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Guangdong: Hong Kong service opportunities amid China’s “going out” strategy

The Third Plenary Session of the 18th Central Committee of the Communist Party of China held in November 2013 proposed that the country should open up internally and externally, and at the same time adopt the strategies of “going out” and “bringing in”. This is essentially to help the country better adjust to economic globalisation, while facilitating a more efficient allocation of resources, both domestically and within the international market.

Since the start of the “12th Five-year Plan” period (2011-2015), the Chinese Government has been actively building platforms to encourage Chinese enterprises to “go out” further. The objective is to drive their upgrade and transformation not only by stepping up their outward foreign direct investment (FDI) but also by facilitating their cooperation with foreign partners. In reality, due to the ever-changing global business environment, mainland enterprises have been raising their competitiveness in earnest since years ago. Through “going out” they hope to develop sales networks in overseas markets, while by “bringing in” the advantages of their partners they want to further develop the booming domestic market.

China has already become the world’s third-largest source of outward FDI while Guangdong is at the forefront of China’s foreign trade and economic cooperation initiatives. According to a survey conducted by HKTDC Research, most Guangdong enterprises would like to raise their competitiveness by increasing investment. Their priority investment areas include the development of their own brands and the enhancement of product design capabilities. Through “going out” they would like to seek such services support as brand design, product development, marketing, business consultancy, as well as financial and professional services in banking/financing and law/accounting.

These enterprises are most interested in seeking such professional services, to look for business partners or to carry out related commercial activities in Hong Kong. As the mainland’s key “going out” destination, Hong Kong is now channelling more than half of the mainland’s outward FDI. Mainland enterprises, particularly Guangdong’s, are now stepping up their “going out” and “bringing in” efforts. Hong Kong’s service suppliers will inevitably get more business opportunities. 

Photo: Enterprises seeking professional services support
Enterprises seeking professional services support

 

A leading source of global FDI

China’s outward FDI flows reached an all-time high of US$87.8 billion in 2012 (up 17.6% year-on-year), making it the world’s third-largest source of such funding. Such statistics are seen by many as clear indications that mainland enterprises are increasingly keen to “go out” in recent years. 

Chart: Leading sources of global FDI flows by country and region 2012
China becomes the world’s third-largest source of FDI flows.
* Amount of outward FDI flows
Source: 2012 Statistical Bulletin of China’s Outward Foreign Direct Investment; World Investment Report 2013, UNCTAD

 

During 2002-2012, China’s outward FDI flows grew at an average annual rate of 41.6%. In particular, since 2008, the amount of its outward investment has exceeded US$50 billion annually. Though China had a late start when compared with other developed countries, the cumulative stock of its outward FDI reached US$531.9 billion at the end of 2012, ranking 13th globally. Furthermore, some 16,000 mainland enterprises/investors have set up offshore investment companies in 179 countries and regions around the world1

Chart: China outward FDI flows
China’s outward FDI flows grew at an average annual rate of 41.6% in 2002-2012.

* Amount of outward FDI flows

Source: 2012 Statistical Bulletin of China’s Outward Foreign Direct Investment

 

The scope of China’s outward investment is very extensive. Sectors with more than US$10 billion in investment stock now include leasing and business services, finance, mining, wholesale and retail trade, manufacturing, transport/storage/postal services and construction. This “going out” of mainland enterprises has not been limited to mergers and acquisitions or the sourcing of raw materials/key parts and components from overseas. It has also seen Chinese companies undertaking joint venture technology projects with overseas businesses and launching co-operative initiatives with a number of foreign brands.

Joint emphasis on overseas and domestic markets

The “going out” strategy came as a response to events in the ever-changing global business environment. With many overseas markets remaining weak, exports from the mainland have been, inevitably, constrained. The problem has been compounded by a continued appreciation of the Renminbi and rising domestic costs of land and labour. This has seen many mainland enterprises adopt a number of different “upgrade and transformation” strategies in order to increase their competitiveness and broaden their profit margins. This has ensured that the “going out” strategy is not restricted to developing sales networks in overseas markets, but also involves the “bringing in” of foreign partners in a bid to further develop domestic markets.

Guangdong at the forefront of outward FDI

Guangdong has always been one of the mainland’s key players in terms of external trade and economic co-operation. It has also festablished itself at the forefront of the country’s FDI initiatives, particularly in the non-financial sectors. In 2012, Guangdong’s outflow of non-financial sector FDI was US$5.3 billion, while its year-end stock of non-financial FDI amounted to US$25.2 billion. These impressive returns represented the largest source of outward non-financial FDI among all of the mainland provinces. 

Table: China’s outward FDI by province
* Non-financial sectors
Source: 2012 Statistical Bulletin of China’s Outward Foreign Direct Investment

 

Given its proximity to Guangdong, Hong Kong has, understandably, been the key investment route for the mainland’s outward FDI (both financial and non-financial). In 2012, Hong Kong channelled 58.4% of the mainland’s FDI outflow and accounted for 57.6% of the year-end outward FDI stock.

Sourcing external “going out” support

In a bid to identify the “upgrade and transformation” strategies of Guangdong companies, HKTDC Research commissioned a survey at the SmartHK fair held in Guangzhou city in August 2013. As well as seeking to identify the “going out” policies of the enterprises in attendance, the survey also focused on their professional services requirements.2

 

Photo: ’Think Global, Think Hong Kong’ CEO Forum held at SmartHK
"Think Global, Think Hong Kong" CEO Forum held at SmartHK

 

•  Developing own brands and raising product design capabilities

The vast majority of respondents indicated that they had considered increasing (or had already increased) their investment in upgrading and transforming themselves as a way of boosting their competitiveness. Overall, developing and promoting their own brands (52%), while upgrading product design and R&D capability (45%), were the two main investment priorities of the mainland enterprises surveyed.

The respondents also said they will invest in strengthening quality control and management (33%) and upgrading production technology (29%). Some (25%) also said they will invest in using technologies such as Internet of Things (IoT) and RFID to enhance logistics management of materials and products. 

Chart: Any plans to increase investment?/Areas where mainland enterprises will increase investment
Developing and promoting their own brands, while upgrading product design and R&D capability are the main investment priorities of mainland enterprises.

Source: HKTDC survey


n = 211 (multiple answers were allowed)
# Mainland enterprises which will increase investment (or consider doing so) in order to raise competitiveness over the next one to three years
* Including investment in the use of technologies such as Internet of Things (IoT) and RFID to enhance logistics management of materials and products

Download excel 

•  Equal emphasis on mainland and overseas markets

According to the survey, many respondents have already begun to adjust their business and operational strategies and have made corresponding investments. The main strategy of these enterprises was to nurture the development of the domestic markets (48%), while 31% and 29% of the surveyed enterprises indicated an intention to further develop their trade in the overseas mature markets and the overseas emerging markets respectively.

In addition, the strategy of some enterprises is to develop new products related to their existing business (33%), while 22% indicated that they will venture into new business areas and tap opportunities in businesses that are not very much related to their existing ones. 

Chart: Any plans to adjust strategies?/Areas where mainland enterprises will adjust business
Majority of the enterprises surveyed place equal emphasis on mainland and overseas markets.

Source: HKTDC survey


n = 211 (multiple answers were allowed)
#  Mainland enterprises which will adjust or invest in business & operating strategies (or will consider doing so) over the next one to three years
*  Including expanding into related upstream (parts & components, raw materials) or downstream (retailing) businesses

Download excel

•  Targeting Hong Kong and overseas service suppliers

In order to implement their investment and business adjustment plans, most enterprises surveyed indicated a need to seek support from external service providers. The most sought-after services were those related to product development and design (54%), with brand design and promotion (53%) coming a close second. Overall, around 60-70% of the enterprises surveyed indicated a wish to obtain such services from Hong Kong or from overseas.

Other than these, the enterprises will also source services related to marketing (47%) and business consultancy/corporate management (41%). They would also like to source from related service providers professional services in law, accounting and due diligence investigation (40%) as well as financial services such as banking, financing and project valuation (39%). Moreover, more than half of them said they will use such services provided by Hong Kong or overseas suppliers. 

Chart: Will consider or already using services from other companies/Any plans to use Hong Kong
Mainland enterprises are most keen on sourcing services in brand design and promotion strategies and services in product development and design.

Source: HKTDC survey


n = 217 (multiple answers were allowed)
# Mainland enterprises wishing to source services from Hong Kong or overseas to drive upgrade and transformation over the next one to three years
* Including services such as due diligence investigation
** Including financial services such as banking, financing and project valuation

Download excel

•  Seeking “going out” partners

91% of the enterprises said they are “going out” to seek business partners. Their main objectives are to cooperate with foreign brands (37%) and to carry out technological cooperation with overseas institutions (34%). Some would also like to expand their overseas sales network through acquiring minority equity stakes in foreign companies (27%) and use “going out” to boost the procurement of foreign high-tech equipment, raw materials and key parts and components (24%).

Meanwhile, a smaller proportion of the enterprises (less than 20%) are interested in direct acquisitions of foreign brands and foreign R&D/production/environmental protection technologies. They may also acquire foreign companies or invest in greenfield projects/start-ups. 

Chart: Interested or already seeking?/Business activities for seeking business partners overseas
Cooperating with foreign brands, entering into technological cooperation and expanding sales in mainland and overseas markets are the main reasons for “going out”.

Source: HKTDC survey


n = 212 (multiple answers were allowed)
#  Mainland enterprises which are already seeking business partners overseas or carrying out related business activities overseas or considering to do so
*  Including technological cooperation in R&D, production, environmental protection, etc
**  Including sourcing of raw materials and key parts and components
*** Including business activities related to trade marks and licensing
^  Including investing in start-ups, setting up sales networks or securing raw materials supplies from overseas
^^  Including acquiring/obtaining technologies related to R&D, production, environmental protection etc (including activities relating to patents and licensing, etc)

Download excel

•  Hong Kong: the preferred sourcing location for mainland enterprises

When it comes to contracting overseas support, looking for business partners or carrying out related commercial activities, most enterprises (65%) indicated a preference for sourcing such services in Hong Kong. This finding coincides with the aforementioned fact that Hong Kong remains the key destination for the mainland’s outward FDI. Aside from Hong Kong, other preferred sourcing destinations included the US (35%), Taiwan (25%), Singapore (20%) and Japan (18%). 

Chart: Destinations for seeking services and business partners
The majority of enterprises expressed interest in sourcing overseas services and business partners from Hong Kong.

n = 217 (multiple answers were allowed)

Source: HKTDC survey

Download excel

Accelerating efforts

The mainland is accelerating its efforts to encourage “going out” initiatives among its enterprises. Alongside this, there is the expectation that the concomitant “bringing in” strategy will enhance the overall competitiveness of mainland enterprises in both the domestic and international markets.

In response to the increased competition, many Guangdong enterprises are also putting increased priority on securing the services of various external bodies to boost their own “upgrade and transformation” initiatives. Hong Kong, long-established as the mainland’s key “going out” destination, is also seen as the prime location for those mainland enterprises (particularly in Guangdong) that are keen to secure the services of external suppliers and business partners. This trend will certainly prove hugely beneficial for Hong Kong service suppliers and inevitably provide an array of business opportunities.


 

1Source: 2012 Statistical Bulletin of China’s Outward Foreign Direct Investment
2The SmartHK fair was organised by the HKTDC and held in Guangzhou from 28-29 August 2013. During the “Think Global, Think Hong Kong” CEO Forum and two other “going out” seminars, questionnaire-based surveys were carried out by HKTDC Research. A total of 297 valid questionnaires were successfully collected, of which 217 were filled out by mainland enterprises (including traders, manufacturers and services providers). The survey results mentioned below only included the opinions of these 217 mainland enterprises.
Content provided by Picture: Wing Chu
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