Hong Kong Manufacturing SMEs: Preparing for the Future

49that it is unlikely production would leave China,eventually such costs should result in higher prices.However, individual firms (particularly SMEs) findit difficult to pass on cost increases in the face ofpowerful buyers, as SMEs find it more difficultto take on the added administrative burden thanlarger firms, and some Hong Kong companiesbelieve that Mainland Chinese firms are able (orwilling) to skirt the Law. As a result, the HongKong SMEs are disproportionately disadvantagedby its implementation. Since the impact should begreatest for the most labour intensive industries,the impact of the Law on Hong Kong’s watch andclock companies is likely to be middling comparedto other industries, with more labour-intensiveindustries like garment and toy more affected, andless labour-intensive industries like mould and dieless affected.The watch and clock industry has been subject topressure to move out of the Pearl River Delta or outof Guangdong completely under the Ministry ofCommerce’s “Opinion on Supporting the Middleand Western Regions’ Reception of Processing TradeRelocation” (November 2007) 106 and Guangdong’s“Decision on Promoting the Relocations ofIndustries and Labour Force.” 107 Such relocation isproblematic because watch production dependson a dense supply network. Hong Kong watchfirms are attracted to the PRD due to the presenceof a complete network of suppliers of parts,components, and services such as electroplating.In an effort to encourage relocation, HepingCounty (Heyuan, Guangdong) and Shenzhenjointly established a watch industry relocation parkin 2006 with an investment of RMB 8 billion. Thepark, which aims to attract 200 firms and to provide100,000 jobs, has planned a centralised testingcentre and a centralised electroplating facility (mostwatch components need to be electroplated) tominimise pollution. As of mid-2009, 41 watchfirms were located in the Park, but relocations hadslowed due to the financial crisis. It is yet to be seenwhether the park will result in large scale movementof the industry from Shenzhen, or whether it willresult in consolidation of the industry, but it is clearthat the overall policy direction is to move watchproduction out of the core areas of the PRD.Response Strategies of Hong Kong SMEsHong Kong watch and clock manufacturers haveundertaken a variety of strategies to deal withrecent pressures. In general, Hong Kong watch andclock manufacturers are attempting to maintaintheir presence in traditional OEM manufacturingwhile at the same time trying to add value toexisting products, develop new high value addingproducts, develop their own brands, find newmarkets for their products, and work out their salesplans so as to achieve sustainable development. Wenote the following:• The downturn in traditional markets has led manyHong Kong firms to seek markets elsewhere,including Mainland China and the Middle East.For example, a 2008 survey by the HKTDC 108showed that 89 per cent of respondents wereoptimistic about the sales of watches to MainlandChina. Developing new markets takes time,however, and the scale of potential new marketseven if deeply penetrated does not currentlycompare to that of the existing European andAmerican markets.• Penetrating the China market will be difficultfor many Hong Kong SMEs, because exportprocessing and OEM business is very differentfrom distributing and selling within China. HongKong SMEs tend to be good at controlling costs,but are less knowledgeable about consumers,marketing, and distribution. Thus they mayencounter difficulties in building a businessaround domestic sales in China unless theyreconfigure their business model.106 www.gov.cn107 www.gdsme.com.cn108 Hong Kong Trade Development Council, “Offshore Trade andProduction: Development and Implications” 5 February 2008.