6 Dec 1999
HONG KONG IN COMPETITION: ON TRACK AND RUNNING THE RACE
[Keynote Address by Dr. Victor Fung, Chairman, Hong Kong Trade Development Council, at the American Chamber of Commerce Trade & Investment Committee Competitiveness Series Luncheon, Furama Hotel Hong Kong, given on 6 December 1999]
Good afternoon, ladies and gentlemen. I am honored to round out this series on Hong Kong's competitiveness sponsored by the AmCham Trade & Investment Committee.
AmCham was one of the first organizations to highlight competitiveness as a key issue for post-handover Hong Kong and emphasize that competitiveness goes beyond cost cuts to include larger issues such as open competition and quality of life. Your consistent promotion of these issues and your active engagement with Hong Kong businesses play an important part in shaping our community.
It has been an eventful two years since I spoke at your last series on Hong Kong's competitiveness, and I think it would give us some perspective to recap some of the points I addressed back then.
In December 1997, the two top issues were the high cost of working and living in Hong Kong and the appropriate response to severe currency and stock market fluctuations hitting Asia. I agreed then that Hong Kong needed to work on reducing costs, but for competitiveness I argued we also needed to maximize the unique value delivered for those costs. I doubted the benefits of currency devaluation outweighed the risks at that time.
I pointed out that Hong Kong had three fundamental competitive advantages to build on:
-breadth and depth in the services sector;
-a position as the control center of globally dispersed manufacturing networks; and
-close business integration with the Chinese mainland.
I highlighted that Hong Kong was becoming a metropolitan economy interacting with the Chinese hinterland, and emphasized the importance of our SMEs, their strongly transnational reach and their role as generators of business.
Finally, I suggested that Hong Kong should set its sights on being one of a "handful of financial centres of global importance, the brain of a manufacturing heartland--of one billion people or more--a regional centre for multinationals in Asia, as well as a major transportation and logistics hub."
The opening session of this year's competitiveness series addressed the question, "Two Years Later--Are We On the Right Track?"
In my view, the answer is yes. To pick up the analogy, Hong Kong is not only on the right track, we have already begun competitively to run the race on that track. And with the prospect of China acceding to WTO, the pace of the race is picking up.
What has become clearer over the last two years is the nature of the race we are running. It requires Hong Kong to be a global integrator, an information hub, and a world city.
2. GLOBAL INTEGRATOR
Hong Kong is realizing in very tangible ways the potential and the impact of closer integration with the Chinese mainland. At the same time, we are realizing how to make "one country, two systems" work to allow economic integration while preserving our autonomy and uniquely different competitive advantages.
I want to focus on the way Hong Kong is competitively implementing this economic integration.
Hong Kong today acts as much more than a gateway for trade with China. As a trade intermediary, we do more than simple "market brokering", warehousing and distribution. We integrate and coordinate rationalized production chains reaching into the Chinese mainland and other low-cost production sources. We also provide high value-added services, such as design, marketing and trade services, at the front and back ends of the production and distribution process.
Let me use my family's trading business to illustrate one application of this model. Less than 5% of our business now derives from "market-clearing". Our clients often know product sources as well as we do, but they look to us mainly to devise and manage a broad, international production and marketing program. For example, for an order of shirts, we can dissect the production process from the creative design phase through yarn sourcing, weaving, sewing, finishing and distribution, at each stage optimizing multiple suppliers and locations while ensuring the process and end-product is as consistent, integrated and timely as if there had been one source. Our added value goes beyond market contacts and market information to our ability to execute and integrate.
Most of Hong Kong's broad base of small and medium enterprises have evolved to play, in one way or another, similar value-added intermediary roles. They have had to do so in order to compete effectively as China opens to global markets and as global markets increasingly demand customization, innovation, flexibility and speed.
Collectively, Hong Kong has moved up the value chain as a trade intermediary. We have become an integral part of both the trading and the execution process. As we extend our reach, Hong Kong's infrastructure, knowledge and talent make Hong Kong a uniquely effective and efficient base location from which to orchestrate everything. Hong Kong has become much more than the traditional "middleman": we have become "the Global Integrator".
This is why I believe that Hong Kong will continue to play a pivotal role in China's trade even after China accedes to WTO. Yes, we will face greater competition in that market, with many international companies dealing directly with China. But Hong Kong will continue to bring important competitive advantages to the table--as long as we are quick to build on our integral roles on the mainland and globally, and as long as we maintain a critical mass of world-class talent and information based in Hong Kong.
Essentially, by being more than a gateway, Hong Kong has expanded the limits of our role beyond our territory's physical boundaries. We have also expanded the nature of our role beyond purely physical trade.
Let me be clear that Hong Kong is by no means giving up its competitiveness as a physical trade hub. Hong Kong still handles almost half of all trade to and from the Chinese mainland. With the new Hong Kong International Airport, our accessibility as a transportation and air cargo center is unrivalled in the region. And we are undertaking initiatives which will help us compete effectively with other trade centers on the Chinese mainland and enable us to capture new trade opportunities created by technology.
3. INFORMATION HUB
A second and related aspect of our competitive race is the importance of information. Hong Kong's competitiveness must take into account our broader role as a global information hub--a center for the free flow of ideas and know-how and a platform for the exchange of global information--and our role as a conduit for information in China.
As the Information Age spreads throughout Asia, information is the new currency. Adding value in this market requires an ability to create, dissect, repackage and apply information, and the quality of our human resources becomes an important dimension to productive capital.
In today's Internet parlance, Hong Kong has "content". We are rich with business information, news connections, market intelligence, practical experience, relationship networks, business contacts, and deal opportunities. With a critical mass of international information and talent based in Hong Kong, the scope of our content is local, regional and global.
Just as importantly, Hong Kong has the unrestricted expertise to prepare, reformulate, apply and distribute such content. We manage, process, and distribute value-added information about the Chinese mainland to the world. Equally, we are a key hub and provider for mainland enterprises seeking information and analysis on overseas markets.
Without a doubt, the way forward requires leveraging on advances in information technology. In fact, the pace of advance probably gives Hong Kong only a few years to bring our information technology infrastructure to top competitive condition. This has been a key rationale behind the Hong Kong government's proactive approach to development of IT. Such initiatives are designed to keep us running as fast as is necessary in the information game--but the government clearly remains a coach in the game, not a player.
Since information is a key driver of modern service economies, Hong Kong's position as a global information hub gives us significant strategic advantages as a major service provider in the region.
Hong Kong is using its competitive advantages particularly to provide services to China in areas beyond merchandise trade. These services are oriented both inwards to Chinese end-customers, as well as outwards to overseas end-customers.
Services account for less than 40% of China's GDP, a figure lower than that of most developing countries. Hong Kong's sophisticated service sector, which contributes 84% of Hong Kong's GDP, is well-positioned to help fill in the gap for services, as well as to help China develop its own service industries.
Hong Kong is beginning to rationalize the way we deliver such services. The sheer magnitude of opportunity for Hong Kong service industries as the Chinese mainland develops and opens up, together with the very personal nature of service delivery, makes this rationalization inevitable for Hong Kong.
As China opens up--even in advance of progress on WTO accession--and as Hong Kong businesses "reach in" towards the Chinese mainland, Hong Kong is quickly evolving into a dynamic information hub anchoring rationalized networks of service providers extending throughout China and the region.
4. WORLD CITY
The third aspect of our competitive race entails Hong Kong's unique position of being at once a part of China and a world city. Because of our status as a Special Administrative Region, we are the only city in China with such broad latitude to be a world city. Paradoxically, strengthening our attractiveness as a world city is a crucial component of playing an expanded role in China's service and information economy.
Hong Kong's accessibility as a transportation and air hub makes us a nexus for the movement of people delivering services.
Equally important, however, staying competitive as a world city means Hong Kong must proactively enhance, build and promote its international appeal and stature. This includes addressing intangibles such as creating business opportunities of global interest, attracting a critical mass of multinational talent, recalibrating our education system to nurture creativity, and maintaining world-class environmental standards; and it includes addressing more tangible aspects such as rule of law, business frameworks and procedures, communications, transportation and infrastructure.
5. FIT FOR THE RACE
Given the nature of the race, how fit are we to run it?
First, the three fundamental competitive advantages I pointed out two years ago are even more relevant today. Hong Kong's services sector--from financial services to professional services and telecom/Internet services--is dynamic and growing both at home and on the mainland. We continue to be a competitive regional headquarters and China base for multinational corporations--especially for medium-sized MNCs as they explore new market opportunities in China. And the strong bridgeheads in the mainland that Hong Kong companies have established in the past twenty years give us a strategic headstart in manufacturing, retail, trading, distribution, and services as China opens to global competition.
These advantages continue to be built on by Hong Kong's broad base of small and medium enterprises, which bring diversification, agility and flexibility to the competitive race.
Let us look next at the cost of doing business in Hong Kong. All in all, as to value for cost, I believe Hong Kong is currently competitive. World-class cities clearly attract a premium for strategic advantage, and it is not realistic to expect Hong Kong simply to be "cheapest". However, we also cannot be complacent in continuing to hone our value and costs. We must keep pace with the developing value and cost of our competitors.
In the wake of Asia's financial crisis and economic slump, market forces have actually driven many of Hong Kong's business costs sharply downward. As the Asian Wall Street Journal reported on November 24, deflation has brought down rents, salaries and other prices, and begun to reshape our productivity.
Prime office rents in Hong Kong are now more competitive with the region.
Hong Kong's labor costs have decreased less dramatically, with businesses seeming to focus on increased output and reduced employment. Some businesses have used the economic readjustment to uptier the quality of their human resources.
The issue of value and quality for cost is most relevant to labor--both in absolute terms for Hong Kong and other world cities, and in relative terms when comparing to regional competitors. I believe Hong Kong currently has an advantage as to overall labor value; but we need to move quickly to strengthen this advantage through forward-thinking and aggressive education, retraining, and management. This clearly requires action from our community as a whole.
6. STRATEGY FOR THE RACE
As China continues to open its markets further, I believe Hong Kong's immediate strategy for competing should focus on three fronts. We need to consolidate our position as a global information hub by reinforcing Hong Kong's critical mass of talent and information. We need to act quickly to realize the "first-in position" advantage of our networks in the mainland. And we need to build up Hong Kong--particularly our services--as a "brand" representing quality, value and "up-to-date-ness".
It is important to recognize that the nature of our race is a team event. Hong Kong will lead as an integrator, a service and information platform, and a global hub. As such, we cannot run the race alone. Our future competitive success requires us to build competitive advantage by maintaining "critical mass" and effective global networks.
7. SPECIAL IMPACT OF INFORMATION AGE
To compete effectively in the Information Age, Hong Kong must do more to nurture our homegrown human resources. Hong Kong needs to lead the trend in education and retraining. We can extend this role to become a business education hub for the Chinese mainland.
But the importance of nurturing human resources goes beyond education. Because the Information Age thrives on creativity, participation, accessibility, and interaction, economic progress in this age involves more than "the bottom line". Our business policies have to tie in the social, political, cultural, environmental and aesthetic aspects of our community. This is an important subtext running throughout AmCham's programs.
In this vein, I believe Hong Kong must lead competitively in Asia, not only in terms of global connections and free exchange, but also as an example for calibrating economic progress beyond "the bottom line". With your help I believe Hong Kong will meet all these competitive challenges.
The race is on and the pace has just picked up. Hong Kong looks forward to running with you at the head of the pack.