Hong Kong Manufacturing SMEs: Preparing for the Future

2ForewordOn behalf of the Federation of Hong Kong Industries, I would like to present this report to Hong Kongmanufacturing SMEs. As the third study under our “Made in PRD” Research Series, this study aims toprovide them with practical guidance on dealing with the challenges emanating from reduced demand ininternational markets in the aftermath of the global financial crisis, and, in particular, recent changes in thePRD operating environment.Since the FHKI embarked on the “Made in PRD” Research Series in 2001, two reports have been releasedin 2003 and 2007, respectively. They looked into the emergence and growth of the PRD as a productionhinterland of Hong Kong industries, the economic synergy between Hong Kong and the PRD, and the pivotalrole played by Hong Kong manufacturers in driving the industrial, economic and technological developmentof this rapidly evolving region. Their findings and recommendations not only helped local manufacturing andservicing companies in formulating business strategies, but also provided a direction for furthering the HongKong/PRD synergy and harnessing the business opportunities this would bring to our industries. We weregratified to see that a number of the measures recommended in our previous reports had been adopted bythe authorities. These measures have greatly facilitated the production operations of our manufacturers andfostered the industrial growth of the region.Since the publication of our last research report, the PRD business environment has become more challengingfollowing a series of changes in government policy and the global financial tsunami. First, the shifts inprocessing trade policy at the national level have deepened. Second, steps to restructure and upgrade thePRD industrial landscape have been speeded up, driving low value-added, labour-intensive, polluting andresource-depleting industries against the wall. Then, in the midst of this restructuring, the global financialcrisis broke out, hitting many export-oriented factories in the PRD.While orders from major overseas markets have begun to pick up gradually with the crisis receding in thesecond half of 2009, they have remained off the pre-crisis levels by a significant margin. Aside from industrialpolicy shifts and demand contraction, Hong Kong manufacturing SMEs are faced with other pressingchallenges due to changes in the operating environment in the PRD. These include worker shortages, labourcost escalation, appreciation of the Renminbi and stronger regulatory pressure.In order to offer Hong Kong manufacturing SMEs expert advice on overcoming these challenges andenhancing competitiveness, the FHKI commissioned Professor Michael Enright and his research team inFebruary 2010 to undertake the present study. Professor Enright is one of the world’s reigning strategy gurusand has published books and papers extensively on the PRD industrial development.