes in externalmarkets, or changes in public policies, or even theemergence of new competitors. The most commonreasons for failure involve basic flaws in the businessplan (or the lack of a business plan), basic flaws inoperations, and basic flaws in management. Thuswhile Hong Kong SMEs need to understand andadjust to global economic conditions, changingconditions in China, and a changing competitivelandscape, they also need to ensure that they getthe basics right in order to survive and thrive.
33The Impacts of Developments on Hong KongManufacturing FirmsThere have been a number of reports of impacts ofthe developments in the Pearl River Delta on HongKong firms in recent years. These reports highlightthe challenges faced by Hong Kong manufacturingSMEs operating in the Pearl River Delta region.Greater PRD Business Council/ HongKong Trade Development Council(June 2007) 81According to a June 2007 report prepared for theGreater Pearl River Delta Business Council by theHong Kong Trade Development Council on theimpact of changes in export processing regulations,as of 2006 there were 57,500 Hong Kong investedfactories controlled by 55,200 companies in thePearl River Delta region with 9.6 million employees.In 2006, 80.7 per cent of Hong Kong’s re-exportsof Mainland China origin were related to exportprocessing. 82Based on a survey conducted in early 2007, theHong Kong Trade Development Council concludedthat 14,500 Hong Kong enterprises would beseriously affected due to the changes of processingtrade policy of adjustment of the tax rebate ratesand issuance of the new restriction cataloguefor processing trade. The survey concluded that1,500 enterprises could cease production, 375,000Mainland production workers (out of 9.6 millionemployed by Hong Kong firms) could lose theirjobs, and 10,000 employees in Hong Kong couldlose their jobs. If these impacts were to cascadethrough the economy a total of 10,000 enterprisescould cease or scale down production, 2.5 millionmainland production worker jobs could be underthreat, and a total of 70,000 Hong Kong jobs couldbe in jeopardy. The report noted that Hong Kongmanufacturers had already reported a drop of profitmargins in export processing of 18 per cent in 2002to 10 per cent in 2007.In terms of factors that were affecting theinvestment environment in the PRD, Hong Kongcompanies listed rising labour costs and labourshortages of skilled workers, RMB appreciation,rising land costs and restrictions, and tighteningof processing trade policies as the factors mostaffecting the investment environment (see Exhibit12). It should be noted that the final details of theLabour Contract Law were announced after thesurvey period, though the outlines of the Law hadbeen released earlier.81 GPRD Business Council, “Implications of Mainland ProcessingTrade Policy on Hong Kong,” June 2007.82 These numbers include both direct investment enterprisesand companies in other contractual forms. Other contractualforms include three forms of processing and assemblyoperations, compensatory trade, and any other processingarrangements or relationships into which a foreign companyenters with a Mainland factory.Exhibit 12. Factors Affecting the Investment Environment in the PRD, 2007WeightedAverage ScoreEvaluation (%)1 = Most Impact, 5 = Least Impact, No = No Impact1 2 3 4 5 NoRising labour cost/ skilled labour shortage 1.78 56.2 22.9 11.2 4.4 3.9 1.4RMB appreciation 1.96 43.9 26.8 17.3 6.1 4.4 1.5Rising land cost/ land restrictions 2.21 25.4 19.8 25.5 11.2 6.9 11.2Tightening of processing trade policy 2.22 26.9 21.4 25.5 9.9 7.2 9.1Tightening of Labour Contract Law 2.27 24.6 28.4 29.5 7.9 5.1 4.5Power/ water shortage 2.33 25.0 23.2 27.2 11.4 6.8 6.3Adjustment in export VAT rebate 2.37 19.2 21.9 26.7 12.4 8.8 11.0Higher environmental protection requirements 2.37 21.8 26.8 28.3 10.8 6.6 5.6Expiry of corporate income tax concession 2.39 20.2 22.7 29.0 12.3 7.5 8.3Note: According to Hong Kong Manufacturers.Source: Hong Kong Trade Development Council.
Page 1 and 2: Hong Kong Manufacturing SMEs:PREPAR
Page 3 and 4: ContentsForeword 2Executive Summary
Page 5 and 6: 3In this report and the accompanyin
Page 7 and 8: 5Cost reduction strategies may incl
Page 9 and 10: 7In order to answer these questions
Page 11 and 12: 9Exhibit 2. Exhibit 3.Global Stock
Page 13 and 14: 11Exhibit 6.Exhibit 7.Hong Kong’s
Page 15 and 16: 13Hong Kong manufacturing firms RMB
Page 17 and 18: 15hour in Bangladesh, US$0.33 per h
Page 19 and 20: 17Utilities and sewage charges are
Page 21 and 22: 19tax if they carried out export pr
Page 23 and 24: 21demand and production (such as in
Page 25 and 26: 23In recent years, China has become
Page 27 and 28: 25keep costs down rather than inves
Page 29 and 30: 27specific infrastructure projects,
Page 31 and 32: 29markets. 71This included helping
Page 33: 31Failure to DifferentiateMany Hong
Page 37 and 38: 35performance). Note that the figur
Page 39 and 40: 37The RMB appreciation and inflatio
Page 41 and 42: 39In spite of these challenges, the
Page 43 and 44: 41Exhibit 23. Measures Taken to Cop
Page 45 and 46: 43The Chinese Manufacturers’Assoc
Page 47 and 48: 45Industry Situation ReportsWhile i
Page 49 and 50: 47Exhibit 33. Exports of Watches &
Page 51 and 52: 49that it is unlikely production wo
Page 53 and 54: 51factory in Cheung Sha Wan. The co
Page 55 and 56: 53Renley focuses a good deal of att
Page 57 and 58: 55The Consumer Electronics Industry
Page 59 and 60: 57Issues for Hong Kong Consumer Ele
Page 61 and 62: 59Some Hong Kong owned firms have a
Page 63 and 64: 61Suga has occasionally been challe
Page 65 and 66: 63In terms of dealing with regulato
Page 67 and 68: 65• Having a manufacturing base i
Page 69 and 70: 67Exhibit 41. Textiles and Clothing
Page 71 and 72: 69China’s Labour Contract Law is
Page 73 and 74: 71Case Study - Lever Style Incorpor
Page 75 and 76: 73and potential customers know of L
Page 77 and 78: 75are likely to yield them profits
Page 79 and 80: 77Exhibit 46. Top Mould and Die Exp
Page 81 and 82: 79under pressure to reduce prices.
Page 83 and 84: 81Some Hong Kong firms are finding
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83Datamatic has worked hard to deve
Page 87 and 88:
85• Companies that try to compete
Page 89 and 90:
87Exhibit 52. Exports of Toys, Baby
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89into the medium-term. A further s
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91• As the entertainment and toy
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93Company StrategySilverlit constan
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95Silverlit plans to continue manuf
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97Strategies to Meet the Challenges
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99Central Governments, who set up r
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101manufacturing jobs, which is sti
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103• Strategies to deal with envi
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105Strategies to Deal with Internal
Page 109 and 110:
107• Identify the key functional
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109• Superior visionSuperior visi
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111• Implement suitable workplace
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113• Plan for successionSuccessio
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115• Joint or place branding and
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117New OpportunitiesOne major devel
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119management, especially when it c
Page 124:
Federation of Hong Kong Industries3
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