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MADE IN 2015

Hong Kong Industries: The Way Forward

The Made in PRD 2015 Study – Hong Kong Industries: The Way Forward is a Federation of Hong Kong Industries (FHKI) project. It was commissioned to the China Business Centre of the Hong Kong Polytechnic University. The Study was sponsored by HSBC Commercial Banking and the Hong Kong Polytechnic University. The FHKI sincerely thanks them for their generous support.

© 2015 Federation of Hong Kong IndustriesAll rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a data base or retrieval system, without the prior written permission of the Federation of Hong Kong Industries.

Website: http://www.industryhk.org

Hong Kong Industries: The Way Forward

Table of Contents

Foreword 2

Preface 6Hong Kong Industries and Made in the Pearl River Delta (PRD) 6

Introducing the Study 9

Chapter 1 The Transformation of Manufacturing in the PRD 10Change in Market Direction of Manufacturing in the PRD 11

Changes in Manufacturing Structure in the PRD 13

Development of PRD Business Policies 16

Trends in the PRD Business Environment 26

Chapter 2 Hong Kong Manufacturers in the PRD Seek Changes 29Industrial Scale and Structure of Manufacturers 29

Operating Model of Manufacturers 32

Transformation of Manufacturers 39

Future Development Directions of Manufacturers 45

Chapter 3 Development Challenges of Hong Kong Industries 50Manufacturing in the PRD 50

Human Resources 50

Scientific Research and Innovation 51

Expanding Sales in the Mainland 52

Succession in Industries 53

Returning to Hong Kong 53

Summary of the Challenges Facing Hong Kong Industries 56

Chapter 4 Development Trends of Hong Kong Industries 62New Directions in International Industries 62

China’s New Industrial Trends 67

New Opportunities for Hong Kong Industries 74

Hong Kong Industries and Industrial Policy 75

Chapter 5 Policy Proposals 79Development Objectives 79

Comprehensive Plan for Hong Kong Industrial Policy 82

Actively Promote External Industrial Co-operation 97

Appendices 102Appendix 1: Summary of Focus Group Discussion 102

Appendix 2: Questionnaire 120

2

Since the global financial tsunami in 2008, we have witnessed changes in industries worldwide. Driven

by specific strategies including re-industrialisation in Europe and the US, Industry 4.0 in Germany,

Advanced Manufacturing Partnership in the US and Made in China 2025 in China, there has been an increase

in the construction of information-based infrastructure for industrial internets. This new manufacturing mode

includes using smart production, big data and the promotion of the internet era. All these are gradually

forming new structural changes in global industrial development.

In particular, Made in China 2025 advocates the Internet Plus Manufacturing Mode, smart manufacturing,

green production, as well as the transformation from a manufacturing-oriented production to a service-

oriented one. These initiatives alter the co-operation modes of Hong Kong and the Mainland, especially in

the Pearl River Delta (PRD) region.

Hong Kong’s industrial sector has been keeping up with the latest development trends in the external

economic environment and seeking for transformation and upgrading through developing environmental

technologies and green production, increasing research and development (R&D) activities and entering

into new industries and business fields in the form of investment, while a new generation of R&D-based

enterprises is also emerging.

At present, there are ample opportunities for Hong Kong industrial development brought about by Made

in China 2025 and industrial policies in the PRD region. Initiatives including smart manufacturing, green

production, service-oriented manufacturing, and integration of the internet and the manufacturing industry

have been proposed, capitalising on the major trends of global industrial development. The industrial sector

of Hong Kong can engage in these developing fields in the Mainland and leverage its advantages in servicing

to foster the transformation and upgrading of Hong Kong manufacturers operating in the PRD region.

On the other hand, Hong Kong, as an international metropolis, is an international finance and service centre

in the region. Equipped with a well-established intellectual property system, Hong Kong is notably suitable

for launching projects on cross-national industrial R&D co-operations for developing knowledge-based

manufacturing modes.

Foreword

3

The focus of this Study is to understand the changes in the operational environment in the PRD region and

the modes of business of Hong Kong enterprises from 2008 onwards. This will help explore how the related

industry players including Hong Kong manufacturers, production service providers, R&D institutions and

university graduates assess the current situations and plan ahead for the future. The report details a range

of recommendations on how to drive the sustainable development of Hong Kong industries. The focus is

a comprehensive set of industrial policies and systems to increase Hong Kong’s industrial resources, enhance

its industrial competitiveness, boost a diversified development and improve the environment conducive to its

industrial development.

The Study findings show that the operational environment in the PRD, in areas of the import and export

clearance as well as the electricity supply, has improved. But enterprises are still under substantial pressure

with concerns over labour shortages, soaring production costs and the tightening up of labour laws. In the

face of acute challenges rising from these new changes, we are pleased to see that many Hong Kong

manufacturers have adopted proactive measures. In fact, the manufacturing industry is an indispensable part

of the economy and livelihoods (as in clothing, food, housing and transportation). While Hong Kong devotes

efforts to develop the service sector including finance, logistics, tourism and retail, it should also strengthen

its industries as a key pillar in its real economy to secure a solid economic base. In the face of the “shuffling”

changes brought about by the Internet Plus era to the market, technology and manufacturing activities,

Hong Kong industrial enterprises, the production service providers as well as the Government should all take

proactive steps to adjust and transform themselves accordingly, to respond to the challenges of industrial

structural changes and strive for another breakthrough for Hong Kong industries. The Federation of Hong

Kong Industries will continue to assist our members and other organisations to engage in this endeavour.

Professor Daniel M Cheng

Chairman, Federation of Hong Kong Industries

October 2015

4

The Mainland has stepped into the period of the 13th Five Year Plan, which is also the beginning stage of

the Belt and Road Initiative. Its economic reforms are believed to continue to deepen and Hong Kong

should seize the opportunities brought about by these developments. The release of the 2015 Made in PRD

Study: Hong Kong Industries: The Way Forward comes at the right time. It principally describes the changes

of the operating conditions of Hong Kong enterprises in the Pearl River Delta (PRD) region since 2008 and

their future operational directions, thus exploring the road ahead for Hong Kong industries.

Since 2002, the Federation of Hong Kong Industries (FHKI) has carried out regular investigations into

manufacturing in the PRD region with a view to assisting Hong Kong enterprises’ development in the region.

The Hong Kong Industries: The Way Forward is a report on results of a questionnaire survey conducted by

the research team led by Dr Thomas Chan, Head of China Business Centre of the Hong Kong Polytechnic

University, from March to December 2014 in Hong Kong and Dongguan. It is also the fourth of the Made

in PRD report series published by the FHKI, serving as an important reference for Hong Kong’s industrial

development.

In the 80s and 90s, manufacturing in the PRD region brought enormous development opportunities to

Hong Kong enterprises, taking off Hong Kong’s industries and contributing to the whole economy. The

Guangdong-Hong Kong “Front Shop, Back Factory” operation mode was also formed at that time. Since

2006, however, the business operation environment in the PRD has experienced gradual changes – shortage

of Mainland labour and land resources and policy adjustments in various industries, import and export, labour,

and exchange rate, etc. Meanwhile, the 2008 world financial crisis further gave Hong Kong enterprises a

hard impact. Some of them could not adapt to the changes and had to relocate or close their businesses,

resulting in a decrease in the number of Hong Kong factories operating in the PRD region in recent years.

Those still in operation have to adjust their business strategies by adopting various changes, for instance,

adding automated facilities, tapping into the domestic market, creating their own brands, setting aside more

resources for R&D and design, as well as relocation to overseas.

Having said the above, prolonged operation of Hong Kong manufacturers in the PRD has also resulted in the

hollowing out of industries in Hong Kong, which has indirectly created a serious talent gap. The succession

problem in the industrial sector also limits the sustainable development of our industries.

5

During my term as the FHKI Chairman from 2013 to 2015, all the General Committee and I rendered our

full support to encourage enterprises in the PRD region to leverage on Hong Kong’s advantages. Being

an international city with a mutual commercial relationship with the Mainland should enable Hong Kong

industries to develop new business opportunities as well as to transform and upgrade themselves. Such will

continue to be the work of the FHKI.

The development of Hong Kong industries needs the support from substantial government policies. Without

this, Hong Kong enterprises are bound to encounter difficulties in their transformation and upgrading

process. This report suggests that the Mainland Government should strengthen its co-ordination efforts with

enterprises in policy consultation in order to enhance the business environment and manufacturing conditions

in the PRD region. The SAR Government is also advised to initiate more co-operation with the Guangdong

Provincial Government to improve the manufacturing situations and conditions in the PRD region.

Currently, Hong Kong industries have entered into an era of re-positioning and image-rebuilding. Their key

role in promoting long-term development of the overall economy and society must be recognised by the

SAR Government which should establish a comprehensive industrial policy without delay. I sincerely hope

this research report can receive active responses from both the Guangdong and Hong Kong Governments,

industrial and business sectors as well as other stakeholders.

Stanley Lau

Honorary President, Federation of Hong Kong Industries

October 2015

6

HONG KONG INDUSTRIES AND MADE IN PEARL RIVER DELTA

Hong Kong’s Industrial Development Hong Kong’s industrial development began at the end of the 19th century with British investment in sugar and shipbuilding and Chinese investment in the production of matches, soap, and other products. Before the 1950s, Hong Kong’s manufacturing mainly served the local market and sold goods to China and Southeast Asian countries; it also used the British Empire’s Ottawa Agreement to promote international trade. The scale of Hong Kong’s manufacturing was small and its impact on the local economy’s development was not so evident. 1

The first breakthrough for Hong Kong’s industrial sector came after World War II. A large number of Mainland entrepreneurs and refugees moved to Hong Kong and set up a manufacturing system—its mainstay being light industries and labour-intensive processing trade. From 1950 to the mid-1980s, development peaked for the local manufacturing industry. It was the leading component of Hong Kong’s GDP until 1988, representing over 20 per cent. 2 The manufacturing sector employed a large portion of the local population, increasing from 47,000 in 1947 to a peak of 905,000 in 1984, which was 41.7 per cent of the city’s workforce at that time. 3 From 1950s to the 1970s, the western world imposed a trade boycott on China: very

Preface

limited import and export to the Mainland greatly weakened Hong Kong’s role as an international entrepôt. Manufacturers subsequently threw all their efforts into developing the European and American markets, which became the largest export markets for Hong Kong’s manufactured goods. Hong Kong officially entered the world market where it remains today.

At the close of the 1970s, Hong Kong’s industrial development faced a challenge: the rate of increase in the export of manufactured goods declined. The colonial government set up the Advisory Committee on Diversification, and in 1979, it presented its report. Analysing the constraints on the city’s industrial development, it recommended policies to promote industrial diversification, including adjustments in the use of industrial land, development of finance and education, industrial support, trade promotion, and external trade-related negotiations. This report also briefly mentioned the start of Hong Kong manufacturers’ investment in processing trade in Shenzhen. It recommended that the Government pays close attention to the development of the Pearl River Delta (PRD) and, at the appropriate time, improves co-operation between Guangdong and Hong Kong. This was the first mention in an official report suggesting that Hong Kong’s manufacturing industry should consider linking with the PRD.

Recommendation of this report was not implemented. Hong Kong was then entering a transition period before the return to China, and the new position of Hong Kong’s industrial system was not a priority of the Government. More importantly, after China’s open-door policy was introduced, every level of the Guangdong Government was providing all kinds of preferential concessions to encourage Hong Kong manufacturers to invest in and transfer their manufacturing to the PRD. This brought about the second breakthrough in Hong Kong’s industrial sector, not as a result of internal policy changes but from external factors. If the first breakthrough was to develop external markets, then the second was to extend the manufacturing base from Hong Kong into the PRD.

1 莊重文，《香港工業之成長》，香港：三聯書店香港分店，1986年，第5頁。The Economist Intelligence Unit, Industry in Hong Kong, Hong Kong: South China Morning Post, 1962, pp.1.

2 Industry Department of Hong Kong Government, 1996 Hong Kong’s Manufacturing Industries, pp. 8.

3 Census & Statistics Department, Hong Kong Statistics 1947-1967. Census & Statistics Department, Hong Kong Annual Digest of Statistics 1986.

7

The first breakthrough, from the 1950s to the 1960s, was due to industrialists coming from the outside (especially from Shanghai) investing in manufacturing in Hong Kong, creating the industrial base of “Made in Hong Kong” with Europe and the US being the major markets. Conversely, the second breakthrough, from the 1980s to the 1990s, was the expansion of investments of Hong Kong industrialists to the outside world. Hong Kong manufacturers set up factories in the PRD and promoted a change from “Made in Hong Kong” to “Made by Hong Kong”. This resulted in explosive growth for Hong Kong industry from 1980 to 2000.

Hong Kong Industrialists and Made in PRD From the perspective of Hong Kong industries, “Made by Hong Kong” and “Made in PRD” were like a single operation. It involved the manufacturing relocation of Hong Kong industrialists, as well as the expansion of their investment to the PRD. For Hong Kong’s overall economic development, it was a spatial expansion for its services, especially its producer service networks. Its economic hinterland increased from the 1,000 square kilometres of Hong Kong to the 40,000 square kilometres of the PRD. This formed the cornerstone of Guangdong-Hong Kong co-operation. This promoted the co-operation and division of labour between the PRD’s manufacturing system and Hong Kong’s service system, creating the distinctive “Front Shop, Back Factory” co-operation between Guangdong and Hong Kong.

Hong Kong manufacturers made a key contribution to the “Front Shop, Back Factory” model. They invested in factories in the PRD and simultaneously promoted their Hong Kong offices into corporate headquarters—the latter being responsible for overall market operations, financing, logistics, as well as research and development. Even more importantly, Hong Kong manufacturers worked closely with Hong Kong financial and logistics providers, transferring the PRD’s manufacturing benefits to the Hong Kong service system. This promoted the city’s economy at the end of the century to have an advanced service structure. Without the aid of the “Back Factory” in the PRD, the “Front Shop” in Hong Kong could not have expanded, and Hong Kong’s economic takeoff at the end of the century would not have been possible.

The Change of Made in PRDBy the start of the new century, Hong Kong manufacturers had completed the relocation of production to the PRD. With manufacturers from Hong Kong, Taiwan, foreign countries, and the Mainland working together, the PRD built a relatively comprehensive manufacturing system, and became the most important export production base of China as “the Factory of the World”.

From 2000 to 2008, Hong Kong manufacturers in the PRD continued to expand but also faced growing challenges. Traditional industries were the first hit: although their industrial value continued to increase, their share of the PRD’s total industrial output started to fall. This was due to the takeoff in production of IT and electronic products by Taiwan-invested firms, the clustering of Japanese auto factories in Guangzhou, and breakthroughs by Mainland companies in telecom equipment, petrochemicals, and domestic electrical appliances.

8

In addition, in 2001, China entered the World Trade Organisation (WTO), resulting in a more regulated management system of imports, exports and bonded goods. Also, the PRD extensively developed container ports, enabling manufacturers to export and import goods directly or to sell locally, thereby they no longer need to make transshipments via Hong Kong. PRD-Hong Kong ties began to weaken, leading to a decline of influence of Hong Kong production service providers in the PRD.

In 2006, China’s 11th Five-Year Plan was released. It brought a series of policy changes from the Central Government to local levels, in industrial strategies, foreign trade, labour and finance. These included the Central Government’s export tax rebate policy changes, the promulgation of the Catalogue for the Guidance of Foreign Investment Industries, the reform of the renminbi exchange rate, the promulgation of the Labour Contract Law, and policies on industrial relocation, the unification of corporate income tax and environmental protection. There was also the Guangdong’s provincial policy of “emptying the cage for new birds” for industrial relocation and upgrading in the PRD. The business environment of PRD manufacturing changed frequently and substantially.

The shortage of migrant workers in the PRD influenced the recruitment of labour-intensive industries. In 2008, the Labour Contract Law led to sharp increases in labour costs. As a result, export factories in the PRD began to plan moving out their manufacturing operations; they transferred some of their PRD manufacturing activities to the Mainland’s interior provinces where there was an abundance of large cheap labour supply. Some even left the Mainland and relocated their manufacturing to Southeast Asia. The PRD power systems could not meet the rising demand of industries; this also drove some manufacturers to move energy-intensive operations out of the PRD. Hong Kong manufacturers began to lose interest in investing in the delta.

Made in PRD after the Financial Crisis The global financial crisis of in 2008 caused export markets to shrink; this badly hit Hong Kong manufacturers, who were export-oriented. Those who built up their market base during the first industrial breakthrough were most affected. And for those who established their manufacturing base in the PRD during the second industrial breakthrough, they found it difficult to fit into the new industrial strategies stipulated in the 12th Five-Year Plan. The Plan called for the development of strategic emerging industries and modern services. Hong Kong manufacturers faced mounting pressure to develop new markets externally and adjust their operations internally. They also needed to respond to demands to upgrade from local PRD governments.

After relocating Hong Kong manufacturing to the PRD, there was a hollowing out of industries in Hong Kong itself. Manufacturing accounted for a record 24.3 per cent of the city’s GDP in 1984; by 2000, it had fallen to 4.8 per cent and, by 2013, to 1.4 per cent. The number of employees in manufacturing fell from 333,700 in 2000 (accounting for 10.5 per cent of Hong Kong’s total workforce) to 125,700 in 2013 (3.4 per cent of the total). The direct contribution of manufacturing to Hong Kong economy apparently was not significant, despite the fact that Hong Kong manufacturers created a processing trade volume of more than HK$one trillion, stimulating enormous development in commerce, trading, and logistics.

The development of industries was unable to garner significant attention from the Government or from society. This affected the Government’s allocation of resources toward industries and the interest of young people in joining the sector. So, when Hong Kong industries strived to upgrade and transform in the aftermath of the financial crisis, it lacked support resources from the city and from talented personnel. There was not sufficient vigour to move ahead.

9

Today, Hong Kong industries are again standing at the crossroads of manufacturing transformation. It is reconsidering the relations between the Hong Kong manufacturers and the manufacturing in PRD, the role of industries in Hong Kong’s economic development, and the city’s industrial future in the post-PRD manufacturing era.

INTRODUCING THE STUDY

This research study was developed on the basis of a report published in April 2007 by the Hong Kong Federation of Industries entitled “Made in PRD – Challenges & Opportunities for HK Industry”. This report studied the operations of Hong Kong-invested companies in the PRD, their sales features and R&D activities. It also assessed the business environment in the PRD. It was then the peak of Hong Kong manufacturers’ development in the delta, with booming exports. At the time, manufacturers could resolve challenges through adjusting their internal operations. They could also lobbied the Hong Kong and Guangdong governments to improve the business environment to resolve problems.

The financial crisis of 2008 had an all-round and far-reaching impact on Hong Kong manufacturers. It severely affected their external market environment and changed the PRD manufacturing setting. It spurred Hong Kong industrialists into exploring the Mainland market and internet sales. Even more importantly, in the aftermath of this global financial crisis, almost all leading industrial countries sought new ways to develop manufacturing. There were initiatives such as the “Industrie 4.0” in Germany, “Advanced Manufacturing Partnership” in the US, and the Mainland’s “Made in China 2025”.

Predictably, the “Made in China 2025” initiative will have a major impact on both the Mainland and global industrial development. The future of Hong Kong industries should no longer be limited to using cheap labour and land resources on the Mainland; it is more important to maintain the link with the Mainland’s industrial system and that of the world. Hong Kong industries and PRD manufacturing need to interact

with each other; the PRD is a platform for Hong Kong to link up with the “Made in China 2025” plan.

In the post-PRD manufacturing era, Hong Kong will reinvent itself with its industrial resources, responding to the new trends of “Internet Plus”, smart manufacturing, internationalisation, and will transform and expand in the global and Chinese industrial system. This is the springboard of the third breakthrough for Hong Kong industries.

Aiming to promote the development of Hong Kong industries, this research study has employed questionnaire surveys, focus group meetings and, in-depth interviews to collect information and date. Literature review. has also been undertaken.4 First, this report reviews changes in the operations of Hong Kong manufacturers in the PRD since 2008 and their progress in upgrading and transformation. It seeks to clarify what manufacturers expect from the Hong Kong Government in terms of strengthening industrial development, and also what they expect from governments in the PRD for improving the business environment. Through exchanges with stakeholders of the Hong Kong industries, the report seeks to understand the developmental directions of the industries’ support system. It compares key industrial development strategies in Europe, North America, and Japan and explores the “Made in China 2025” initiative. It then makes comprehensive recommendations for the development of Hong Kong industry to rebuild its industrial competitiveness.

4 This survey, carried out from March to December in 2014, targets at Hong Kong-invested manufacturers and received a total of 641 valid questionnaires. Focus group meetings and in-depth interviews covered manufacturers, industry stakeholders (such as producer service providers, scientific research organisations, Government departments, specialists and scholars). A total 10 focus group meetings and more than 20 interviews were arranged, which involved exchanges with more than 80 manufacturers and industry people.

10

Since the start of the reform and open-door policy in 1978, industry has been the most important sector propelling Guangdong’s economic development. The eastern region of the Pearl River Delta (PRD) has established a manufacturing cluster with processing trade as its mainstay, thanks to exports from Hong Kong, Taiwan, and overseas firms. The western region of the PRD has been oriented more toward the domestic market, with a manufacturing cluster producing electrical appliances, automobiles, and household products. Industries’ contribution to Guangdong’s GDP has been growing very rapidly, in terms of both the province’s total output and its percentage share. Provincial industrial output increased from nine billion RMB in 1980 to 2.7426 trillion RMB in 2013, an average annual increase of 18.7 per cent. Industries’ share in the provincial GDP increased from 36 per cent in 1980 to a peak of 47.1 per cent in 2006 . (See Figure 1.1)

Figure 1.1: Guangdong’s Industrial Development (1980–2013)

The three main forces of “Made in PRD” have been the market expansion of PRD manufacturers, the support of local governments, and improvements in the delta’s business environment; the resulting growth has been enormous and has brought about upgrades and transformation. The market is the base of the PRD manufacturing sector driving the expansion of its regional production network. Industrial policy has changed the structure and technology content of PRD manufacturing, pushing industrial upgrading and structural transformation. The PRD’s macro business environment attracts foreign investments, develops new domestic enterprises, supports existing firms, phases out backward ones, and regulates business practices.

Since 2000, and especially after 2008, great changes have occurred in the PRD with regards to market orientation, industrial policy, and business environment. These changes are due to external market factors beyond control as well as internal policy changes driven by the Mainland Government. These changes are pushing the PRD industrial system to transform and upgrade itself, advance the technological level of industrial products, and automate manufacturing. Subsequently, some traditional industries have had to move elsewhere, downsize, or close. It has been and continues to be a period of great changes in the PRD. For Hong Kong manufacturers, it is a transition period in which only the fittest will survive.

CHAPTER 1 THE TRANSFORMATION OF MANUFACTURING IN THE PEARL RIVER DELTA

30,000

25,000

20,000

15,000

10,000

5,000

0

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

1980

1985

1990

1995

2000

2005

2006

2007

2008

2009

2010

2011

2012

2013

Indu

stria

l Out

put (

10

0 m

illio

n R

MB

)

Guangdong’s Industrial Output

Share of Industries in Guangdong’s GDP (%)

Sha

re o

f G

uang

dong

’s G

DP

(%

)

Source: Guangdong Statistical Yearbook 2014

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CHANGE IN MARKET DIRECTION OF MANUFACTURING IN THE PRD

Prior to the 1980s, Guangdong only accounted for four to five per cent of national industrial output. Its industries were weak because it lacked mineral resources and had few state-owned firms; its industries ranking was among the lowest in the nation. The open-door policy brought an infusion of outside investment—more importantly, it opened up the international market. From 1980 to 2000, the income of Mainland residents was not high and their purchasing power was low; therefore, the scale of the domestic market was small. As the eastern region of the PRD adopted the export-processing model — producing labour-intensive goods such as textiles and garments, leather cases and bags, and electrical appliances — companies aggressively developed the international market. The western region of the PRD operated on an import-substitution strategy, producing in-demand electrical appliances and selling the Guangdong-made products nationwide. Both eastern and western regions of the PRD each had their own market priorities; thus, the characteristics of their products were differentiated. Companies on the east were mainly established with investments from Hong Kong, Taiwan, and foreign firms, while collective and private companies congregated on the west. Together, manufacturing clusters catering both to the export market and to domestic consumption have been built over the 40,000-plus square kilometres of the PRD.

The period from 1980 to 2000 was one of major development in globalisation. The international trading system benefitted from the end of the Cold War, the establishment of the WTO trading regulations, as well as the liberalisation of the global market. Driven by the market boom in the United States, the scale of the international market grew very rapidly. With Hong Kong facilitating as an intermediary for re-exports, PRD goods quickly entered the international market. China’s accession to the WTO in 2001 reduced the possibility that developed countries might use political means and impose trade sanctions on Chinese goods. With this new integration into the world economy, exports from the PRD further soared. In 2005, Guangdong’s industrial exports accounted for 40.9 per cent of the province’s total sales, and the structure of exports improved evidently, beginning with the export of IT and technological products with more high-tech content. 5

The 2008 financial crisis marked a watershed for manufacturing in the PRD, causing a major downturn or even shrinking in export markets. To counter the global recession, the Mainland Government adopted many policies to stimulate consumption, including subsidising electrical appliance purchases in rural areas and automobile purchases. This stimulated growthin Guangdong’s auto sector and Shunde’s appliance sector appliance from 2009 to 2011.

5 Guangdong Provincial Statistics Bureau, 24 January 2008, http://www.gdstats.gov.cn/tjzl/tjkx/200801/t20080124_52500.html.

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Thus, the domestic market continued to grow while exports became less important. The proportion of exports of Guangdong’s industrial enterprises above Designated Size 6 fell continuously, to 28.3 per cent by 2013, and the influence of exporting factories in Guangdong’s industrial system quickly weakened. (See Table 1.1)

Guangdong’s total retail consumer sales continued to grow, maintaining double-digit growth; this underscored the opportunities in the Mainland market. After the financial crisis, the total volume of imports and exports fluctuated with great volatility, falling by as much as 10.6 per cent. Starting in 2012, growth vacillated between 1.3 and 10.7 per cent. The proportion of international trade volume in total consumer sales fell from 467 per cent in 2006 to 266 per cent in 2013. (See Figure 1.2)

The sales boom on the Mainland prompted export manufacturers in the PRD to explore opportunities in the domestic market; they hoped to find a new source of growth outside the weakening export market. The Guangdong Government utilised numerous fiscal resources to promote Guangdong products all over the country. The objective was to “stimulate consumption, expand domestic demand, modify the structure, and stabilise growth.” One example was the introduction of the “Buy Guangdong Goods Online” campaign in line with the boom of online purchasing. In 2012, the Hong Kong SAR Government introduced a HK$ one billion fund, “Dedicated Fund on Branding, Upgrading and Domestic Sales” (BUD Fund), to help Hong Kong companies sell in the Mainland.

Figure 1.2: Comparison of Guangdong’s International Trade with its total Consumer Retail Sales (2000–2013)

Table 1.1: Sales of Guangdong’s industrial enterprises above Designated Size (2000-2013)

2000 2005 2010 2011 2012 2013

Value of Industrial Sales (billion RMB) 1,215.6 3,504.6 8,364.7 9,262.5 9,375.4 10,685.4

Value of Export Shipments (billion RMB)

463.4 1,432.7 2,591.9 2,740.8 2,854.1 3,020.5

Proportion of exports in total sales 38.1% 40.9% 31.0% 29.6% 30.4% 28.3%

Sources: Guangdong Statistical Yearbook 2012 and 2014

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0

500%

450%

400%

350%

300%

250%

200%

150%

100%

50%

0%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Val

ue (

10

0 m

illio

n R

MB

)

International Trade Value

Total Retail Sales of Consumer Goods

Ratio of International Trade to Total Retail Sales

Rat

io o

f In

tern

atio

nal T

rade

to T

otal

Ret

ail S

ales

Source: Guangdong Statistical Yearbook, various issues.

6 In 1998, the State Statistical Bureau divided its industrial statistics into two parts: industrial enterprises above Designated Size, and enterprises below Designated Size. Industrial enterprises above Designated Size were defined, from 1998 to 2006, as “all state-owned companies, and non-state-owned enterprises with an annual revenue of more than five million RMB from their principal business”. From 2007 to 2010, this definition was “industrial enterprises with an annual revenue of more than five million RMB from their principal business”. Since 2011, the revenue amount has been raised to more than 20 million RMB for these firms.

13

For many years, the marketisation level of Guangdong’s economy has been higher than that of other provinces and cities; this can be attributed partly to the PRD’s export-oriented model. Exporting manufacturers in the PRD have been conducting international trade which requires their operational methods to comply with global economic and trading practices; the management of these companies has also been standardised.The primary markets for PRD manufacturers are changing, and different markets have different rules of operation; this has led manufacturing enterprises as well as the overall industrial structure to change accordingly. The 2008 financial crisis shifted the market’s centre of gravity and put enormous pressure on export manufacturers on the PRD’s eastern side. Manufacturers in Guangzhou and on the western side still had the competitive advantage of selling to the domestic market. This shifted the manufacturing balance between the eastern and western regions, with Hong Kong manufacturers on the eastern side being more greatly affected.

CHANGES IN MANUFACTURING STRUCTURE IN THE PRD

The development of Guangdong industries has been closely related to its industrial policy. At the end of the 20th century, industries in the PRD applied the model of attracting investment from Hong Kong, Taiwan, and foreign enterprises; within a short period of 20 years, it subsequently built a manufacturing base and a comprehensive industrial supply system.

From the 10th to the 11th Five-Year PlanAfter 2000, there were major changes in Guangdong’s industrial strategy; this not only spurred the rate of industrial growth, more importantly, it modified the structure of industry. Guangdong’s “10th Five-Year Plan” (2001–2005) presented a trio of traditional, new, and potential industries. The province’s “11th Five-Year Plan” (2006–2010) promoted the development of nine major industries. Of these, electronics and telecom, electrical machinery and specialised equipment, as well as oil and petrochemicals were the three new industries; textiles and garments, food and beverage, and construction materials the three traditional industries; and automobiles, pulp and paper-making, and pharmaceuticals the three potential industries.

14

The 2008 financial crisis badly affected the export-oriented electronics and IT sector. However, led by sales of the traditional industries of textiles, garments, and construction materials, the high-potential sectors of automobiles and motorcycles did quite well. Guangdong Province therefore again changed its industrial development outlook in its “12th Five-Year Plan”. (See Table 1.2)

12th Five-Year PlanGuangdong Province’s 12th Five-Year Plan proposed a modernised industrial system and development of strategic new industries and advanced manufacturing. It included high-end electronics and

IT products, energy-efficient cars, semiconductor lighting, energy-saving and environmental protection, solar photovoltaics, nuclear power equipment, wind power, biotechnology, new materials, aviation, aeronautics, and marine development. By 2015, Guangdong expects the production scale of these strategic new industries to exceed two trillion RMB, with advanced manufacturing and high-technology manufacturing accounting for 50 per cent and 26 per cent, respectively, of the industrial added-value of enterprises above the Designated Size.

In 2014, Guangdong’s advanced manufacturing and high-technology manufacturing accounted for 48.1 per cent and 25.7 per cent, respectively, of industrial added-value above Designated Size. 7 The province’s electronics and telecommunications equipment production (part of high-technology manufacturing), benefitted from the development of smart phones and grew by an annual average of 22.6 per cent from 2011 to 2013, having the fastest growth of any industrial sector. (See Table 1.3)

Table 1.2: Industrial Added-Value of Guangdong’s Nine Major Industries (2005-2010)

Value-Added of Industry (billion RMB) 2005–2010Annual Growth (%)2005 2010

Value-Added of Industrial Enterprises above Designated Size

941.6 2,298.8 19.5%

Value-Added of Nine Major Industries 683.3 1,600.2 18.6%

Three Emerging Industries 462.4 1,005.3 16.8%

Electronic and Information Technology 209.5 430.6 15.5%

Electric Equipment and Special-Purpose Machinery

132.2 312.0 18.7%

Petroleum and Chemistry 120.7 262.7 16.8%

Three Traditional Industries 150.0 380.9 20.5%

Textile and Garments 57.2 147.5 20.8%

Food and Beverage 56.0 123.6 17.1%

Building Materials 36.7 109.8 24.5%

Three High-Potential Industries 71.0 214.0 24.7%

Logging and Papermaking 21.1 55.0 21.2%

Medicine 11.4 27.9 19.7%

Automobiles and Motor Vehicles 38.5 131.1 27.8%

Source: Guangdong Provincial Statistical Yearbook 2006, 2011

7 Guangdong Provincial Statistics Bureau, 23 Jaunary 2015, http://www.gdstats.gov.cn/tjzl/tjkx/201501/t20150123_196150.html

15

In 2013, nine cities of the PRD met their respective development targets set by Guangdong. Shenzhen ranked first: the city’s advanced manufacturing and high-technology manufacturing accounted for 71.4 per cent and 60.3 per cent, respectively, of the city’s industrial added-value. Shenzhen also completed

Table 1.3: Industrial Added-value of Advanced and High-Technology Manufacturing in Guangdong (2011–2013)

Industrial Added-value (billion yuen) 2011 2013 2011–2013 Annual Growth

Industrial Added-value of Enterprises above Designated Size

2,166.3 2654.0 10.7%

Advanced Manufacturing Industry 1,032.6 1,271.5 11.0%

Equipment Manufacturing 732.5 944.8 13.6%

Steel and Iron Processing 39.5 41.6 2.7%

Petroleum and Chemical Industry 260.7 285.0 4.6%

High-Technology Industry 474.1 665.4 18.5%

Information and Chemical Products 2.4 3.0 10.6%

Medicine 28.7 38.5 15.7%

Aircraft and Spacecraft Industry 1.9 2.5 16.2%

Electronic and Communication Equipment 341.5 513.0 22.6%

Computers and Office Equipment 84.0 85.8 1.0%

Medical Equipment, Instruments, and Metres 15.6 22.7 20.8%

Source: Guangdong Statistical Yearbook 2012, 2014

Table 1.4: Industrial Added-value of Advanced, High-technology Manufacturing of PRD Cities (2013)

Industrial Added-value (billion RMB) Share of Local Industrial Added-value

Advanced Manufacturing

High-technology Manufacturing

Advanced Manufacturing

High-technology Manufacturing

Guangdong 1,271.5 665.4 47.9% 25.1%

Pearl River Delta 1,116.3 631.0 52.0% 29.4%

Shenzhen 413.5 349.2 71.4% 60.3%

Guangzhou 244.9 53.2 55.1% 12.0%

Foshan 125.4 28.3 32.4% 7.3%

Dongguan 112.0 86.4 46.2% 35.6%

Huizhou 94.4 59.5 66.3% 41.8%

Zhongshan 41.4 19.5 34.6% 16.3%

Zhuhai 35.8 22.0 45.7% 28.1%

Zhaoqing 27.0 8.1 33.4% 10.1%

Jiangmen 21.9 4.8 31.4% 6.8%

Source: Guangdong Statistical Yearbook 2014

upgrading its industrial technology: its enterprise composition transformed from one dominated by foreign-invested firms to that of domestic private hi-tech companies, establishing a new structure under which domestic and foreign companies developed together. (See Table 1.4)

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Over the past decade, Guangdong’s industrial structure has transformed due to changes in its industrial policy. In 2000, the respective shares of light and heavy industry in total industrial output were about the same. Since then, driven by projects in petrochemicals, iron and steel, automobiles, and nuclear energy, the proportion of heavy industry has gradually increased. Conversely, the proportion of Guangdong’s industrial added-value contributed by foreign-, Hong Kong-, Macau-, and Taiwan-invested companies has fallen from over 50 per cent in 2000 to less than 50 per cent today, with those of Hong Kong, Macau, and Taiwan falling the fastest. In 2013, the proportion of their industrial added-value was less than 25 per cent of the province’s total. (See Table 1.5)

Since 2000, Guangdong’s industrial policy has basically enabled the PRD to transform its industrial structure. It has evolved from a model driven by foreign, Hong Kong, and Taiwan investment to one in which domestic and foreign companies are balanced. t has also switched from a model based on labour-intensive manufacturing to a technology-intensive one producing equipment. However, close attention should be paid to the fact that the links between Hong Kong and PRD manufacturing have declined quickly.

One reason for this decline is the decreasing number of Hong Kong companies in the PRD manufacturing system. More important is the lack of progress in technological development, making it difficult to expand scale of production, so manufacturing operations can only respond passively to new circumstances.

DEVELOPMENT OF PRD BUSINESS POLICIES

Changes in Policy Direction The PRD’s system of business policies started to change in 2006 following the 11th Five-Year Plan (2006–2010). Post financial crisis, during the 12th Five-Year Plan (2011–2015), it made more adjustments. The business policies brought many challenges to Hong Kong manufacturing in the PRD and affected the collaboration between Hong Kong industries and PRD manufacturing.

Domestic demand and foreign trade being equally important, When the Central Government drew up the 11th Five-Year Plan, it adopted the principle of “transformation” to guide its economic policies. First, it changed the development model from one of over-reliance on export markets to one in which domestic demand and the international market could develop together.

Table 1.5: Added-value of Guangdong’s Industrial Enterprises above Designated Size (2000–2013)

2000 2005 2010 2012 2013

By Industry

Light industry 47.6% 41.8% 39.5% 39.3% 38.9%

Heavy industry 52.4% 58.2% 60.5% 60.7% 61.1%

By Ownership

Foreign, Hong Kong, Macau, and Taiwan Investment

54.5% 63.1% 52.1% 48.4% 46.2%

Foreign-invested enterprises 16.8% 28.2% 25.6% 23.7% 23.1%

Hong Kong-, Macau-, and Taiwan- invested enterprises

37.7% 34.9% 26.5% 24.7% 23.1%

Source: Guangdong Statistical Yearbook 2014

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Second, it aimed to slow the enormous rise in foreign exchange reserves (which had reached US$818.9 billion by 2005) caused by surpluses in merchandise trade. It also set out to reduce the number of anti-dumping sanctions against China’s exports brought by the international community. The plan called for long-term trade balance. The Central Government chose the sector of processing trade, which had large trade surpluses, as a priority for reform; it hopes this would bring the foreign reserves to a reasonable level.

Strengthening the rights of workers: The 11th Five-Year Plan covered the period when the Mainland was at a crossroads, with its “population dividend” diminishing. After the rural reforms of 1979, huge numbers of young farmers moved from the villages to work in manufacturing in the cities. By 2000, they were entering middle age. In the 1980s, the Mainland implemented the one-child policy, and by 2000, its consequences were becoming clear as the number of young people had fallen quickly. Additionally, in 1999, the Mainland began increasing recruitment of college students in a bid to raise the educational level of the youth. Young people with higher education, however, preferred to work in the service sector, which indirectly suppressed growth of the migrant labour force. A shortage of migrant workers first hit the PRD’s manufacturing system in 2003; then the shortages occurred more frequently, eventually becoming a fact of life. These labour shortages caused a shift in the balance of power between employers and employees, with the bargaining advantage favouring the latter. This prompted the Mainland Government to introduce gradually, in 2006, labour-related laws and regulations to strengthen the rights and improve the livelihood of workers.

Changing the processing trade in the PRD: The Yangtze and Pearl River Deltas historically have been the two large regions for processing trade. The Yangtze Delta supported concentrations of large-scale Taiwan factories producing notebook computers, IT, and electronics products. Taiwan started investing in the Mainland after 2002, producing goods with a high technological level. Their factories belonged to the high-tech sector, and their operations conformed to standard business practices. The PRD supported a concentration of traditional and labour-intensive industries, most of which had invested in the Mainland between 1980 and 2000, with a low technology level. The majority of these firms were small- and medium-sized companies who often did not meet regular business standards. The PRD therefore became a priority reform area for processing trade, with most related reform measures first being introduced there. This had an enormous impact on export-oriented processing factories in the PRD: it promoted transformation but also suppressed changes in some cases.

The PRD strengthens the service sector: The financial crisis continued to affect exports from the PRD. After the four trillion RMB stimulation of consumption, domestic demand resumed its normal growth. Growth of international and domestic consumption subsequently slowed, which was not conducive to manufacturing expansion. Added to the long-standing difficulties of the PRD’s labour shortage, Guangdong was unable to fulfill targets set in the 11th Five-Year Plan, especially in the nine big sectors. In its 12th Five-Year Plan, the province proposed the development of a “modern industrial system” with special emphasis on a “modern service sector”. Manufacturing sectors other than strategic new industries found it hard to attract policy support; sometimes they even had to shoulder the pressure screated by these policies.

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Government Restricts Processing Trade The Mainland’s trade processing policy aimed at providing export tax rebates for intermediate domestic inputs and materials. It implemented bonded supervision for imported intermediate inputs and materials in order to encourage the export of products. Bonded supervision uses two systems, a customs duty deposit system and a “deep processing transfer” system, to charge customs duty on processing materials imported by the processing company. Depending on the nature of the company, a “nominal payment”（空轉）, or a 50 per cent deposit, or actual payments（實轉） would be applied. This nominal payment system involved no actual payment but provided great convenience in terms of capital management to trade processing firms. The Mainland Government concentrated its changes in policy in three main respects:

1. Changing the export tax rebate: The Mainland changed the rebate rates to encourage labour-intensive processing firms to transform and upgrade. In September 2006, Mainland ministries issued two documents, one being The Circular on Adjustments Made to the Export VAT Rebate Rates for Certain Products and the Expansion of the Prohibited Category under Processing Trade (Finance and Tax [2006], Circular No.139); the other being A Supplementary Circular on Adjustments Made to the Export VAT Rebate Rates for Certain Products (Finance and Tax [2006], Circular No.145). They abolished or reduced export tax rebates for labour-intensive products as well as the so-called “two high, one resource” industries referring to production processes with high-energy consumption, high levels of pollution, and that over-used resources.

The Central Government cut export tax rebates to regulate the scale of the processing trade and to encourage such firms to use surplus goods produced by domestic firms, such as iron and steel raw materials. After the 2008 financial crisis, the Government temporarily increased the rate of the export tax rebate to maintain stability of the export industry.

2. Making adjustment to the commodities list for processing trade: In 2007, the General Administration of Customs, the Ministry of Commerce, and other departments greatly expanded the list of goods that were prohibited or restricted in processing trade. Processing firms could not use the “bonded” approach” to import products on the prohibited list nor could they apply for export tax rebates. With restricted items, manufacturers had to provide a bank-guaranteed customs duty deposit for actual payments. This put pressure on company’s cash flow. The main goods added to the restriction list in 2007 were related to plastics, textiles, furniture, crude processing of metals, and other labour-intensive items, making operations in traditional sectors more difficult.

3. Encouraging industrial relocate to central and western regions: According to customs’ classification of processing firms, Category A and B companies in the eastern region 8 had to pay 50 per cent of the tariff and VAT on the import of restricted commodities, as a customs duty deposit. Firms in these categories in the central and western regions, however, were entitled to the benefit of nominal payment under the bank guarantee scheme. Many Hong Kong and Taiwan processing firms were in the B category. The Government used this regional difference in customs duty to encourage them to relocate to central and western regions.

8 Beijing, Tianjin, Shanghai, Liaoning, Hebei, Shandong, Jiangsu, Zhejiang, Fujian, Guangdong.

19

These changes in policy toward processing trade were the first blow to export-oriented firms in the PRD. Due to the cut in export tax rebate, the rate of profit for labour-intensive traditional factories was severely affected. The new Customs Duty Deposit System for goods on the restricted list presented an obstacle to the operations of small- and medium-sized firms that were not financially strong. The Mainland’s processing policy, that of differentiating companies located in the east from the west side of the PRD, forced Hong Kong manufacturers to consider relocating their operationsto other regions or other countries’ which would be a second major relocation since their move from Hong Kong to the PRD.

Overall, these policy changes helped to promote the transformation and the upgrading of processing trade. They also encouraged manufacturers to move up the technology ladder and increase the added-value of their goods. More importantly, the changes triggered a sense of crisis among firms in traditional sectors, forcing them to confront their next move: to go forward, remain constant, or quit.

Improving Workers’ Rights In the 11th Five-Year Plan, the Government proposed, for the first time, “to completely implement the labour contract system … coordinate the three-sided labour relations system, and perfect the system managing labour disputes.” Raising income was another goal: “actively raising the income level of the lowest paid … vigorously enforcing the minimum wage system, and gradually raising the threshold of the lowest wages.” Starting in 2006, laws and regulations to strengthen workers’ rights were successively introduced. These had especially large impact on manufacturers employing a large number of workers.

Labour contract system: In 2006, the Mainland government commenced consultations on its cornerstone law for the labour contract system, the Labour Contract Law. The aim of this law was to standardise labour relations between employers and employees, setting down the rights and obligations of both sides. During this consultation

period, PRD manufacturers were very concerned about economic compensation made to workers who were dismissed or whose contracts had been terminated. The companies worried that, in the event of large-scale, sudden resignations, they would have difficulty covering this unforeseen expenditure. Those most affected would be enterprises employing large numbers of workers with long years of service. Before Labour Contract Law came into effect, many manufacturers signed new employee contracts in the second half of 2007, reducing the length of service to zero. In Guangdong, some workers went on strike because neither workers nor companies fully understood the Labour Contract Law, and Mainland labour departments could not adequately provide an authoritative explanation of the new Law.

From September 2007 to April 2008—that is, the initial implementation period of Labour Contract Law—some Taiwan-invested companies even closed down in southern China. This perhaps had less to do with Labour Contract Law and more to do with workers’ reactions, disputes, and strikes related to the Law. Finding the situation untenable, these companies decided to close down. 9 The implementation of this Law had major impacts on employer-employee relations. Workers who were idle and irresponsible chose a passive work attitude or used confrontational means to test their employers, causing companies to set even stricter staff regulations: the two sides lost confidence in each other. It was a vicious circle for both parties. By comparison, Hong Kong manufacturers in the PRD did not take this extreme step of closing down. Rather, most of them controlled and reduced the size of their workforce and established standard human resource management systems.

9 Taiwan: Investment Commission, MOEA, 2008, pp. 54-61.

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Minimum wage system: To meet the national policy demand of “raising the income level of the lowest paid”, governments in the PRD started, in 2006, to increase the minimum wage incrementally, on average every 12-18 months. This was to ensure that the increase in workers’ income was higher than inflation and thus achieved the goal of improving people’s living standards. After the financial crisis, inflation on the Mainland rose rapidly, forcing the minimum wage higher and to be adjusted more often. In Shenzhen, minimum wage rose from 1,000 RMB a month in 2008 to 1,600 RMB in 2013 and 2,030 RMB in 2015, effectively achieving a double in seven years.

Hong Kong companies in the PRD had not been greatly affected by these minimum wage increases for several reasons. First, their firms attracted high-quality technical staff whose wages already far exceeded the minimum wage. Second, the labour shortage made these firms improve worker incentive schemes, encouraging them to work paid overtime, so their overall salary was again substantially higher than the stipulated minimum wage. Third, Hong Kong-, Taiwan-, and foreign-invested firms strictly followed the minimum wage requirements to avoid arbitration with employees. In reality, incomes and livelihoods had already improved for low-level workers in private and small-scale firms. For Hong

Kong, Taiwan, and foreign firms, the increase in minimum wage led to an across-the-board increase, from low-level to management levels. Thus, over the past decade, labour costs have greatly increased.

Labour contracts and the minimum wage profoundly changed the labour strategy of factory owners: by increasing machinery and equipment, they reduced their demand for workers. Post 2008, hiring of Guangdong manufacturing workers slowed. After the minimum wage increase in 2010, the number of workers stabilised at roughly 22 million. With newly installed equipment, the capital intensity of Guangdong’s manufacturing increased yearly, as did the average output value per worker: from 394,000 RMB in 2009, it rose to 532,000 RMB in 2013. In other words, improvements in workers’ rights played an important part in promoting the use of machinery in PRD manufacturing. (See Figure 1.3)

Changes in Processing Trade in the PRD In 2008, the Guangdong Government published Certain Opinions on Promoting the Upgrading and Transformation of the Processing Trade with the aim of comprehensively overhauling the trade policy regime: the goal was to raise the level of companies in this sector, promote the transfer of industries within the province, and help factory owners develop the Mainland market.

Transformation of firms in processing/assembly operations and compensatory trade”: “Processing/assembly operations and compensatory trade” was a model unique to the processing trade. Participating firms were not considered legal entities in the Mainland; the products they made were entirely for export and were usually not allowed to be sold in the domestic market. The PRD had the largest concentration of these firms in the country, with more than 10,000 at its peak, mainly backed by investment from Hong Kong and Taiwan. In 2008, Guangdong encouraged such firms to evolve into one of three kinds of corporate vehicles: a wholly foreign-owned enterprise, a Sino-foreign joint venture, or a Sino-foreign co-operative venture. This would enable them to make the necessary transformation with

Source: Guangdong Statistical Yearbook, various issues.

2,400

2,200

2,000

1,800

1,600

1,400

1,200

1,000

60

50

40

30

20

10

0

Employed Persons in the Industries

Per Capita Output of Manufacturing Employees

Per

Cap

ita O

utpu

t of M

anuf

actu

ring

Em

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(10

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sand

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Em

ploy

ed P

erso

ns in

the

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strie

s(1

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ousa

nd p

eopl

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Figure 1.3: Number of Employees in Guangdong’s Manufacturing and Their Per Capita Output (2003–2013)

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

21

the help of domestic sales. It would also force their management to conform more to regulated business practices and increase government tax income. The province allowed these firms to continue production while undergoing this transition. Local governments set up one-stop service facilities, jointly manned by different departments, to support firms making the change. During this period, many Hong Kong and Taiwan processing factories converted to one of these three new kinds of corporate structure.

Industrial relocation within the Province: To maintain the PRD manufacturing system, Guangdong has encouraged PRD firms, since 2006, to relocate to the province’s northern region or to its eastern and western areas; this is known as “the double transfer policy” of transferring both industry and labour10. In the delta, Guangdong proverbially “emptied the cage and changed the bird”, a policy reducing traditional industries and welcoming new industries. In its mountainous north and the eastern and western wings, it “made a forest to attract the phoenix”, priming the economic environment for the PRD’s labour-intensive industries such as textiles and garments, shoes, plastics, metals, bags and cases, toys, furniture and construction materials. The provincial government plans to invest 50 billion RMB to build one or two large-scale industrial parks for the relocated factories and to promote overall migration of industries within the province. It has also provided funds to reward processing trade firms moving to these new, less-developed areas.

Developing the domestic market: To help export manufacturers in the PRD sell to the domestic market, Guangdong has, since 2009, helped to organise the annual China Processing-Trade Products Fair in Dongguan11, a city with a large concentration of processing firms. Thanks to efforts made at all levels of the Guangdong Government, the share of the province’s processing trade in overall imports and exports fell from 61.0 per cent in 2008 to 48.2 per cent in 2013, while the share of general trade rose from 29.1 per cent in 2008 to 33.8 per cent in 2013. Foreign-invested firms, the main players of processing trade, accounted for 64.2 per cent of Guangdong’s trade in 2008; this fell to 54.2 per cent in 2013. Worth noting is that the share of Guangdong’s trade accounted for by bonded warehouses rose from 8.3 per cent in 2008 to 17.5 per cent in 2013, indicating that manufacturers had shifted from the cross-border Guangdong-Hong Kong processing trade to bonded warehouse trade within Guangdong. (See Table 1.6)

Table 1.6: Changes in Guangdong’s Trade Structure (2000–2013)

2000 2005 2008 2010 2013

By Form of Trade

General Trade 22.5% 23.8% 29.1% 34.2% 33.8%

Processing Trade 71.2% 68.2% 61.0% 56.9% 48.2%

Bonded Warehouse 2.8% 5.6% 8.3% 8.2% 17.5%

By Type of Ownership

Foreign-Funded Enterprises 54.1% 65.1% 64.2% 61.7% 54.2%

Private Enterprises 0.7% 11.9% 15.9% 21.5% 32.5%

Source: Guangdong Statistical Yearbook, various issues

10 Labour-intensive industries in the PRD moved to the eastern and western wings, and northern mountain districts of Guangdong. Labour in these regions shifted to work in local secondary and tertiary sectors, while the more skilled labour worked in the developed areas of the PRD.

11 The Guangdong Foreign-invested Enterprises Product Fair, formerly known as Guangdong Foreign Enterprises Commodities Fair, was first held in Dongguan in 2009. In 2012, this exhibition was upgraded to become the China Processing Trade Product Fair, elevating it from the provincial to the national level.

22

The change in Guangdong’s processing trade was also reflected in Hong Kong trade statistics. Between 2001 and 2008, the estimated value of Hong Kong trade linked to the Mainland’s outward processing grew rapidly. After the financial crisis, this figure fell sharply, although in recent year sit has rebounded to some extent. In 2014, Hong Kong exported to the Mainland 580.4 billion RMB of goods to be used in outward processing trade. This figure accounted for 29 per cent of all exports to the Mainland, down from 34.4 per cent in 2008. Hong Kong also imported 755.1 billion RMB of outward processed goods from the Mainland in 2014, accounting for 38 per cent of its total imports from China12, a sharp drop from 55.9 per cent in 2008. The impact of such outward processing trade on China-Hong Kong trade and Guangdong-Hong Kong trade has been in sharp decline. (See Figure 1.4)

Overall, the most evident change initiated by the PRD’s processing trade policy has been prompting manufacturers in “processing/assembly operations and compensatory trade” to transform into one of three types of foreign-invested companies. Normally, changing a processing firm into a wholly owned venture involves complicated administrative procedures; the process would require suspending production. Some manufacturers therefore opted to close their processing factories and start a new wholly owned company rather than making the conversion. However, under strong pressure from governments in the PRD, more than 10,000 processing firms successfully switched over within two to three years.

In an effort to transform themselves, export-processing firms have been the most active in developing the domestic market because they need to explore new business frontiers. The Guangdong government has allocated many resources to promote the relocation of factories within the province; however, there have been few successes. One reason is that export factories losing orders lack incentives to expand their investment; also, it is difficult to attract migrant workers to the new locations.

12 Census and Statistics Department of Hong Kong, “Hong Kong’s Trade Involving Outward Processing in mainland China, 4th Quarter 2014”, March 19, 2015.

Source: Census and Statistics Department of Hong Kong

9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,0002001 2005 2008 2009 2010 2011 2012 2013 2014

Est

imat

ed V

alue

of H

ong

Kon

g Tr

ade

(HK

$10

0 m

illio

n)Total Exports of Outward Processing Trade, to the Mainland

Total Imports of Outward Processing Trade, from the Mainland

Re-exports of Outward Processing Trade Originating from China to Other Places

Figure 1.4: Estimated Value of Hong Kong Trade Involving the Mainland’s Outward Processing Trade

23

PRD Strengthens the Service SectorBetween 2004 and 2006, industries accounted over 50 per cent of Guangdong’s GDP and of the Province’s annual economic growth as well; it was the golden age of manufacturing in the PRD.

But the financial crisis of 2008 and Labour Contract Law dealt a double blow to export-driven, labour-intensive manufacturing. In drawing up the 12th Five-Year Plan, Guangdong emphasised the development of a modern service sector with three large development bases: Qianhai in Shenzhen, Nansha in Guangzhou, and Hengqin in Zhuhai. The delta’s governments allocated land and financial resources to support the service sector, with the slogan “withdrawing secondary industry and advancing tertiary industry”. These measures helped the service sector (or the tertiary sector) grow rapidly in 2010 in terms of its proportion of Guangdong’s GDP and of the province’s overall economic growth; by 2012, the share of services in GDP exceeded that of industry. (See Figure 1.5)

Each level of the Guangdong Government supported the service sector; the main form of this support was increasing available land, such as converting industrial land to develop services and real estate. The impact of this land policy on existing labour-intensive factories was not large, since they were cutting back on their operations anyway. However, for new factories just being established, the availability of industrial land became a restraint, following of insufficient labour.

Figure 1.5: Development of Guangdong’s Industries and Tertiary Sectors

Source: Guangdong Statistical Yearbook 2014

60%

50%

40%

30%

20%

10%

0%

70%

60%

50%

40%

30%

20%

10%

0%

Pro

port

ion

to G

uang

dong

’s G

DP

Rat

e of

Con

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on to

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ngdo

ng’s

GD

P

1980 1990 2000 2005 2008 2009 2010 2011 2012 2013 1980 1990 2000 2005 2008 2009 2010 2011 2012 2013

Proportion of Industry to GDP (%) Contribution of Industry to GDP Growth (%)

Proportion of Tertiary Sectors to GDP (%) Contribution of Tertiary Sectors to GDP Growth (%)

24

The growth of Guangdong’s service sector was partly attributed to two factors: the policy of “withdrawing manufacturing and advancing tertiary sector of PRD governments” and the growth in domestic demand following the financial crisis. In terms of real economic growth, the service sector grew by an annual average of 10.2 per cent in the post-financial crisis years of 2008 to 2013, slightly higher than the 10 per cent of the industrial sector13. This was slower than the annual average of 12.8 per cent during the 2000–2007 period. Wholesale and retail sectors, however, outgrew the 2000-2007 period, while the rate of growth in transport, storage, and postal services—all closely connected with manufacturing—slowed. Much of the growth of Guangdong’s logistics industry came from its domestic business, while growth in the overseas market was steady. (See Table 1.7)

Historically, Hong Kong has been Guangdong’s most important re-export port. However, in the past decade or so, Guangdong has built its own ports, improved its bonded tax system, and replaced a significant part of the Hong Kong logistics industry. Recently, Guangdong’s international logistics industry has been facing growth constraints; Hong Kong obviously is facing similar pressure.

Other Policy Changes Related to Business Since the 11th Five-Year Plan, Mainland governments at all levels have altered numerous policies related to the business system; these have supported or affected manufacturers to varying degrees.

Appreciation of the Renminbi (RMB): In July 2005, the rate of the RMB was no longer linked to the US dollar alone but to a basket of currencies under a floating exchange rate system. It then embarked upon a continuous ascent, from 8.19 RMB on the dollar in 2005 to 6.14 RMB in 2014. This appreciation affected traditional labour-intensive industries the most, as first, they have thin profit margins—only three to seven per cent—and often have to rely on the export tax rebate to boost profit. Second, with labour costs rising quickly in the PRD, they found it difficult to compete with cheap-labour countries in Southeast Asia like Vietnam. Third, the rate of the export tax rebate was reduced. The exchange rate of the RMB continued to fluctuate unpredictably, making it difficult for manufacturers to quote a price for their orders. After the financial crisis, Southeast Asian countries devalued their currencies, which affected the cost competitiveness of the PRD exporting system against those of newly developing countries; as a result, traditional industries staged a hastened migration to Southeast Asia. (See Figure 1.6)

Table 1.7: Growth in Guangdong’s Economic Sectors

2000–2007 2008–2013

Guangdong GDP 13.7% 9.7%

Secondary Industry 16.1% 9.8%

Industry 16.9% 10.0%

Tertiary Industry 12.8% 10.2%

Transport, Storage, and

Postal Services

12.0% 10.7%

Wholesale and Retail

Trades

11.2% 12.6%

Finance 12.7% 11.4%

Real Estate 13.0% 10.3%

Source: Guangdong Statistical Yearbook 2014

13 At current prices.

Source: China Statistical Yearbook 2014

8.60

8.40

8.20

8.00

7.80

7.60

7.40

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5.802001

8.288.19

7.97

7.60

6.956.83 6.77

6.466.31

6.19 6.14

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Figure 1.6: Annual Average of Renminbi’s Exchange Rate (Per US dollar)

25

Adjustment of the catalogue for the guidance of foreign investment industries: Since the promulgation of the Catalogue for the Guidance of Foreign Investment Industries, the Mainland has revised the list several times in accordance with the development of different industries. Catalogue for the Guidance of Foreign Investment Industries, 2007 Revision cancelled the original 2004 publication with the hopes of encouraging specific sectors; this measure was called “Types of Foreign-Investor Projects Allowed for Wholly Export of Goods”. After that, the Government no longer encouraged foreign firms to invest in traditional manufacturing such as general machinery, textiles and leather, and metallic products. Manufacturers in these sectors no longer enjoyed duty-free import of machinery, VAT, and other tax benefits. These changes hit PRD manufacturers the hardest. In light of these benefit reductions for foreign manufacturing projects and the increase in regulation, some Hong Kong and Taiwan manufacturers opted to co-operate with Mainland partners and re-established themselves in the form of “private companies” for investment in the PRD.

Reform of the Enterprise Income Tax Law: In 2008, the Mainland Government implemented a new Enterprise Income Tax Law, unifying the income tax rate for domestic and foreign firms at 25 per cent; it also restricted or reduced other tax concessions. For Hong Kong, Taiwan, and foreign companies enjoying tax concessions under the “full exemption for two years, and half exemption for three years” scheme, these concessions would be honoured according to the original laws and regulations until the end of the companies’ contracts. The new law meant that Hong Kong, Taiwan, and foreign firms would no longer enjoy tax privileges. Manufacturers who had benefitted from this scheme were obliged to operate until the end of their contracts, and it was difficult to make changes to their investment or even shut down operations before then. Some Hong Kong and Taiwan firms switched to operating as private investments, noting how Mainland Government departments provided private companies with looser tax monitoring.

Developing strategic new industries: In the 12th Five-Year Plan, the Mainland Government paid great attention to new high-tech sectors, providing manufacturers in these sectors with enormous financial assistance and tax privileges.

Reform of business management system: In recent years, the Central and Guangdong Governments have aggressively simplified and reformed the business management system and promoted online administrative systems. For example, they implemented online customs inspection for processing trade firms. In the last two years, they have also greatly reduced the kinds of projects that require official approval, making it easier for PRD manufacturers to operate their businesses.

26

TRENDS IN THE PRD BUSINESS ENVIRONMENT

2006–2007 was the peak of Hong Kong manufacturing in the PRD. The difficulties they faced then in running their operations were different than those of today. According to the 2007 Made in PRD survey, 71.4 per cent of those interviewed claim their biggest problem in operating in the PRD has been the different kinds of fees levied by local governments. Rounding out the list: customs clearance for import and export, 55.6 per cent; electricity shortages, 42.6 per cent; labour shortages, 36.3 per cent; and tax issues, 40.1 per cent. The current survey again lists these five issues in the research, adding a few new ones as well: employer-employee disputes, environmental protection regulatiions, finance channels, and cost of production. The survey also attempts to gauge whether these nine factors of running a business have, since the 2008 financial crisis, improved, worsened, or stayed the same.

Changes in the PRD Business Environment (2008 -2014) (See Figure 1.7)Most evident improvements in customs clearance and shortage of electricity: Over 60 per cent of the firms agree that, compared to 2008, there have been definite improvements in these two areas. Improvements in customs clearance have been directly related to the PRD’s upgrading of the customs management system in recent years, the use of electronic customs control, and the establishment of varying types of bonded centres. Improvements in the supply of industrial electricity have been due to the PRD’s increased capacity to supply power as well as a drop in the number of energy-intensive factories due to relocation.

Overall improvements in environmental protection regulations, local government fees, and taxation: Of the firms interviewed, 50 per cent agree that there have been improvements in environmental protection regulations and local government fees, while less than 20 per cent claim that the situation had worsened. In 2007, local government fees were the biggest headache for

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Figure 1.7: Changes in the PRD Business Environment

Source: Guangdong Statistical Yearbook 2014

Worsened

Stayed the Same

Improved

Customs Clearance for Import and Export

Electricity Shortages

Regulating Environmental Protection

Local Government Fees Tax Issues

Financial Channels

Employer-Employee Disputes

Labour Shortages

Improved 68.0% 63.7% 52.7% 58.5% 43.0% 33.7% 45.9% 13.9%

Stayed the

Same26.2% 28.1% 33.9% 24.1% 38.3% 47.4% 29.6% 16.1%

Worsened 5.8% 8.2% 13.4% 17.4% 18.7% 18.9% 24.5% 70.0%

27

PRD manufacturers. Recent years have brought clear improvement due, in part, to the transformation of manufacturers of “processing/assembly operations and compensatory trade” into foreign-funded enterprises. These new firms belong to body corporate and are subject to the standards set by the national tax system. In recent years, the poor business performance of export manufacturers has limited the room for local governments to impose fees. The Mainland tax system was reformed in 2008 with the consolidation of enterprise income tax from 33 per cent to 25 per cent. In the wake of the financial crisis, central and local governments provided special tax arrangements to help firms cope with difficulties; this also lightened the tax burden.

Stable finance channels and costs with some improvements: Almost half the manufacturers interviewed assert that, since 2008, there has been no change in the channels for and the costs of raising capital. This is mainly because most of them raise money from Hong Kong where conditions have not changed. Hong Kong financial institutions are now expanding and making improvements to their Mainland operations.

Shortage of labour and labour disputes have worsened. More than 70 per cent of PRD manufacturers claim that, in recent years, the shortage of workers in the delta has worsened. Only 13.9 per cent think the situation has improved. This shortage erupted in 2003 and settled into the norm, starting with unskilled labour and spreading to technical staff. About 25 per cent of the firms report that the frequency of labour disputeshas increased. According to the survey, most cases have been related to the implementation of Labour Contract Law, with labour departments and arbitration organisations usually siding with workers. Details involving the implementation of this Law need to be clarified and standardised.

Factors Changing the Business Environment Survey results reveal that changes in the PRD business environment can be categorised into three aspects: practical, institutional, and operational issues.

Shortages of labour and electricity are practical issues. The labour shortage was caused mainly by the Mainland’s dwindling “population dividend”. The narrowing wage gap between coastal areas and the interior was another factor, as migrant workers no longer needed to move from home for employment. The power shortage was due to a short-term insufficient supply. Power departments needed long-term investment to expand supply, and there has been a slowdown in demand for electricity along with the business slow down.

Import and export clearance, environmental protection regulations, local government fees, and taxation are all institutional issues. Local governments have expended a great deal of effort to make changes and improve business conditions. Many employer-employee disputes were due to this institutional arrangement, which included the interpretation of Labour Contract Law by government departments and the implementation of labour regulations. The tension between employers and employees in evolving labour employment has yet to be improved.

The channels and cost of financing are matters related both to running a business as well as to local economic and service systems. Hong Kong manufacturers in the PRD were initially considered an outside project, and so their financing had to come from Hong Kong. Even after three decades of a strong manufacturing presence in the PRD, they are still largely dependent on financing channels in Hong Kong. This indicates that the delta’s financing system still has much room for improvement. It also underscores the competitiveness of Hong Kong’s financial system.

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Considering all these issues, it is clear that the Mainland Government could deal with the practical challenges, for example, by increasing public investment to end the shortage of materials (such as increasing the power supply). However, the ability of local economic policies to deal with social-related resources, such as labour supply, is limited. On issues concerning the institutional framework governing business operations, the Mainland has actively taken steps, using complementary policies to implement comprehensive reforms. This has enabled the PRD to overcome a large number of major business obstacles within just five years, such as import and export customs clearance, local government fees, and taxes.

The Mainland government has also actively taken steps to support the routine business operation of enterprises, especially instrengthening ties between outside firms and the domestic economy. For example, the PRD has accelerated construction of the local financial system with the aim of attracting foreign enterprises to raise capital locally.

In summary, changes in the PRD manufacturing system have much to do with institutional factors — a result of the proactive economic policies of the Central Government. One factor is the high of marketisation degree of the PRD economy, thanks to its integration into the world. The PRD’s business system must fit, to a certain degree, international economic regulations and operating practices. This means that changes to the PRD system must be based on market conditions; only then can policy objectives be achieved efficiently.

The 2008 financial crisis had a profound impact on manufacturing in the PRD, causing a bottleneck in the development of the manufacturing-for-export model. It also resulted in a turning point in exploring the domestic market. Manufacturing must have a certain sizeable market volume; only then can it establish a relatively all-rounded production system. R&D of high-tech and creative activities requires an even larger market volume to shoulder the risks and costs involved. The transformation of “Made in PRD” will be possible with the integration of domestic and foreign markets, institutional renovation, and the participation of companies.

In retrospect, the reinvention of the PRD manufacturing model is clearly now a pressing issue.

29

By the time the Mainland Government had changed its policy on processing trade in 2006, Hong Kong manufacturers had already started planning their own change of direction. This included moving production to neighbouring provinces such as Hunan, Jiangxi, and Guangxi and installing more machinery to replace workers. Thus, although manufacturers felt the effects of the Mainland’s updated business environment, the market continued to thrive, and after some internal adjustments, operations ran smoothly.

2008, however, was a pivotal turning point. The global financial crisis combined with the Mainland’s new labour policy shook their two core operating foundations: exports and labour-intensive production. This accelerated corporate transformation. Hong Kong entrepreneurs nearing retirement age either took a “wait and see” attitude toward the future or maintained the status quo. Others took the opportunity to close their factories and leave the market, citing operating difficulties. This led to enormous change in the number and types of business models of surviving Hong Kong manufacturers in the PRD. (See Figure 2.1)

INDUSTRIAL SCALE AND STRUCTURE OF MANUFACTURERS

Based on the results of the 2007 survey Made in PRD, 8.7 per cent of Hong Kong manufacturers interviewed had begun investing in the PRD in the 1980s. Another 63 per cent had invested by the 1990s. From there, the rate of investment slowed. From 2001 to 2005, the number of manufacturers remaining in operation had started to fall dramatically: during that period, only 28.3 per cent of those surveyed remained in operation. Their investments were concentrated on the eastern region of the PRD in Shenzhen and Dongguan; these two cities accounted for nearly half of Hong Kong-invested factories surveyed.

Number of Manufacturers In a survey conducted from May to November 201414, 46.6 per cent of participants interviewed set up factories during the period of 1991-2000, the peak of Hong Kong investment in the PRD. After this initial flurry of relocating manufacturing to the Mainland, the flow of investment to the PRD slowed. From 2001-2008, only 27.3 per cent of manufacturers surveyed built new factories in the PRD. After the financial crisis, their investments in the region fell sharply: many closed their operations or transferred their businesses to Mainland buyers. The number of Hong Kong manufacturers in the PRD was in steep decline: only seven per cent of those surveyed set up new PRD factories after 2009, compared to 19 per cent in the 1980s. (See Figure 2.1)

CHAPTER 2 HONG KONG MANUFACTURERS IN THE PRD SEEK CHANGES

50.0%

45.0%

40.0%

35.0%

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%

1980-1990 1991-2000 2001-2008 2009 and after

19.0%

46.6%

27.3%

7.0%

Figure 2.1: Date of Establishment of Hong Kong-invested Firms

14 Results are based on 641 valid responses. The survey itself was conducted in Hong Kong and the PRD; the PRD portion was largely focused on manufacturers in Dongguan.

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The number of Hong Kong manufacturers in the PRD fell rapidly from it speak in 2007, an estimate based on relevant data collected by the research team and comprehensive survey results. By the end of 2013, roughly 32,000 manufacturers remained15, but the impact of their investment in the PRD was diminishing.

The date of establishment of surveyed firms was closely related to the development path of Guangdong-Hong Kong industrial interdependence.In the 1990s, the “Front Shop, Back Factory” model was a result of close co-operation and interdependency between industries in Hong Kong and Guangdong, and thus Hong Kong-invested firms proliferated during this period. But at the turn of the century, manufacturing in the PRD needed to change, sodomestic firms grew in the wake of the financial crisis. All this added to the growing pressures facing Hong Kong manufacturers.

Industrial Structure At the close of 2013, the industrial structure of Hong Kong-invested enterprises was similar to that in the Made in PRD survey: its defining feature being its diversity. Three main sector categories accounted for more than two-thirds of the total breakdown. Electronics ranked first, with 17.1 per cent, followed by traditional industries like textiles at 8.7 per cent, garments at 7.1 per cent, and toys at 4.0 per cent. Then came auxiliary industries, like metal manufacturing at 13.8 per cent, plastics at 12.7 per cent, paper and printing at 7.8 per cent, and moulding at 2.5 per cent.

15 Made in PRD (2007) used a broader definition of “Hong Kong business” in estimating the investment scale of Hong Kong-funded enterprises in the PRD. This definition included businesses for which (1) major decision-making management or operation rights were controlled by Hong Kong residents, as well as (2) those that had offices or branches in Hong Kong. Such companies included Hong Kong-funded firms in the PRD, like those classified as “processing/assembly operations and compensatory trade” enterprises and “firms in the three categories of investment” (ie, Sino-foreign equity joint ventures, Sino-foreign contractual joint ventures, and wholly foreign-owned enterprises). They also included Mainland-invested firms with offices or subsidiaries in Hong Kong and some Mainland-invested firms in Guangdong with shareholder investment from Hong Kong firms.

Around 2008, a large number of Mainland-funded firms in the PRD began using Hong Kong as an investment springboard “to go global” or set up subsidiaries in Hong Kong. They wanted to take advantage of the city’s international status to facilitate trade and financing. If we had continued using the broader definition of “Hong Kong business” a large number of Mainland firms would be counted, including many listed in Hong Kong. This would over-estimate the scale of investment by Hong Kong firms in the PRD.

In this survey, we have used a narrower definition of “Hong Kong business” as follows: (1) companies whose main source of capital comes from Hong Kong, including “processing/assembly operations and compensatory trade” enterprises and “firms in the three categories of investment”; (2) companies controlled or managed by Hong Kong residents, including Mainland-invested firms in Guangdong with Hong Kong shareholders; and (3) Hong Kong companies that have continued industrial and commercial activities in China. This survey has adjusted the statistical basis to accurately estimate the influence of Hong Kong-invested firms in the PRD. Applying this new calibration, our survey counts roughly 32,000 active Hong Kong firms. This number should not be statistically compared with the 57,000 Hong Kong firms in Made in PRD (2007).

Elaborating on this second category of “Hong Kong firms” as defined in our survey, we include Mainland enterprises managed by Hong Kong businessmen and those in which Hong Kong businessmen hold shares. This figure is not covered by either national statistical bureaus or Mainland industrial and commercial departments. Our comprehensive tally of Hong Kong manufacturers is therefore higher than that published in Guangdong’s official statistics.

31

Hong Kong manufacturers in the PRD established the electronics and traditional industries first, exploiting their strengths with an export-oriented production value chain. (See Figure 2.2)

Corporate SalesSME accounted for the majority of Hong Kong manufacturers in the PRD: More than half of the Hong Kong investors surveyed had annual sales less than HK$50 million. Small firms with annual sales less than HK$10 million accounted for 26.9 per cent of all companies interviewed, and with the number of small firms in Dongguan was especially large, accounting for 31.4 per cent of the Dongguan’s surveyed enterprises. These companies provided support services that proved crucial to the delta’s major companies, forming an indispensable part of the PRD manufacturing system. (See Fig 2.3)

Larger firms branch out across China and Overseas: Of Hong Kong manufacturers with annual sales more than HK$100 million, roughly 20 per cent had factories or sales departments in the Mainland or Southeast Asia.16 Thus, manufacturers needed to reach a certain corporate scale before they could financially support expansion outside the PRD. Small- and medium-sized firms, conversely, were usually important players with strong local ties

or ties to major companies during relocation. These small enterprises were not leaders in industrial mobility.

A relatively small corporate scale of traditional and supplementary industries: According to a cross-comparison of sales volume versus industry type, firms that make electronics, electrical appliances, and optical products have greater sales volume, establishing them as the main players among enterprises with revenues of HK$100 million or more. The industries supporting them are mostly small firms—metal products and machinery, plastics, and moulding—with sales less than HK$10 million.Among traditional industries like garments, toys, and furniture, there is an even spread of small, medium, and large firms as well as an even spread of sales revenue.

Figure 2.2: Sectoral distribution of Hong Kong Industries

Figure 2.3: Sales Distribution of Hong Kong-invested Firms

Electronics, Electrical and Optical Industries

Annual Sales

Traditional Industries

AuxiliaryIndustries

<HK$5 million

HK$5-10 million

HK$10-50 million HK$50-100 million

HK$100 million-1 billion

> HK$1 billionElectronic products

Electrical appliances and optics

Textiles

Others

Garments

Toys

Leather/rubber products

Furniture

Chemical products and pharmaceuticals

Handbags and suitcasesWatches

and clocksShoes

Food and beverage

Jewellery

Lighting products

Metallic products and machinery

Plastic products

Paper productsand printing

Moulding

0.180.160.140.12

0.10.080.060.040.02

0

5.7%

24.7%

14.4%28.4%

14.1%

12.7%

16 This result is generated from a survey conducted in Hong Kong.

32

Table 2.1: Types of Hong Kong-Invested Industry Based on Sales Volume

Industry proportion

Less than HK$5

millionHK$5–10 million

HK$10–50 million

HK$50–100 million

HK$100 million-1

billion

More than HK$1 billion

Total 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Electronic products 17.53% 6.25% 12.50% 16.97% 16.06% 24.08% 17.53%

Metallic products and machinery

14.90% 18.75% 15.00% 20.12% 11.12% 11.68% 14.90%

Plastic products 12.46% 17.50% 16.25% 11.94% 13.58% 7.30% 12.46%

Textiles 9.30% 7.50% 10.00% 12.58% 9.88% 7.30% 9.30%

Garments 7.72% 5.00% 8.75% 6.92% 8.64% 9.49% 7.72%

Paper products and printing

7.37% 6.25% 8.75% 6.29% 9.88% 5.84% 7.37%

Electrical appliances and optical products

4.39% 1.25% 2.50% 2.52% 4.94% 8.76% 4.39%

Leather/Rubber products

4.04% 3.75% 5.00% 4.40% 2.47% 3.65% 4.04%

Toys 4.04% 2.50% 6.25% 2.52% 3.70% 5.84% 4.04%

Furniture 2.98% 6.25% 1.25% 1.89% 2.47% 4.38% 2.98%

Chemical products and pharmaceuticals

2.81% 1.25% 1.25% 3.77% 3.70% 2.19% 2.81%

Moulding 2.28% 6.25% 1.25% 1.89% 1.23% 1.46% 2.28%

Handbags and suitcases

2.11% 5.00% 7.50% 0.63% 1.23% 0.00% 2.11%

Watches and clocks 1.58% 2.50% 0.00% 1.89% 1.23% 2.19% 1.58%

Food and beverage 1.23% 3.75% 0.00% 0.63% 1.23% 0.00% 1.23%

Shoes 1.05% 0.00% 0.00% 1.26% 1.23% 2.92% 1.05%

Lighting products 0.70% 0.00% 0.00% 1.26% 2.47% 0.00% 0.70%

Others 3.51% 6.25% 3.75% 2.52% 4.94% 2.92% 3.51%

Traditional industries are distinctive in that they produce diversified products and at various levels. That is, manufacturers can choose from a variety of production scales. Entry into these sectors is low, making it easy for start-ups to join and also for small companies to easily expand. (See Table 2.1)

OPERATING MODEL OF MANUFACTURERS

Operating CostsOverall Operating Costs Have Risen: Since 2008, with factors such as the appreciation of the Renminbi, the increase in the Mainland’s minimum

wage, and the shortage of labour, operating costs for Hong Kong manufacturers in the PRD have risen continuously. More than one-third of manufacturers have seen costs rise between 21 and 40 per cent. Less than five per cent have seen costs fall, and of these firms, all had simultaneously reduced the scale of their operations.

Drastic Rise in Labour Costs: 96.6 per cent of firms agree that labour costs have also increased. Yet again, more than one-third have reported rising costs between 21 and 40 per cent. Only 1.8 per cent have seen a decrease in labour costs, likely due to large cuts in their workforce.

33

Costs of raw materials and parts and components have risen quickly: Of the firms surveyed, 48.4 per cent report that costs of raw materials and components have increased between one and 20 per cent. As these inputs have been influenced mostly by external factors and have affected parties across the board, manufacturers have faced similar cost structures and have managed their costs accordingly.

Land and rental costs remained stable: 42.7 per cent of firms assert that land and rental costs have not changed. Many manufacturers in the PRD own the land on which they built their factories, so they are operating on their own premises and are little affected by rising land and rental costs. A handful of firms even own spare factory space which they rent out to other companies, thus increasing their income.

Costs of credit have increased slightly: Most Hong Kong companies borrow from the Hong Kong financial system or rely on their retained profits for working capital. Export-oriented firms have settled their accounts in foreign currency thus reducing their reliance on Mainland financial resources. Nearly 60 per cent of firms report that the cost of loans had not changed or had fallen. The increase in credit costs is generally less than 20 per cent.

Government taxes have increased: Two-thirds of the companies say that government taxes and fees have risen in the range of one to 20 per cent, a moderate increase. This is partly due to the Mainland’s tax reform and a reduction or abolition of local taxes and fees in recent years. (See Figure 2.4)

Employing Mainland Workers Size of labour force generally reduced: Based on questionnaire results and in-depth interviews, Hong Kong manufacturers in the PRD were under the dual pressure of a shortage of labour and continual increases in minimum wage. To counteract these pressures, they would commonly reduce the size of their workforce, usually by one-third. Some firms, facing bleak market prospects and inadequate orders, had to reduce other costs in addition to cutting staff.

Greatest cuts in general workers: The results of the survey show that nearly two-thirds of firms cut general workers. Cuts of one–20 per cent, 21–40 per cent, and 41–40 per cent were made by 17.3 per cent, 15.9 per cent, and 16.3 per cent of the firms, respectively. These figures applied to nearly half those surveyed. A shortage of general labour, often sourced from inland and poor provinces, has been the most prominent issue for the PRD in recent years. With the rise of wages and improved economic conditions in inland cities and provinces, these workers have begun to find jobs in their home provinces and no longer need to migrate for work. Additionally, young migrant workers tend to move into the service sector, which contributes to the difficulties facing manufacturers hoping to upgrade with more qualified personnel. Many of the garment manufacturers from Hong Kong claim that the PRD lacks experienced labour, making it difficult for them to move into the high-end garment market.

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%Overall

Operating Cost

Labour Cost Costs of Raw Materials and

Parts

Land and Rental Costs

Costs ofCredit

Government Taxes and

Fees

Increase: above 100%

Increase: 41% to 60%

Remain the same

Reduce: 41% to 60%

Increase: 81% to 100%

Increase: 21% to 40%

Reduce: 1% to 20%

Reduce: 61% to 80%

Increase: 61% to 80%

Increase: 1% to 20%

Reduce: 21% to 40%

13.8%

16.8%

7.7% 12.2%7.9%

13.6%

36.7%

35.1%

48.4%

27.4%

37.8%

29.8%

41.9%

32.7%27.4%

7.7%

42.7%

55.6%

25.5%

7.6%

Figure 2.4: Changes in Firms’ Operating Costs

34

Smaller reduction in technical and managerial staff: Almost half, 49.5 per cent, of the interviewed companies have reduced the size of their technical staff and management. Conversely, 21.1 per cent have retained their levels, and 29.3 per cent have even increased their workforce. Firms greatly value staff with technical skills and knowledge, as they make technology upgrades possible. Likewise, valued management helps improve operating efficiency and develop domestic sales. (See Figure 2.5)

Combining the average reduction of one-third Mainland staff in PRD enterprises and the decrease of Hong Kong manufacturers in PRD, it is estimated that Hong Kong manufacturers in the delta employed more than 4.5 million workers in 2014, a sharp decline from it speaks in 2006. 17

Employment Situation of Hong Kong Employees Replacement rate of Hong Kong employees increased to above 30 per cent: Hong Kong enterprises have been steadily replacing Hong Kong employees stationed in the delta with Mainland workers. Nearly 30 per cent of all positions are now held by Mainland employees. The highest replacement rate has been with engineers and technicians in areas such as production and quality management, rising as high as 33.9 per cent. As local production and quality-control personnel become more experienced day by day, manufacturers no longer need to import Hong Kong staff to the PRD. But with a missing generation of engineering personnel, it will be progressively more difficult to find qualified Hong Kong workers. Additionally, some Hong Kong personnel have retired and returned to Hong Kong. Based on cross-analyses, the smaller an enterprise, the stronger is the desire to replace Hong Kong staff with Mainland stand-ins. This may be due to the fact that most small- and medium-sized firms are family businesses whose founders have settled in the PRD to supervise daily operation, so there is little desire to employ high-paid managers from abroad.

Hong Kong employers retain certain positions: Nearly 40 per cent of firms confirm that positions in sales and marketing promotion as well as administrative management will not be taken over by Mainland staff. As these firms are export-oriented, their Hong Kong staff possess invaluable international business experience. Companies maintaining headquarters in Hong Kong have also retained Hong Kong personnel for administrative management positions. It is notable that roughly one-third of firms commit to the continued employment of Hong Kong staff in departments such as research and development, engineering and technology, finance, accounting, and law. Focus group participants echo similar hiring intentions. Some manufacturers have gone even further, retaining key R&D and design activities at Hong Kong headquarters with no intention of transferring such positions to the Mainland at all.

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

General Workers Technical Staff Managerial and Other Staff

Increase: 61% to 80%

Increase: more than 201%

Increase: 1% to20%

Reduce: 21% to 40%

Reduce: 81% to100%

Increase: 41% to 60%

Increase: 101% to 200%

Remain the same

Reduce: 41% to 60%

Increase: 21% to 40%

Increase: 81% to 100%

Reduce: 1% to 20%

Reduce: 61% to80%

5.1% 5.8% 5.7%9.3% 9.8% 10.2%

10.5%

21.1% 27.6%17.3%

12.9%12.9%15.9%

13.5%14%16.3%

12.9%12%10.1% 7.3%3.7%

Figure 2.5: Enterprises’ Intention to Hire Mainland Worker

17 This research redefined Hong Kong-invested companies, subsequently influencing the tally of Hong Kong-invested manufacturers in the PRD. The number of 2013-year-end employees and the estimated numbers in Made in the Pearl River Delta (2007) should not be compared statistically.

35

Some firms have adopted a “wait-and-see” attitude toward the employment of Hong Kong staff: Nearly one-third have not yet made a definitive decision, especially Hong Kong manufacturers in Dongguan. This indicates an uncertainty toward market prospects and the future direction of their companies. (See Figure 2.6)

At the time of the Made in PRD (2007) survey, participating companies reported that roughly 6–26 per cent of all positions had been entrusted to Mainland employees. Additionally, they forecasted that another 15–25 per cent of the positions filled by Hong Kong staff (at that time) would be taken over by Mainland workers within five years or so. In our follow-up research eight years later, results show that these forecasts were quite accurate. What differs is that less than 10 per cent of the firms interviewed now plan to completely replace their Hong Kong employees. This indicates that Hong Kong staff at these firms have become key management personnel. (It is also perhaps the kind of nepotism found in family-run businesses.)

In summary, Mainland staff likely will not completely replace their Hong Kong counterparts in the future. However, many Hong Kong enterprises have adopted a “wait-and-see” attitude regarding hiring

more Hong Kong staff. This will affect industry job prospects of qualified Hong Kong workers.

Investment in Equipment Manufacturers increase investment in equipment: The PRD’s shortage of labour has accelerated automation of the manufacturing process, resulting in increased investment in equipment. Mainland statistics also clearly show

Figure 2.6: Enterprises’ Intention to Hire Hong Kong Staff

Over five years

Undecided

Within five years

Have already been fully replaced

No intention to replace

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

R&D Sales and Marketing

Finance/Accounting/

Legal

Engineering Management

32.7% 34.6% 28.2% 28.0% 28.1%

34.1%39.3%

33.6% 29.6%38.4%

28.7%21.6%

33.9% 33.9%28.1%

Number of Hong Kong Residents in Manufacturing Making Regular Business Trips to the PRD

2003 2007 2009 2011 2013/2014

Manufacturing

No. of persons

65,300 70,000 47,300 37,200 40,900

Proportion 39.5% 39.5% 34.5% 33.7% 35.8%

Total 177,500 137,300 110,400 114,200

This issue of Hong Kong enterprises employing Hong Kong workers may be demonstrated by the cross-border movement between Guangdong and Hong Kong. According to an ongoing survey started in 2003 by the Hong Kong Planning Department, the volume of Hong Kong business travelers crossing the border on business specifically related to manufacturing peaked at 70,000 in 2007 and has fallen steadily since. In the last two years, it has stabilised at around 40,000. The proportion of manufacturing-related business travel (out of total business-related travel) has fallen from nearly 40 per cent in 2007 to 33–36 per cent; this incidentally parallels the drop in manufacturing co-operation between Guangdong and Hong Kong over the past eight years.

Source: Hong Kong Planning Department, “Northbound Southbound Survey Report on Cross-boundary Travel Survey 2013/14”, page 121.

36

that, following the financial crisis, Hong Kong, Taiwan, and foreign firms continued to increase overall investment in the delta, mostly to overcome the shortage of labour, in addition to investing in machinery. This has pushed Hong Kong firms to gradually move away from labour-intensive operations to an upgraded capital-intensive manufacturing model.

Companies increase equipment purchasing from the Mainland: Nearly three-quarters of companies have increased their purchase of Mainland manufacturing equipment. Roughly 42.2 per cent have also increased foreign equipment purchases. The technology gap between Mainland and foreign production equipment is gradually narrowing, with Mainland models maintaining a price advantage. Nearly 30 per cent of firms have increased their purchase of Mainland equipment by 21 per cent or more, and Hong Kong manufacturers are scaling up co-operation with Mainland machinery and equipment makers. (See Figure 2.7)

Over the past three years, the Central and Guangdong Governments have accelerated intelligent manufacturing, the use of Chinese-made industrial equipment and machinery, and especially the use of industrial robots. Taiwan-invested IT and electronics manufacturers on the Mainland have also started to increase their deployment of industrial robots, thus reducing the need for migrant labour. This trend reveals that investment in automation and intelligent equipment has become the development focus of manufacturing in the PRD, transforming the region’s 30-year-old model of labour-intensive production.

Channels for Import and ExportManufacturers have reduced the volume of goods shipped through Hong Kong: Previously, manufacturers took advantage of Hong Kong’s free port to import and export raw materials, components, and finished products. Those who shipped all imports and exports through Hong Kong fell from 47.3 per cent and 30.7 per cent, respectively, in 2008, to 39.5 per cent and 27.7 per cent, respectively, in 2014. At the same time, manufacturers importing and exporting all materials and finished products through the Mainland remained stable at 11 and 5 per cent, respectively. The PRD has not completely replaced Hong Kong’s role in handling imports, exports, and re-exports, which reflects Hong Kong manufacturers’ preference and deep reliance upon Hong Kong import and export channels.

Manufacturers increase the use of Mainland’s raw materials: As the comprehensiveness of the PRD’s manufacturing system has improved, Hong Kong manufacturers no longer need to import foreign raw materials, parts, and components. As a result, the number of firms procuring 100 per cent of their raw materials from the Mainland rose from 8.3 per cent in 2008 to 12.3 per cent in 2014. (See Tables 2.2 & 2.3)

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Foreign Equipment Mainland Equipment

Increase: 81% to 100%

Increase: more than 201%

Increase: 21% to 40%

Reduce: 1% to 20%

Reduce: 61% to 80%

Increase: 61% to 80%

Increase: 151% to 200%

Reduce: 81% to 100%

Increase: 1% to 20%

Reduce: 21% to 40%

Increase: 41% to 60%

Increase: 101% to 150%

Remain the same

Reduce: 41% to 60%

24.0% 11.1%

5.4% 6.3%

43.1%

39.6%

6.3%16.0%

5.7%

Figure 2.7: Change in Equipment Investment

37

Table 2.2: Changes in Manufacturers’ Export Channels Since 2008

2014

TotalAll exports through

Hong Kong

Some exports through

Hong Kong

All exports through the

Mainland No exports Unspecified

2008

All exports through Hong Kong

35.8% 5.5% 0.3% 0.3% 5.4% 47.3%

Some exports through Hong Kong

29.4% 0.2% 0.3% 1.2% 31.1%

All exports through the Mainland

0.5% 9.5% 0.3% 10.4%

No exports 0.2% 4.3% 0.2% 4.7%

Unspecified 3.5% 2.1% 1.0% 6.6%

Total 39.5% 37.5% 11.0% 5.2% 6.8% 100.0%

Table 2.3: Changes in Manufacturers’ Import Channels for Raw Materials Since 2008

2014

Total

All imports through

Hong Kong

Some imports through

Hong Kong

All imports through the

Mainland

All procured in the

Mainland Unspecified

2008

All imports through Hong Kong

22.8% 3.1% 0.2% 1.6% 3.0% 30.7%

Some imports through Hong Kong

31.9% 0.8% 1.9% 34.6%

All imports through the Mainland

3.7% 0.2% 0.5% 4.4%

All procured in the Mainland

0.2% 7.2% 0.9% 8.3%

Unspecified 4.9% 12.1% 1.3% 2.5% 1.2% 22.0%

Total 27.7% 47.3% 5.2% 12.3% 7.5% 100.0%

38

Overall, manufacturers using Hong Kong ports for imports and exports has declined; this not only indicates a migration of firms’ import and export activities to the Mainland but also a diminishing in Hong Kong’s intermediary role. This growing trend of increased procurement of Mainland materials has pushed Hong Kong enterprises away from import and export logistics systems as well as producer service systems. The interaction between Hong Kong enterprise and its trade and commerce system has thus decreased.

Source of CapitalManufacturers basically utilise Hong Kong and other non-Mainland funds to develop business: 69.5 per cent claim that they use Hong Kong or non-Mainland funds entirely to develop business; 17.8 per cent receive more than half of their capital from Hong Kong or non-Mainland sources (the remainder of capital coming from Mainland sources); only 12.7 per cent rely completely on Mainland funding. (See Figure 2.8)

Retained profits, bank loans, and capital injections by shareholders are all important channels for capital: Hong Kong funds are derived from a combination of retained profits, bank loans, shareholder capital injections, investments from affiliated parties, and initial public offerings, among

others. The majority of Mainland funds, however, come from corporate profits, implying that, in developing their Mainland businesses, companies mostly rely on accumulated retained profits. (See Figure 2.9)

Hong Kong’s financial system has been an important fundraising platform for enterprises, as firms mostly rely on the Hong Kong banking system to raise capital. 37.9 per cent utilise Hong Kong bank loans, while another 15.0 per cent utilise loans from Mainland banks. Shares have been mainly listed in Hong Kong as well. Management of capital and credit finance has helped manufacturers maintain a connection to the Hong Kong economic system.

All from Mainland sources

All from Hong Kong and other non-Mainland sources

From the Mainland/ Hong Kong and other non-Mainland sources

17.8% 12.7%

69.5%

Figure 2.8: Sources of Capital

Average Daily Number of Cargo Vehicles Going between Hong Kong and the Mainland

2003 2007 2009 2011 2013/2014

Container truck 12,800 11,000 8,800 9,500 8,500

Heavy and mediumgoods vehicle 15,000

13,800 11,800 11,500 10,100

Light goods vehicle 1,300 1,700 1100 1,400

Goods van 700 400 400 300 200

Total: 28,500 26,500 22,700 22,400 20,200

Collected data on goods flowing between Guangdong and Hong Kong corroborate the change in import and export channel traffic for Hong Kong manufacturers. The number of cargo vehicles travelling between the two has been decreasing since 2003. The decline in container trucks has been especially large—a direct result of the expansion of container ports in the PRD as well as improvement of Mainland customs and bonded systems. This trend will continue to influence the long-term development of Hong Kong’s international logistics.

Source: Hong Kong Planning Department, “Northbound Southbound Survey Report on Cross-boundary Travel Survey 2013/14”, page 146.

39

Civil loans

Capital injection by shareholders

Investments from affiliated parties

Bank loans

Initial public offerings

Retained profits

Entirely from Hong Kong and non-

Mainland sources

Hong Kong and non-Mainland

sources

Sou

rces

of p

art o

f the

fund

ing

Sou

rces

of F

undi

ng

Entirely from the Mainland

Mainland

0.0% 10.0% 20.0% 30.0% 40.0% 50.0%

6.7%

7.6%

3.7%

34.8%

9.1%

8.4%

5.9%

4.6%

27.3%

11.7%

10.6%

9.3%

2.2%

40.7%

Figure 2.9: Sources of Funds

According to our survey, Hong Kong has been the most important source of capital for manufacturers (ie, the most common response in the survey). Maintaining the link between manufacturers and Hong Kong financing is of foremost consideration, and Hong Kong’s financial system has remained the preferred platform for raising capital. Despite the convenience of the Mainland’s financial system, most manufacturers have not transferred over their fiscal operations as they have manufacturing. Where enterprises manage their capital is an important indicator of whether they are still linked to Hong Kong, and manufacturers feel that this remains the most important channel connecting them to the Hong Kong production service system.

TRANSFORMATION OF MANUFACTURERS

Upgrading and Transforming CompaniesFollowing the financial crisis, Hong Kong-invested companies changed their business strategy and set out to upgrade.

Nearly half the firms carried out some sort of innovative management: 45.9 per cent, comprising the most popular choice, chose to upgrade with new management. The shortage of workers in the PRD forced companies to improve human resource management and automation, respectively reducing the pressure from a shortfall in manpower and strengthening their capacity for production.

Thirty per cent of companies surveyed improved product design and R&D: Companies tent to adopt the forms of in-house design (32.1 per cent) and in-house R&D (28.5 per cent) to improve in-house capacity. This trend increased Hong Kong industry’s demand for qualified design and R&D talent.

40

Twenty per cent of firms chose to set up brands: 20.4 per cent companies chose to strengthen branding activities and 9 per cent even devided to set up proprietary brands, while other enterprises operated as OEM and did not establish proprietary brands. An enterprise’s position within the production value chain affected its decision to build a brand. Based on cross-analysis, it appears that producers of intermediary products and parts tended to strengthen design and R&D, with only a few setting up brands. (See Figure 2.10)

Nearly 40 per cent of firms maintained their existing business strategies: Those who did so comprised two major groups: one being new companies established post 2009 whose corporate strategy was already designed for market changes that had occurred after the financial crisis; the other being Hong Kong-invested firms in Dongguan. Cross-analyses show that the date of establishment and industry type did not have great impacts on the decision to upgrade. Firms established in the 1980s and 1990s had the drive to renovate and

upgrade; whether or not they maintained their existing model was their individual choice.

The decision to upgrade was also affected by the local environment for innovation and a firm’s position within the industrial value chain: According to an investigation of Hong Kong-invested firms in Dongguan, manufacturers’ desires to improve product design and R&D were limited. Only 14 per cent set up brands, while most carried on with their existing business strategy. Many of these Dongguan firms maintaining the status quo made intermediate products as well as parts and components. This showed how the local business environment and positioning within the industrial value chain greatly influenced decisions regarding management innovation.

In regards to adjusting business strategy, Hong Kong enterprises have concentrated on management innovation pertaining to the characteristics of Hong Kong manufacturing, how it processes orders, and its production supply chain. At the end of the

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%

39.2%

45.9%

33.1%

26.5%

18.9%

32.1%

28.5%

22.8%

6.2%

5.0%

4.1%

3.6%

20.4%

9.0%

8.6%

3.1%

1.6%

28.1%

2.7%

Maintain the business strategies

Innovative management innovation

Improve human resource management

Automatic production

Informatisation management

Strengthen product design

In-house design

Outsourcing

Strengthen R&D and technological activities

In-house R&D

Co-operate with Hong Kong R&D institutions

Co-operate with Mainland R&D institutions

Co-operate with international R&D institutions

Outsourcing

Strengthen branding activities

Set up proprietary brands

Increase branding investment

Brand agency

Brand erger and acquisition

Figure 2.10: Company Business Strategy Since 2008

41

20th century, their competitive advantage was in production management and rapid and flexible response to customers’ varying demands (this was especially common in the textile, garment, toy, and other traditional industries). In the past decade, Hong Kong firms have increased their design and have moved from the OEM to ODM model. This trend is also noted in the 2007 Made in PRD report. The biggest difference between the 2007 report and ours is that firms have increased their brand building: nine per cent have now established their own new brands, and 1.4 per cent have obtained brands through mergers and acquisitions.

The processing model of a particular enterprise has greatly influenced the direction of company upgrading. Makers of processing parts and components manufacture according to specifications required by customers and thereby had no need to promote R&D activities. Many processing manufacturers felt that setting up brands was unnecessary, a similar view held by Taiwan-invested companies. International brand customers did not like seeing their OEMs establish proprietary brands, fearing that the OEMs might copy their design elements or become competitors. Processing companies wanted to retain major clients, so they ignored brand establishment or started a different line of products in order to avoid competition. Hong Kong firms have used the processing model for a long time. It will not be easy for them to change their business model within a few short years, thus management innovation will remain the dominant business strategy over the next five to seven years.

Market OrientationManufacturers mostly produce for export, with limited sales to the domestic market: According to the survey, sales in the three main sectors of export, the domestic market, and other factories stand as follows. Export: 33.2 per cent of the companies surveyed export 100 per cent of their production; 34 per cent export over 50 per cent. These export-oriented firms comprise two-thirds of the companies surveyed. Domestic sales: Only 5.5 per cent of firms send all their output to the

domestic market; 10.7 per cent report more than 50 per cent of revenue coming from the domestic market. Less than 20 per cent of the firms are oriented to the domestic market. Sales/transfer to other factories: 3.9 per cent report selling their entire output to other plants, while 8.6 per cent report more than half their sales going to other plants. It is worth noting that “sales/transfer to other factories” is a special kind of domestic sale: it is a form of trade between factories that make parts and components and those that assemble the final product. These products go through customs inspection before being shipped abroad, and sales are actually carried out in the PRD. Their domestic sales have been underestimated as a result of the customs management system. (See Figure 2.11)

In the past five years, the Mainland and Hong Kong Governments have jointly promoted sales to the domestic market. As the above responses would indicate, domestic sales of Hong Kong manufacturers have not been satisfactory. First, firms require an extended period to adapt their sales structure from export-focused to one developing exports and domestic sales simultaneously. Second, producers of parts and components have, by selling to other factories, achieved sales to the domestic market. Thus it appears that helping assembly factories to enter the Mainland market should be the priority for new domestic sales policies.

80%

70%

60%

50%

40%

30%

20%

10%

0%

Exports Sales/Transfer to Other Plants

Domestic Sales

51%–99.9% Sales 100% Sales

33.2%

8.6% 5.5%

34.0%

3.9% 10.7%

Figure 2.11: Sales Market Structure

42

Developing the International Market Most of the participating firms have continued their original market strategy: 59.4 per cent have maintained their existing strategy, and 39.0 per cent have increased development of the international market, with only a few reducing activities. The target markets of Hong Kong enterprises continue to be the developed countries of Europe, Japan, and the United States. (See Figure 2.12)

Manufacturers have been developing newly emerging markets such as Eastern Europe, the Association of Southeast Asian Nations (ASEAN), and South America. Many firms concurrently develop the established markets of Japan, Europe, and the US while redirecting priorities to these newly emerging markets.

Developing the Domestic Market Half of the firms have ramped up development of the Mainland market: The Mainland market is clearly a newly emerging market which Hong Kong enterprises have been actively exploring. Of participating companies, 50 per cent will increase activity in this market; 10.8 per cent plan to develop domestic sales in the short term; while 16.7 per cent are not considering this market at all. (See Figure 2.13)

Sales to the Mainland have been constrained by the nature of manufacturers and product specialties: Many firms that previously had not considered domestic sales were “processing/assembly operations and compensatory trade” companies that were not allowed to do so. Producers of semi-finished goods, parts, and components were not inclined either. These firms lacked domestic market sales teams, did not understand the culture of domestic sales, and found it difficult to collect outstanding sales revenue. Other reasons for not developing the Mainland market include serious infringements of intellectual property rights, complexity of customs control, and excessive taxes and fees.

Direct marketing has been an important channel for Mainland sales: Nearly 70 per cent of firms use direct sales to end-users as their main channel for Mainland sales. This includes two main methods: selling the finished product to the consumer, and employing the factory-to-factory method of selling half-finished goods to a downstream plant. Online shopping as a platform for direct sales has been booming and may soon catch up to more traditional channels of agents and wholesalers. This will become an important channel for future domestic sales. (See Figure 2.14)

Guangdong has proven to be the hottest domestic market: Of the firms surveyed, 90.4 per cent target Guangdong for their Mainland sales, while 55 per cent target eastern China where purchasing power is also strong. A lower percentage of firms target interior provinces and northern China. Enterprises have historically been active in the Guangdong market because they are familiar with it and can more easily manage sales activities. Sales between manufacturers of parts and components and downstream processing companies have also proliferated; these are included in domestic sales. (See Figure 2.15)

43

Figure 2.12: Enterprise Development of the International Market

Figure 2.13: Firms’ Willingness to Develop the Mainland Market

Not considering

Developing in the short term

Reducing0.8%

Enhancing domestic sales

Maintaining domestic sales

0.0% 50.0% 100.0%

Current Major Markets (can select one or more options)

New Markets Being Developed (can select one or more options)

82.0%

33.8%

27.5%

19.9%

12.5%

7.9%

11.4%

14.4%

9.3%

12.5%

8.2%

22.2%

7.7%

16.7%

7.5%

10.6%

7.3%

11.6%

7.0%

15.3%

21.7%

50.0%

10.8%

16.7%

South Asia

ASEAN

South America

Europe and US

Middle East

Africa

Australia and New Zealand

Japan and Korea

Eastern Europe

Russia

90.4%

55.0%

43.8%

37.8%

26.9%

23.7%

18.1%

8.0%

Guangdong

Eastern China

Southern China (other than Guangdong)

Northern China

Central China

Southwestern China

Northeastern China

Northwestern China

Figure 2.15: Domestic Markets of Companies

Figure 2.14: Channels for Companies to Sell to the Mainland Market

Direct sales to end-users

Agents

Wholesaling

Others

Online shopping platform

Franchising

23.5%

71.0%

21.6%

11.0%

9.8%

9.0%

44

Research and Development (R&D) and Design Manufacturers R&D inputs stayed low: Nearly half of those surveyed have spent less than three per cent of sales revenue on R&D. Roughly 28 per cent claim they have not invested in R&D at all. These firms are mainly concentrated in Dongguan. (See Figure 2.16)

Most firms conduct R&D on the Mainland: Roughly 40 per cent claim that all or the majority of their R&D and design is handled on the Mainland. Only 25 per cent report that Hong Kong oversees all or the majority of their R&D and design. In focus group meetings, some companies state that they have always conducted key R&D activities in Hong Kong even while their entire manufacturing process has been transferred to the PRD. (See Figure 2.17)

Where firms conduct R&D activities and where they are based are related: Cross-analyses examine the co-relation of R&D activities with factors such as a firm’s establishment date, the nature of its industry, and its geographical location. The level of R&D spending has a higher correlation to geographical location. For example, investments by Dongguan firms are clearly lower than other places. Other factors include a firm’s size, the characteristics of the local industrial system, the supply of qualified technical staff, and an environment for creativity and R&D development. (See Figure 2.18)

1–3% of sales revenue

All in the Mainland

Mainly in Hong Kong

5–7% of sales revenue

All in other countries2.7%

Mainly in other countries0.9%

3–5% of sales revenue

Mainly in the Mainland

7–10% of sales revenue

No R&D activities

Less than 1% of sales revenue

All in Hong Kong

More than 10% of sales revenue

9.3%

28.3%

11.6%

14.0%

27.4%15.1%

19.0%

28.6%

23.3%

11.1%

8.7%

Figure 2.16: R&D Spending as Percentage of Sales Revenue

Figure 2.17: Where Firms Conduct R&D

3–5%

More than 10%

1–3% Less than 1%

7–10% 5–7%

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

1980–1990 1991–2000 2001–2008 2009 and after

3.9% 10.1% 10.5% 6.3%11.8%

9.4% 7.9% 12.5%7.9%

14.5%7.9% 12.5%

31.6%22.6%

18.4%

43.8%

28.9% 25.2%

30.3%

25.0%15.8% 18.2% 25.0%

Figure 2.18: Company Establishment Dates and R&D Budget

45

Enterprises tend to accept financial support in R&D from the Mainland govenment18 : According to this survey, 43 firms have received R&D and innovation financial aid from either the Mainland or Hong Kong Government: thirty-nine from the Mainland Government and five from the Hong Kong Government (one manufacturer of electrical appliances and optical products received help from both). The Mainland provides more R&D and than Hong Kong, both in terms of project load and fiscal amount. Their aid—ranging from tens of thousands of Renminbi to 100 million, with a medium of RMB 800,000—is concentrated mainly in electronic products, electronic appliances, optical goods, pharmaceuticals, chemicals, metallic goods, and machinery. The Mainland Government is determined to promote R&D, innovation, and strategic new industries, especially in Guangdong as a result of the 11th Five-Year Plan.

Industrial RelocationIndustries that have relocated have been mainly labour-intensive: Principal ones are garments, textiles, and toys. Most have moved to countries in Southeast Asia where there is anabundant supply of cheap labour. This directly relates to the labour shortage in the PRD, where a shrinking workforce has become the main constraint on manufacturing in the Mainland.

This relocation began primarily after 2008: Prior to that, firms were situated mostly in Guangdong or elsewhere in the Mainland. After 2010, most have migrated to Southeast Asian countries or even moved back to Hong Kong. The PRD’s manufacturing climate has worsened dramatically since 2010.

Manufacturers have still retained the PRD as their principal manufacturing base: The 37 firms who replied, five plan to bring part of their manufacturing and R&D back to Hong Kong. Only one plans to relocate its entire operation. Thirteen others plan to move part of their operations within Guangdong, fifteen within the Mainland, and nine to other countries. Hong Kong manufacturers continue to retain the PRD as their main manufacturing base because of the region’s close proximity to Hong Kong headquarters and the ease of coordinating resource exchanges between Guangdong and Hong Kong. The support system for PRD manufacturing yet surpasses those in Southeast Asia, so firms use their PRD factories to support and complement operations of subsidiary factories in other countries.

FUTURE DEVELOPMENT OF MANUFACTURERS

Main Business Strategy for the Next Three to Five YearsOur survey asked Hong Kong manufacturers about their business strategies and plans for the next three to five years. The results are very similar to those presented in Section 3 of this chapter addressing the upgrading and transformation of operations. This similarity indicates an inclination to continue their business activities without too big a change. About one-third of the firms assert that they will maintain the status quo.

Boosting automation, improving product design, setting up brands, and pursuing R&D of science and technology: 41.2 per cent aim to increase automation and improve product design, while roughly 30 per cent plan to set up more brands and increase R&D.

18 This survey does not cover all Hong Kong man-ufacturers. The analysis may be used for refer-ence purposes but cannot be used to compare financial support for scientific research provid-ed by the two governments.

46

Business choices are partly affected by the specific PRD location in which manufacturers are located: For example, a higher proportion of manufacturers in Dongguan opted to maintain the status quo, sell the business, or shut down. Firms elsewhere in the PRD were more inclined to pursue other strategies: improve creation of brands, product design, R&D, increase investment, move or transform the business, or switch to the service sector. Clearly, manufacturers in the PRD chose different business strategies based in part on their specific locations. (See Figure 2.19)

Investing in the PRD Willingness to invest further in the PRD: Of manufacturers surveyed, 46.7 per cent would maintain their current level of investment in the PRD; 24.0 per cent have a “wait and see” attitude; 21.1 per cent would increase their investment; and 8.1 per cent would reduce it. Overall, Hong Kong companies no longer havea strong desire to invest in the PRD. (See Figure 2.20)

Early manufacturers in the PRD have been inclined to keep the status quo: The majority of those who invested between 1980 and 2000 have maintained their current scale of investment. Many of those established after 2001 have yet to decide their future investment strategy. Nearly half the manufacturers in Dongguan plan on maintaining the current level of investment, with over 25 per cent still deciding. This indicates that early PRD manufacturers have limited room for development despite the maturing of their industry. Their course of action is either to preserveor even reduce the scale of business. Companies established post 2011 are still growing, so while they face many challenges in PRD business environment, they can afford to take a “wait and see” attitude. (See Figure 2.21)

Market Development Plans for market development within firms are very similar to their respective business strategies of the past five years. Roughly 40 per cent would expand further in developed markets like Japan, the US, and Europe as well as in the Mainland market and emerging markets like ASEAN and the Middle East. Another 30 per cent mention developing other newly emerging markets like South America and Africa. Many companies still maintain a “wait and see” attitude toward developing markets. (See Figure 2.22)

R&D Activities Overall, the dominant trend among firms is to strengthen R&D. About 40 per cent report that they would increase R&D spending and hire more staff in these departments; nearly 30 per cent have not decided their R&D strategy; only some claim they would reduce R&D spending and staff. A majority of the firms from Dongguan say that they have not yet made a decision. (See Figure 2.23)

Plans to Relocate Production Mainland provinces outside Guangdong, overseas countries, and Hong Kong are popular destinations for manufacturers planning to relocate operations: Of the 38 who plan to move, 14 plan to go to Mainland provinces outside Guangdong, and 11 would move to Southeast Asia, South Asia, and other countries. Only six plan to move within Guangdong but away from the PRD. Guangdong’s appeal to the manufacturing sector seems to be falling.

47

41.2%

41.2%

30.6%

30.6%

27.5%

5.3%

5.2%

3.7%

3.1%

1.3%

1.3%

No change

Reduce investment

Increase investment

Undecided 24.0%

8.1%

21.2%

46.7%

Increase investment Reduce investment

Unchanged Increase investment

Undecided Undecided

Reduce investment Unchanged

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

1980-1990 Developed markets1991-2000 Emerging markets2001-2008 Developing markets2009 and after Mainland market

17.7% 19.5%20.8%

36.1%29.1%

43.8%35.9% 34.4%

10.3% 3.7%7.6%

2.5%7.6%

2.4%

2.6% 1.6%23.4% 31.0%20.5%

22.1%20.9%

24.2%

25.6%20.1%

48.6% 45.8%51.1%

39.3%42.4%

29.6%35.9%

43.9%

Reduce

Increase

Undecided

Unchanged

28.9% 28.1%

1.8% 1.9%

35.4%30.5%

33.9% 39.5%

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

R&D staff R&D spending

Figure 2.19: Business Strategies for the Next 3-5 Years

Figure 2.20: Intention to Invest in the PRD

Figure 2.21: Establishment Year and Intention to Invest in the PRD

Figure 2.22: Plans to Develop Markets

Figure 2.23: Enterprises’ R&D Plans

Increase automation

Improve product design

Increase efforts to establish brands

Maintain status quo

Improve R&D

Increase investment in areas such as mergers

and acquisitions

Relocate production

Reduce manufacturing, move into service sector

Sell the business

Move back to Hong Kong or place of origin

Plan to close the business

48

The main industries being relocated include plastics, electronics, and electric appliances and optical products: Seven plastics, seven electronics, and two electrical appliances and optical products firms plan to relocate their plants. Most claim they would move to Mainland provinces outside Guangdong and other countries, with a small number planning to move back to Hong Kong. The industries of plastics, electronics, and electrical appliances and optical goods interact closely and constitute an electronics-related cluster; in fact, they seem to have already formed another industrial cluster outside Guangdong. A similar situation can be seen in the increased investment of Japanese, South Korean, and Taiwan companies in Southeast Asia.

Firms tend to move R&D activities back to Hong Kong: Of the 12 firms which plan to move back to Hong Kong, six say they would move their R&D activities and five would relocate all operations. Only one company would move its manufacturing back to the city. Hong Kong’s main attractiveness lies in the knowledge and creativity the city affords R&D activities, not in manufacturing advantages.

General Trend According to our survey and interview results, Hong Kong manufacturers in the PRD are still keen to maintain their production activities in the region. With this objective in mind, they have improved internal management systems and increased investment in order to greatly reduce the workforce, the aim being to gradually change their labour-intensive model to one that stresses both capital and labour.

Regarding operations, manufacturers have made the following changes. Many of which were initiated by manufacturers in traditional industries, indicating their keenness to improve and make changes.

1. Revive automation: In the 1970s and 1980s, under the pressure of high wages in Hong Kong, firms started to automate. Then, with the Mainland’s abundant supply of cheap labour, manufacturers in the PRD returned to the labour-intensive model in the 1990s. Now, Hong Kong manufacturers are gradually returning to automation once again.

2. Deploy new technology: Jewellery manufacturers have started to extensively use 3D printing technology, making it practical to bring R&D and design back to Hong Kong where the level of such work is of higher quality. Toy manufacturers are now using the latest app techniques in their designs as well.

3. Expand investment networks: Manufacturers have continued to promote the internationalisation of their Hong Kong production networks, breaking through the confines of “Made in PRD”.

• International: Large-scale producers of garments and textiles have expanded their investment abroad, making use of the interaction between plants in the PRD and abroad to implement the “China plus one” strategy. They have moved low-price, labour-intensive orders to Southeast Asia and other low-cost countries and have designated PRD factories as their production base for medium- and high-range products and as a regional support base to provide supplies where needed. If problems occur in Southeast Asia plants, manufacturers can deploy their PRD factories to fill the gap and complete the orders.

• Domestic: Small-scale Hong Kong manufacturers have moved part of their production capacity to the Mainland’s interior provinces, closer to the supply of migrant labour and local markets. Some manufacturers have invested in Mainland companies, using their market networks and local technical staff as a way to enter the domestic market indirectly.

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4. Diversify selling channels: Some manufacturers have been seriously exploring retail, web-based sales, and other channels to implement the “Internet plus” sales model.

5. Design and brand development: Many OEM firms have rebuilt their design teams and are co-operating actively with overseas customers in design and R&D, warehouse management, and other areas; they have moved from the OEM to ODM model. Other companies, driven by the needs of the Mainland and newly emerging markets, are using their own designs to change to operating as OBMs.

6. Promote international R&D co-operation via Hong Kong: Hong Kong firms in the environmental protection field use the SAR as a window for technological exchange to better understand the latest trends abroad and bring in international technology.

Overall, Hong Kong firms still value the PRD’s comprehensive value chain system and its production advantage of being able to move in and out of the market rapidly. Companies can still compete effectively with low-cost countries by producing relatively complicated products in the PRD.

Since 2008, Hong Kong firms in the PRD have undergone dramatic changes in two areas: the scale of business and the business model.

The number of Hong Kong manufacturers in the PRD has fallen sharply. This has partly to do with negative factors such as market depression and poor business operation; some firms have also left the market. Manpower shortages and rising labour costs have pushed firms to reduce the size of their workforce and embrace automation to replace workers. This situation has indirectly promoted manufacturers to upgrade from a labour-intensive to capital-intensive manufacturing model.

Firms have aggressively changed their business model, implemented management innovation, developed new markets, improved R&D and design, moved production, and adopted other measures to overcome the blows of the global financial crisis. The most popular business strategies chosen include management innovation, development of the Mainland market, and exploring new emerging markets. Hong Kong manufacturers in different PRD cities have chosen different strategies of transformation. Local business environments and industrial systems have played a part in these decisions.

Many companies have changed their import and export channels and increased the purchase of raw materials fromthe Mainland market. This has affected the interaction between firms and Hong Kong’s logistics system. Of all Hong Kong service sectors, firms have consistently retained close co-operation with one: its financial system.

Overall, the number of Hong Kong-invested projects in the PRD has fallen as has the scale of the workforce. This has reduced the influence of Hong Kong firms in the PRD manufacturing system. Still, those who remain have demonstrated their vitality to change and grow stronger. In this survival game, these enterprises have been compelledto upgrade and reinvent.

Hong Kong firms engaged in “Made in PRD” are moving ahead with their transformation.

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Today, Hong Kong industries faces many hurdles, including the pressures of manufacturing in the PRD as well as shortages in resources necessary for industrial transformation and upgrades. It must also address the challenge of Hong Kong industries across time.

MANUFACTURING IN THE PRD

Over the past 20 years, Hong Kong manufacturers have invested in factories in the PRD, developing a single industrial entity with two sides—“Made by Hong Kong” and “Made in PRD”. The difficulties of manufacturing in the PRD have also been the difficulties of Hong Kong industries. The results of our survey show that the challenges of Hong Kong manufacturers in the PRD are still concentrated in human resources.

Supply of human resources has been the most common obstacle in business operations: 92.2 per cent of companies surveyed claim their labour costs are increasing; 71.1 per cent say that overall labour supply is insufficient; and 38.4 per cent say that labour laws and regulations are too harsh. Additionally, 25.4 per cent indicate that they are in lack of R&D as well as technical and management staff. That is, there is a shortage of both skilled labour and technical experts.

The biggest obstacle for the business system has been government taxes and fees: Since 2008, the Mainland has been reforming its tax system, and as a result, there have been improvements. Still, 47.5 per cent of firms say that there are too many Government fees and taxes; 24.7 per cent are of the opinion that the government has tightened environmental protection rules; and 11.6 per cent feel that the efficiency of import/export customs is low and inspection procedures are too strict.

Issues of succession and talent gap: 8.7 per cent of firms claim that they have encountered problems finding people to run and succeed their businesses. This will inevitably influence the sustainable development of enterprises. (See Figure 3.1)

HUMAN RESOURCES

The shortage of industrial manpower is a common issue in this survey—a particularly serious problem for Hong Kong. Manufacturers claim that while Guangdong and Hong Kong governments demanded companies to transform and upgrade, they did not make adequate arrangements for securing technical staff. The limited human resources available could not meet the needs of all the companies, causing fierce competition in each industry for limited talent.

CHAPTER 3 DEVELOPMENT CHALLENGES OF HONG KONG INDUSTRIES

Rising labour costs

Labour shortage

Numerous government fees and taxes

Stringent labour regulations

High logistics costs

Energy shortage and high energy costs

Lack of R&D talent

Lack of management talent

Environmental regulations tightened

Difficulty in financing

Land shortage and high land cost

Inefficient customs and tightened inspection

Infringement of intellectual property rights

Succession and a missing generation of skilled

personnel

92.2%

71.1%

47.5%

38.4%

38.1%

29.6%

25.4%

24.7%

24.7%

19.5%

17.6%

11.6%

11.6%

8.7%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

Figure 3.1: Challenges Facing Manufacturers in the PRD

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Throughout 30 years of Hong Kong enterprises operating in the PRD, the number of Hong Kong residents working in the industrial sector has fallen sharply. Ever since firms moved their plants to the Mainland, they basically have not hired Hong Kong apprentices. Manufacturing studies in Hong Kong’s vocational education system have shrunk and failed to attract outstanding students. Manufacturers lament that industrial talent is insufficient, which also is a symptom of Hong Kong society’s inability to understand the latest developments in manufacturing. In Hong Kong media and educational circles, the perception of manufacturing remains in the labour-intensive model from the last century. In reality, today’s high-precision manufacturing offers an orderly environment, a high level of automation, and a pleasant workplace. Hong Kong’s misunderstanding of manufacturing has turned young urbanites off to working in the sector or in the PRD. As a result, they do not enroll in industry-related studies. In actuality, students of industrial engineering have a wide variety of career choices and higher starting salaries than that of business school graduates; in addition, the modern workplace is quite pleasant. But there is no authoritative professional association that awards the qualification of “engineer” to graduates of industrial engineering, which has not helped boost the professional status of manufacturing personnel. This influences the willingness of secondary school students to enroll in industry-related studies and that of engineering and science graduates to work in industries.

Thus, there is a double shortage of Hong Kong engineers and technicians which has caused a industrial talent gap. This mismatch between the development of manufacturing and the structure of Hong Kong’s skilled labour has influenced the Government’s willingness to support industry and has deeply affected the incentives for Hong Kong industries’ to move forward.

SCIENTIFIC RESEARCH AND INNOVATION

Historically, R&D spending in Hong Kong as a percentage of GDP has been lower than that in developed economies; this has to do with the limited R&D activities of Hong Kong manufacturers. Research teams set up focus groups with science and technology transfer departments at Hong Kong universities and colleges to discuss the academia’s R&D development in developing industry-related technology, the interaction between universities and industries, and their evaluation of Hong Kong manufacturers’ ability to pursue R&D.

Around the year 2000, a number of tertiary education institutions in Hong Kong set up science and technology transfer centres; at the time, the environment for such transfers was still immature, so the results of the first ten years were not significant. In recent years, the co-operation system between universities and industries has gradually been perfected, and the results of Hong Kong’s R&D have begun to find co-operation opportunities with international and Mainland companies. Major European and American companies have, through academic meetings and academic papers, started to pay attention to the scientific researches being conducted at these transfer centres. Mainland industrial associations have also actively sought co-operation with these Hong Kong institutions. International and Mainland companies alike are now carrying out small-scale R&D co-operations in Hong Kong while maintaining their major manufacturing operations on the Mainland.

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Hong Kong’s academic institutions possess a large pool of qualified, world-class intellectuals; the city also has a comprehensive system of intellectual property rights. However, the university funding system lacks incentives to undertake industrial-related R&D projects. Additionally, the management system is too rigid which limits graduate students’ participation in joint research projects between manufacturers and academic institutions. There is also a fundamental philosophical divide between the two: academic researchers focus primarily on “research outcome”, while manufacturers value “problem solving”. These differing attitudes toward research have affected both the coordination of matching R&D outcomes as well as the transfer of knowledge. University representatives assert that Hong Kong manufacturers’ competitive edge lies in their production management, but not R&D in raw materials. For more than 20 years, manufacturers have kept the same manufacturing model, thus the level of industrial engineering has not been high. The industry climate has not been conducive to attracting top industrial talent which has greatly affected the ability of manufacturers to absorb and transfer new technologies.

In recent years, manufacturers have been more active in seeking co-operation with academic institutions, some through investment transferred and through using foreign technology to promote industrial upgrades. Academic representatives agree that now is an ideal time to promote co-operation with industries in scientific research. They propose that Hong Kong manufacturers should shift away from their “problem solving” mindset, thereby strengthening the engineering capacity of companies and fostering knowledge consolidation via “technology acquisition”.

EXPANDING SALES IN THE MAINLAND

Demand in the Mainland market has been a hot topic in recent years. Hong Kong manufacturers have invested numerous resources to promote sales, but the outcome has not been satisfactory. According to Hong Kong providers of producer services, the sales strategies of Mainland and Hong Kong companies are very different: Mainland firms more readily accept the concept of brand building, are more daring with investing, and generally worry less and experiment more. In contrast, Hong Kong firms are clearly more conservative in developing markets and in investing in brands.

Several years ago, when Hong Kong firms decided to develop the Mainland market, they spent a considerable amount of resources in establishing physical shops and less in e-commerce. Now, the bar for entering e-commerce has risen much higher, and it is not easy for Hong Kong companies to break in. They missed the best time to invest.

e-Commerce requires substantial initial advertising investments, and one must be prepared to lose capital (easily in the millions of RMB) for at least half a year. The investment prowess of Hong Kong companies is relatively limited, and they are too keen to see quick results. Internet sales in the Mainland require an enormous sales force for online customer services officers who need to be familiar with local culture and online shopping habits. Hong Kong lacks such skilled sales people.

Recently, the business mode of Online to Offline (O2O) has emerged in the Mainland Buyers can search for products online, then pick up and experience their products and services offline in a physical store Enterprises can utilise their online promotions to drive offline sales. This new trend will further change the sales strategies of the manufacturers to tap into the domestic markets, posing uncertainties and challenges to Hong Kong enterprises’ domestic sales expansion.

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SUCCESSION IN INDUSTRY

The succession of Hong Kong industrialists embodies three issues. The first is the interaction between skilled personnel within industrial technology. The second is training a new generation of industrialists. The third is passing on the management power of existing manufacturing enterprises. An earlier section has already analysed the generation gap of Hong Kong industrialists. This section will concentrate on the issue of Hong Kong young industrialists’ succession to businesses.

Manufacturers claim that the Hong Kong Government has not done enough to nurture young industrialists. Outstanding young industrialists rarely credit governmental support for their innovations, implying that Government funds may not be sufficient to meet the financing demand of start-ups. Angel investment funds and venture capitalists are likely to be more effective in supporting entrepreneurs.

The issue of succession is especially important in Hong Kong firms which are predominantly family businesses. This has become more evident after the financial crisis in 2008: the older generation of entrepreneurs, facing a void in successors, have been forced to confront the dilemma of maintaining the status quo or closing down. This will obviously affect the development and continuity of Hong Kong industry. The second generation of industrialists believe that succession is a ceding process between two generations, with the focus on the younger generation, but the input of the out-going generation is equally as important. Handing over a family business includes three major elements: keeping existing operations, developing future ones, and asset management. In taking over the family business and developing future business, the second generation is essentially starting a new business. They will forge ahead into territories wholly unknown to the first generation, which will put inter-generational trust and interaction to the test. Hong Kong manufacturers have been both late and disorganised in arranging for their succession. By comparison, Taiwan companies

have systematically prepared and trained the second generation through internships across different factory departments. The first generation of Hong Kong manufacturers have been extremely successful in their ventures; however, realising that running a factory business is not easy, they do not give pressure to the second generation to take over. Subsequently, the younger generation have mostly worked in business operations while hiring outside experts to manage the factories. These choices may, in large part, have to do with Hong Kong’s competitive advantage in trade and commerce, but they have also affected firms’ abilities to upgrade their science and technology.

In summary, there is currently a shortage of young industrialists in Hong Kong as the second generation does not want to take over the family business. This reflects a lack of industrial spirit among young urbanites. In this atmosphere, it is hard for Hong Kong to develop new forms of industry, which affects sustainable industrial development. Even with government-backed business opportunities, firms will not be able to capitalise them due to the lack of qualified people.

RETURNING TO HONG KONG

Returning home has become an option for Hong Kong industry in recent years. Facing the many challenges of manufacturing in the Mainland, Taiwan investors have also expressed a wish to return to Taiwan. In interviews and focus group discussions, some Hong Kong manufacturers have indeed expressed an interest in returning to Hong Kong: a few plan to move their entire manufacturing base back to the city. This study has thus incorporated a questionnaire addressing this issue.

The high cost of labour and shortage of workers are the biggest obstacles to such a return: Of companies surveyed, 88.2 per cent claim labour costs in Hong Kong are too high, and 67.7 per cent deem the supply of workers inadequate. Another 18.2 per cent say they lack qualified personnel in R&D and management, a situation similar to that in the PRD.

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Another obstacle is the supply of land: 48.8 per cent claim that available land is insufficient and that costs are too high.

Industrial policy and Government regulations are also systemic challenges: 39.6 per cent of companies state that Hong Kong lacks industrial development and support policies, while 28.4 per cent claim that Government regulations are becoming increasingly complicated.

Insufficient energy and industrial components also present hurdles: 39.5 per cent of firms say that energy costs are too high, and 26.8 per cent say that the industrial auxiliary support is inadequate.

Instability within the business environment presents another potential problem: 33 per cent of firms do not see the business environment of Hong Kong as stable. This survey was conducted during on-going consultations regarding political developments in Hong Kong which may have affected these responses in particular. (See Figure 3.2)

Figure 3.2: Challenges Facing Manufacturers in Returning to Hong Kong

In interviews and focus groups, manufacturers agree that the difficulties of moving manufacturing from the PRD back to Hong Kong are many. There are the obvious constraints of insufficient industrial land space in the city and high operational costs. But more importantly, attracting Hong Kong workers, especially of the younger generation, to manufacturing has proved difficult. Some garment makers have resorted to the “social enterprise” business model in order to attract middle-aged, female immigrant workers with previous manufacturing experience on the Mainland. Food and beverage factories also tend to hire middle-aged women due to their proven rate of job retention. Due to the shortage in labour, production processes must be automated in order for manufacturing to return to Hong Kong. A number of high-precision moulding manufacturers have stated that if the city could provide suitable industrial land, they would consider bringing back equipment-intensive production processes that require less labour. However, they claim that the SAR Government’s procedures for monitoring manufacturing have become more complicated and yet uncoordinated. Obtaining business licenses has proven difficult, which affects further industrial development in the city.

Industrialists emphasise that industries are not limited to manufacturing but also includes front-end R&D and design, back-end brand sales management, as well as innovative management of production. The return of industry should therefore encompass comprehensive planning of the overall production value chain, including human resources, land, scientific research and design, sales and marketing, and supply chain management. (See Table 3.1)

High labour costs

Labour shortage

Land shortage and high land cost

Absence of policies in industrial development and in

other related support

Energy shortage and high energy costs

Unstable business environment

Government regulations increasingly complex

Inadequate industrial auxiliary support

Difficulty in getting credit

Lack of management talent

Lack of R&D talent

88.2%

67.7%

48.8%

39.6%

39.5%

33.0%

28.4%

26.8%

18.4%

18.4%

18.2%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

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Table 3.1: Analysis of Business Factors for the Return to Hong Kong

• Favourable Conditions Constraints

Market Factors • Positive image and a competitive edge in marketing Hong Kong-made products.

-

Labour Factors • Rising labour costs in the PRD narrows the gap with Hong Kong salaries.

• Hong Kong personnel are easier to manage and display professional integrity.

• Difficulty in hiring Hong Kong labour.• Lack of labour force with technical skills.• Rising manpower costs due to labour regulations

such as minimum wage and standard working hours.

Industrial Land Factors

-

• Insufficient industrial land and high costs.• Current industrial buildings have difficulty meeting

the demands of automated manufacturing, especially those using high-precision equipment.

Ancillary Factors

-

• After moving manufacturing to the PRD, the industrial auxiliary system in Hong Kong has basically disappeared.

• Industrial support and industrial research systems do not meet the requirements for upgrades in manufacturing.

• High energy costs.

Institutional Factors • Zero tariff and low tax could lower the cost of equipment.

• Intellectual property rights are comprehensively protected and therefore suitable for conducting R&D and innovation activities.

• The Government has no industrial policy and provides no support for industry. There are insufficient preferential concessions for promoting scientific research and innovation.

• Regulatory procedures of government departments are complicated and sometimes lack coordination.

• Insufficient industry-related training within the education system.

• The business environment is not as stable as it once was.

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SUMMARY OF THE CHALLENGES FACING HONG KONG INDUSTRIES

Hong Kong industries are facing many challenges related to policy, technology, marketing, and production, and it must resolve these accumulating issues before it can complete its structural transformation.

Non-intervention Approach AdoptedIn the late 1970s, Hong Kong industrialists felt the need to upgrade and transform. The Hong Kong-British colonial Government therefore set up an “Advisory Committee on Diversification” to address three major industrial development issues. One dealt with the industrial system, including industrial land and R&D; another with industrial support, including finance, education, and training; and a third with market development, including promotion of trade and trade negotiations. This committee proposed a number of policies for industrial diversification. Of the proposals, only those dealing with market development were ultimately implemented. These included having the Hong Kong Government establish a trade negotiation mechanism to obtain quotas for its textile and garment manufacturers. Another proposal adopted was tasking the Hong Kong Trade and Development Council with aiding Hong Kong industrial enterprises in developing the international market. Proposals involving the industrial system and industrial support measures were not implemented because manufacturers chose the “Made in PRD” model, for one.

At the end of the 20th century, Hong Kong manufacturers benefitted from adopting the “Made in PRD” model. This transformation was indebted to Mainland trade and industrial policy and had very little to do with Hong Kong’s own industrial policy. In 2006, the central and PRD governments again changed trade and industrial policies; only this time, greatly reducing the preferential policies Hong Kong firms had once enjoyed. Firms also

faced a shortage of workers in the PRD and the rapid development of Mainland companies, an ascent supported by the new Mainland industrial policies. In recent decades, the Hong Kong Government has lost concessions (such as textile quotas) because of the WTO’s multi-lateral trade negotiations and global market liberalisation. While Hong Kong has obtained zero-tax treatment under the Closer Economic Partnership Arrangement (CEPA) in recent years, Hong Kong’s hollowed-out manufacturing sector and its firms’ inadequate capacity to sell in China has left few able to benefit from this agreement.

In other words, since 2006, Hong Kong manufacturers have gained little in terms of trade and industrial policy.

No Breakthroughs in Industrial Technology One essential component of industrial development is technology. After Hong Kong manufacturers moved to the PRD, they upped the scale of production, improved the level of management, and increased the range of products. However, the nature of their operations remained fundamentally unchanged, lacking technological breakthroughs. Consequently, Hong Kong industry has been dominated by traditional sectors and small and medium-sized enterprises (SMEs) — a situation largely the same now as in the 1980s.

International experience shows that there are many policy factors involved in the technological upgrading of manufacturing. Hong Kong and Taiwan companies have both employed the business model of processing trade. But in the 1980s and 1990s, the Taiwan Government collaborated with Hsinchu Science Park and the Industrial Research Institute on breakthroughs in semiconductor technologies. This enabled newly rising, large-sized Taiwan IT firms to establish manufacturing bases all over the country as well as internationally, giving them a physical presence outside the PRD. By comparison, the non-interventionist policies of the Hong Kong government tended to encourage the city’s industrialists to maintain the status quo with few new forms of production.

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If Hong Kong continues to stick to market-oriented development of industry, thereby neglecting technical upgrades and the role of the Government, it will be difficult to change the existing industrial structure and for firms to seize market opportunities outside the PRD.

New Challenges in the Market Hong Kong firms have been very active in traditional industries, being part of the buyer-driven value chain; therefore, the market factor is of utmost importance. Over the last 30 years, Hong Kong manufacturers have enjoyed long-term prosperity in the European and US markets, but they have not done much to develop newly emerging markets.

The 2008 financial crisis seriously affected Hong Kong manufacturers who, relying heavily on European and US markets, lacked diversification. Production costs in the PRD rose rapidly, and manufacturers had to compete with cheap-labour countries in Southeast and South Asia. Hong Kong enterprises had invested little outside the PRD and found it difficult to retain international customers. In recent years, they have actively explored the Mainland market which has been changing rapidly, especially with rising Internet sales. The Mainland economy is currently still adjusting to the “New Normal” situation, so prospects of domestic sales may be hard to predict.

In 2015, China’s exports suddenly plummeted, and orders to Hong Kong firms from the international market shrank. Having yet to establish their own brands in the Mainland and newly emerging markets, the pressure on Hong Kong businesses has been enormous.

Structural Challenges Over the past 30 years, numerous Hong Kong-sponsored and international research reports and academic studies have analysed the city’s industrial development and have made proposals accordingly. In 1979, the Advisory Committee on Economic Diversification conducted the first comprehensive research on this subject. In 1997 came “Made by Hong Kong” by the Massachusetts Institute of

Technology (MIT). Even with a gap of nearly 20 years, both reports point out the same four major development constraints on Hong Kong industries.

• Cost and shortage of industrial land• Supply of labour• Education and training of industrial personnel• Hong Kong manufacturers’ development,

investment in, and adoption of new technology

These issues have been mainly related to the “Made in Hong Kong” model of production. In the 1990s, Hong Kong manufacturers moved to the PRD; subsequently, they turned from only the “Made in Hong Kong” model to both “Made in PRD” and “Made by Hong Kong”, thereby overcoming these challenges. By using the “Made in PRD” model, they surmounted the “Made in Hong Kong” constraints of land and labour by designating technical positions to Mainland staff, indirectly reducing the pressure of a shortage of qualified personnel. For a long time, Hong Kong manufacturers were active in traditional industries and used flexible production management in place of R&D.

In late 1990s, “Made by Hong Kong” report outlined three new challenges19:

• Limitations of family ownership of business enterprises

• Low rate of formation of new technology-based enterprises

• Scarcity of specialised technological knowledge in government

19 Suzanne Berger and Richard K. Lester (eds), Made by Hong Kong: Hong Kong Industry’s Past-Present-Future; Beijing:Tsinghua University Press, 2000, pg 62.

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These problems did not initially attract widespread attention. Hong Kong is a free economy that does not interfere in the ownership structure of companies. By the end of the 1990s, Hong Kong had given priority to financial and professional service sectors. As a result, its young people enthusiastically joined the service sector, and by comparison, industry was relatively unattractive. In 2000, the SAR Government set up the Innovation and Technology Commission to strengthen its technology base and facilities; it also supported applied research and transfer of industrial technology. However, it rarely provided strategic guidance for developing industry. Ten years later, these three issues have become major development constraints for the post-PRD manufacturing era. Family ownership of companies initially only influenced the efficiency of corporate management; only later did the lack of succession become a larger problem. This has indirectly caused a reduction in the number of Hong Kong manufacturers. Additionally, the lack of new technology not only slowed down PRD entrepreneurs regarding new investment projects, but also influenced the degree of industrial co-operation between Guangdong and Hong Kong.

This Study has clearly illuminated the pressing challenge of Hong Kong’s missing generation of qualified industrial staff. Over the span of 20 years, “Made in PRD” model has completely changed the industrial base of Hong Kong. Manufacturers have transferred industrial skills to PRD workers and neglected to retain such core skills in a new generation of Hong Kong staff; this has affected the accumulation of industrial know-how in Hong Kong, and the number of Hong Kong industrial specialists has decreased quickly with manufacturing moving to the PRD. Enterprises relocating their manufacturing to the PRD made a purely rational, market-based decision. However, with a lack of industrial policy in Hong Kong and the hollowing-out of local manufacturing at home, it has dealt a major blow to Hong Kong’s industrial competitiveness.

The preceding accumulated constraints on industrial development have remained unresolved for the past 30 years. Tack on the changes brought by the “Made in PRD” model, and Hong Kong industry is facing unprecedented obstacles. All the development challenges mentioned here are related to Hong Kong’s industrial competence, reflecting both current and future concerns of Hong Kong industries. After 2005, new hurdles emerged in the PRD, arising from changes in Mainland policies and market setbacks caused by the financial crisis. Returning to Hong Kong is a long-term issue and one requiries a resolution to the fundamental constraints on Hong Kong industrial development (See Table 3.2).

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Table 3.2: Challenges of Hong Kong’s Industrial Development

Main Challenges Concrete Issues

Overall Challenges

Hong Kong industrial talent gap

• Young Hong Kong talent not willing to work in industry

• The education system’s inadequate training of industrial talent

Relatively weak R&D input of Hong Kong manufacturers

• Limited technological and R&D activities of manufacturers

• Weak capability of manufacturers’ to adopt new technologies

Lack of technology-based industries

• New technology-based enterprises have been slow to establish and innovate

• Hong Kong’s government-industry-academia research co-operation needs to be improved

Difficulty in expanding markets• Slowing down of international export markets• The Mainland market has just started to develop

Scale of Hong Kong manufacturers is declining

• Falling number of manufacturers, impacting the com-prehensiveness of the industrial auxiliary system

• Few new manufacturing projects

Challenges in Returning to Hong Kong

Labour shortage, high production costs• Inadequate supply of labour in Hong Kong• Labour regulations, such as those on minimum wage

and standard working hours, affect wage costs

Shortage of industrial land, high production costs

• Shortage of industrial land• Traditional industrial buildings can not meet the needs

of new manufacturing techniques

Deficiencies in industrial policies and regulatory systems

• Lack of a long-term industrial policy has affected industry-related support and the establishment of a personnel training system

• Government procedures for regulating factories have become more complicated

Insufficient auxiliary support for manufacturing

• Lack of a support system for local industry.• High energy costs

Challenges of Manufacturing in the PRD

Labour shortage in the PRD• All-round shortage of industrial labour in the PRD• Mainland labour regulations are becoming more strict

Production costs rising in the PRD• Rapidly rising costs of labour in the PRD• Rising costs of land and funding

Changing business policies in the Mainland

• Preferential policies for exports are being reduced• Preferential investment measures have been sharply

decreased• Changes in industrial policies

Challenges that existed before 2005

New challenges after 2005

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Of all challenges, relatively limited R&D and lack of emerging technologies are direct results of Hong Kong’s lack of industrial and technological policies. Such policies are the greatest forces in promoting new industries and include allowances for R&D, tax concessions, co-operation between industries, academia and research sectors, and training qualified staff. In the 1970s and 1980s, Hong Kong manufacturers were not behind the other “four Asian dragons” in terms of technology and automation. However, without policy support, they found it hard to conduct large-scale R&D and therefore could only stick to their old ways, gradually evolving into an industrial structure dominated by traditional industries. More importantly, Hong Kong’s industrial environment and the PRD’s manufacturing system both lack institutional incentives and highly-qualified people to fully support R&D and innovation activities.

Regarding the return to Hong Kong, insufficient industrial land and workforce continue to be problematic, having been obstacles to industrial development since the 1970s. Hong Kong’s lack of industrial policy and related business support became more evident in the 1990s with the relocation of manufacturing to the PRD; this being the result of a hollowing-out of Hong Kong manufacturing, also known as Hong Kong’s chicken-and-egg conundrum.

The challenges of manufacturing in the PRD have also resulted from changes in the Mainland policy, an external factor. Hong Kong manufacturers still need to adapt to this new business environment. In a nutshell, “Made in PRD” was a model that drew upon strength from the outside, thereby possessing embedded, inherently unstable and uncontrollable factors.

Nearly half the challenges described above are old ones, and many of the new challenges have arisen directly from a lack of resolution to the old challenges; as a result, they have piled up over time. By investing outside Hong Kong, Hong Kong firms have extended their manufacturing but have also indirectly imported the opportunities and challenges of the PRD back to Hong Kong. Of the three newly identified challenges, the more “comprehensive” ones and those related to a return to Hong Kong are internal issues that can be solved through policy measures and co-operation between industrial and commercial associations, public organisations, and manufacturers. Those in the PRD also require improved co-operation between Hong Kong and the Mainland and PRD governments.

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The challenges of Hong Kong industries come in many forms, with unresolved issues spanning different periods of time and crossing borders; as they have piled up, they have become bigger structural challenges.

By the end of the 1970s, Hong Kong industries were already facing challenges like weak R&D and insufficient talent training. These issues have only continued to become more urgent. At the turn of the last century, industries were booming, and they relied on a group of young and middle-aged industrialists establishing manufacturing plants in the PRD to develop the international market. But as these entrepreneurs approach retirement, how to sustain development has become a pressing dilemma. Following the financial crisis, Hong Kong manufacturers made major operational changes, but under the constraints of Hong Kong industrial and technological policies, they could not easily change the overall manufacturing structure.

Looking back upon the more than 30 years of history of “Made in PRD”, Hong Kong industries have benefitted from its low-lost labour, land resources, and industrial policies, which enabled it to boom. Having moved their operations to the PRD following simple market principles, manufacturers gave little consideration to the impact their relocation would have on Hong Kong’s industrial system. The subsequent lack of Hong Kong industrial policy has led to a weakening of the city’s industrial foundation and to a void in talent. The course of this transition has deeply affected the overall competitiveness of Hong Kong industries.

“Made in PRD” was the springboard from “Made in Hong Kong” to “Made by Hong Kong”. As Hong Kong manufacturers find it more and more difficult to continue the “Made in PRD” model, they will have to reconsider strategies for the post-“Made in PRD” period. It is time for Hong Kong to formulate comprehensive industrial policies, adjust manufacturing structure, and promote industrial upgrading.

Most importantly, Hong Kong has reached the moment in which it must rebuild its industrial competitiveness.

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The 2008 financial crisis was a blow to Hong Kong manufacturers. It forced developed countries—those who had made the service sector the mainstay of their “virtual economy”—to reflect on their future. Renewed attention to the “real economy” and reindustrialisation became the new focus for European and North American countries after 2009. The European Union, United States, Germany, Japan, and other countries with strong manufacturing sectors rolled out new industrial policies. And in May 2015, China promulgated its Made in China 2025 plan.

Adjusting to market changes post crisis, the rising popularity of e-commerce being one, manufacturers around the world executed major changes in production, R&D, and marketing. Working closely with their respective governments and industry stakeholders, they proposed new industrial models. This era of change brought both crises and opportunities for Hong Kong manufacturers who saw it as an opportune moment for adjustments and transformation.

NEW DIRECTIONS IN INTERNATIONAL INDUSTRIES

Changes in Industrial PolicyIn the 1960s and 1970s, countries in Europe and the US began to deindustrialise, shifting their economic focus from manufacturing to the service sector. A business model, such as R&D and sales, was deployed at home while manufacturing was either contracted to foreign companies or fulfilled by developing countries where labour was cheap and abundant and where they had investments. This led to the loss of a large number of local manufacturing jobs.

After the financial crisis, Europe and the US realised the importance of industries, especially in promoting R&D and innovation and in generating high-end jobs. Industries accounted for 80 per cent of the European Union’s (EU) exports and 80 per cent of the R&D spending of private organisations20. In 2011, the US proposed to re-strengthen manufacturing and set up the Advanced Manufacturing Partnership Steering Committee. Every two years, this committee offers policy advice on major issues of industrial development. In 2012, the EU published a report entitled A Stronger European Industry for Growth and Economic Recovery, proposing that industries account for 20 per cent of the EU’s GDP by 2020, up from 15.6 per cent in 2011. Another major motion was Germany’s Industry 4.0 strategy. Following its publication in 2011, it garnered strong support from the country’s industrial firms, government, and academia. Its details were re-published at the 2013 Hanover Industrial Exhibition.

Industrie 4.0 is considered Germany’s fourth industrial revolution (See Figure 4.1). The first, from 1784 to 1890, advanced mechanical production via water- and steam-powered engines; the second, from 1890 to 1969, mass-production via electrical power; the third, from the 1970s onwards, automated production using electronics and IT goods. Now, with the development of cyber-physical systems fueling intelligent manufacturing, the entire global economy is jumping on the bandwagon of the fourth industrial revolution. The foundation of Industry 4.0’s Internet operations combines this manufacturing system with the Internet of Things and the Internet of Services. Components include smart products, smart logistics, smart buildings, smart grids, among other aspects to form the Smart Factory system (See Figure 4.2).

CHAPTER 4 DEVELOPMENT TRENDS OF HONG KONG INDUSTRIES

20 European Commission, A Stronger European Industry for Growth and Economic Recovery, COM(2012) 582 final, Brussels, October 2012, p. 3.

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Figure 4.2: Internet and the Industry 4.0 Smart Factories

Source: The Industrie 4.0 Working Group, Recommendations for implementing the strategic initiative INDUSTRIE 4.0, April 2013, pp.19.

Source: The Industrie 4.0 Working Group, Recommendations for implementing the strategic initiative INDUSTRIE 4.0, April 2013, pp.13.

First mechanical 1784

First production line, 1870

First programmabel logic controller (PLC), 1969

1. Industrial revolution follows introduction of water - and steam-powered mechanical manufacturing facilities

End of 18th century Start of 20th century Start of 1970s Today

Time

Com

plex

ity

2. Industrial revolution follows introduction of electrically-powered mass production based on the division of labour

3. Industrial revolution uses electronics and IT to achieve further automation of manufacturing

4. Industrial revolution based on Cyber-Physical Systems

Smart Mobility Smart Logistics

Smart Buildings

Cyber-physical system (CPS)

Smart FactorySmart Grids

Figure 4.1: Industry 4.0

Internet of Services

Internet of ThingsSmart Product

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Industriy 4.0 has taken the industry by storm; major industrial nations are consequently reevaluating their respective manufacturing sectors and revising industrial strategies. The Mainland borrowed heavily from it in drawing up Made in China 2025 in an effort to match the development pace of advanced industrial countries. Japan’s 2015 Manufacturing White Paper analysed the changes in American and German industries, exposing its own manufacturing crisis; it therefore proposes using the Internet of Things, artificial intelligence, and big data to reform its industrial structure and promote horizontal co-operation between companies. Taiwan published its own Productivity 4.0 plan: in addition to intelligent manufacturing, it calls for an increase in both intelligent agriculture and commerce to develop productivity.

For all major manufacturing countries, prioritising industrial development and manufacturing capacity is linked to R&D activities and manufacturing structure. The US is a leader in R&D and IT, but its manufacturing activities are limited. Germany and Japan have retained physical industrial bases, strong manufacturing capacity, and small- and medium-sized enterprises (SMEs), but they lag in IT application. Thus, while the US is working on its “advanced manufacturing” strategy and reindustrialisation, Germany is focusing on informatisation and linking the industrial system and production methods to the Internet. Meanwhile, Japan is stressing overall development in line with international trends. China is upping the ante in the race by transformation and upgrading to become a manufacturing titan. Each country has customised its own development strategy. (See Table 4.1)

Manufacturing Strategies of the US, Germany, and Japan The US, Germany, and Japan have developed their own respective strategies and working programmes placing great emphasis on a combination of informatisation, the Internet, manufacturing models, innovation of industry, human resources, and development of SMEs. (See Table 4.2)

Table 4.1: Development Priorities of Major industrial Countries

Development Targets Main Development Issues

The US –Advanced Manufacturing Partnership

Strengthen and rebuild advanced competitiveness of US manufacturing

• Enable innovation• Secure the talent pipeline• Improve the business environment21

Germany – Industry 4.0

Development of German industry in the Internet era

• Horizontal integration through value networks• End-to-end engineering across the entire value chain• Vertical integration and networked manufacturing systems• New social infrastructure in the workplace• Cyber-physical systems technology22

Japan – 2015 Manufacturing White Paper

Assessment of and recommendations for Japanese manufacturing

• Strengthen the use of technology in the Internet of Things• Accelerate and protect human resources in manufacturing• Apply education and R&D systems to support the Japanese

manufacturing base

China – Made in China 2025

Medium- and long-term plan for Chinese manufacturing

• Stimulate innovation• Intelligent transformation• Strengthen industrial competence and foundation• Green development

21 Enabling innovation; Securing the talent pipeline; improving the business environment.

22 Horizontal integration through value networks; End-to-end engineering across the entire value chain; Vertical integration and networked manufacturing systems; New social infrastructures in the workplace; Cyber-Physical Systems technology

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Informatisation the internet and the industrial development: The three countries stress on the importance of informatisation and the internet on industries, regarding them as future development cores. The US makes use of industrial internet and big data to further strengthen the country’s industrial competitiveness. Germany has fully incorporated the internet and informatisation into its industrial system, while using cyber-physical systems technology to change manufacturing organisation modes. Japan, observing the changes the US and Germany have made, strengthens its usage of the internet of things to catch up with the two countries.

Informatisation and US’s advanced manufacturing: The US is a pioneer in the Internet, big data, and 3D printing. The Internet allows manufacturers to directly contact customers, thus lowering transaction costs and raising trading efficiency. Informatisation is the foundation of big data, enabling manufacturers to promptly understand the state of the market and adjust production accordingly. In short, America’s manufacturing development goal is to target the industrial Internet; it also stresses big

Table 4.2 Comparing Manufacturing Strategies of the US, Germany and Japan

The US Germany Japan

Informatisation and Internet Industrial Internet Cyber-physical Systems

Technology (Internet of Things and Internet of Services)

Internet of Things

Modes of ManufacturingDigital manufacturing (such as 3D printing), Big Data

Smart factories, Human-Machine Interaction

Robotic Technology, 3D Printing Manufacturing

Industrial Innovation

National manufacturing technology strategy; National Network for Manufacturing Innovation

A new kind of industrial framework to encourage employees to innovate, to have commercial innovation, and shorten the innovation cycle.

R&D of core technologies. Government-Industry-Academia cooperation in R & D

Human Resources

Shift the misconceptions the public holds of manufacturing; Increase the skills of manufacturing personnel

Training and continuing professional development.

Nurturing R&D personnel, job training, assessment of skills, young people joining manufacturing, female manufacturing personnel

Development of SMEs

Intermediary solutions of professional skills; Technology; Information flow of market and supply chain; Increase funding channels.

Networked manufacturing system

Operation, innovation, entrepreneurship, new business, support for overseas expansion

data applications and digitalised manufacturing. A research report by General Electric asserts that the industrial Internet drives a combination of intelligent equipment, intelligent systems, and intelligent decision-making in machinery, as well as equipment, system networks, big data, and analysis. Benefitting 46 per cent of the global economy (USD32.3 trillion in global output value), industrial Internet is spreading to traditional industries as well as the transportation and medical sectors. Over the next 20 years, the industrial Internet is projected to increase the scale of the global economy by USD15 trillion, that is, a figure equivalent to the current GDP of the US, and an increase of nearly 20 per cent in global per capita GDP 23.

23 Peter C. Evans and Marco Annunziata, Industrial Internet: Pushing the Boundaries of Minds and Machines, November 2012 (retrieved from: http://www.ge.com/docs/chapters/Industrial_Internet.pdf).

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Informatisation and German smart factories: Germany’s smart factories are built on information network systems comprising the following: upstream and downstream factories, customers as well as production equipment, and information networks in warehouse systems. Using cyber-physical systems technology to send product information in real time to manufacturing equipment enables production to respond to market changes in a technologically intelligent way. These intelligent factories combine the Internet of Things, the Internet of Services, and smart products, each with their respective designated functions. Smart logistics are then employed to form a real-time interactive network for the procurement of raw materials, production, sales, delivery, and services. The aim is to establish a vertically integrated manufacturing network and a horizontally integrated real-time business management system. This German concept of a smart factory is supported by SMEs. As a result, German production has changed from “centralised” to “de-centralised”, resulting in a networked manufacturing system; it satisfies the three major demands customers make of producers—efficiency, speed, and flexibility. According to a study by Strategy&, German companies plan to spend 3.3 per cent of annual income on industrial Internet solutions, equivalent to half of all new planned capital investment spending. Over the next five years, more than 80 per cent of companies will implement digitalisation of their production24.

Industrial innovation: The US, Germany, and Japan’s governments continue to provide fiscal resources to support R&D of core technologies. For example, the US is currently promoting technology-based platforms such as advanced sensors, control platforms, visualisation, informatics and digital manufacturing, and other advanced materials25. In addition, a National Network for Manufacturing Innovation has been proposed to develop cutting-edge technology through public-private partnerships. Germany’s Industry 4.0 employs cyber-physical systems to promote horizontal integration of production and point-to-point engineering integration as well as a shortening of R&D and innovation cycles. This enables manufacturers to obtain new commercial innovations in addition to industrial ones. The smart assistance of Industry 4.0 is also capable of reducing the monotony of workers and systematising work procedures, allowing them to concentrate on innovation and value-added activities.

Human resources: The US, Germany, and Japan all claim that they lack industrial workers; therefore, each plans to improve education and training to increase the supply of manpower and technical ability. Historically, the US and Japan have emphasised developing the service sector, which affected the willingness of the workforce to enter manufacturing. They now need to rectify public misunderstanding in order to attract young people to join the manufacturing sector. All three countries face a business environment comprising ageing populations, low birth rates, and high salaries. This has increased the demand for automation in order to reduce the need for labour; the working life of senior employees has also been extended. Japan has even encouraged women to join the traditionally male-dominated manufacturing sector. Japan has also established a Robot Revolution Initiative Council to develop artificial intelligence to deal with the labour shortage. This is key to Japan’s advanced manufacturing.

24 Strategy& and PwC, Industry 4.0: Opportunities and challenges of the industrial internet, 2015, pp. 7.

25 Advanced sensing, controls, and platforms for manufacturing；visualization, informatics & digital manufacturing; advanced materials manufacturing；

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SMEs: Long-term deindustrialisation of the US has impacted the manufacturing capacity of SMEs. The US now plans to expand and strengthen the industrial intermediary service system to help SMEs adopt new technologies for processes, materials, and new products. A platform for industrial pilot projects and industry expertise will also be provided. This will encourage the use of digitalised design and manufacturing among SMEs. Germany and Japan each have a large number of SMEs, but their respective governments fear that SMEs will not be able to move easily into informatised manufacturing. Germany’s Industry 4.0 proposes establishing industrial broadband infrastructure and a knowledge-based manufacturing environment to promote standard, security, and safety management of industrial big data; this would help SME manufacturers use the Internet to develop industrial co-operation and complete their upgrading in intelligent production. Ultimately, this has helped strengthen the overall co-operative industrial system of Germany, of which SMEs are the mainstay. It has also helped SME manufacturers avoid marginalization for their lack of investment and IT capacity.

Looking at the industrial strategies of these three powerhouse nations, the US and Germany have comprehensively described future development trends and set out proposals accordingly, while Japan acknowledges a strong sense of crisis and is actively altering its industrial strategy. In other words, they view the industrial Internet and intelligent manufacturing as keys to the future of industrial development. Industrial Internet, in particular, will bring aggregate benefits to the informatisation and networking of manufacturing, energy, consumption, transportation, and other economic sectors. Backed by its powerful science and commercial service capacity, the US is utilising the competitive advantage of its large companies and the domestic market to strengthen and revitalise its industrial development. Germany and Japan have cutting-edge manufacturing ability but face a shortage of workers and development constraints on SME manufacturers. Therefore, they are aggressively using informatisation and the Internet to back

up their industrial system. They are building up an intelligent factory network to strengthen the innovation of industry and the industrial service system. If we say that the U.S. is sharpening the competitive advantage of its industrial system’s IT, then Germany and Japan are patching the IT weaknesses of their industrial systems.

CHINA’S NEW INDUSTRIAL TRENDS

Made in China 2025From the inception of the 11th Five-Year Plan, China has constantly stressed the need to transform and upgrade its industrial system. Changes in the PRD’s manufacturing environment are due, in large part, to changes in the Mainland’s industrial policy. China faces the pressure of Europe and US’s reindustrialisation as well as the “New Normal” situation of its economy. In response, over 20 government departments (including the Ministry of Industry and Information Technology, the National Development and Reform Commission, the Ministry of Science and Technology, the Ministry of Finance, and the Academy of Engineering) are collaborating on a comprehensive plan on the development of industries. In May 2015, the Mainland published Made in China 2025 to promote China’s transformation from a country with not only a large manufacturing base to one with a powerful one as well. Through three major steps, it aims to achieve this objective over the next 10 years and catch up with Germany and Japan.

• Step One: By 2025, join the ranks of leading manufacturing powerhouse countries.

• Step Two: By 2035, position China’s manufacturing squarely among the middle pack of these powerful manufacturing countries.

• Step Three: By the 100th anniversary of the establishment of new China, become an unequivocal manufacturing leader.

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According to Mainland assessments, the current level of China’s manufacturing is somewhere between that of the second (mass production) and third (automated production) industrial revolutions. To bring manufacturing up to speed requires promoting aspects of the second, third, and fourth industrial revolutions concurrently: that is, remaking and upgrading traditional industries, popularising new forms of manufacturing, and developing high-quality sectors. However, making such leaps in development is an extremely complicated and difficult task.

The emphasis of Made in China 2025 is on innovation, intelligent transformation, strengthening industrial competence, bolstering the foundation of the industrial economy, and green development. It lists manufacturing targets for 2020 and 2025, with eight strategic tasks and priorities, eight strategic supports and five major engineering projects. Made in China 2025 addresses the main issues of global industrial development, combining them with measures that are compatible with the national industrial situation of China. For example, in the face of the US’s industrial Internet and Germany’s technology in information physics systems, China proposes a “two integration” strategy of informationisation and industrialisation. With an eye to reducing the Mainland workforce and confronted with a lack of skilled industrial workers, China has

studied Germany’s intelligent manufacturing and Japan’s robot programme. To catch up to the three global manufacturing powers in science and technology, Made in China 2025 envisages a new generation of IT technology, high-end machinery, new materials, and biotech pharmaceuticals, among other strategic sectors.

To foster the industrial development as well as the cross-industry between the manufacturing and the service sectors in this era of the Internet, the State Council issued Guiding Opinions on Encouraging “Internet Plus” in July 2015, promoting the concept of “Internet Plus”. In its section on “Internet Plus and collaborative manufacturing”, it proposes integrating Internet and manufacturing in order to improve digitalisation, networked manufacturing, and intelligent manufacturing, which would greatly advance mass customisation of orders and the use of Internet in collaborative and service-oriented manufacturing. This would create an industry ecosystem with a networked manufacturing system, a model similar to the networked manufacturing system and the intelligent factory in Industry 4.0.

Made in 2025 is the national response to the great changes in global industry, setting out a top-level plan for the entire industrial system. Compared to past five-year plans which addressed more medium-term goals, it looks further ahead and is more comprehensive, strategic, and international in its thinking.

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Made in China 2025 – Main Manufacturing Targets for 2020 and 2025

Type Target 2013 2015 2020 2025

Ability to Innovate Proportion of principal revenue of industrial enterprises over designated size spent internally on R&D (per cent)

0.88 0.95 1.26 1.68

Number of patents per 100 million RMB of revenue of industrial enterprises over designated size1 (piece)

0.36 0.44 0.7 1.1

Quality Efficiency Competitiveness index of manufacturing firms2

83.1 83.5 84.5 85.5

Percentage of industrial value added

- - Increase by two percentage points from 2015

Increase by four percentage points from 2015

Total labour productivity of manufacturing workers (per cent)

- - 7.5 per cent (average growth in the 13th Five Year Plan period)

6.5 per cent (average growth in the 14th Five Year Plan period)

Two Integrations Penetration rate of broadband (per cent)3

37 50 70 82

Penetration rate of digitalised R&D design (per cent)4

52 58 72 84

Use of numerical controls for key processes (per cent)5

27 33 50 64

Green Development Unit energy consumption in the industrial value-added output of industrial enterprises over designated size

- - 18 per cent reduction compared to 2015

34 per cent reduction compared to 2015

Unit carbon emissions in industrial value-added output

- - 22 per cent reduction compared to 2015

40% 40 per cent reduction compared to 2015

Reduction rate of unit water usage in industrial value-added output

- - 23 per cent reduction compared to 2015

41 per cent reduction compared to 2015

Overall utilisation rate of industrial solid waste (per cent)

62 65 73 79

1. Number of effective inventions and patents of industrial enterprises over designated size / Principal revenue of industrial enterprises over designated size.

2. The manufacturing quality competitiveness index—a comprehensive assessment index of economic and technology—reflects the overall quality of manufacturing; it is measured by 12 specific standards comprising quality standards and development ability.

3. Penetration rate of fixed-line broadband in households = Number of households using fixed-line broadband / Number of households.

4. Penetration rate of digital R&D design tools = Number of industrial enterprises over designated size using digital R&D design tools / Total number of industrial enterprises over designated size.

5. Rate of numerical control of key processes is the average of this rate among industrial enterprises over designated size.

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Policy Directions in Manufacturing in the PRD Automation and informatisation are the latest manufacturing trends in the PRD. In March 2015, Guangdong issued the Guangdong Province Industrial Transformation and Upgrading Three-Year Plan 2015–2017. The province set aside RMB51.6 billion for a “robots replacing humans” programme in 1,950 large industrial firms. Foshan and Dongguan also set aside hundreds of millions of RMB to subsidise local firms replacing people with robots. Guangzhou, Shenzhen, Foshan, Dongguan, and Huizhou are actively pushing the use of industrial robots in their production chains.

In July 2015, Guangdong issued the Guangdong Province Intelligent Manufacturing Development Plan 2015–2025 to accelerate the province’s manufacturing transformation toward digitalisation, networking, intelligent systems, and service upgrading, that is, to change from “manufacturing” to “intelligent manufacturing”. Guangdong plans to use Guangzhou and Shenzhen as its axis of

intelligent manufacturing R&D. In the PRD, it will set up districts for the purpose of demonstrating independent innovation on intelligent manufacturing as well as several industrial bases for intelligent equipment. These will promote the model of “Internet Plus” manufacturing and the remaking of manufacturing’s informatisation. Specific measures will include setting up industrial cloud platforms, industrial big data integrated applications, and the “robots replacing humans” programme.

In September 2015, Guangdong issued Implementing Measures on Made in China, which proposed that manufacturing should develop in the direction of “advanced, intelligent, intensive, and green”. These priorities are developing a new generation of information technology, advanced machinery manufacture, production of new materials, and biotech pharmaceuticals. The goal is to strengthen the industrial base, develop service-related manufacturing and production services, and raise manufacturing to the international level.

Made in China 2025 Framework

Strategic Tasks and Priorities Strategic Supporting System Engineering Columns

1 Enhance the national manufacturing innovation ability

Deepen institutional reform Build a manufacturing innovation centre (ie, industrial technology research base)

2 Promote deep integration of informatisation and industrialisation

Create an environment of equal market competition

Work on intelligent manufacturing engineering

3 Strengthen the capacity of the industrial foundation

Improve financial support policies Engineer projects to strengthen the industrial foundation

4 Promote green manufacturing in all areas

Increase tax and finance policy support

Implement green manufacturing projects

5 Promote breakthroughs and development in prioritised sectors

Build a multi-level system for training qualified people

Engineer innovative projects for high-end machinery

6 Deepen and promote structural reform of manufacturing

Improve policies for micro-, small-, and medium-sized enterprises

7 Actively develop service-based manufacturing and production-related services

Further expand the internationalisation of manufacturing

8 Raise the international development level of manufacturing

Improve implementation mechanisms

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Mainland Manufacturing Policies and Hong Kong Manufacturers Hong Kong manufacturers are mainly traditional industries, with some still operating at a level akin to that during the second industrial revolution. Many are investing heavily in equipment to reach the automation level of the third industrial revolution. Even so, if they continue using the same business model, it will not be easy for them to attain the current international level of Industry 4.0, which is based on the Internet and intelligent factories. That is, it may be difficult for Hong Kong manufacturers in the PRD to meet the standards of Made in China 2025.

The contents of Made in China 2025 are not necessarily directly related to Hong Kong manufacturers in the PRD. First, Made in China 2025 deals with industry, R&D, and commerce and education in the industrial system; it coordinates local governments, large state-owned companies, the defense industry, and other sectors; it is based on a systemic organisation for a large country with little consideration for the concrete needs of local factories. Second, Made in China 2025 deals with very large R&D and industrial projects, most to be taken on at the state and regional level, by R&D organisations and large state-owned firms, with grants or loans from the state. Hong Kong firms are mainly SMEs that lack R&D and the funding for investment projects. Third, Made in China 2025 emphasises how advanced science and technology will propel the country to become a powerful manufacturing nation; the traditional industries in which Hong Kong firms are active are not a priority.

Made in China 2025 stresses issues like intelligent, green, and service-oriented manufacturing and the integration of Internet and manufacturing—major global industry trends. Hong Kong industrialists could take part in Made in China 2025 using China’s manufacturing platform to promote intelligent and green manufacturing; they should efficiently utilise the existing competitive advantage afforded by Hong Kong services and implement early the transition to service-oriented manufacturing. Made in China 2025 is a strategy for improving international co-operation and could become a new direction for Hong Kong industries in the post-PRD manufacturing era. Hong Kong could attract quality industrial firms and talent from the Mainland, including the PRD, to migrate to Hong Kong and take advantage of new opportunities brought about by the Belt and Road Initiative, that of combining the resources of the Mainland and Hong Kong to become a springboard onto the international market. This would reverse the one-way flow of Hong Kong capital and industry people into the PRD, turning it into a two-way flow of industrial resources between the PRD and Hong Kong.

If we look at the overall policy documents of Made in China 2025 regarding manufacturing in Guangdong, Hong Kong could strengthen its co-operation with the Mainland and the PRD in the following sectors.

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1. Industrial internet: The combination of industry and Internet is a major trend of global industry. Over the next 20 years, industrial Internet in China could increase GDP by US$3 trillion26. However, industrial Internet requires enormous investment. The US and Germany mobilised General Electric, Siemens, and other large companies to start their transformations. The Mainland is therefore consolidating resources nationwide to promote “Internet Plus”. Hong Kong lacks the local investment and human resources to contribute to this enormous undertaking. It must therefore attract international and Mainland industrial Internet companies to Hong Kong in order to invest and encourage local R&D institutions and IT companies to participate in Chinese and foreign industrial Internet projects. Hong Kong still needs an industrial cloud platform, the Internet of Things, big data-application broadband construction, technical standards, data centres, industrial software, and application as well as supporting services. These would help promote co-operation between Hong Kong and the PRD in the sector of industrial Internet and build such a network linking the Mainland to the international world.

2. Intelligent manufacturing: Intelligent manufacturing uses artificial intelligence, digital manufacturing (3D printing technology), and industrial robots to reduce the demand for labour, meet individual demands, and shorten the R&D cycle, especially for traditional manufacturers. Hong Kong should meet the needs of the industries in which its firms are concentrated. It should promote digital manufacturing, collaborative development of the Internet, resource management, e-commerce, and other intelligent manufacturing models to help these firms make the switch to smart factories. Intelligent manufacturing is fragmented, which aides the return of industry to Hong Kong. Through industrial Internet, Hong Kong firms could, with their PRD factories, make innovations through market networks to set up small-scale, high-end digital showrooms in Hong Kong and work to scale with the manufacturing base in the PRD. Intelligent manufacturing involves intelligent logistics and a supply management chain; Hong Kong services have a competitive advantage in this. Hong Kong industrialists should strengthen their co-operation with related service institutions and promote upgrading of the whole production value chain. Simultaneously, they should increase exchange and co-operation with Guangdong in the areas of intelligent manufacturing, intelligence security, and manufacturing networking. This would help create a reasonable division of labour between industries.

3. Manufacturing innovation: Made in China 2025 proposes the creation of 40 national-level manufacturing innovation centres (ie, industrial technology research bases). These would develop R&D of basic key industry technologies that could be commonly used, turning these results into industrial use and training skilled manpower. Hong Kong should consider setting up an industrial innovation centre in the city to raise the manufacturing ability of its companies and promote breakthroughs in the city’s industrial science and technology. Green manufacturing is one of the main themes of Made in China 2025. This fits well with the

26 “揭開“中國製造2025”的面紗 — 專家解析國務院常務會議透露新信號”，中央政府門戶網站，2015年3月25日，http://b i g5 . go v . cn/ga te/b i g5/www .gov . cn/zhengce/2015-03/25/content_2838435.htm

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attitudes of Hong Kong’s young generation for sustainable development; it could be a new form of co-operation in manufacturing innovation between Hong Kong and the Mainland.

4. Service-Oriented manufacturing: Made in China 2025 proposes the development of service-based manufacturing and producer-service industries. It encourages the transformation of production-based manufacturing to service-based manufacturing. This would increase companies’ service activities and turn them from traditional output of products to providing goods and services such as customised services, lifetime-cycle management, Internet target sales, and online support services. These are incidentally the development priorities of Germany’s Industry 4.0. Service-based manufacturing increases the business scope of manufacturers and promotes new specialised services. Take, for example, the idea of lifetime-cycle management: manufacturers can extend their business from production to post-sales maintenance service. During the era of “Made in PRD”, Hong Kong companies provided processing services to international brands. Future service-based manufacturing could help the firms create a new form of co-operation with specialised service organisations. For example, Hong Kong could promote co-operation between aircraft repair organisations and manufacturers, improve service efficiency of the repair organisations, and help producers enter high-technology manufacturing sectors. It could also integrate the manufacturing and service sectors. In the sector of producer services, Made in China 2025 supports technology service industries such as mobile e-commerce, transfer of technology, innovation incubators and intellectual property; these are new services which Hong Kong, already possessing the necessary conditions, needs to develop.

5. Training and attracting talent: Made in China 2025 proposes the establishment of a multi-level system for training qualified people and increasing efforts to attract talent, especially for sectors with shortages in manpower with leadership capacity. Facing a shortage of talent in industry, Hong Kong should co-operate with the Mainland on this. In recent years, many Mainlanders who have gone overseas to study have returned home to set up new businesses. They are very active in biotechnology, new-generation information technology, energy conservation, and other national-level strategic industries. Hong Kong could take advantage of its standing within the international community to attract such people in cutting-edge industries to create new businesses, thereby providing new production technologies and breakthrough manufacturing for Hong Kong industries. Simultaneously, the city should encourage and guide these returnees to R&D and innovation and then ultimately to manufacturing in the PRD; this would be a new model of Guangdong-Hong Kong co-operation: “Front Research , Back Factory”.

6. International co-operation: During the last decade, new science- and technology-based factories in the PRD have risen quickly, leading the country in innovation and international sales. Hong Kong should exploit its internationalism, financial services, and regional advantage to help PRD companies expand overseas. It should simultaneously employ intellectual property mechanisms to encourage multi-national companies, scientific research institutions, and Mainland companies to use Hong Kong as a platform to develop R&D and design, industrial big data management analysis, and other knowledge-based co-operation; this would mutually benefit all parties concerned.

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NEW OPPORTUNITIES FOR HONG KONG INDUSTRIES

Facing many kinds of challenges, Hong Kong industrialists remain full of confidence. They assert that industries are and always will be an essential part of the economy and general livelihood. As it develops its financial, property, and other service sectors, Hong Kong should also strengthen its real economy and industries to give the city a more solid and comprehensive economic base.

In recent years, Hong Kong industrialists have been exploring new opportunities in addition to changes in their PRD manufacturing policy of increased automation and Mainland sales.

1. R&D and design: Jewellery manufacturers claim that Hong Kong’s R&D and design are rooted in an international perspective, thanks to the maturation of R&D 3D design and 3D printing technology; the Mainland cannot match the standards of Hong Kong in the short term. Consequently, jewellery R&D and design departments were able to move back to Hong Kong and find room for development. Hong Kong Science Park has also attracted numerous R&D companies, becoming the city’s R&D base.

2. Production and manufacturing: Manufacturers of high-precision moulds assert that the turnover rate of Mainland employees is very high, making it difficult to accumulate their technology. Hong Kong attrition rates are more stable and more conducive to developing a high-precision moulding industry which requires continuous technology innovation and investment in high-end equipment. As salaries do not account for a high proportion of high-value jewellery revenue, the comparatively high salaries in Hong Kong are still within budget. Hong Kong’s zero customs duty and low taxes further reduce the business costs of equipment-intensive investment.

3. Expanding investment: The comparative advantage of Hong Kong’s financial sector opens up investment opportunities for the city’s firms. Hong Kong firms manufacturing in the PRD form the base of Hong Kong investment; now, they are actively leveraging this investment to expand beyond manufacturing in the PRD and enter new markets and industrial sectors. Concrete projects include investing in factories overseas and setting up multi-national production networks. Some manufacturers have entered Southeast Asian countries along the Belt and Road, aiming to nab early opportunities. Others are drawing upon their own knowledge of production technology and investing in promising international and Mainland factories, opening up markets, and increasing their presence in scientific and technological sectors.

4. International co-operation: Hong Kong manufacturers use Hong Kong as a platform to co-operate with international companies in R&D and marketing. For example, Hong Kong environmental protection firms have exchanged technological information with related organisations worldwide. These firms bring advanced technology to Hong Kong and become foreign ambassadors in this field, then spreading the technology to the Mainland.

5. Manufacturing climate: Those surveyed agree that the Hong Kong youth are very receptive to ideas of creativity and handicraft goods. If Hong Kong could create an atmosphere for such hand-made and creative items, it would very quickly inspire the interest of young people in manufacturing. It could then attract Hong Kong’s brightest students to careers in industrial and science sectors, ensuring the continued longevity of industries.

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Hong Kong manufacturers are moving boldly into these aforementioned sectors, making investments, and promoting international co-operation, with the hopes of yielding results in the snort to medium term. These areas are to Hong Kong’s advantage and crucial to injecting new life into Hong Kong’s industrial development. R&D and design are speeding up, indicating that manufacturers are moving from manufacturing to knowledge-based activities. Bringing back production and improving the manufacturing atmosphere are necessary conditions for the reindustrialisation of Hong Kong and the rebuilding of its industrial base.

HONG KONG INDUSTRIES AND INDUSTRIAL POLICY

In the wake of the financial crisis, advanced countries promoted a large number of industrial policies to promote reindustrialisation. The Organisation for Economic Co-operation and Development (OECD) also produced a series of research reports exploring the importance of industrial policy. They subsequently proposed their own system of industrial policies and related priorities.

Developed countries and countries and regions neighouring Hong Kong have all been active in changing their industrial policy systems. Their priorities are improving industrial competitiveness, developing new sectors, encouraging R&D and renovation, training manpower, and returning businesses to their respective home countries. Hong Kong manufacturers greatly hope that the governments of Hong Kong and the PRD can promote more policies to encourage industry during this critical period.

Expectations for Hong Kong Industrial Policy Our survey examines the expectations Hong Kong firms have of the SAR Government in terms of policies promoting industrial development, emphasising issues such as human resources, R&D and innovation, marketing, SMEs, support services for industry, and co-operation between China and Hong Kong. (See Figure 4.3)

Human resources: Nearly half of survey participants propose improved and enhanced training. Nearly 30 per cent propose relaxing restrictions on importing foreign labour due to Hong Kong’s labour scarcity. If a firm were to bring back a department requiring a staff of 50, it would create enormous demand for the whole sector.

R&D and innovation: Roughly 40 per cent propose tax incentives for R&D to promote and encourage development of science and technology.

Expanding the market: Around 40 per cent propose support for expansion into the Mainland and emerging markets overseas.

SMEs: Forty-six per cent propose better financial support for SMEs. As reducing the workforce via production equipment is the trend of the future, the initial investment overhead in equipment is enormous and requires government assistance in obtaining credit and providing tax incentives.

Industrial ancillary support: A resounding 45.3 per cent request improvements in ancillary support. The hollowing-out of Hong Kong manufacturing has had a drastic impact, leaving behind a need to reorganise the industrial support system.

Co-operation between Hong Kong and China: Another 40.2 per cent of firms request greater co-operation with the Mainland Government.

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Industrial land: 32.1 per cent desire an increase in the supply of industrial land. As the workforce in Mainland factories has fallen to mere dozens, there is no longer the need for large-scale production plants in the PRD. The Government should consider providing land in Hong Kong for the construction of industrial buildings fitted with modern facilities. This would encourage SMEs to return and promote manufacturing in Hong Kong. (See Figure 4.3)

Policy Expectations for Business Operations in the PRD In expressing expectations regarding Mainland business-related policies, manufacturers focus on areas such as the reduction and abolition of taxes and fees, human resources, and government efficiency. (See Figure 4.4)

Reduce or eliminate taxes and local administrative fees: An astounding 85 per cent of firms agree that the Mainland Government should reduce or eliminate taxes as well as administrative fees levied by local governments.

Human resources: Three-quarters of the firms want to ensure the supply of labour, with nearly 40 per cent requesting improved training of skilled industrial personnel.

Government efficiency: Roughly 40 per cent of the firms want to see improvements in government efficiency and transparency, simplification of customs procedures, and liberalisation and simplification of foreign exchange management. One-quarter of the firms also desire simplification of procedures to enter the Mainland market.

Miscellaneous: Nearly 30 per cent want improvements in ancillary support for industries, a more favourable financial and credit environment, and incentives and subsidies for R&D, among other policy suggestions.

Figure 4.4: Policy Proposals Made to the Mainland Government

Figure 4.3: Policy Proposals Made to the Hong Kong Government

0%

84.0%

73.8%

48.0%

43.7%

40.7%

37.0%

28.5%

26.7%

24.8%

23.3%

18.0%

20% 40% 60% 80% 100%

Strengthen protection for intellectual property rights

Simplify procedures for entering the

Mainland market

Provide concessions and subsidies for R&D

Improve environment for credit and financing

Improve ancillary support for industries

Improve talent training for industries

Liberalise and simplify foreign exchange

management

Simplify customs clearance procedures

Improve government efficiency and transparency

Ensure supply of workers

Reduce or eliminate taxes and local

administrative fees

0%

49.5%

48.1%

47.6%

46.0%

45.3%

41.5%

41.1%

40.2%

32.1%

28.6%

20.7%

10% 20% 30% 40% 50% 60%

Enhance industrial talent training

Provide tax concessions for

R&D activitiesAssist enterprises in developing the Mainland market

Strengthen support for SMEs on financing

Improve ancillary support

Promote and encourage technology

development

Assist enterprises in developing

international marketsEnhance cooperation

with the Mainland government

Reserve more land for industrial use

Relax limitations on labour import

Encourage new business startups

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Industrial Development and Industrial Policy In the questionnaires, interviews, and focus group meetings, Hong Kong manufacturers repeatedly stress the necessity and importance of industrial policy for the development of industries.

Generally speaking, international and regional governments work to promote the overall competitiveness of their industries: they do so through the training of personnel, incentives for industrial R&D, and government procurement. These measures support existing manufacturers and nurture enterprises with new technology. Environmental protection firms claim that the Hong Kong Government’s support for their sector has been insufficient, resulting in local firms lacking opportunities to enter cutting-edge sectors in their field. Government regulations and management of the environmental protection industries and supervision of related organizations are somewhat backwards and obstructive. Textile and garment manufacturers rely on R&D, design, manufacturing, establishing brands, and many other processes in their industries. Thus, education and training of personnel, building up handicraft skills, and environmental protection weight heavily. It is difficult for these firms to rely solely on market forces to upgrade their business model.

Manufacturers agree that Hong Kong’s non-interventionist policy has resulted in a lack of a comprehensive industrial development policy. While neighbouring countries and regions are actively supporting industrial development, manufacturers in Hong Kong feel neglected by their Government. This has made the task of upgrading and transformation very difficult. In the modern industrial system, industry is not only limited to manufacturing; upstream, it involves R&D and design, and downstream, it involves branding and sales as well as producer services in supply chain management and venture capital. These are all sectors of high added-value and knowledge which Hong Kong could develop. Hong Kong’s lack of industrial policy means that its education and manpower training systems cannot train new types of industrial specialists to support Hong Kong industries in a new era.

Concerning Hong Kong industrial policy, manufacturers mainly focus on developing the industrial base, industrial personnel, and industrial competitiveness. With regards to the interaction between Hong Kong manufacturers and Mainland industrial policy, three aspects weigh heavily. One involves the business environment in which they operate on the Mainland; for example, the lowering of taxes and fees, raising government efficiency, and other issues. Another is strengthening their activities in the domestic market, and a third, keeping pace with the Mainland’s development trends.

Overall, manufacturers have enormous expectations for a revised Hong Kong industrial policy and have suggested a variety of proposals. At the end of the day, these manufacturers are the embodiment of Hong Kong’s industrial competitiveness. Hong Kong’s industrial competence is the foundation of its producer service systems as well as its high-value-added service systems. Hong Kong’s industrial strategy and industrial policy system, being the basis of its industrial competitiveness, must be taken into account together as we move forward.

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With Europe and the US reindustralising post the global financial crisis, there have been changes in cross-border manufacturing configurations. Germany’s Industry 4.0 and the US’s Advanced Manufacturing Partnership have both promoted the development of industrial Internet’s IT infrastructure, using intelligent manufacturing and big data operations to develop a new manufacturing model in the Internet era.

Made in China 2025 advocates an Internet Plus Manufacturing Mode, intelligent and green production, and the transformation of production-based manufacturing into one based on services. This will fundamentally change not only the PRD manufacturing model but co-operation between Hong Kong and the Mainland as well.

In recent years, Hong Kong manufacturers have been seeking a new development direction in the post-PRD manufacturing era. They have been exploring new opportunities in R&D, design, production, international co-operation, investment development, among others.

The changes in global industries stem from industrial strategies adopted by different countries. Hong Kong’s industrial policy system must make structural adjustments and strengthen the city’s industrial competitiveness as it faces the market in the “Internet Plus” era and new forms of technology-based production. Manufacturers, producer service organisations, and the government must actively respond to the enormous changes and challenges facing industries. Once again, Hong Kong stands at the starting line of industrial development, awaiting a new round of competition with strong manufacturing countries.

This is the starting point of the third breakthrough for Hong Kong industries.

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In the face of numerous challenges compounded by the 2008 financial crisis, Hong Kong must reform its existing industrial policy and formulate a comprehensive framework to drive industries forward. This will rebuild the city’s industrial base and strengthen its competitiveness, positioning it in line with global industrial development models of the new era.

DEVELOPMENT OBJECTIVES

Being an international city, Hong Kong must account for two major components when revising its industrial policy: its own development, certainly, but within the context of the global community. More specifically, it must seamlessly blend a comprehensive policy promoting the upgrading and transformation of Hong Kong industries with industrial and R&D systems of local and foreign markets alike.

Development objectives of Hong Kong industries:

A Comprehensive Outline for Hong Kong’s Industrial Policy1. Increase Industrial Resources: Strengthen

education and training programmes to attract outside talent and expand the pool of specialised personnel. Increase the supply of available industrial land to facilitate large-scale operations.

2. Raise Industry Competitiveness: Encourage scientific research and innovation and improve manufacturing capability.

3. Promote Diversification: Develop new emerging markets and encourage investment abroad to enrich and strengthen traditional industries at home.

4. Improve Industrial Development Environment: Rebuild the industries’ image, optimise their management system, strengthen investment in infrastructure and support systems, and improve producer service systems to achieve overall improvement in manufacturing business conditions.

5. Advance Production Capability to that of Industry 4.0: Adopt intelligent manufacturing models, big data, cloud computing, and industrial Internet to elevate Hong Kong’s manufacturing capacity.

Develop International Industrial Co-operation1. Increase Hong Kong-Mainland Co-operation:

In line with objectives outlined in “Made in China 2025”, strengthen Guangdong-Hong Kong ties in R&D, innovation, and industrial co-operation and promote Hong Kong goods in the domestic markets on the Mainland. The objectives are to foster comprehensive partnerships in areas including manufacturing, R&D, regional development, and domestic sales.

2. Expand the International Co-operation Domain: Boost international co-operation in science and research fields by facilitating advanced training and personnel exchanges, thereby enhancing Hong Kong manufacturer’s development of foreign markets through improved knowledge and investment. (see Table 5.1)

3. Leverage the “Belt and Road” Initiative: Collaborate with strategic “Belt and Road” cities and provinces on the Mainland, such as Fujian, Guangdong, Guangxi, Hainan,Shaanxi, Qinghai, among others, to establish footholds for exploring new business opportunities.

CHAPTER 5 POLICY PROPOSALS

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Main Issues Sectors Priorities

Local Industrial Development

Industrial Personnel

Education • Increase industry-related education• Encourage academic collaboration on industry-

related research• Strengthen co-operation between industry and

academia

Professional Training • Apprenticeship programmes• Continued education and training for existing

personnel

Qualification Authentication • Authentication of engineering qualifications• Authentication of technical staff qualifications

along with plans for future progress

Attracting Skilled International Personnel

• Facilitation of work visas• Action plan for importing outstanding talent• Market Hong Kong’s amenities in order to

attract international talent

Scientific Research and Innovation

Collaboration between government, industry, and academic and research sectors

• Establish an innovative and technological framework to nurture collaboration between government, industry, and academic and research sectors

• Promote co-operation among manufacturers, schools, and scientific research institutions

• Set up a research platform for international co-operation between industry and academia

Financial Assistance for Scientific Research and Innovation

• Increase investment in R&D• Increase financial assistance for basic

and platform-based industrial science and technology

• Upgrade approval procedures and cross-border arrangements for the use of scientific research funds

Tax Incentives • Expenditure on scientific research• Industrial equipment

Linking Innovation and Manufacturing

• Promote co-operation between industrial design talent and manufacturers

• Provide basic manufacturing support to industrial designers and those working on innovative projects

Manufacturing Technology and IT Systems

• Follow international trends in manufacturing science and technology

• Keep government and industry informed with regards to scientific and technological developments in order to facilitate new industrial policies and decisions pertaining to business

Enhance Manufacturing Capability

Rebuild Hong Kong’s Manufacturing Capability

• Attract enterprises pursuing new and high-end forms of manufacturing

• Encourage companies to increase investment in manufacturing equipment

• Improve Hong Kong’s manufacturing environment

Promote Intelligent and Flexible Manufacturing Models

• Promote intelligent manufacturing models and intelligent factories

• Leverage big data, cloud computing, and industrial Internet to improve manufacturing flexibility

• Explore to opportunities for individualised production using 3D printing technology

Green Manufacturing • Set up green production systems• Encourage green products

Table 5.1: Proposals on how to improve Hong Kong’s Industrial Policy System

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Table 5.1: Proposals on how to improve Hong Kong Industrial Policy System

Main Issues Sectors Priorities

Local Industrial Development

Develop New Industries

Scientific Research and Emerging Industries

• Connect academic institutions, R&D specialists, and new industries

• Attract manufacturers in new industries and nurture entrepreneurs

Encourage Entrepreneurship

• Build up an entrepreneurial environment • Connect entrepreneurs with venture capital

funds • Assist entrepreneurs with marketing and image

promotion

Attract Investment • Encourage local and foreign firms to set up R&D organisations in Hong Kong

• Attract hi-tech and knowledge-based manufacturing companies

Strengthen Traditional Industries, Support Development of SMEs

• Encourage innovation• Strengthen manufacturing capacity• Train skilled personnel• Miscellaneous(financing, credit insurance,

market expansion)

Urban Planning

Industrial Land • Increase industrial land supply• Choose suitable industrial location

New Industrial Buildings • Encourage construction of modern industrial buildings

• Construct public industrial buildings

Miscellaneous

Establish an Industrial Development Supervisory Committee

• A coordinated Hong Kong’ s industrial development plans

Rebuild Industry’s Image • Strengthen exchanges between industry and society

• Promote industry’s image through multimedia• Organise “Industry Week” and other large-scale

events• Set up an open platform for experimental

manufacturing• Encourage industrialists to play an active role in

social activities

Improve Systems Related to Industry

• Improve manufacturing supervisory system• Improve industrial human resources• Improve government procurement system• Bolster intellectual property protection system

and commercial opportunities related to intellectual protection

Infrastructure Investment and Ancillary Support

• Arrange for ancillary support in industrial zones• Strengthen logistics facilities of Hong Kong’s

tertiary education

Producer Services • Organisations supporting industry• Standards for informatisation and testing

system• Industrial credit system• Market promotional services• Intelligent management of logistics

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Table 5.1: Proposals on how to improve Hong Kong Industrial Policy System

Main Issues Sectors Priorities

External Co-operation

Co-operation with Mainland and the PRD

In Line with “Made in China 2025”

• Establish departments for coordination and consultation

• Establish a national-level manufacturing innovation centre

Industrial Co-operation Between Guangdong and Hong Kong

• Co-operation and interaction between Guangdong and Hong Kong’s manufacturing systems

• Co-operation in training skilled industry personnel

• Co-operation in investment • Co-operation in Mainland sales

Co-operation in R&D and Innovation

• Encourage R&D collaboration between Hong Kong and the Mainland

• Link with Mainland’s industrial innovation system

• Strengthen creative co-operation

Hong Kong Products to the Mainland Market

• Help Hong Kong manufacturers enter the Mainland market

• Promote CEPA’s concession of zero customs duties among manufacturers

Co-operate with International Society

Knowledge Co-operation • Co-operation in science and technology• Training and personnel exchanges• International industrial development and

research

Investment Co-operation • Encourage Hong Kong firms to invest overseas• Resolve obstacles to Hong Kong firms

investing overseas

COMPREHENSIVE PLAN FOR HONG KONG INDUSTRIAL POLICY

Skilled Industry WorkersThe generational gap of skilled workers in Hong Kong combined with an overall inadequacy of industrial talent are the greatest challenges facing Hong Kong industries. We propose four major initiatives to address these challenges: education, training, validation of related professional qualifications, and importing international talent. These initiatives will help enhance the quality of Hong Kong’s industrial personnel, improve public perception of industrial careers, and diversify and increase the pool of available talent.

Secondary and Tertiary Education1. Increase industry-related education in Hong

Kong • Increase the number of industry-related

courses offered by tertiary and vocational institutions to train a larger skilled workforce. These courses should cover areas pertaining to industrial technology, development of new materials, manufacturing management, and manufacturing techniques.

• Improve training programmes for designers that better meet the needs of traditional industries such as apparel, toys, watches, and jewellery which require extensive design work.

• Introduce basic industrial knowledge and activities in secondary schools, nurture craftsmanship of students, stimulate students’ interest in industry, and encourage enrolment in industrial courses.

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2. Encourage industry-related academic research• Increase general funding and designate

special funds for industrial research: encourage industry-related academic research as well as research in applied science and technology.

• Re-adjust the use of research funds by allowing post-graduate students to participate in applied industrial research to obtain practical experience.

3. Strengthen co-operation between industry and academia• Encourage co-operation initiatives between

manufacturers and academia, in particular through internship to provide students with hands-on manufacturing experience.

• Extend this manufacturer-academia co-operation to the PRD to help students understand the region’s overall manufacturing situation to promote exchanges of skilled personnel in the region.

• Provide government-funded allowances for internships; this would increase the willingness of manufacturers, schools, and students alike to take part in the proposed collaborations. These allowances should also apply discretely to cross-border programmes to enhance understanding of industries outside Hong Kong.

Vocational TrainingIndustry’s development is dynamic. Vocational training should therefore emphasise on practical, on-site experience and continual improvement of technical capabilities. In short, vocational training comprises both basic skill acquisition and life-time professional learning.

1. Apprenticeship training• Improve the curriculum and teaching facilities

for apprenticeship programmes to ensure that students will acquire the necessary skills to meet industries’ needs.

• Bring in master-class industrial technicians and craftsmen to train apprentices to broaden their international exposure.

2. Life-long education and training• In the past, Hong Kong Government

provided less continued training for those already working. Companies are also reluctant to invest in staff training because of high turnover rates and relatively high training costs. The Government therefore should introduce new funds designated for industrial training programmes to encourage life-long training for industrial personnel and professionals.

• Training institutions should co-operate closely with business associations to offer more practical curriculums. Each year, the Government should allocate training funds to manufacturing associations to jointly organise specific training programmes with local and overseas training institutions on skills much needed by industries.

Professional Qualifications1. Professional engineering qualifications

• Currently, in Hong Kong there is no accreditation body to offer professional qualifications to industrial engineers. This would discourage students from choosing engineering as their study and career. To establish a new accreditation for industrial engineering would facilitate continuing learning and advancement of qualifications and professionalism.

2. Establish a qualification framework for technicans• To enhance the qualification framework for

technicians to recognize their credentials so as to motivate them to pursue continued learning; qualifications obtained should be recognised by tertiary educational institutions. The Government should consider providing financial support for those aged under 40 and who have not yet attained level three of Qualfication Framework.

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• Technicans who have attained master-level should be acknowledged by the Government and the industries. This would help enhance the image of technicians professionals in society. It would also encourage them to offer training to the younger generation.

Attract International Industrial talentThe Government should open up the industrial talent market to international industrial personnel (engineers and technicians) to re-establish the industrial talent pool in Hong Kong.

1. Facilitate the issuance of work visas: Make work visas readily available to overseas industrial talent, in particular master-class professionals, to facilitate them coming to Hong Kong to .

2. Quality Migrant Admission Scheme: Should make use of this Admission Scheme to attract R&D and industrial talent to Hong Kong. A bigger, more diverse pool of industrial professionals would enrich the internationalisation of Hong Kong’s R&D community, connecting it to high-end manufacturing systems around the world.

3. Enhance Hong Kong’s living environment to attract overseas professionals: the Government should provide solutions to help expatriates find affordable housing in view of the acute housing shortage problem in Hong Kong. More international schools should be set up to cater for educational needs of children of expatriates.

4. Import talent and labour: When Hong Kong manufacturers start returning part of their production lines and R&D activities to Hong Kong, the current serious labour shortages will be aggravated. The Government should review talent importation schemes. For noxious and physically demanding manual jobs which local Hong Kong people do not want to take up, foreign labour should be imported.

R&D and InnovationR&D and innovation are the driving forces behind the successful upgrading and transformation of the manufacturing industry. For a long time, Hong Kong manufacturers’ R&D activities and related investment have been relatively low. Interactions between the industries and the innovation & technology sectors have been weak. It is recommended to establish a ‘government-industry-academia-research’ collaboration mechanism; to increase financial support for R&D and innovation activities; to strengthen links between innovation and manufacturing; to provide tax incentives, and to build a manufacturing technology information system.

Government-Industry-Academia-Research System1. Through the Innovation and Technology

Bureau, a ‘government-industry-academia-research’ collaboration mechanism should be set up.• The Innovation and Technology Bureau to

formulate policies to promote technology and innovation and to establish a collaboration network among industry, academia and research institutions in Hong Kong, the Mainland, and the international community at large.

• Hong Kong should formulate its innovation and technology policies with an international perspective. Future policies should take into consideration of regional science and technology developments and keep track of global development trend of techno-industries. A more streamlined and comprehensive foundation of international co-operation to capitalize on the global and regional technology resources would help attract industrial talent to Hong Kong.

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2. Promote co-operation among Hong Kong’s universities, research institutions, and industries• Different attitude of academic institutions

and manufacturers toward the utilization of research results affect the effectiveness of their collaborations and ultimately, the success of commercialisation of research results. A new exchange platform would mitigate this situation: public R&D centres and industry support organisations could coordinate the exchange of information and introduce the latest R&D findings to industries.

• The commercialisation of R&D results requires improved engineering capability in the industries. Support and financial funding of government science and technology R&D centres, the Hong Kong Productivity Council, and private engineering consulting firms would be a good start. These institutions should actively participate in the transfer of science and technology to manufacturers and also assist the manufacturing process in design and other aspects, thereby accelerating the commercialisation of research outputs.

3. Establish platforms for international co-operation between industry, academia, and research• To attract local and foreign companies with

cutting-edge technology, Hong Kong’s system of intellectual property rights, the Hong Kong Science and Technology Parks Corporation, Cyberport, and other industrial parks should be engaged. As an international finance centre, Hong Kong should also make capital investments in technology companies to establish an international co-operation platform among industry, academia, and research, thereby linking science and technology, individual companies, skilled manpower, and financial resources.

• Organising large-scale international industrial technology seminars and high-tech exhibitions would bring companies and research institutes together. Enabling Hong Kong manufacturers and research organisations to co-operate with their international counterparts would improve knowledge of international technology and promote industrial patent exchanges.

• The SAR Government could provide financial support for dedicated projects that encourage co-operation between Hong Kong manufacturers and international and Mainland technology organisations and companies. It should also consider investing in selected manufacturing projects that could benefit Hong Kong — those involving international co-operation in advanced technologies and providing support to Hong Kong manufacturing activities, such as environmental and ecological protection projects, to overcome the problem of inadequate input of investment.

Financial Support for R&D and Innovation1. Increase financial support for R&D: The SAR

government should increase financial support to encourage Hong Kong companies, universities, and research institutes to carry out innovative projects.

2. Increase financial support for developing basic and platform-based industrial technology• Most Hong Kong manufacturers are small-

and medium-sized enterprises lacking the capacity to carry out large-scale scientific research on their own. The Government could provide financial support to promote co-operation with public R&D entities, academic institutions, and related industries. This would facilitate collaboration on shared issues such as industrial technology and manufacturing process management. Research results could be shared within the industries, and related training courses could be provided.

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• Hong Kong should co-operate with the Mainland, particularly Guangdong, to carry out joint development of basic and platform-based industrial technology research projects and promote exchanges between the Mainland and Hong Kong.

3. Streamline the application procedures for technology and research development funds. • Facilitate the processing of fund applications

so that more Hong Kong manufacturers and start-ups could benefit from such funding.

• Currently, firms applying for scientific and research funds must co-operate with local research institutions, but the R&D costs of these institutions are relatively high and the direction of their research may not align with the companies. Therefore, with some specified conditions, co-operations between Hong Kong firms and Mainland/overseas R&D institutions should be supported.

Tax IncentivesProviding tax benefits is an effective incentive to encourage firms to invest more; this is a policy tool frequently employed by developed industrial countries to promote the use of technology in manufacturing and knowledge-added value production. The SAR Government should provide tax incentives to encourage knowledge-intensive R&D activities and investment on state-of-the-art manufacturing machinery and equipment.

1. R&D expenditures: Tax incentives should be offered to R&D activities on industrial sectors that have high potential, inparticular, companies for research in newly emerging and high-end technological industrial sectors, prioritising those in which Hong Kong plans to develop extensively. Such concessions should also be applied to hi-tech companies and R&D centres in Hong Kong. The tax exemption for R&D spending should be raised from the current100 per cent to 150 per cent or higher(the Mainland and Singapore both offer an exemption of 150 per cent). Hong Kong currently limits R&D activities, but these new tax arrangements

would not affect existing tax revenue and would increase business and investment activities, thus boosting Hong Kong’s overall tax revenue in the long term.

2. Industrial equipment• To prevent Hong Kong industry and R&D

development from falling further behind global industrial developments, the SAR government should encourage the use of state-of-the-art equipment through tax incentives. This would help firms better decide whether to bring highly-automated, high-precision manufacturing back to Hong Kong.

• Manufacturers have moved their contracted, low-value-added production to the Pearl River Delta and other countries and regions, which involves production machinery expenditures outside of Hong Kong. The government therefore needs to provide a certain level of tax depreciation to support the cost competitiveness of Hong Kong firms.

3. Other expenditures: The government should consider providing funds for staff training and tax reductions of 150 per cent or higher; this would encourage firms to invest in the technical competence and professional knowledge of their staff.

Linking Innovation with ManufacturingSectors such as garments, toys, watches, and jewellery inherently have a strong demand for innovation and design, but Hong Kong lacks designers with an international outlook. The city must strengthen the link between innovation and manufacturing.

1. Promote co-operation between industrial designers and manufacturers • The Government should provide financial

support for cross-sector activities between designers and industries. It should help designers better understand Hong Kong’s industrial trends and encourage

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manufacturers to utilise designs to differentiate them from those of the Mainland and international companies. These cross-sector activities should include industrial design competitions with themes designated by manufacturers, and winning designs could be produced for the market. This would not only present Hong Kong as a platform to promote trade and sell to local and overseas markets, but also enable the city’s outstanding designers to promote themselves internationally.

• Hong Kong should organise design competitions in tertiary education institutions to promote cross-discipline co-operation between designers and students in industrial faculties. Utilising existing design and industrial equipment, students could propose plans for new products Such synergy and collaboration shared be encouraged to drive interactive and sustainable development in industrial design and manufacturing.

• The Government should set aside a certain amount of space in industrial sites and public factory buildings for design workshops. Or they could permit industrial buildings to host design workshops where design specialists and manufacturers collaborate. These workshops could even hold small-scale trial sales to give designers a better grasp of market conditions.

2. Basic supports for industrial designers and creative personnel• Hong Kong should provide a certain level of

basic manufacturing support to designers to help build models, execute small-scale production, and conduct trial sales. Supports should be targeted at sectors that employ similar technologies and innovative models, such as garments, jewellery, metallic goods, and 3D-printing. For instance, to run trial production lines in design faculties, and industrialists could also, in the mode of social enterprises, provide basic manufacturing supports to industrial designers.

Information Systems of Manufacturing TechnologyA good information system on manufacturing technologies would enable the government to draw up timely industrial policies and enterprises to adjust their business strategies to catch up with the fast-changing markets and technology developments.

1. Take reference from overseas: Hong Kong could benefit from Taiwan’s experience of setting up a manufacturing technology information system. The Innovation and Technology Bureau could coordinate the establishment of a manufacturing technology information system, and give financial support to public R&D institutions to track the latest industrial technology trends, changes of global technology policies, and related market intelligence.

2. Release industrial information: News and information on industries can be released via study reports, circulars, seminars, training courses etc. This can help enhance the general public’s understanding of the current industry situation to allow industry, enterprises and society to reach consensus on the direction of industry development and related supporting policies.

Enhance Manufacturing CapabilityManufacturing ability is the cornerstone of industrial development. Hong Kong must maintain a highly efficient, flexible, and competitive manufacturing system. During the past decade, the relocation of production lines outside Hong Kong has seriously weakened the capability of local industries, training of industrial talent and the shaping of effective industrial policies. Hong Kong needs to rebuild its manufacturing capability by adopting new intelligent production solutions and green manufacturing systems so as to revive competitiveness to cope with global industrial developments.

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Rebuild Hong Kong’s Manufacturing capability1. Bring in high-end and new emerging industries:

Hong Kong manufacturers are mostly engaged in labour-intensive traditional industries. Even if they relocate their production lines back to Hong Kong, they will not be able to source enough workers locally. It is therefore suggested that incentive measures should be targeted at industrial enterprises that employ high-tech technologies so as to raise the capability of local industry.

2. Encourage manufacturers to increase investment in production equipment: Hong Kong’s zero-tariff policy and well-established financial systems favour manufacturers to import machinery and equipment. Hong Kong manufacturers to increase investment in high-precision and cutting-edge equipment would be in line with a capital-intensive manufacturing model. This would differentiate Hong Kong’s manufacturing model from that of the PRD region.

3. Improve the local manufacturing environment: Manufacturing activities involve industrial land, production procedures, public utilities such as electricity and water, industrial discharges, transportation systems, labour etc. Time required for a manufacturing plant to start actual production from the planning stage is relatively long. During the past 20 years and more, no large-scale industrial investments have been seen in Hong Kong, and together with the emerging modern production technologies, some industrial regulatory policies have become obsolete, the Government should review its regulatory regime so as to improve Hong Kong’s manufacturing environment.

Intelligent Manufacturing Models1. Take reference to Germany’s Industry 4.0 to

promote the intelligent manufacturing models and intelligent factories• The Government should conduct studies on

the standards of intelligent manufacturing adopted by the Mainland and neighouring countries and regions. By introducing support measures, tax incentives and financial supports, the Government should encourage industrialists to employ intelligent manufacturing and undertake R&D on smart products, hoping to accelerate the transformation from large-scale, labour-intensive manufacturing to flexible and intelligent manufacturing.

• Strengthen the research on intelligent manufacturing management systems and explore the optimal model for various industries. Through training, experience sharing, and on-site consultancy, supports would be given to manufacturers to transform. The Hong Kong Productivity Council together with other research institutions should designate a dedicated team to provide support services for transformation.

• Hong Kong industries should make use of the resources of trade associations to gauge the latest situation of intelligent manufacturing in the Mainland and overseas. Industries could form alliance among themselves, including those upstream and downstream players, to facilitate transformation to intelligent manufacturing.

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2. Use big data, cloud computing, and industrial Internet to improve flexibility in manufacturing: Flexible production requires market data and a smart logistics management system. Big data, cloud computing, and industrial Internet involve overseas consumption data and production information on the PRD manufacturing system. Hong Kong must strengthen its co-operation with the Mainland’s manufacturing system, institutions representing overseas consumers and buyers, and logistics industry so as to construct an interactive and secure manufacturing information and management system.• Big data, cloud computing, and industrial

Internet are platforms that form the base of industrial development. The Innovation and Technology Bureau should take the initiative to coordinate an overall plan for developing such public platforms with cross-department support and participation.

• The Hong Kong Productivity Council should collaborate with public research institutions to explore the feasibility of industrial Internet and establish platforms for big data and cloud computing in addition to industrial Internet. Through training, and financial support, small- and medium-sized manufacturers could obtain assistance to transform and upgrade.

3. Explore commercial opportunities of tailor-made production through 3D printing technology: 3D printing technology is suitable for design-based tailor-made manufacturing. It can also be used for small-scale production, such as that of aircraft repair parts and products require short delivery time and high precision. • Hong Kong should conduct more studies

on the feasibility of 3D printing technology in areas of reducing production space, promotion of designs, and opportunities of flexible production. The support and assistance given by 3D printing technology to start-ups is also worth studying.

• The Government should consider tax incentives for 3D printing technology to help reduce the investment.

Green Manufacturing1. Establish a green production system.

• Hong Kong should increase its R&D support to the environmental protection industries. Public research institutions and the Hong Kong Science & Technology Parks can be used as platforms to attract overseas companies and specialists in this field. Green manufacturing technologies can then be marketed among Hong Kong manufacturers and neighbouring regions.

• Green production systems could also be set up in new industrial parks, such as adopting centralised power supply and discharge management systems to reduce energy use and industrial waste.

• The government could provide financial support for machinery, increase tax deduction, and encourage manufacturers to invest in energy-saving machinery and equipment.

2. Encourage green products• Explore the green supply chain and

producers’ responsibilities for green products. Assistance should be given to manufacturers to comply with requirements of production of green products around the world such as green procurement requirements.

• Encourage Hong Kong manufacturers to use recyclable materials, to develop more green products and to strengthen green management throughout the life cycle of products. The Government and public institutions should prioritise supporting and purchasing locally-produced green products and environment-friendly materials.

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New and Emerging IndustriesNew and emerging industries are the driving force of industrial development. Currently, Hong Kong manufacturers are mostly small- and medium-sized companies mainly engaged in traditional industries. Developing high-tech, knowledge-intensive manufacturing enterprises is a challenge. Hong Kong must provide support to R&D activities, encourage new industries, and attract advanced technology- and knowledge-intensive companies to Hong Kong so as to bring new drivers to the local industry.

R&D and Emerging Industries1. Encourage industry-academia-research

collaboration: Universities form the cradle of local R&D talent; their research outputs in turn lead new and emerging industrial technologies. More support should be given to faculties and students in industrial, engineering, and other technological disciplines with increased inputs to start-up funds. As industrial start-ups require higher funding inputs, the Government should appropriately increase the amount of financial support provided under the innovation funds and patent application funds, and also to facilitate start-ups to meet Angel investors. Start-ups should also be allowed to use facilities, such as laboratories, in public industrial support organisations.

2. Hong Kong industrial parks can be used as platforms to attract emerging industries: science parks, Cyberport, industrial estates, and other industrial parks could all be used to attract local and overseas companies to station in Hong Kong. Start-ups should also be encouraged to locate near established industrial clusters to facilitate interaction and collaborations.

Encourage Start-ups1. Foster an encouraging environment for start-

ups• It is suggested to devote more efforts on

publicity and media campaigns to showcase outstanding start-ups, so as to attract more young people to explore business opportunities in industries.

• Start-ups are the future of Hong Kong’s industrial development. Comprehensive supports should be given, say, space for start-ups in industrial parks, and consultancy services on production and marketing skills.

• The Government and the industry should provide more working space for young designers, such as co-working space to facilitate interaction and inspire creative ideas and collaboration. It is suggested to set up a “Made in Hong Kong” wholesale fair to exhibit new products to provide young start-ups a venue to market their products. Veteran industrialists can serve as mentors to offer practical experience and guidelines.

• Students in science and engineering faculties should be encouraged to interact and collaborate with students in the design and commercial studies. The industry can also provide awards and prizes to assist outstanding start-ups. Platforms should also be set up to facilitate start-ups to solicit venture capitals and financial supports

• Establish start-up alliances to facilitate the organisation of interactive forums, technology exchanges, experience sharing and network building to stimulate new ideas and innovative solutions

2. Bring start-ups and venture capital funds in closer contact• The Government should consider setting

up supporting funds for start-ups and new companies. Vetting committees can be comprised of Government officials, industrialists, and venture fund managers to process applications for financial support for creative new ventures.

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• Set up a platform to bring together venture capital funds and start-up alliances to facilitate start-ups to solicit funds while financial institutions can invest on quality start-ups.

• Venture capital funds have always been active in places with high start-up activities. Hong Kong could make use of the information channels and networks to attract local and overseas new companies to settle in Hong Kong’s science and technology parks.

3. Assist start-ups in opening markets and image promotion: assistance could be given to industrial designers and creative start-ups in helping them to showcase their products locally and abroad. At the same time, Hong Kong should establish itself as a city for start-ups to attract more start-ups to make use of Hong Kong to access the Mainland market as well as Asian Pacific market.

Attract Investment1. Encourage local and overseas companies to

operate R&D activities in Hong Kong• Given shortage of land supply, Hong Kong is

not suitable for the setting up of large-scale industrial production. Instead efforts should be targeted at international knowledge-based companies to set up regional R&D centres in Hong Kong.

• Provide preferential tax treatment to firms setting up regional R&D centres in Hong Kong and firms whose R&D activities account for more than 50 per cent of their business operations.

• The Government should provide more financial support to InvestHK, Hong Kong Science & Technology Parks and Cyberport. It should also make use of InvestHK’s investment promotion network and science parks to attract manufacturers and R&D bodies in emerging sectors to set up R&D centres in Hong Kong, providing them with much-needed assistance during the initial start-up period.

2. Attract high-tech and knowledge-based companies to invest in Hong Kong• Hong Kong has an effective regime for the

protection of intellectual property rights. It should encourage Mainland companies with advanced manufacturing to use Hong Kong as a middleman for science and technology co-operation with international companies. It should also attract international manufacturers to invest in high-end manufacturing, targeting the Mainland market in sectors such as IT, medicine, new materials, environmental items, parts and components for aircrafts, and other high-tech items that involve sensitive intellectual property but do not require a lot of space to produce.

• It is suggested to build more industrial parks, set aside more land for industrial development, and attract investments in related industries.

Strengthen Traditional Industries and Help SMEs DevelopHong Kong’s industrial structure is basically made up of small- and medium-sized enterprises (SMEs) operating traditional industries. The SMEs are indispensable components of the local industrial system. They play the essential roles of sustaining the development of local industries, nurturing industrial personnel, and generating demand for producer services. Hong Kong should provide sufficient resources, with the aim to nurture a new generation of industrialists, and to strengthen the manufacturing capability of Hong Kong industries.

Encourage creativity and noveltyMany of Hong Kong’s traditional manufacturing industries make use of innovative designs to upgrade their business. Given that design students in local higher education institution do have good standards, Hong Kong manufacturers should be encouraged to adopt more local innovative designs to upgrade products of traditional industries.

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Enhance Hong Kong’s Manufacturing Capability Hong Kong manufacturers have always been well known for their flexible production management, yet their technological and innovative capability has yet to become world-class. This is partly because manufacturers used to employ low-skill workers. It is suggested that Hong Kong should take reference to the experience of Germany and Japan on how to enhance the technical competency of workers. Taiwan’s experience in improvement of manufacturing management system can also be a reference.

Support Training of WorkforceAs SMEs in general lack the resources to train their employees, more support should be given to training of industrial workforce and managers. Training programmes can be tailor made according to needs of different industries so as to uplift the professional standard of industrial managers and technical staff.

Miscellaneous (Financing, Credit Insurance, Marketing)The SAR Government at present provides many supportive measures for the development of SMEs. However, in view of the needs of future manufacturing models, financial support for equipment financing should be increased. Moreover, SMEs are actively exploring the Mainland market as well as the emerging markets that carry a higher level of risk. More supports in areas of credit insurance, market promotion and brand building are needed to help SMEs to diversify their markets.

Urban PlanningLimited industrial land and industrial buildings have long been constraints on the development of Hong Kong industries. Increasing the supply of both would alleviate this problem.

Industrial Land1. Increase industrial land supply: During the past

two decades, Hong Kong has not increased the supply of large plots of industrial land at all. In fact, many industrial buildings have been converted to commercial or other uses. Hong Kong’s three industrial estates have already been fully occupied, leaving very limited land for industrial use. We propose increasing the supply of industrial land, accelerating the construction of the fourth industrial estate, and planning the fourth phase of Hong Kong Science & Technology Parks.

2. When choosing the location for an industrial district, convenient access to PRD’s manufacturing base should be considered, these include linking up with the highway system that leads to the delta’s eastern side, or the future Hong Kong-Zhuhai-Macau bridge that will stretch to the PRD’s western side, as well as the transport and logistics networks in the northwest region of the New Territories. Another possible consideration could be that newly created industrial district will provide job opportunities for the population in the northeast and northwest regions of the New Territories.

Construct Modern Industrial Buildings1. Construct modern industrial buildings to suit

new models of manufacturing: over the past decade, the manufacturing model has changed from labour-intensive to automated production. For example, manufacturing involving high-precision machinery (such as moulding, high-precision instruments, and printing) requires factory space that is dust-free, shockproof, and heavy load-bearing throughout. Hong Kong’s old industrial buildings were designed for labour-intensive manufacturing and cannot meet the demands of modern production in the era of information and the Internet.

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• The Government needs to build new industrial estates, industrial parks, and factory space suited to the demands of modern manufacturing. This would attract high-value-added manufacturing, such as precision instruments and biotechnology, to move in.

• For manufacturing activities that involve industrial discharge (such as printing and electronic circuit boards production) should be grouped in designated industrial buildings or designated areas within industrial parks with a central waste and water treatment system. Some manufacturing sectors may require further industrial ancillary supports; priority should be given to these providers in multi-storey industrial buildings.

2. The Government should consider constructing public industrial buildings within new industrial estates that could be leased to new and emerging industries, start-ups, and SMEs. These new buildings should meet manufacturing regulatory standards (such as GMP (Good Manufacturing Practice) for pharmaceutical companies). Newly established companies could then devote their efforts more on R&D, innovation and marketing.

Other Measures1. To avoid improper use of industrial buildings by

real-estate investors, new regulations could be drawn up to reduce vacancies.

2. Currently, old industrial buildings in urban areas of Hong Kong mostly are not suitable for modern, high-value-added industries. It is suggested that regulations should be relaxed to allow usage for creative and design operations. Old industrial buildings in Kowloon’s business area could be transformed to low-rent co-share workshops for young local and foreign.

3. Land near these new industrial estates should be reserved for logistics industry to facilitate goods and commodities.

OthersIndustrial development requires a comprehensive support system involving government policy and participation from business and public institutions. To comprehensively coordinate and promote Hong Kong’s industrial development, Hong Kong should review its industry-related policies and measures.

Set up an Industrial Development Supervisory CommitteeIndustrial models around the world are developing and advancing. Industrial development is not only limited to manufacturers and the industrial support system; it involves also home-grown innovation and technology, education and training, producer service systems, land and infrastructure, overseas markets, investment and research. The creation of an industrial development supervisory committee would streamline the overall planning for Hong Kong’s industrial development.

The Committee should comprise members from sectors of manufacturing, industrial support, scientific research, IT, education, and planning—and also from the service sectors including marketing, investment, finance, and law as well as Mainland and international technology specialists.

Rebuild the image of industriesHong Kong society’s inadequate understanding of industries discourage young people to work in the industrial sectors. Rebuilding the image of industry would help enhance the general public’s awareness of the important role of industries in Hong Kong’s, economic development. This would facilitate Government to allocate resources to support benefit its development. The experience of the United States on reshaping the perception of the general public on industry can be taken as reference.

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1. Increasing interaction and exchanges between the industries and the general public: Firstly, enhance interchanges with educational institutes, in particular with students and teachers of secondary and primary schools. Activities can be organised to engage young people in science and technology subjects to increase their interests. Secondly, increase the understanding of parents and the community on the development of modern industries, so that they would encourage their children to develop their career in the industrial sector. Thirdly, improve the image of Hong Kong industries in the international arena to attract en trepreneurs to invest in Hong Kong and collaborate with local industrialists.

2. Making use of multi-media: Through television and web-based platforms, television series about manufacturing, micro-films on science and technology, stories about companies and profiles on successful industrialists, the message of “manufacturing is chic” can be disseminated.

3. Organise large-scale events: To organise large-scale events such as Industry Week in Hong Kong, annually or biennially, to showcase the latest development and quality products of Hong Kong industries. Competitions on technical skills and industrial design can be held to give exposure of the capability of Hong Kong industries to the world.

4. Set up open platforms for experimental production and nurture the industrial talent of the future: Many countries have launched ‘maker movements’ comprising workshops and open platform models to encourage young people to hand-make their products. This would encourage young people to innovate and tap into their creativity, shaping an environment conducive to manufacturing. Companies should tap into the opportunities presented by these platforms and select products for mass production.

5. Encourage industries to participate in social activities: To set up publicly-accessible platforms to cultivate the concept of shared value. The industrial sector can operate social enterprises, promote cooperation between factories and schools and produce green products, so as to enhance the image of Hong Kong industries.

Improving the relevant systems pertaining to Industries1. Improve the manufacturing regulatory system

• Interdepartmental coordination: At present, manufacturing activities in Hong Kong are regulated by legislation and regulations enforced by different government departments. It is suggested to set up a one-stop coordinating unit to streamline applications from manufacturing companies on factory layouts, manufacturing workflow, industrial discharge and other matters, so as to shorten the lead time of getting licenses and permits.

• Assistance provided by industry-supporting bodies: Encourage and provide financial support to various industry-supporting institutions, associations and agencies to render assistance to industrial enterprises to comply with legislative and regulatory requirements.

2. Improve the Government procurement system: Hong Kong manufacturers, especially those in innovative and environmental protection sectors, mostly are in the early stages of development. They are in less advantageous position to compete with top international firms in areas of advanced technologies while with firms in developing countries in terms of low costs. • It is suggested that the Government should

review the existing procurement procedure. With the prerequisite of in compliance with international requirements, the Government should include measures to support local production, services, and research activities, especially those related to ecological and environmental protection, and renewable energy.

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3. Leverage commercial opportunities arising from intellectual property (IP). Global industrial development has entered an era in which the emphasis is on knowledge. In light of this, Hong Kong must link up with international and Mainland efforts in IP protection, industrial patents, innovation and design, registration of brands, and other related legal aspects. Compatible IP standards and regulations would facilitate investment from foreign and Mainland manufacturers, as well as research institutions, in Hong Kong.• The Government should devote efforts

for the perfection of the legal regime for the protection of IP rights. More IP legal professionals should be trained. Hong Kong could develop an IP protection regime that can connect the Mainland with the international arena. An “original grant” patent system should be established in Hong Kong.

• Explore IP trading opportunities in the industrial sector: As industrial patents have been increasingly used by industriesmanufacturing, Hong Kong should explore opportunities in the international IP market, including demands from Mainland companies for industrial patents, IP trading, evaluation of patents, etc. By setting up an industrial patent data bank and trading platform, Hong Kong could promote the usage of patents by local companies. The platform can also facilitate IP owners and buyers as well as investors to invest in industrial patents. This would help establish Hong Kong as an international IP trading hub.

• Enhance Hong Kong manufacturers’ knowledge of IP rights: Organise more training programmes on industrial patents and trade mark registration, and increase financial support to help industrial companies reduce legal costs.

Invest on industrial Infrastructure1. Ancillary supports in industrial districts: While

many industrial buildings are located in urban areas, more and more are being used for non-industrial activities. As a result, support and supply chains for manufacturing operations become increasingly fragmented. Government should provide industrial ancillary supports such as logistics services in new industrial districts and estates.

2. Strengthen the local logistics facilities: With proliferating online sales and increasingly fragmented manufacturing, customer orders are now produced in multi-batches, made in small volumes, and delivered more efficiently. Employing smart manufacturing would therefore stimulate the development of smart logistics systems which would bolster logistics facilities in Hong Kong, especially that of air freight and related services.

Producer Services1. Industrial support institutions: Institutions

that support industries should provide more assistance to manufacturers, especially SMEs and innovative companies, in the following four aspects:• Management of the manufacturing workflow:

Hong Kong should consider setting up a specialised centre to assist manufacturers upgrade their production management. Taiwan’s experience of employing both public and private institutions to provide manufacturers with multi-channel support services such as equipment investment can be taken as reference. Through direct funding and support services, the Government can help manufacturers apply the latest technology into their production lines.

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• Technological support: Public research institutions, like the Hong Kong Applied Science and Technology Research Institute, should seek more co-operating opportunities with the industries so as to increase the adoption of advanced technologies into operations and enhance their technological standards. These institutions could also offer preferential rates to SMEs and start-ups for usage of the testing and research facilities.

• Training and exchange of skilled personnel: Industry support institutions should provide in-training on applied industrial skills. Personnel exchanges between industrial research institutions and the manufacturing sector should also be encouraged with both sides providing short-term research positions and factory internships to young researchers and industrial personnel. The Government could provide salary subsidies to those taking part in these internship programmes.

• International exchanges in industrial science and technology: Public industrial support institutions should support more exchanges with overseas countries. For example, outgoing delegations to overseas research centres and institutions. During the future, this would enable local manufacturers to carve out their stake within the global industrial system. The Government should also subsidise a portion of this undertaking.

2. Upgrade the standard and testing systems of information • “Informatisation” of manufacturing standards:

The use of IT in the manufacturing sector is increasingly popular, especially that of smart machinery deploying cyber-physical systems. Smart factories are, in fact, changing the way manufacturing works. Industrial standards are being extended to manufacturing networks, management of supply chains, e-commerce systems, and related IT standards. The Government should financially support co-operation between Hong Kong’s industrial research organisations and the IT sector for the development of a comprehensive

manufacturing IT management system. Such a system should be compatible with standards of Mainland’s industrial Internet system. This would expedite a transition to an Internet-based and “informationised” manufacturing management. The research and IT sectors could jointly use such a platform for manufacturing standards which would, in the long run, build a smart, standardised, and IT-adapted production system for Hong Kong manufacturers.

• Testing authentication system: Hong Kong should continue to support the development of the testing authentication industry in order to reinforce and uphold its image of quality manufacturing management.

3. Financing support for industries: Financing support for industries has long been based on trade financing. With increasing use of machinery and IT equipment by manufacturers, demand for machinery and equipment financing will increase too. It is suggested that Hong Kong’s financial institutions should offer more financing products for industrial equipment while the Government should also provide more credit guarantees to local manufacturers for equipment financing.

4. Market promotion services: The Government, public organisations, industry and trade associations and private companies should join hands to carry out market promotion in three areas: • Promote the quality image of Hong

Kong manufacturing: As Hong Kong manufacturers continue to upgrade their products, the “Made by Hong Kong” brands will add value to fashionable products (such as garments and clothing, clocks andwatches, and jewellery), food and beverages, pharmaceuticals, and cosmetics. The Government and public institutions should promote the “Made by Hong Kong” image in both overseas and domestic markets to help manufacturers expand their markets, and to attract high tech enterprises and talent to invest and work in Hong Kong.

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• Increase support for e-commerce: Given the growing popularity of online shopping, Hong Kong should increase its support for e-commerce.i. Publicise via the Internet: Use public

trade promotion institutions and industry associations to showcase Hong Kong products through various themes in publicity campaigns.

ii. Online sales: In addition to publicity via standard market-promotion platforms, trial sales could be arranged via online shopping websites. Different online shopping platforms have varying sales features for products, so different industries should build up customized online shops based on the characteristics of their products. This would increase publicity for Hong Kong goods in addition to improving customer service and management of customs and logistics; it would also avoid duplication of products that could affect the market position of online shops.

iii. Training of e-commerce manpower: e-commerce requires manufacturers to understand the buying habit of customers of their target markets. Online business transactions are different from the traditional trading approach of many Hong Kong enterprises. The long-standing business-to-business way involves importers, exporters, and merchandisers negotiating prices based on the volume purchased. Hong Kong lacks a skilled e-commerce workforce, especially in the customer service department. Training of e-commerce manpower should be prioritised, focusing on how customers in different target markets conduct online shopping. Internships studying online shopping trends on the Mainland should be encouraged with the goal of understanding how to tap into this vast market.

• Promote sales in the Mainland and international markets: Hong Kong should continue to promote sales in the Mainland and international markets, particularly diverting support to SMEs and new companies. The Government should increase the amount of financial support allocated for developing such markets and should strengthen its economic and trade offices overseas, providing more market information and organising more market research.

5. Smart logistics services: Intelligent manufacturing, e-commerce, and online shopping have revolutionised the interactive trading model of manufacturer-to-manufacturing and manufacturer-to-consumer trading. The function of a logistics company as an intermediary between provider and purchaser has also shifted. All signs point to IT being the basis of smart logistics services moving forward. Hong Kong must therefore promote more multi-level co-operation between industry, logistics, IT, and financial sectors. It should step up efforts to develop smart logistics services, help manufacturers sell abroad, and preserve the status of Hong Kong as a regional centre for wholesale and retail sales.

ACTIVELY PROMOTE EXTERNAL INDUSTRIAL CO-OPERATION

Co-operation with the Mainland and the Pearl River DeltaHong Kong industry must strengthen its co-operation with the Mainland and the Pearl River Delta to ensure continual room for development: The Mainland has abundant land and human resources conducive to large-scale manufacturing as well as enormous market potential to promote market diversification of manufacturers. The Pearl River Delta provides a comprehensive manufacturing network, and well-established customs and logistics systems to facilitate cross-border manufacturing and sales management. This has created an ideal platform for Mainland-Hong Kong co-operation in manufacturing and research.

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“Made in China 2025”1. Establish a planning and co-ordination platform:

Hong Kong should set up a cross-sector, interdepartmental unit to work with related and corresponding counterparts on the Mainland to understand the details of the “Made in China 2025” strategy. This unit would help Hong Kong industries get the opportunities to participate in the national development projects. These works can be the proposed Industry Development Supervisory Commission which could co-ordinate all these initiatives.

2. Establish a national-level manufacturing and innovation centre: “Made in China 2025” sets out to establish roughly 15 and 40 manufacturing and innovation centres as research bases for industrial technologies respectively, by years 2020 and 2025. Hong Kong should mobilise its industrial and technology research resources so as to set up a national-level manufacturing and innovation centre in areas of information technology, intelligent manufacturing, biomedical, and the transformation and upgrading of traditional industries. This would promote the overall upgrading of local industries and enable Hong Kong to take part in the national strategic development.

Guangdong-Hong Kong Industrial Co-operation1. Strengthen bilateral interactive co-operation

• Improve the PRD business environment: Bilateral communication amongst officials and industrialists should be increased. Sufficient time should be given to industries to adjust to new policy changes. Efforts should be made in other areas including enhancing customs efficiency, seeking solutions to problems of labour shortage and labour disputes, reducing tax rates and fees, and improving ancillary supports to industries in counties and towns.

• Co-operation in manufacturing technology: The Guangdong and Hong Kong governments should draw up joint technological innovation initiatives to address, for example, intelligent manufacturing and green manufacturing in

traditional industries. These initiatives would encourage Hong Kong tertiary education institutes, R&D bodies, and manufacturers to collaborate with their Guangdong counterparts. Their combined research outputs could help upgrade and transform manufacturers in the PRD; it could also improve the living environment of the greater PRD area.

• Support ancillary industrial services: The Government should allow Government-funded industrial support agencies to offer supportive services to Hong Kong manufacturers operating in the Mainland. The Government should not require those agencies to fully recover the costs when those services are provided outside Hong Kong territory. This could encourage closer Guangdong-Hong Kong industrial cooperation.

2. Co-operation in training industrial talent: As the majority of Hong Kong manufacturers are located in the PRD region, making the PRD a suitable platform for training industrial personnel. Hong Kong students of industrial and engineering disciplines could take up internships in PRD factories, and Hong Kong’s vocational training and professional educational institutions should utilise the comprehensive industrial base of the PRD to offer training courses.• The Mainland has initiated reform in

application-oriented educational institutions to enhance their training capability in industry and technical skills. Guangdong and Hong Kong should jointly launch similar training programmes targeting at specific technical skills which are in high demand. Hong Kong students participating in cross-border technical internships in the PRD could receive government subsidies, and Guangdong could facilitate work and living arrangements for Hong Kong teachers and interns. PRD Government could also consider providing salary tax allowance to Hong Kong teaching staff as well.

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• Promoting mutual recognition of technical skills qualifications, both in Hong Kong and the Mainland, which would facilitate talent mobility between the two places and increase employment opportunities in the long term.

3. Investment co-operation• Encourage Guangdong’s technology

companies to invest in Hong Kong: Hong Kong should publicise its industrial parks to attract the fast-growing technology companies in Guangdong to set up R&D centres in Hong Kong. They could use Hong Kong as a springboard to the international market and to secure co-operation with international R&D and financial institutions.

• Strengthen co-operation with startups in the PRD: Governments in the PRD region, especially Shenzhen, are providing supports to startup companies. Hong Kong should strengthen its ties with these startups and encourage startups in the manufacturing and technological business to cooperate with Hong Kong companies. Hong Kong should also encourage Mainland startups to come to Hong Kong.

4. Co-operation in domestic sales: With the launch of the Guangdong Free Trade Zone, Hong Kong should actively explore co-operation with its e-commerce firms, using favourable tax terms in the bonded areas, simplified customs clearance, and convenient logistics of the industrial zone to penetrate the Mainland’s e-commerce market.

Co-operation in R&D and Innovation1. Encourage Hong Kong academia, R&D

institutions, and manufacturers to collaborate with their Mainland counterparts. It is suggested to set up a Mainland-Hong Kong R&D Fund to encourage Hong Kong academia, R&D agencies and manufacturers to increase cooperation with Mainland counterparts on projects pertinent to the “Made in China 2025” strategy.

2. Connect with Mainland’s innovative industries: “Made in China 2025” advocates the construction of manufacturing innovation networks through public platforms and engineering data centres. The SAR Government should consider setting up a similar public platform and data management system in Hong Kong that would support and interact with its Mainland counterparts.

3. Strengthen Mainland-Hong Kong co-operation in industrial design and creative sectors• Encourage and financially support

Hong Kong design students to take up short-term internships on the Mainland. These internships would facilitate their understanding of Mainland culture, translating into design products which would better suit the Mainland market. Financial support should also be given to Mainland design students for internships in Hong Kong to promote mutual understanding.

• Hong Kong should consider establishing its own designer service centres in important and influential Mainland innovation parks to facilitate direct exchange between designers of the two places.

• The future innovation parks that are being proposed in Hong Kong should allocate space to attract Mainland industrial design companies to set up branches. These company branches could make use of Hong Kong’s comprehensive system of intellectual property rights protection to promote international co-operation.

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Hong Kong Products Sold in the Mainland1. Assist Hong Kong manufacturers to tap into the

Mainland market• With the launching of the Mainland’s various

Free Trade Zones, Hong Kong should explore co-operation opportunities with trading and logistics companies in these zones to facilitate products of Hong Kong manufacturers entering the Mainland market.

• The Government should increase its e-commerce support for Hong Kong manufacturers, encouraging them to use e-commerce and Internet sales to enter the Mainland market.

2. Encourage manufacturers to embrace the tariff-free privileges provided by the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA): As Hong Kong’s current manufacturing activities are limited, CEPA’s zero tariff benefits have not been well used. The Government should increase communication with local manufacturing-related organisations to better understand the obstacles to benefitting from CEPA. While the local production scale of manufacturers remains small and the volume of orders limited, facilitation measures should be introduced to reduce the cost of CEPA application.

Co-operation with the International CommunityHong Kong industries’ co-operations with the international community mainly involve the purchase of raw materials, parts, and components, and the sale of finished products. And some established Hong Kong companies have set up factories overseas or acquired international brands. With global changes in industrial models, especially the increased use of knowledge and IT in manufacturing, Hong Kong industries need to adjust their international business strategy. In view of the already established mutual trust with the international community based on long years of interaction, it is suggested to develop international industrial co-operation in two major areas:

Knowledge-Based Co-operation 1. Co-operation in science and research:

Through the newly established Innovation and Technology Bureau, Hong Kong academia and R&D institutions should be encouraged to co-operate with their overseas counterparts and well-known international companies. An international industrial technology and innovation network should be set up in Hong Kong to assist manufacturers in brainstorming new ideas and recruit international talent.

2. Personnel training and exchanges• Training with International exposure

i. Assist industry personnel from Hong Kong to seek training abroad to study cutting-edge manufacturing technology and to nurture international industry skills.

ii. Encourage Hong Kong educational institutions and public industrial support organisations to organise seminars and training classes on international industrial development and technology.

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• Exchange of International Talenti. Invite top international industrial talent

to join the Industrial Development Supervisory Committee so as to broaden the vision of industrial development of Hong Kong.

ii. Provide financial assistance to international industry specialists coming to Hong Kong to provide technical training and participate in knowledge exchanges.

3. International research: strengthen the tracking work on international industrial developments to better understand global trends and to facilitate the formulation of Hong Kong industry’s long-term development. Such research would also help Hong Kong adjust its industrial policy, bringing it in line with international developments.

Investment Co-operationTo support Hong Kong manufacturers in investing in overseas and increasing the production networks of Hong Kong industries at home and abroad so as to enhance Hong Kong’s status as an international trade, logistics, and financial centre.

1. The SAR Government should assist companies in exploring development opportunities arising from the Belt and Road Initiative. The Mainland has been improving its infrastructure construction and business environment under this national initiative, and Hong Kong should also take advantage of this initiative. It could consult and co-operate with the Mainland governments in establishing Hong Kong-invested industrial parks in Southeast Asia and South Asia to where labour-intensive manufacturing could be relocated, thereby rebuilding Hong Kong’s international production network.

2. The SAR Government has to undertake negotiations with countries along the Belt and Road on issues including regional trade, mutual investment promotion and protection, avoidance of double taxation, and other issues that would protect the interests of Hong Kong-invested firms overseas. When foreign tax authorities impose unreasonable tax evasion regulations, the Government should examine the situation and solutions.

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To understand in detail the business situation of Hong Kong manufacturers in the Pearl River Delta (PRD) and their future plans, the research team organised 10 focus group meetings in Hong Kong and in the PRD. Hong Kong manufacturers from different industries, producer service sectors, representatives from university technology-transfer departments, as well as students of industrial engineering and design were invited to take part in the discussions.

OVERVIEW

Since 2008, the manufacturing sector in the PRD has faced many challenges. Manufacturers in all sectors agree that their major challenges include shortages of labour and qualified workers, unstable business environment, and fast and frequent changes in government policies.

Manufacturers have taken steps to reduce the size of their workforce significantly in the PRD: In the face of frequent increases in the minimum wage, implementation of Labour Contract Law, and ever-increasing labour disputes, manufacturers have implemented numerous measures for workforce reduction. These include increasing automation, revamping production processes, and shifting orders for low-price and labour-intensive items to Southeast Asian countries and interior provinces of the Mainland. Hong Kong manufacturers in the PRD have managed to reduce their workforce by one-third or more while maintaining business revenue. They have done so by improving internal management and increasing investment. They also have gradually moved from their previous model of labour-intensive production to one emphasising both capital and labour.

Manufacturers unanimously agree that the lack of qualified workers has constrained their enterprises from restructuring and upgrading: the missing generation of industrial personnel, or the talent gap, is particularly serious in Hong Kong. While these manufacturers have relocated to the PRD for over 30 years, the number of Hong Kong people working in manufacturing has fallen sharply and the training of local industrial personnel is inadequate. As the first generation of Hong Kong entrepreneurs in the PRD approach retirement, this imbalance between industrial development and insufficient supply of manpower poses a challenge to the continued operation of their enterprises.

The shortage of qualified industrial personnel has much to do with Hong Kong society’s lack of understanding of the latest developments in manufacturing: Manufacturers claim that their sector is highly misunderstood, being perceived as still being stuck in the labour-intensive model of the 1960s and 1970s. This has turned off Hong Kong’s young workforce from entering industry, studying industry-related disciplines and working in the PRD, thereby aggravating the problem of a missing generation of industrial talent.

APPENDICESAppendix 1 – Summary of Focus Group Discussion

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The Hong Kong SAR Government lacks an industrial development policy: Manufacturers claim that the Hong Kong Government’s policy of non-intervention results in the absence of an overall industrial development policy. While the governments of all neighbouring countries and regions are actively supporting industrial development, Hong Kong manufacturers are unable to obtain support from theirs and have to struggle on their own, compounding the task of restructuring and upgrading. This lack of industrial policy makes it more difficult for Hong Kong’s education and training systems to nurture new kinds of industrial personnel. The support of these institutions is necessary to restructure and upgrade Hong Kong industries in this new era.

Hong Kong industrialists are yet full of confidence regarding the development of their sector, pointing out that manufacturing is and always will be essential for economic livelihood: While Hong Kong devotes efforts to enhance its financial and professional services, other sectors of the real economy have to be strengthened as well so as to achieve more comprehensive and stable development. A modern industrial system is not limited to manufacturing; it also includes advanced scientific research and development, innovative design, marketing and sales at the upper stream of the value chain, brand management and marketing at the end stream of the value chain. Enhancing these high value-added and knowledge sectors as well as supply chain management and processing control across the entire value chain would greatly augment industries. The sale of Hong Kong industrial products to the Mainland’s booming domestic market is an important part of economic co-operation between these two places.

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SECTORAL VIEWS

Toy Industry

Industry TrendsHong Kong manufacturers are the world’s leading producers of toys. They supply OEM services to a vast portion of international toy brands, about 60 to 70 per cent of the world’s toys are processed by Hong Kong-managed factories. In recent years, the volume of re-exports shipped through Hong Kong has fallen, thanks to direct exports from the PRD.

Toy production in the PRD has retained its competitive advantage. In recent years, international brands have moved simple merchandise to Vietnam, India and other Southeast Asian countries, but production of complicated items remains in the material-rich PRD, as these toys require large quantities of metal, plastics, clothing, electronic parts and components and machinery. For the time being, very few places in the world are able to compete with the PRD in terms of supplying parts and logistical efficiency. Hong Kong’s share of the global toy market has thus remained stable. Manufacturers believe that in this era of advanced automation, the US and European buyers could purchase automation-made toys in their own backyard instead of coming to Asia. By comparison, toys made in the PRD still require inputs of labour and machinery, which could differentiate the PRD from European and American competitors.

Toy manufacturers have increased automation to offset the labour shortage in the PRD, and the resulting efficiencies are evident. One manufacturer claims that, by changing the manufacturing design and increasing production equipment, it reduced the number of workers required for one production process from 300 to 30 people. Another has, over a six-year period, cut its workforce by half, with no change in sales income.

Toy manufacturers, moving once again from the OEM model to ODM, have resurrected their design activities. During the 1960s, Hong Kong toy manufacturers used their own designs but, as international brands came to Hong Kong for sourcing in the late 1970s with proprietary designs, manufacturers switched to an OEM model. In recent years, the negotiation power of international brands has increased, putting pressure on producers. Consequently, many OEM factories have re-established their own design teams and returned to an ODM model. Some firms that have always retained their R&D activities in Hong Kong and have not moved to the PRD, have fewer problems in making the transition from being OEMs to ODMs. In the meantime, manufacturers have also started to incorporate ‘apps’ elements in their latest designs, responding to new market trends.

A few selected manufacturers have begun operating as OBMs (original brand manufacturers), targeting the Mainland and emerging markets with large populations. However, toys are products that reflect cultural contexts, requiring multi-faceted promotion and close interaction with consumers, all of which require great investment. Therefore, not all manufacturers opt for an OBM model.

Manufacturers are exploring Internet sales. Historically, toys have often been sold through bricks-and-mortar establishments; but, with the popularity of online purchasing, enterprises must carefully explore marketing and pricing strategies for both physical shops and e-commerce channels.

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RecommendationsThe government should increase investment in manpower training and support for design activities. Manufacturers indicate that government funds for toy design are limited, with high volumes of applications for a handful of grants. Hong Kong’s finite supply of design talent further hinders progress. If all the manufacturers increased their design activities, competition for such qualified people would be intense. The Government must accelerate and expand training to meet industry needs.

The Government should provide more industrial land in Hong Kong to facilitate manufacturing. Manufacturers in the PRD are currently slashing their workforce and, when a labour pool is reduced to a few dozen people, production in the PRD may no longer be necessary. The Government should provide industrial land in the New Territories, enabling small-and mid-size firms to move back to Hong Kong and promote manufacturing locally.

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Textile and Garment Industry

Industry TrendsHong Kong garment manufacturers have been actively investing overseas. They are following other international brands that have shifted purchase orders for low-price items to Laos, Myanmar and other low-cost countries. In the meantime, they have designated their PRD factories for producing medium-and high-quality merchandise which can be quickly dispatched to the market. Should their Southeast Asia factories run into fulfilment problems, their PRD plants can be deployed to meet the deficit. Some small-scale Hong Kong manufacturers have alternatively moved part of production to inland provinces, positioning them closer to local labour and domestic markets. Overall, the Mainland still retains the competitive edge of a comprehensive and stable supply chain, making it especially suitable to make complex products and fast-to-market efficiency.

In the wake of the global financial crisis, Hong Kong manufacturers enacted numerous strategies in an effort to upgrade and transform business, in addition to greatly reducing their workforce. They introduced measures such as improving production and logistics management, increasing automation, developing new technologies, investing in R&D and promoting business cooperation with overseas clients in the area of design. Additionally, some manufacturers have successfully switched from an OEM (original equipment manufacturer) model to ODM (an original design manufacturer).

Hong Kong manufacturers have returned to the automation model. In the 1970s and 1980s, they started to automate production under the pressure of rising wages. But the advent of China’s open-door policy offered an abundant supply of cheap labour on the Mainland, allowing PRD firms to revert to labour-intensive production. Now, as production costs in the PRD have risen while labour supply has shrunk, manufacturers are turning again to automation, reviving their earlier pursuit of the capital-intensive model.

Progress in this automation push has lagged partly due to Hong Kong manufacturers’ weak industrial engineering capability. Automation requires a high level of engineering, from production efficiency and energy conservation to designing the automated production line. Hong Kong’s few industrial engineering firms are not of a high level, making it difficult to secure sufficient technical support to automate production. Taiwan, on the other hand, nurtures an abundance of industrial engineering talent, but seldom serves Hong Kong manufacturers.

In recent years, the number of young Mainlanders joining the textile and garment industry has fallen sharply, as has the technical ability of existing workers. Consequently, Hong Kong manufacturers in the PRD have faced difficulties in implementing a ‘high fashion’ market strategy.

After the financial crisis, the garment and apparel industry moved to greater economies of scale as well as toward monopolistic operation. Large producers have a strong financial base and abundant overseas management experience. They co-ordinate manufacturing in their Mainland and overseas factories by applying the ‘China plus one’ strategy. In this way, they are able to satisfy foreign clients’ demands for cheap and agile goods. This has increased pressure on small-and medium-sized producers.

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Feasibility of Returning to Hong KongThe “Made in Hong Kong” label carries a price and prestige of which firms cannot afford to disregard. However, with a limited production scale, manufacturers therefore need to coordinate operations based in Hong Kong with production in their PRD factories in order to comply with Hong Kong stipulations. Many of the female migrant employees in Hong Kong have experience in the garment industry, but chores at home make it impossible to work full-time. Some manufacturers have therefore established social enterprise programmes for mutual benefit.

Hong Kong retains a certain competitive advantage in design and the protection of intellectual property. There are relatively enough designers, but the deficit in production support hinders their design concepts from being transformed into actual creations. Manufacturers have suggested setting up joint offices, or co-shares, with designers to stimulate innovative ideas. This could facilitate the incorporation of new designs into production processes, bringing them to the market.

RecommendationsImprove the creative environment, encourage and help young designers and entrepreneurs to set up their own enterprises and avoid large-scale relocation of manufacturing from the PRD in order to preserve the sector’s vitality. Furthermore, the Government and industry should work together to provide more work space for young designers. They could set up modern exhibition facilities for product display and wholesale to promote the Made in Hong Kong brand. They should help young entrepreneurs put into practice the knowledge acquired in school through internship programmes. Mentorship initiatives should also be established offering practical guidance and support.

The Government and industry should strengthen industrial research as well as explore and redefine its market position. This would involve training and education, craftsmanship mentoring and environmental protection procedures. The textile and garment industry covers a wide range of activities, such as R&D, design, manufacturing, and branding; it cannot rely solely on market forces or corporate adjustments to reinvent itself. Collaboration between Government and manufacturers is essential to carve a new development path able to cope with changes in the global purchasing system, industrial relocation from the PRD and the shortage of new talent entering the sector.

It has been suggested that Hong Kong set up a wholesale garment market like that of Dongdaemum in South Korea. Manufacturers also advocate support measures similar to those of South Korea’s government regarding property, education, training and promotion, among other areas. If Hong Kong were to rely solely on market mechanisms to pursue this project, it would evolve only to benefit the property market rather than further industry development.

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Watch and Jewellery Industry

Industry TrendsSince 2008, manufacturing in the PRD has faced many challenges: increases in the minimum wage, Labour Contract Law, tightening of environmental protection rules, and, more recently, collective bargaining regulations. All these have led to a decline in the number of PRD manufacturers, and companies have taken the move to cut the number of employees.

Automated production is important, as demonstrated by the pervasive new trend of equipment replacing manpower, but it can never be able to entirely replace skilled labour. A distinct feature of the watch and jewellery industry is that craftsmanship provides added value. Automation would actually deface the inherent value of these luxury products. Hence, the demand for skilled craftsmen in this industry remains strong. Furthermore, the initial equipment investment required for automation is substantial, and not all factories can bear the costs. The support of government loans and tax benefits is necessary.

On the Mainland, Internet sales are rising while bricks-and-mortar businesses are on the decline. The Internet retail industry is now well-established. However, while RMB1,000 watches befit online retail, above RMB10,000 jewellery are still better served in bricks-and-mortar establishments. Additionally, the maintenance cost of online retail is rising quickly: establishing a brand in the Mainland online market requires at least five years and substantial marketing investment.

Watch Industry The global financial crisis has impacted the consumption model in Europe and North America, with major brands gaining more of the market share. The number of suppliers has shrunk accordingly. Manufacturers previously targeting the low-price mass market have started moving toward brand business. Hong Kong manufacturers are mostly in line with this trend, and few now opt for the low-price business model. Specifically, they are focused on brand building, quality, and design.

Founding entrepreneurs, having established their businesses in the early 1990s, are approaching retirement and face the challenge of succession. The new generation does not want to enter the industry, resulting in a succession problem for both individual enterprises and the sector as a whole.

Jewellery IndustryIn recent years, the jewellery industry has faced many difficulties. The volume of orders has fallen, and the majority of low-cost orders have gone to cheap-labour countries like India. With the Chinese government tightening regulations, manufacturers in the PRD have to cope simultaneously with the subsequent rise in production costs and the difficulty of finding workers. As a result, many small-to mid-size firms (ie, fewer than 100 employees) have closed.

Advancements in 3D technology make the return of R&D and design to Hong Kong feasible. With substantial improvements in 3D design and 3D printing technology, jewellery manufacturers have all but ceased hand-made moulding. Hong Kong’s R&D and design sectors, with their international sensibilities, could easily meet Europe’s market needs. The Mainland has yet to catch up with Hong Kong in this aspect, so moving R&D and design departments to Hong Kong would create great development potential.

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RecommendationsE-Commerce has significantly influenced transaction strategies and order volumes within an accelerated timeframe. With rising costs, manufacturers have transferred production from the PRD to low-cost areas. The government should review the long-term impact of this relocation on Hong Kong’s future.

Improving the public image of manufacturing remains a crucial task. Hong Kong society still perceives the industry as stuck in the production workshops of the 1970s and the 1980s. Hong Kong must strengthen and improve workforce training, refresh job titles, and incorporate more design and R&D content into manufacturing careers. An improved image could attract more young people to the profession.

The shortage of labour is yet again the biggest challenge to returning to Hong Kong, making it imperative to import labour from outside. If each factory were to move back with only 50 people, the cumulative demand for staffing would be enormous. The Government should open up the labour market and import workers.

Hong Kong has a competitive advantage in developing and producing luxury jewellery. As labour does not account for a large proportion of production costs, this industry can afford Hong Kong’s relatively high labour costs.

The jewellery industry needs experienced labour, as this kind of high-precision manufacturing necessitates craftsmen of the proper standard. But training skilled workers is not easy, and Hong Kong society bears a prejudice against manufacturing, making it difficult to attract new employees. To bring in the new generation, the industry has launched an Adopt-a-School Project in secondary schools.

Outstanding graduates earn the opportunity to travel to Italy, Thailand and Mainland China, among other places to participate in exhibitions and explore their interest in the jewellery industry. The goal is to encourage them to enrol in jewellery courses organised by the Vocational Training Council.

The lack of Hong Kong talent limits development of the watch and jewellery sector. R&D requires people with computer skills who are also in demand in other sectors such as animation and fashion. The competition for talent in Hong Kong is fierce, driving wages up and holding industry expansion back.

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Mould and Die Industry

Industry TrendsThe mould and die industry in Hong Kong has gone from high to low growth. It has a very strong interdependence with other manufacturing sectors, its growth has run parallel with that in other industries. There are three factors leading to the current low ebb situation: first, many of the founders of companies are nearing retirement age; second, the business environment has changed; and third, there is a talent gap. The future of the mould and die industry depends on whether the new generation has the confidence to return the business to Hong Kong.

After moving their production bases to the PRD, manufacturers have basically stopped hiring Hong Kong apprentices: the salaries of Hong Kong employees are too high, and they do not wish to work in the Mainland. Moulding-related training resources have also been reduced and could not attract outstanding students, while many teaching staff are approaching retirement. It is under such circumstance, the mould and die industry suffers from a serious talent gap.

Hong Kong’s policy of non-intervention combined with the society’s lack of respect for the craftsmanship of skilled mould makers discourage local industrial development. In contrast, Germany, Switzerland, Japan and other high-cost countries do strongly promote industries by providing a supportive business environment that respects skilled workers in the mould and die industry.

The contents of Hong Kong’s vocational training do not always meet career requirements, and supporting resources have been reduced. The Vocational Training Council’s qualifications framework (QF) could also be better structured. Hong Kong’s social attitudes, industrial structure, and educational framework make it difficult to attract young apprentices, while, the shortfall of student enrolment in turn has led to a decline in training resources for the industry.

In the 1980s and 1990s, the mould and die industry along with the Hong Kong Productivity Council (HKPC) held joint seminars and exchanges to learn about new technologies. Subsequent changes in the funding criteria have affected this collaboration format, and as a result, opportunities of the industry to learn about new technologies have been reduced.

Both Mainland and Hong Kong have a shortage of qualified workers; nonetheless Hong Kong could still potentially develop a high-precision mould and die industry. On the Mainland, high turnover rates make it difficult for firms to accumulate know-how. Although Hong Kong is small, staff members are relatively more stable. This is conducive to developing high-precision manufacturing which requires aggregated technology and large-scale investment in machinery. To achieve optimal division of labour, manufacturers could use their PRD factories to handle low-end, labour-intensive work, while their Hong Kong factories could deal with more complex, high-precision projects. Manufacturers have expressed interest in bringing part of their production lines back to Hong Kong under the right circumstances.

The general public in Hong Kong misunderstands the mould and die industry, perceiving it as still being stuck in the production mode of the last century. In fact, the manufacturing environment of high-precision moulding is advanced and well-organised with high levels of automation and working conditions are rather pleasant.

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RecommendationsThe Hong Kong Government needs to reshape public perception before formulating new industrial policies: they must acknowledge its importance and to encourage the younger generation to enter the industrial sector through research and development. Manufacturing is founded upon a clustering of industrial talents, not on the location of company headquarters. Hong Kong’s lack of qualified industrial experts has affected the development of industry, forcing the relocation to the Mainland.

To promote the return of manufacturing to Hong Kong, the Government must resolve the shortages of trained workers and industrial land. The shortage of skilled mould makers could be solved by improving vocational education and providing allowances to apprenticeships. High-precision mould and die requires certain spatial specifications for their factories; Hong Kong’s old industrial buildings are not compatible with modern manufacturing technologies. The Government needs to allocate industrial land for customised buildings that suit the needs of modern, high-precision moulding. The ground floor would be reserved for the manufacturing process, while upper units could house supporting enterprises to facilitate industrial clustering.

The Government should make better use of the Qualification Framework (QF) system to improve the professional image of industrial workers, hoping this will help attract young apprentices. Japan and other countries with advanced mould and die industry highly respect their technical masters and craftsmen. Bestowing workers with high esteem for their jobs encourages them to seek self-improvement and raise the technical level of the entire industry. Hong Kong should follow their lead and improve the professional cachet of the industry. Outstanding craftsmen should be recognised and respected by society. Young people could then see that prospects are bright and upward mobility possible.

The Mainland Government already promotes the mould and die industry, offering many concessions for digitalisation, automation and 3D moulds. Market demand for moulding products is enormous. The Hong Kong Government could, through tax incentives, encourage investment in high-precision equipment locally and gradually develop a high-level moulding industry with high added value.

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Environmental Recycling Industry

Industry TrendsCompanies in Hong Kong’s environmental protection industry use the SAR as a pipeline for scientific exchange to better understand the latest trends overseas. These companies exchange technical information with specialists and organisations in the field worldwide. They also act as agents for foreign environmental technologies: advanced foreign technologies are brought into Hong Kong and then introduced to the Mainland.

Through investing in Mainland environmental enterprises, Hong Kong companies are able to access Mainland market networks and qualified technical staff to penetrate the Mainland market. Hong Kong also draws upon their strengths: interest rates on loans from Mainland banks are quite high while lower interest rates are offered by banks in Hong Kong. In addition, by investing in Mainland enterprises, Hong Kong firms can serve the Mainland market indirectly, thereby bypassing high protective barriers and strict regulatory requirements.

The Hong Kong Government does not provide support for the local environmental protection industry. Local environmental companies have little opportunity to showcase their capability and gain access to the international environmental arena. Manufacturers quoted supports provided by neighbouring countries to the industry, such as, the Singapore Government positions the environmental industry as an emerging strategic sector and actively invites foreign experts to provide technical training to local firms; it also provides loans and government contracts to support industry development. Another example, Israel established an industrial park to bring together related specialists, encourage industry contacts and share common knowledge to promote science and technology in the sector.

The Hong Kong SAR Government’s supervision of the environmental protection industry is somewhat backwards and inflexible, and it cannot meet the demands of the industry with regards to investment and operations.

Hong Kong’s supply of qualified industry personnel is inadequate, and an overall spirit for learning and hard work is lacking. In contrast, young Mainland engineers are keen to study and improve; however, their turnover rate is quite high.

RecommendationsThe Government should open the market for skilled labour in order to attract top talent from the Mainland and around the world, thereby establishing a pool of talent in Hong Kong. The Government should also help satisfy the housing demand of expatriates to increase Hong Kong’s competitiveness in attracting talent.

The Government should promote environmental projects in local communities and provide more business opportunities to small- and mid-size private firms. It should also encourage experimental collaboration: different organisations from different districts working together on similar projects. This would help find out the best solutions, rather than rely on the work of only one company.

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Industrial Engineering/Industrial Design Students

added. Manufacturers often refer designers to established international brands, thus limiting their creativity. The price gap between Hong Kong and Mainland design costs is also a consideration. In order to reduce production costs and facilitate mass production, manufacturers often alter or simplify the original design, compromising its essence. Also, starting salaries of design graduates are relatively low.

Hong Kong’s competitive advantages are its speed and relatively high level of creativity which can be positioned as a good testing platform for new products. For example, designers in this focus group agree that Shenzhen designers’ ability to copy and modify is very strong, but not on novelty. Industrial designers and manufacturers should exploit Hong Kong’s comparative advantage of speedy service. By using the city as a platform for product trials, more venues could be established to display cutting-edge samples and promote new products.

RecommendationsNurture an environment of creativity in Hong Kong and arouse the interest of the new generation in manufacturing. Hong Kong young people are receptive to creative and handicraft disciplines and, with a supportive environment for handicraft manufacturing, interest in the industry could flourish. Hong Kong should showcase its unique position as an international metropolis through media promotion etc., to become a centre for creativity. By bringing together culture, design, manufacturing and handicraft, the notion that “manufacturing is chic” can be promoted. A strong culture of manufacturing could then be formed. A publicity strategy could include short films featuring manufacturing stories and targeted social media campaigns. In addition, summer events could be organised to promote creativity and introduce handicraft concepts to primary and secondary school students to nurture interest in the industries.

Set up open forums for experimental manufacturing. This would encourage creativity and also train future industrial talent. Europe and North America have already started “maker movements” comprising workshops and collective platforms allowing upcoming generations to express their creativity and make their own products. Hong Kong should connect design and engineering students with industrial centres and other similar facilities on campus, to facilitate open forums for creative collaboration on new products. This would build an environment conducive to manufacturing. Entrepreneurs could monitor the activities on these forums and selectively choose products for mass production, thereby maintaining active contact with Hong Kong’s future industrial talent.

Promote the prospects of industry and manufacturing jobs to secondary school students. This would enable them to understand the content and context of industries when applying to university; it might also attract more talent to enrol in industry-related courses.

The OverviewHong Kong society’s misunderstanding of industry influences the entrance of new talent into the sector and dissuades students from taking up industry-related disciplines.

Industrial engineering graduates are presented with a wide range of employment options, but these jobs lack a desirable status and professional image. The Government has not bestowed professional qualification of ‘engineer’ on industrial-engineering graduates, affecting the desire of prospective job seekers to choose the industrial sector.

The demand from Hong Kong manufacturing on industrial design is relatively low, which affects the career prospects and income of design students. Today’s design students lament the lack of industrial design jobs in Hong Kong and of existing employment positions, and many of the current jobs deal with modification tasks with limited value-

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Young Industrialists/The Second Generation

The OverviewThe Hong Kong Government has not done enough in the area of training the younger generation of industrialists. Members of this focus group state that outstanding young industrialists seldom acknowledge the Government in the provision of supports given to them at the startup stages. Non-government funds such as angel investors and venture capitalists give more effective support to young startups.

Hong Kong manufacturers have neglected and not systematically planned their business succession. By comparison, Taiwan counterparts have trained the second generation thoughtfully, arranging for them to take up internships in different departments. Whereas in Hong Kong, the first generation of manufacturers found that establishing successful operations is not easy, and tend not demand their younger generation to take over. In Hong Kong, the second generation mainly manages marketing and sales affairs, recruiting industrial experts from outside to handle manufacturing issues. This preference has much to do with Hong Kong’s competitive edge in trade and commerce and may affect future industrial upgrading.

The discussion pertaining to succession usually focuses solely on the incoming generation. In fact, it is a process involving two generations: the attitudes of the outgoing one are equally as important. The succession usually involves three main parts: maintaining the current operations, developing future business and managing assets. Developing a company after inheriting it is like starting a new business. So, when the second generation takes over the family company, the first generation is in fact as inexperienced as the second with the ‘new’ business. This is a test of inter-generational co-operation and trust and of the second generation’s ability to shoulder responsibilities.

In the face of new trends of developing the Mainland market and building brands, some members of the focus group preferred to move from OEM to ODM operation instead of setting up proprietary brands. Their rationales included: first, establishing a new brand involves significant investment with high risk; second, it requires expanding the sales team which would impact the existing operating system; third, international brands still rely on factories to execute their processing. With many commercial opportunities remaining to the processing industries, establishing a new brand is not necessarily the inevitable choice.

There are signs that Mainland engineering capability is catching up with that of Hong Kong. Experienced and capable Mainland engineers now receive commensurate salaries to their Hong Kong counterparts, which may impact career prospects of Hong Kong graduates.

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RecommendationsImprove Hong Kong society’s understanding of the development of industry in order to attract young talent. Many Hong Kong primary and secondary school teachers have the impression that modern industry is like that of its nascent stage in the 1960s and 1970s; this prevalent perspective continues to influence the perception of new generations. Hong Kong is an international metropolis, yet the local born-and-bred young people think about their future in more local-based terms. To broaden their minds, industrial and education sectors should increase co-operation and organise visits to factories aiming to let young people understand the current situation of industries, and arouse their interest in building their career in the industrial sector.

When the government promotes emerging industries, it should carefully consider the supply of qualified workers. The lack of skilled personnel is a common problem faced by Hong Kong industries. Even when there are business opportunities, future development will be constrained by the shortfall in industrial manpower.

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Producer Services Sector

Hong Kong Service Providers’ Operations in the PRD The comparative advantage held by Hong Kong service companies is in decline as their Mainland counterparts are slowly catching up. In early years, Mainland firms had few opportunities to make contacts with foreign businesses and Hong Kong enjoyed a major advantage afforded by its international status. However, with the proliferation of the Internet, Mainland residents are now able to incorporate foreign contents in their advertisements. This coupled with the high wages of Hong Kong employees which pushed the service companies to hire more Mainland staff. In recent years, the Mainland has developed very rapidly and has even surpassed Hong Kong in some sectors. However, Hong Kong service providers continue to maintain a better reputation on integrity. So, while their production costs are higher, the confidence they inspire continues to retain a certain number of Mainland clients.

Hong Kong service companies face challenges in developing the Mainland market. They often fail to secure prospective Mainland customers due to higher prices and a disparity in brand understanding. Lacking a deep comprehension of Mainland culture presents challenges in successfully serving clients. This is especially apparent in e-commerce and Internet sales where direct service to customers is essential.

Hong Kong service providers are slowly returning to the SAR. Drawing upon their experience on the Mainland, they are now in a better position to help Hong Kong manufacturers to develop the Mainland market.

Observations on Hong Kong Manufacturers in the PRDMainland companies are more adventurous in investing in brands. They easily accept the concept of brand-building and are willing to invest substantial capital: the motto “worry less, experiment more” embodies their biggest advantage. Conversely, Hong Kong manufacturers tend to be more conservative both in developing markets and investing in brands.

When first entering the Mainland market, Hong Kong manufacturers generally prioritised establishing physical stores, and very few expanded to e-commerce. Having already missed the early stages of investing in e-commerce, Hong Kong manufacturers subsequently have not invested enough to make up the deficit. In recent years, the bar for entering this sector has risen exponentially, making it much more difficult to establish a foothold. Enormous investment in advertising is required during the initial period of operation. The investment capacity of Hong Kong firms is inadequate: they tend to seek quick returns and are not prepared for the necessary long-term commitment.

Manufacturers are ill-prepared to close their businesses and have found filing for bankruptcy difficult. After 2000, manufacturers in the garment, toy, plastic and other traditional industries faced an international economic crisis, rising production costs on the Mainland, and a lack of favourable tax policies; as a result, they slowly closed down their enterprises. However, they chose an inopportune moment to clear the books. As a result, filing for bankruptcy presented difficulties, leaving them stuck running unwieldy operations.

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RecommendationsWhen undertaking marketing in the Mainland, Hong Kong manufacturers must understand their market positioning, target customers and price strategy if they are to compete with local companies.

e-Commerce has become the new norm for the domestic sales channel in the Mainland. The Hong Kong SAR Government should increase support and financial assistance to e-commerce training.

Different sectors should consider setting up their own e-commerce platforms. Given the high entry bar for e-commerce, industries should customise their respective platforms according to the characteristics of their products and of online-purchasing patterns in the Mainland. These platforms also require government support.

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Hong Kong Technology Transfer Organisations

Advantages and Challenges of Hong Kong’s R&DHong Kong’s academic institutions have talented people conducting world-class researches in a variety of fields. However, no incentive mechanism is in place to encourage academia to co-operate with industry. The institutions’ rigid management systems also pose another obstacle.

Hong Kong’s academic professionals often lack the entrepreneurial spirit of Silicon Valley in applying R&D to business. The academic management system also limits co-operation with manufacturers. This affects participation in factory-university projects, making it difficult for young intellectual talent to obtain practical experience.

Academic institutions and manufacturers view R&D results differently and this in turn affects their co-operation and technology transfer. Academics focus on research output, while Hong Kong manufacturers put solutions to problems as their priority. In the free atmosphere of academia, intellectuals believe that the university’s role is to provide education and cutting-edge results, not to promote R&D used in industry or to resolve daily manufacturing problems. Conversely, manufacturers should be equipped with strong technical competence before transferring technology into product design and manufacturing processes.

The industrial engineering capability of Hong Kong manufacturers is relatively weak, which retards their ascent along the technology ladder. Their competitive advantage is in production management, not R&D. Without cutting-edge engineering, their capacity to absorb and utilise new technology is negatively affected.

Current status quo of Technology Transfer in Hong KongThe system and environment for technology transfer is gradually being improved. Many Hong Kong academic institutions set up technology transfer centres around the year 2000, but not many successful cases were seen in the first 10 years. In recent years, there has been substantial progress. Technical co-operation between academic institutions and industry has also improved. Members of this focus group agreed that now is the ideal time to further strengthen the co-operation of both parties in science and research.

Hong Kong’s R&D results gain international acceptance. European and North American companies get to know about Hong Kong’s R&D results through seminars, academic papers and other channels. These companies are always on the lookout for suitable research results for technology transfers. Mainland industrial associations also actively seek R&D co-operation with Hong Kong academic institutions. International and Mainland companies alike frequently visit Hong Kong to pursue small-scale R&D operations while maintaining their main production base on the Mainland.

Technology transfer activities of Hong Kong manufacturers are limited but are on the rise. Historically, manufacturers had little interest in technology transfer, considering that have no relevance to their business operations. In recent years, however, they have actively sought co-operation with these institutions. They have also invested in Taiwan, thereby obtaining and transferring Taiwan technologies to Hong Kong. This has aided in promoting the development of research and technology.

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RecommendationsIn formulating its policy for research and technology, the Hong Kong Government must maintain an international perspective and stay abreast of international technology advances. Efforts should be made on the enhancement of the intellectual property-related legal and business frameworks, improvement of Hong Kong’s appeal to young talent, establishment of Hong Kong’s R&D leadership, and transforming Hong Kong into a regional hub for technological resources.

In establishing a technology transfer system for manufacturers and academics, the Government should bear in mind that academics and manufacturers hold different attitudes towards R&D. The Government may establish an intermediary institution to facilitate co-ordination.

The Government should provide more supportive measures to train industrial talent and encourage students to participate in industrial research and related studies.

In seeking academic and institutional co-operation in science and technology, Hong Kong manufacturers have to put aside their emphasis on problem-solving. They should strengthen their capability in the reception of cutting-edge technology advances. They may use “technology acquisition” as a means to consolidate the latest developments. Manufacturers should also step up training for industrial talent, and meet the expectation of young employees in areas of promotion, professional qualification and building up of ability.

Hong Kong’s current industrial environment is not attractive to top talent. For more than 20 years, Hong Kong manufacturers have maintained a manufacturing model that has limited room for career promotion of industrial employees. Top Hong Kong students therefore prefer not to enter industry-related disciplines, and attracting talent

from the Mainland is also difficult. As a result, there is an overall shortage of talent in Hong Kong industries. If Hong Kong manufacturers cannot establish a sufficient pool of industrial talent, in both Hong Kong and the PRD, its ability to attract international talent will also be weakened.

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第一部份：企業基本情況

1. 至2014年6月底，貴公司在中國內地設立多少間工廠，及其投資類別?（可選多項）

珠三角

三資企業 三來一補 其他類型

珠三角以外

三資企業 三來一補 其他類型

廣州 廣 東 其 他 縣 市 （請註明）

_______________n n n

深圳

東莞 長三角（請註明）

_______________n n n

中山

佛山 江西

惠州 湖南

江門 廣西

珠海 重慶

肇慶其他（請註明）

_______________

2. 貴公司哪一年在中國內地設立第一家工廠？ ___________________年

其中，珠三角第一家工廠設立於 ___________________年

3. 貴公司從事的工業（根據珠三角主要工廠的經營情況，回答以下問題）

□ 化學製品及藥物 □ 電器與光學製品 □ 電子產品 □ 食品/飲料

□ 皮革/橡膠 □ 金屬製品及機器 □ 模具製造 □ 紙品及印刷

□ 塑膠產品 □ 紡織 □ 玩具 □ 鐘錶

□ 成衣 □ 其他（請註明）：________________________________________________

4. 以貨值計算，2013年，貴公司在中國內地所製造/加工的產品，用於出口、轉廠（深加工結轉）及

內銷的比例分別是多少？（三者總和應等於100%）

出口（不包括轉廠）___________%；轉廠（深加工結轉）___________%；內銷 ___________%

Appendix 2 – Questionnaire

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第二部份：2008年以來的企業經營變化

5. 與2008年比較，貴公司在珠三角工廠的生產成本變化：

若選增加或減少，增／降幅的百分比

0%至20%

21%至40%

41%至60%

61%至80%

81%至100%

100%以上

總經營成本 □ 不變 □ 增加 □ 減少 n n n n n n

勞工成本 □ 不變 □ 增加 □ 減少 n n n n n n

原材料和零部件 □ 不變 □ 增加 □ 減少 n n n n n n

土地和租賃成本 □ 不變 □ 增加 □ 減少 n n n n n n

信貸成本 □ 不變 □ 增加 □ 減少 n n n n n n

政府稅費 □ 不變 □ 增加 □ 減少 n n n n n n

6. 2008年以來，貴公司珠三角工廠的員工僱用變化：

2008年6月底 2014年6月底

普工人數（如裝配、包裝、搬運、清潔、後勤等）

技工人數（如研發、技師、模具、品管等）

管理及其他人員人數（如經理、會計、採購、倉庫等）

常駐中國內地工作的香港僱員人數－ 管理人員－ 技術人員

7. 2008年以來，貴公司珠三角工廠的設備投資變化：

國外設備 □不變 □增加 □減少________% 內地設備 □不變 □增加 □減少________%

8. 與2008年比較，貴公司在進出口產品/原料安排方面，取道（途經）香港的業務變化

出口產品 2008年 目前 進口原料 2008年 目前

全部經香港出口 □ □ 全部經香港進口 □ □

全部經內地出口 □ □ 全部經內地進口 □ □

部份經香港出口 □ □ 部份經香港進口 □ □

沒有產品出口 □ □ 全部內地採購 □ □

9. 貴公司在內地業務發展（例子：擴大生產、擴大經營）所需資金的地域來源是：

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□ 全部屬內地境內資金，例如向內地境內銀行借貸等

□ 全部屬香港或非內地資金，例如向香港或非內地銀行借貸等

□ 來自內地境內約 ___________ %；來自香港或非內地資金約 ___________ %

擴展所需的資金主要源自：（可選多項）

內地境內 香港或非內地資金

n 企業利潤 n 企業利潤

n 銀行、信用合作社貸款 n 銀行、信用合作社貸款

n 股東注資 n 股東注資

n 上市集資 n 上市集資

n 其他（請註明）_____________ n 其他（請註明）_____________

10.在貴公司珠三角工廠擔當下列工作的香港僱員，何時會被內地僱員取代？

已經全部取代

5年以內全部取代

5年或以上全部取代

不會全部取代 不知道

研究開發 □ □ □ □ □

銷售及市場推廣 □ □ □ □ □

財務、會計、法律 □ □ □ □ □

工程技術（如生產、品管） □ □ □ □ □

行政管理 □ □ □ □ □

11.與2008年比較，貴公司在廣東處理以下事宜，情況和效率有否獲得改善?

地方政府收費 □ 改善 □ 不變 □ 惡化 勞工短缺 □ 改善 □ 不變 □ 惡化

進出口清關 □ 改善 □ 不變 □ 惡化 稅務 □ 改善 □ 不變 □ 惡化

融資渠道及成本 □ 改善 □ 不變 □ 惡化 缺電 □ 改善 □ 不變 □ 惡化

勞資糾紛 □ 改善 □ 不變 □ 惡化 環保監管 □ 改善 □ 不變 □ 惡化

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第三部份：2008年以來的企業的轉型升級活動

12.2008年以來，貴公司採取的轉型升級活動：（可選多項）

□ 保持一貫經營策略，沒有太大變化

□ 管理創新，執行形式： □ 資訊化管理 □ 生產自動化 □ 人員優化管理

□ 品牌建立，執行形式： □ 新建品牌 □ 品牌代理 □ 加大品牌投入□ 品牌併購 □ 其他（請註明）_____________

□ 加強產品設計，執行形式： □ 自行設計 □ 委托工業設計機構□ 其他（請註明）_____________

□ 加強科技研發，執行形式： □ 自行研發 □ 研發外包 □ 與國際研發機構合作□ 與內地研發機構合作 □ 與香港研發機構合作□ 其他（請註明）_____________

13.2008年以來，貴公司的市場拓展情況：（可選多項）

國際市場

□ 保持一貫市場策略 □ 加強國際市場 □ 減少國際市場

目前主要市場：（可選多項）

□ 歐美 □ 東歐 □ 俄羅斯 □ 中東 □ 非洲 □ 南美 □ 日韓□ 澳紐 □ 東盟 □ 南亞 □ 其他（請註明）

正拓展的新市場：（可選多項）

□ 歐美 □ 東歐 □ 俄羅斯 □ 中東 □ 非洲 □ 南美 □ 日韓□ 澳紐 □ 東盟 □ 南亞 □ 其他（請註明）

內銷市場

□ 不會考慮開展內銷，原因：_______________________ □ 打算短期內開展內銷

□ 保持內銷 □ 加強內銷 □ 減少內銷（已內銷 ____________年，並填以下）

內銷渠道：（可選多項）

□直銷消費者

□零售

□批發

□代理

佔內銷比例____%

佔內銷比例____%

佔內銷比例____%

佔內銷比例____%

□銷售予下游廠商

□特許經營

□網上購物平台

□其他（請註明）

_______________

佔內銷比例____%

佔內銷比例____%

佔內銷比例____%

佔內銷比例____%

覆蓋地區：（可選多項）

□廣東 □華南（廣東省以外的福建、江西、廣西）

□華東（如上海、江蘇） □華北（如北京、天津） □東北（如吉林、遼寧）

□華中（如湖南、湖北） □西南（如重慶、雲南） □西北（如新疆、青海）

14.過去一年內，貴公司的全球總銷售額為多少？

□ 500萬港元以下 □ 500萬 - 1,000萬港元 □ 1,000萬 - 5,000萬港元

□ 5,000萬 - 1億港元 □ 1億 - 10億港元 □ >10億港元

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15.貴公司在哪裡進行科研和設計活動？（若無，請轉答第18題）

□ 全部在香港 □ 主要在香港進行（研發設計活動比例 ＿＿＿＿＿＿＿ %）□ 全部在內地 □ 主要在內地進行（研發設計活動比例 ＿＿＿＿＿＿＿ %）□ 全部在其他國家地區 □ 主要在其他國家地區（請註明地區 __________ 比例＿＿＿＿ %）

16.過去一年內，貴公司用於產品研究及開發的開支佔營業額的比率為多少？

□ 低於1% □ 1 - 3% □ 3 - 5%□ 5 - 7% □ 7 - 10% □ 等於或大於10%

17.過去五年，貴公司有否接受內地或香港政府在研發或創新方面的資助?（若無，請轉答下題）

□ 內地政府 _____________人民幣 □ 香港政府 ____________港元

18.2008年以來，貴公司的產業轉移情況（可選多項）

□ 沒有轉移□ 已轉移至廣東其他地方（請註明）___________ 轉移年份 ______ （□ 部份轉移　□ 全部轉移）□ 已轉移至內地其他地方（請註明）___________ 轉移年份 ______（□ 部份轉移　□ 全部轉移）□ 已轉移至其他國家（請註明）_______________ 轉移年份 ______（□ 部份轉移　□ 全部轉移）□ 已回流香港 _______________________________ 回流年份 ______ （□ 部份回流　□ 全部回流）

第四部份：企業的中長期發展方向和挑戰

19.貴公司在未來三至五年的主要經營策略？（可選多項）

□ 維持現狀 □ 加強品牌建立 □ 加強產品設計□ 加強科技研發 □ 加強自動化生產 □ 加大投資，如收購兼併□ 出售業務 □ 計劃結業 □ 減少製造，轉型至服務業□ 計劃產業轉移（□ 廣東省 □ 廣東以外的內地省份 □ 其他國家（請註明）__________）□ 計劃回流香港（□ 全部 □ 製造活動 □ 研發活動 □ 其他（請注明）______________）

20.未來三至五年，貴公司的發展方向：

增加 不變 減少 未決定

在珠三角的整體投資規模 □ □ □ □

市場發展方向－ 國際市場

發達國家市場（如歐美日） □ □ □ □新興國家市場（如東盟、中東） □ □ □ □發展中國家市場（如南美、非洲） □ □ □ □

－ 內銷市場 □ □ □ □研究開發及設計活動 研究開發及設計的僱員人數 □ □ □ □ 研究開發及設計開支 □ □ □ □

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21.貴公司在珠三角經營面對的挑戰？（請選擇五項最大挑戰）

□ 融資條件不足 □ 知識產權受侵犯 □ 整體勞動力不足

□ 缺乏研發技術人才 □ 缺乏管理人才 □ 勞工法規嚴苛

□ 勞工成本上升 □ 土地不足和成本高 □ 能源不足和成本高

□ 物流成本高 □ 環保條例收緊 □ 海關效率低／收緊查核

□ 政府稅費多 □ 接班/承傳出現斷層 □ 其他（請注明）_____________

22.貴公司認為製造活動回流香港的挑戰？（請選擇五項最大挑戰）

□ 營商環境不穩定 □ 土地不足和成本高 □ 勞工成本高

□ 能源不足和成本高 □ 融資條件不足 □ 產業配套不足

□ 整體勞動力不足 □ 缺乏研發技術人才 □ 缺乏管理人才

□ 缺乏工業發展和支援政策 □ 政府規管越來越繁複 □ 其他（請注明）_____________

第五部份：政府支援措施

23.哪些是內地政府最需要提供的措施，改善當地的營商環境？（請選擇五項最重要措施）

□ 減免稅負和地方行政收費 □ 放寬及簡化外匯管理 □ 改善融資信貸環境

□ 保障勞工供應 □ 加強產業人才的培訓 □ 改善產業配套條件

□ 對研發提供優惠和補貼 □ 加強知識產權保護 □ 改善政府效率和透明度

□ 簡化進入內銷市場的程序 □ 簡化海關的通關程序 □ 其他（請注明）_____________

24.哪些是香港政府最需提供的措施，推動香港工業的長遠發展？（請選擇五項最重要措施）

□ 增加工業用地 □ 推動和鼓勵科技發展 □ 對研發提供稅務優惠

□ 加強工業人才培訓 □ 改善產業配套條件 □ 鼓勵創業

□ 加強支援中小企融資 □ 協助企業發展內銷 □ 協助企業發展國際市場

□ 放寬引入外勞的限制 □ 加強與內地政府合作 □ 其他（請注明）_____________

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We would like to express our sincere gratitude to Dr Thomas Chan and his team from the China Business

Centre of the Hong Kong Polytechnic University (PolyU) for their professionalism and contribution in analysing

the research data during the course of Made in PRD Study IV, as well as to Research Fellow Dr Justina Yung

for conducting in-depth focus group meetings with key manufacturers and industrialists to thoroughly assess

the current situation and identify future development paths for Hong Kong industries.

We wish to thank the Institute for Entrepreneurship of PolyU and Prof Feng Xiaoyun from the South China

Business College of the Guangdong University of Foreign Studies for carrying out the questionnaire survey

in Hong Kong and in the PRD respectively.

Our gratitude also extends to the many manufacturers who responded to the survey, as well as the

industrialists whom we visited and interviewed. Their resourcefulness and insights contributed largely to the

success of the research project.

Last but not least, without the generous support from our sponsors, HSBC Commercial Banking and PolyU,

the project could not have been completed. We wholeheartedly thank them for their commitment and support.

The Federation of Hong Kong Industries

October 2015

Acknowledgements

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Website: http://www.industryhk.orgEmail: fhki@fhki.org.hk