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Extending the Supply Chain with Added Value,
TDC Chief Economist Urges Hong Kong

March 7, 2008 - Growing offshore trade will enhance rather than diminish Hong Kong's role as a provider of high-quality trade-supporting services, while some Hong Kong companies choose to expand their activities beyond manufacturing, according to survey studies just released in the latest issue of Hong Kong Trade Quarterly by the Hong Kong Trade Development Council (TDC).

To depict the latest developments in Hong Kong's evolving manufacturing and trading sector, TDC has, on a regular basis, conducted two separate but related studies. The first study on offshore trade and production is undertaken every three years. Another one on OEM, ODM and OBM is conducted every four years.

Offshore Trade and Investment

According to the latest offshore trade survey, the seventh of its kind since 1988, among mainland-origin exports managed by Hong Kong, offshore trade made up 56% of the total export value of the respondents in 2006, compared to just 18% in 1988.

Since the 1980s, Hong Kong manufacturers have been shifting their production and trade-related activities across the boundary for lower production costs. According to our latest survey, 91% of the respondents had manufacturing bases and sourcing origins on the mainland in 2006, 26% in Hong Kong, while 28% in other regions.

In tandem with the expansion and improvement in China's port facilities, there has been a rising trend of Hong Kong manufacturers shipping their goods to overseas markets directly from the mainland or transhipping via Hong Kong (referred to as offshore trade).

"Not surprisingly, lower transportation costs are the major reason for direct shipment, as the mainland's port facilities continue to expand and improve," says TDC's Chief Economist Edward Leung.

On the other hand, the reasons for Hong Kong companies choosing to re-export their goods through Hong Kong are mainly related to the quality of service.

Mr Leung says the decision on shipping arrangements depends on a combination of several factors, including price, safety, time, speed, schedules, types of goods, standard of service and supporting facilities.

For goods with high value such as electronic components or jewellery, transportation costs may be of little concern to shippers compared with the risk of delay or loss. In such a case, shipment by air using Hong Kong's airport may be preferred.

According to Mr Leung, despite the fact that increasingly more logistic supports are undertaken outside Hong Kong, Hong Kong companies will still use Hong Kong as an operation centre for the coordination and management of their businesses, and Hong Kong's role as a provider of high-quality trade-supporting service would not diminish.

There were more respondents saying that their overall management and planning, finance and accounting, product design and development, sales and marketing, quality control, and trade financing / insurance arrangement of their Hong Kong office will increase than those who expected decreases.

In particular, 47% of the respondents expected their sales and marketing functions in Hong Kong will increase.

OEM, ODM and OBM

Apart from shifting production across the boundary to control costs, some Hong Kong companies choose to expand their grip along the value chain, by moving towards front- and back-end activities such as design, wholesale, retail and brand management, which usually entail higher added value.

As a result, a lot of OEM companies have entered into ODM, while some Hong Kong companies further develop their brands and distribution networks, stepping into the back-end of the value chain, by engaging in OBM.

According to a recent survey conducted by TDC, the third of its kind since 1999, there were 83%, 61% and 40% of responding companies engaged in OEM, ODM and OBM business, respectively, about the same as in 2003.

Mr Leung adds that Hong Kong companies definitely have the edge in developing ODM businesses. Our respondents indicated that Hong Kong's free flow of information helps companies discern global and product trends, considered key in a successful ODM business.

Our respondents also said that Hong Kong companies have the edges in developing OBM business. They have a good reputation in the global market, which suggests that they have performed well in many aspects. They should capitalize on the opportunities arising from China's blooming consumer market.

Evidently, some companies take ODM as a transitional step towards brand development. From there, they can then acquire the new expertise required for OBM.

Mr Leung advises Hong Kong companies to extend their supply chain with added value, by involving in activities beyond manufacturing.

Mr Leung adds that prototype creation, detailed product design and development of product concepts, the core activities of ODM, should prove easier for Hong Kong companies to master than product development, brand building, marketing and distribution, the core activities of OBM.

In order to avoid over-reliance on overseas importers, achieve product differentiation and nurture customer loyalty, however, Hong Kong exporters and manufacturers should further engage in OBM to capture greater profits by building their own brand names.

After all, along with worldwide competition, product safety concerns and environmental consciousness, Hong Kong exporters and manufacturers, whether in OEM, ODM or OBM, must meet the challenge by shifting the whole value chain upward.

Media Enquiries
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About the TDC
Established in 1966, the Hong Kong Trade Development Council (TDC) is the international marketing arm for Hong Kong-based traders, manufacturers and service providers. With more than 40 offices worldwide, including 11 in the Chinese mainland, the TDC promotes Hong Kong as a platform for doing business with China and Asia. The TDC also organises trade fairs and business missions to connect companies with opportunities in Hong Kong and the mainland, while providing information via trade publications, research reports and online. For more information, visit www.tdctrade.com


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