Hong Kong Manufacturing SMEs: Preparing for the Future

61Suga has occasionally been challenged by theshortage of labour in Mainland China and thecompany is affected when the cost of employmentincreases. The relatively low level of labour intensityin the industry makes this a lower order issue thansome others, however.The recent financial crisis was an issue for Suga, butless so than for many other firms in the consumerelectronics sector, largely due to the nature of itsproducts. Mr Ng admits that Suga’s gross profitmargin was down a bit from 13.1 per cent in fiscalyear 2008 to 11.9 per cent in fiscal year 2009.Overall, however, in terms of production, orders,and share price, the firm’s performance was prettygood and the firm was growing. Revenues fromJapanese customers were down the most becausethey focus more on the consumer products. Butthe economic downturn did not hit the educationproducts, it only slightly hit the pet products, anddemand for the professional audio products evengrew during the economic downturn.Suga’s factories are located in relatively expensiveareas. Cost increases need to be covered by thebusiness and when they frequently occur there is aneed to pass the costs along to the customer, whichis sometimes difficult.Suga has had to deal with a major and unexpectedloss of business on several occasions. Early in Suga’sdevelopment the company’s first customer ran intodifficulty and significantly cut the orders that theyplaced with Suga at a time when Suga was trying togrow and diversify its revenue streams, but before ithad managed to do so. On another occasion, one ofSuga’s customers started to do so well with Suga’shelp that they were acquired by a large companythat then decided to take the business that hadpreviously been given to Suga in-house. Mr Ngnotes that “even excellence in a specialised field orniche area may not make the company successful,or even if we are doing well the result may not bethat satisfactory.” The opposite situation sometimesoccurs with Suga finding that a rush of ordersstretches its existing capacity.Hong Kong’s regulatory system is simple,transparent, and the regulations are applied fairly.Things are quite different in China where there aremore regulations, the regulations change often,they are less clear and therefore pose a greateradministrative burden, and there is less certainty asto the purpose and direction of the regulations. Theregulatory environment in China requires that Sugaplace some senior executive staff in China whoknow how to deal with the system and with thegovernment officials there.Company StrategySuga leveraged a small amount of start-up capitalvery well to create a relatively large scale capacityto do manufacturing. Suga did this through“Chengbao”, meaning that Suga effectively leaseda portion of another factory’s production capacity,using the money that it otherwise would have spentin trying to establish a small production facility ofits own. This arrangement lasted for a few yearsuntil Suga attained a size and scale that enabled thecompany to set up its own factory in 1994. If notfor the Chengbao arrangement, this probably wouldhave taken much longer, if it happened at all. Goodfinancial management, including the maintenanceof strategic cash buffers at the bank along withconsiderable banking facilities, has served Sugawell, giving it great flexibility in pursuing businessexpansion if it so desires.Suga does not aim to be a low cost manufacturerbut Mr Ng thinks that maintaining Suga’smanufacturing base in Mainland China will keepthe company competitive, as will the continuedautomation of firm processes that are labourintensive.