Hong Kong Manufacturing SMEs: Preparing for the Future

37The RMB appreciation and inflation figures wereconsistent with reported movements in theseareas, while the Labour Contract Law figures wereconsistent with the expense of setting up moreformal labour systems and adjusting for severancepayments and loss of flexibility under the newlaw. It should be noted, however, that the valueadded in typical export industries in Guangdongis on the order of 25 per cent to 40 per cent, andtherefore the increases in individual elements do notnecessarily correspond to similar increases in totalproduction costs. In fact, a majority of respondentsindicated that their total operating costs had risenon the order of 20 per cent in 2007.Nearly half (46.9 per cent) of FHKI surveyrespondents indicated that expansion of the list ofindustries restricted for export processing wouldshrink their profit margins and another 36.4 percent indicated it would reduce their cash flow.Another 14.8 per cent indicated that they wouldavoid manufacturing or exporting affected products.Only 17.9 per cent of respondents believed thiswould have little impact on their firm.Despite concerns for their future registered byrespondents, 48.8 per cent would not considerrelocation to China’s western provinces, while43.8 per cent might do it in the long-run. As seenin Exhibit 16, more than half of the respondentsexpected to adopt automation to reduce labourcosts. More than half also expect to upgrade thevalue and value-added in their products. Over onefifth(20.4 per cent) expected to close down theirbusinesses in the PRD. Most of the companies thatexpected to close their businesses had no specifictimetable for doing so.Respondents were also asked to estimate thepercentage of firms in their industries that shutdown in the previous year and how many mightshut down in the next one to two years. Roughly athird of the respondents believed that less than 10per cent of companies in their industry had closed;roughly one-third believed that 10 per cent to 20per cent had shut down, and approximately 24 percent believed the percentage was higher than 20per cent. Roughly a third of respondents indicatedthat they believed 10 per cent to 20 per cent ofcompanies in their industry would close in the nextone to two years, while roughly a third believedthe percentage would be 20 per cent to 30 percent and approximately 17 per cent thought thepercentage would exceed 30 per cent closures (seeExhibit 17).Exhibit 16. Reactions to Cost Increases inSouth ChinaReactions (Multiple responses allowed)% of TotalRespondentsRelocate factories to other parts of Guangdong 17.9Relocate factories to mid and western regionsof China11.1Move factories to Southeast Asian countriessuch as Vietnam14.2Adopt automation to reduce labour cost 59.3Outsource the labour intensive processes 30.9Upgrade the production and develop valueaddedproducts58.0Close down business 20.4Source: Federation of Hong Kong Industries.Exhibit 17. Estimates of Firm Shutdowns inthe PRD by Hong Kong ManagersEstimated Percentageof ClosuresPast Year% of RespondentsNext One toTwo Years% of RespondentsLess than 10% 32.7 14.410% to 20% 36.5 33.820% to 30% 15.7 30.6Above 30% 8.2 16.9No comment 6.9 4.3Source: Federation of Hong Kong Industries.