CAPP Events: 2003

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The next transformation

Posted by permission of the South China Morning Post
10/29/2003

A quarter of a century ago, China first embraced capitalism in the region girdling Hong Kong - the Pearl River Delta. Hong Kong's capital and manufacturing skills have infused the delta; in turn the delta's explosive growth has enriched Hong Kong. Yet the benefits of full partnership remain elusive, in terms of corporate planning, relations among governments and perceptions. We asked three of the world's leading experts on the delta and the Chinese economy to tell us how to keep the momentum going as Hong Kong and the delta move into competition with the mainland's other fast-growing regions.

Richard Wong Yue-chim, dean of the business and economics faculty at the University of Hong Kong: The Pearl River Delta is vast, but most of it is closely tied to Hong Kong, at least in the areas of manufacturing. A recent study I conducted indicated that Hong Kong-based companies employ up to 10 million workers in the manufacturing sector across the border, but is this a sign that we have a partnership? Is this partnership between Hong Kong and Guangdong province a myth or a reality?

William Overholt, the Asia-Pacific chair at the Centre for Asia-Pacific Policy at Rand, a think-tank based in Santa Monica, California: There has always been a partnership. The delta taking off is largely because of Hong Kong. Hong Kong's example has inspired the delta to modernise and move forward. Hong Kong's logistics have moved the cargo from the delta's manufacturing. To a much lesser extent, tourism has been mutual. At the same time, there has been inertia from the days of British-Chinese mutual suspicion of western versus eastern ideological competition. Although the realities of the situation have long since changed, the inertia has lasted until very recently.

What is happening is like the lifting of a huge trade barrier, as mentalities change on both sides. This incomplete, but very rapid, transformation of mentality is the emergence of a completely new level of partnership. Hong Kong and the delta are going to be like Siamese twins who cannot be separated. In dealing with the new challenges, the delta is only going to be able to move forward with Hong Kong marketing, and Hong Kong is only going to maintain its status through the delta story. Otherwise, both will stagnate.

Michael Enright, Sun Hung Kai professor of business at the University of Hong Kong: Obviously, tens of thousands of companies and individuals have formed their own partnerships, and they have done so with the knowledge of, and the facilitation of, government support structures on both sides, but until recently, there has not been a realisation of what partnership could mean.

Since 1997, it is almost as if we have put two children together. When you watch them get together for the first time, they engage in what is called "parallel play". They go about their own business, and it takes them a while to understand that they can play together, that they can co-operate and that they can do better together than they can separately.

I think we are at the stage now where people are recognising that there are partnerships to be had, that in the past, while we could do it on a company-by -company or individual-by-individual basis, many of the issues we face today require a more encompassing sense of partnership. They encompass infrastructure and environmental planning, and a recognition that actions taken in one part of the delta have repercussions in other parts.

One reason I think we will see substantially greater partnership is because it is not being driven by some sense of altruism. It is being driven by very bald, blatant self-interest.

Professor Wong: I think partnerships are best when it is between people who have something different to bring to the table. What are the likely changes in the division of labour between Guangdong and Hong Kong, so this partnership will take shape?

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Hong Kong's economy, on the other hand, will narrow; we will tend to see fewer activities performed here, but potentially it will perform the high -value-added activities for more and more companies.

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Dr Overholt: We are going to see a great refinement of the existing division of labour. The main division is already there, but it has been fragmented and inefficient. There will be enormous efficiencies as it is refined.

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Second, there are going to be fundamental changes, such as Hong Kong moving into all kinds of services in the delta that it has largely been excluded from in the past. Hong Kong distribution is as efficient as any in the world and that will spread very rapidly.

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Professor Wong: How can Hong Kong help Guangdong become more competitive? It is an important issue in a partnership, especially if Hong Kong is Guangdong's best card. What do we have to offer beyond just saying: "Well, we are different just because we know the world better"?

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Dr Overholt: I think it starts with marketing. Hong Kong has the global network. It has the international marketing skills and this is going to be life or death for the delta going forward. I do not think it is really on the radar screen yet. But the controversies over the yuan reflect a protectionist thrust, which could cause companies to consider drastically reducing how much they source from China.

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In areas that are crucial to the ongoing success of the delta - law, international property and the basic rules of the game - Hong Kong is going to play the role it has always played, as an example, as a teacher, and every year this is going to become more important because as the scale of activities increases, so the demands for the international rules to be followed are going to increase exponentially.

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Professor Enright: I think there are a lot of people in Hong Kong who still view it as the leader of Guangdong development. While that might have been accurate 10 years ago, it is not so today. Guangdong is too strong, it has enough linkages of its own to attract major economic activity. I think we in Hong Kong have to be a little more humble when dealing with the delta and Guangdong; we have to think more of a merger of equals.

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What does Hong Kong provide? Hong Kong provides superior knowledge of global markets. How did China, how did the delta, become one of the world's leading exporters after being cut off from the global economy for 20 or 30 years? It has done so through Hong Kong. There is a very strong tendency today in Guangdong province to dismiss the importance of Hong Kong. The rationale is that Hong Kong companies are no longer the source of the largest investments, when there are companies like Shell, BP and IBM putting in large investments. There is a tendency to overlook all the other things that go into turning a factory into an economically viable entity; all the development, design, marketing, sales, promotion and logistics. That is dramatically undervalued in Guangdong. We have to do an education job there.

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Professor Wong: Is a closer partnership with Hong Kong truly beneficial for Guangzhou? The most important thing for the Closer Economic Partnership Arrangement is that it goes beyond manufacturing; it is really about services. Because of the rapid change in the last 20 years, Hong Kong is very much a service-provider economy and that suggests that although we may not have the entire skill set that the delta requires, we are certainly ahead of most, if not all, Asian cities. And given our interaction over the last 20-plus years, we have more knowledge about what is going on in the delta than anybody else. Therefore, Hong Kong has a lot to offer Guangdong.

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The next question is whether the city can rise to the challenge of mainland competition. The confidence of people in Hong Kong has been shaken, particularly as they have gone through six years of zero or negative growth. The basic point is that the mainland cost structure is so much lower than Hong Kong's and mainlanders are probably as smart as, if not smarter than, us. So how can we rise to the challenge?

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Dr Overholt: I think the delta, and the dialogue over Hong Kong's relationship with it, are what is going to move Hong Kong forward. Historically, Hong Kong has been through a lot of major transitions, from being just an entrepot to being a manufacturing centre, a manager of manufacturing across the border, and a great service centre - but now it faces another major transition, and it has been having trouble evolving. Coming back after a couple of years, I find myself inspired by the way these decisions on a closer partnership have been reached. The business community and other groups have got together - they have done strategic planning, they have thought where we want to be 10 years from now. And they have concluded that maybe getting where we want to be 10 years from now involves a certain amount of short-term pain, and that is okay because we are going to get to a great place.

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Professor Enright: Six, seven years ago, everyone was saying Hong Kong would lose out to Singapore. No one is even dreaming that today. Then, two or three years ago, everybody was saying Hong Kong would lose out to Shanghai. We are hearing less about this these days, particularly from people who have business operations in both cities.

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Now we hear that Hong Kong is going to lose out to Shenzhen, Guangzhou and Dongguan. But today, the challenge is somewhat different, because it is much closer to home. We have been able to get away with a lot, in terms of inefficiencies. I am not sure we are going to get away with these forever, given the mounting competition from the delta region. Let me tell you exactly what I mean. We have interviewed hundreds of companies with operations in Hong Kong and the delta. We asked them what they would have to pay someone to do a particular job in Hong Kong, compared to a person in the delta.

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The really alarming area is in the middle and lower-middle managerial and professional ranks, because they said they would have to pay Hong Kong people four, five or six times the amount they could pay somebody in the delta, in order for the people to be able to afford to live in Hong Kong.

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I wonder if that through policies, oligopolies, or whatever, we are pricing out the middle level. We are pricing out the young professionals who will become tomorrow's high-fliers. We are potentially pricing out entrepreneurs who will have a difficult time, given cost structures and productivity in Hong Kong compared to those across the border. Markets will adjust, but we cannot artificially add to our costs in Hong Kong.

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Also, looking at the improved skills and capabilities in the delta, if we are going to stay ahead in terms of being able to provide the highest value -added services for the world's best companies, we need the people to do it. And when we see that a lower percentage of Hong Kong students go on to university than their counterparts in Thailand, and that roughly half the percentage of students go on to tertiary education in Hong Kong, compared with in Shanghai, that gives me cause for concern.This conversation is adapted from a panel discussion at the Second South China Morning Post-Hong Kong General Chamber of Commerce Pearl River Delta Conference on October 17. This is the first in a three-part series.