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Verging on a New Era of Growth

CEPA creates new opportunities for Hong Kong and the Pearl River Delta, but a number of key concerns need to be solved if the agreement is to lead to a new era of growth for the region

A manufacturing perspective

A two-year study entitled "Made in the PRD," found that an estimated 15 million people are employed in the manufacturing sector in Guangdong Province. Out of that, 10 million are employed by Hong Kong-based companies, 70 percent of which are Hong Kong companies.

"These are amazing numbers," says Dr Victor Lo, Chairman and Chief Executive, Gold Peak Group. "If you look at the peak era of manufacturing in Hong Kong in the 1980s, about 900,000 people were employed in the sector. Today the number is less than 200,000. But across the border we employ 10 million people."

To put the numbers into perspective, Dr Lo said the manufacturing sector of South Korea in its heyday employed about 3.5 to 4 million people, while Taiwan employed about 2.5 million people. He estimates that the combined GDP of the Greater PRD area is approaching the size of the Taiwanese economy, and in five years time will be approaching that of the South Korean economy.

Admittedly, Guangdong's 15 million strong army of manufacturers still makes very low-end products, but that is rapidly changing. The PRD may be the workshop of the world, but in the next five to ten years, Dr Lo estimates that factories in the PRD will be able to make any product that can be made in Taiwan or South Korea.

But what Dr Lo says is the most exciting aspect of the PRD is the huge infrastructure, talent and support industries that have been created in the region over the last 20 years, which will also drive its future growth.

"In my opinion, the PRD is the world's most exciting region," he says. "and we have never been more bullish about the PRD than now."

For CEPA, Dr Lo says the agreement is not a magic pill that will be able to turn Hong Kong's economy around overnight. But he does expect it will encourage more companies to invest in Hong Kong to take advantage of the PRD.

Just how and if they will take advantage of CEPA is still the great unknown, because CEPA means different things to different companies and sectors.

For pharmaceutical industries, for example, their products can now enter China under reduced tariffs. But CEPA does not answer all of their questions. They still have to go through all the control and regulatory hurdles that China imposes on drug imports.

Companies in the watch and jewelry sector are enthusiastically looking at how they can use the agreement, but to do so they also need to raise the level of their product development, design and quality control.

These are challenges that could dilute the attractiveness of the PRD and sway investors to sink their money instead into the Yangtse River Delta (YRD). Dr Lo says he believes both deltas will be very successful and important manufacturing bases in China, but the competition lies in who does the value-added functions better, not who has cheaper land and cheaper workers.

"All of China and all of Asia will very soon learn to do low-cost manufacturing," he says. "But who will do better in technology, product design, sales and marketing, and brand promotion? Those who do will be the winners."

Achieving this will require talent. One of the weaknesses of the Greater PRD -- including Hong Kong -- is the size and quality of the region's combined university systems. Guangdong still cannot compete with the YRD in terms of the quantity and quality of students it produces, he says.

The development of talent must also go beyond thinking that all we need is universities to churn out star students. Enterprises need to invest much more in educating the workforce.

Of course, companies in the PRD can hire the best and the brightest students from the north, says Dr Lo. But once they start work here, they stop advancing because adult education in the region is backward.

Hong Kong also needs to be more aggressive in seizing opportunities. He cited the border crossing between Hong Kong and Shenzhen as a classic example of how numb our creativity can sometimes be.

"We have the highest daily volume of traffic across any border in the world. Therefore, we should also have the world's largest and most modern border crossing," he argues. "We should be developing the latest technology to handle this flow but we are not even talking about it."

CEPA will help attract more talent to work in the PRD, but he doesn't expect that it will result in many factories relocating to Hong Kong. However, it will encourage a lot of foreign companies to start in China, especially SMEs coming to Asia for the first time, by using Hong Kong as a springboard.

Retail and distribution

In 1979, when Deng Xiaoping opened up China, there were visions of selling a billion toothbrushes in the country, because if you could sell just one toothbrush to every person in China, then you would become rich.

But the opening up was limited to China allowing the world to use its greatest resource -- cheap labour. As a result, two business concepts about China have emerged. One is China as the world's factory, and the other is China as the world's potentially largest market.

With China's entry into the WTO 2001, the dream of the biggest market is starting to come true, says Dr William Fung, Group Managing Director, Li & Fung Ltd.

He acknowledges that some companies have already been doing business in China for years, so they are not overly excited that much will change. But For Dr Fung, he believes that when China starts to implement its obligations as a WTO member, together with CEPA, then this will present a new era of opportunity and growth for Hong Kong.

"On the services side, I think that CEPA and the WTO opening measures for the Chinese consumer market is as important for Hong Kong as the 1979 Deng Xiaoping opening of the manufacturing sector," he told the business summit audience. "The way we have expanded and rationalized our manufacturing businesses will now hopefully apply to the services business of Hong Kong, and that is 85 percent of Hong Kong's economy."

For retail and distribution, at the moment, laws in China do not allow companies to set up a wholly-owned business in this sector. Hong Kong firms have gotten around this by using "guanxi" through relationships with business partners, which creates its own difficulties.

Up until the WTO, it has also been forbidden for foreign companies to export out of China under their own name. That will change under the WTO rules as of 2005. But for Hong Kong companies, CEPA provides the added advantage of earlier liberalization of certain sectors, geography, and most importantly entry threshold.

The major benefit for Hong Kong wholesale companies under CEPA is the lowering of the entry threshold from US$2.5 billion to US$30 million.

With regard to retail, Dr Fung believes CEPA provides important opportunities for Hong Kong companies. Before WTO, foreign firms could only hold a minority ownership in a retail business in China, which Hong Kong firms managed to work around with their local partner. Under China's WTO commitments, that will not change for another two to three years. But under CEPA, Hong Kong firms have a one year head start. The lower threshold from US$2 billion to US$100 million -- although it will only allow two dozen or so Hong Kong firms to qualify -- is far better than before.

"That gives you an idea of how restricted this still are," he says. "So you could ask what are central benefits to Hong Kong? Firstly, it gives us the first-mover advantage. Secondly, even after the WTO rules kick in, we still have the advantage of a lower threshold. 

"That is why I say, I think CEPA and the WTO will herald a new era of growth as important as when Deng Xiaoping opened up China in 1979."

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