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Money Services Expand As Mainland Opens(HKTDC Enterprise, Vol 11,2002)

Vol 11, 2002

Market News

Money Services Expand As Mainland Opens

Value-added Products New Trend
In Household Electrical Appliances

Strategic Path in Licensing Trade

Hong Kong Eases Logistics Bottleneck

Build Business Online With New Internet Sourcing System

Money Services Expand As Mainland Opens

Leading financial institutions in Hong Kong, such as the Bank of China (foreground) and HSBC (towering in the background), have close cultural and historical ties on the Chinese mainland.

FOR more than 20 years, as SMEs heightened their business activities on the Chinese mainland, the choices among financial institutions were rather limited. That situation is changing fast.

The market for non-mainland banks has been opening for several years, a process accelerated through concessions granted by the mainland government to secure entry into the World Trade Organization (WTO).

Hong Kong banks, having close cultural and historical affiliations with many parts of the mainland, are developing a strong presence and offering many services ideal for SMEs. After all, such companies are the foundation of any Hong Kong bank's client base.

Substantial restrictions affect how non-mainland banks can deal in renminbi (RMB), the mainland currency, and the extent to which they can serve domestic clients. Hence, until now many of the services involved foreign currency and international companies.

The Bank of East Asia (BEA) is recognized as having the largest network among foreign banks on the mainland. It opened its first mainland branch in Shanghai in 1920.

Consistent with growing business, along with a main branch in Shanghai's Pudong area, BEA has a sub-branch in the Puxi district and branches in the cities of Shenzhen, Xiamen, Guangzhou, Zhuhai, Dalian and Xian. Its representative offices in Fuzhou, Beijing, Qingdao, Wuhan, Tianjin, Chongqing and Chengdu operate mainly for business liaison.

The bank recently obtained approvals to upgrade its Beijing representative office to a full branch and to offer Internet banking services by all its branches and sub-branches on the mainland.

Services of special importance to SMEs include:

  • foreign currency and RMB deposits and loans;
  • project finance and working capital loans;
  • trade finance facilities;
  • documentary credit negotiations and collections;
  • remittances, guarantees; and
  • buying and selling foreign currency.

Hang Seng Bank provides numerous financial services on the Chinese mainland, including at this branch in Shenzhen.

BEA has gained approval from the People's Bank of China (PBOC) to conduct RMB business in Shanghai, Shenzhen, Dalian and Tianjin cities, as well as in Jiangsu, Zhejiang, Guangdong, Guangxi and Hunan provinces. BEA has the largest number of licences to offer RMB services on the mainland. With these approvals, the bank offers a full range of RMB services to those customers permitted by the PBOC.

Hang Seng Bank also has a number of branches on the Chinese mainland and supplies "most normal banking services and a full range of trade services as far as regulations allow", says assistant general manager and head of commercial banking David Tam.

Hang Seng Bank offers RMB accounts to foreign or joint venture sino-foreign companies through its Shanghai branch and foreign currency services to foreign and Chinese mainland enterprises through its Shanghai, Guangzhou and Shenzhen branches.

How do SMEs stand to benefit? "With our experience, expertise and connections, we can develop tailor-made financial packages for SMEs to meet specific needs and requirements when operating in the mainland market," says BEA's general manager and China division head Raymond Yu.

Why should SMEs use Hong Kong-based financial service providers for business on the mainland? "Thanks to our broad customer base in Hong Kong, there is a lot of opportunity for us to leverage their relationships with us. There is a credit history, and we have good knowledge of their businesses. This can speed up the process when they start to work with our mainland branches," says Hang Seng Bank's Tam.

Apart from branches in Guangzhou, Shenzhen and Shanghai, Hang Seng Bank also has a branch in Fuzhou along with representative offices in Beijing and Xiamen. It has obtained preliminary approval to set up a branch in Nanjing.

"In providing services to SMEs, Hong Kong-based banks will as far as possible maintain practices on the mainland similar to their operations in Hong Kong. SMEs can accommodate these practices without difficulties. They do not need to spend much time to become familiar with such practices, which in turn can enable them to focus on their own businesses and enhance their operational efficiency and effectiveness," says Yu.

Many non-mainland banks need broader networks as the market continues opening. One way to expand is through WTO-related measures which allow them to buy into domestic banks. HSBC led the way last December by acquiring 8% of the Bank of Shanghai (in which Hong Kong-based Shanghai Commercial Bank also owns 3%).

Hong Kong banks will continue serving customers with a widening range of financial services. For example, HSBC has negotiated for a stake in the mainland's Ping An Insurance.

Value-added Products New Trend
In Household Electrical Appliances

HONG KONG produces and exports a wide range of household electrical appliances, including kitchen appliances, home care appliances, personal care items and household lighting products. In 2000, Hong Kong was the world's largest exporter of hairdressing apparatus, and the second-largest exporter of electric food grinders, mixers and juicers.

Manufacturers of small-sized items dominate Hong Kong's household electrical appliances industry. While many manufacturers mainly produce on an OEM and ODM basis, a few large companies market own-brand products.

Hong Kong's exports of household electrical appliances declined by 9% during January-July 2002, while sales to the US and the EU, constituting about three quarters of the total, were lacklustre. Exports to Japan continued to grow robustly amid the popularity of value-for-money products and increases in outsourcing activities of Japanese companies.

Many domestic appliances have been featured with electronic controls in place of mechanical switches. Some wired appliances have also evolved into wireless versions powered by charged batteries to enhance user-friendliness. Looking ahead, smart appliances that utilize the Internet and networking technology will elicit demand over the longer run.

Hong Kong's spread of household electrical appliances includes kitchen appliances, which range from food grinders, mixers and juicers to thermic domestic appliances like coffee makers, toasters, electric kettles and cup warmers, and ovens and cookers.

In home care appliances, there are electric fans, air-conditioning machines, vacuum cleaners, floor polishers, space heaters and irons.

Personal care products include hairdressing and hand-drying apparatus, shavers, hair clippers, massagers, face steamers and electric toothbrushes.

Manufacturers of small-sized household appliances dominate the industry, with a few companies producing large items such as air-conditioners and space heaters.

Today, most manufacturers have relocated their production facilities to the Chinese mainland to maintain cost competitiveness.

Offices in Hong Kong are mainly responsible for product development, quality control, management, marketing and logistic support.

Apart from original equipment manufacturing (OEM), many Hong Kong companies have their principal business based on original design manufacturing (ODM).

These cover product design and development, mechanical drawing, prototyping and sampling, toolmaking and production, with buyers providing the industrial/conceptual design only, such as cosmetic drawings and features. In some cases, Hong Kong companies undertake the industrial/conceptual design.

Increasingly, Hong Kong manufacturers now adopt a higher degree of vertical integration to increase the value-added. In addition to product design and development, toolmaking, plastics injection moulding, metal parts manufacturing, production and/or quality assurance are all done under one roof.

The success of Hong Kong's electrical appliances industry also lies in efficient management. Against fast-changing markets, Hong Kong companies emphasise a quick response to ensure effective marketing services to their customers, and to monitor changing product trends.

Moreover, due to the growing concern of quality conscious buyers, more and more companies have strengthened their quality assurance systems. This is evidenced by the growing number of Hong Kong companies certified as complying with ISO 9000, which is an internationally recognized standard for quality management systems.

Along with the slowdown in the global economy, Hong Kong's exports of household electrical appliances declined by 9% during January-July 2002. Sales of household lighting products, thermic domestic appliances, electric fans and hairdressing/hand-drying apparatus registered declines by different degrees, while exports of vacuum cleaners/floor polishers continued to grow by 5%.

The US was the largest export market, constituting almost half of Hong Kong's total exports of household electrical appliances. Sales to the US decreased by 10% during January-July 2002 due mainly to the weak consumer sentiment and fierce competition. Exports to Canada also decreased by 3% while exports to the EU declined by 16%.

EU demand was hampered by the sluggish economy, and exports to the region were also affected by mounting pressures amid intensified competition stemming from the restructuring of the EU's distribution sector.

Sales to Japan continued to grow by 17% during January-July 2002 amid the popularity of value-for-money products. Sales were also facilitated by increases in outsourcing of Japanese companies for competitive products.

Exports to the Chinese mainland were again dragged by keen competition from local Chinese enterprises.

Hong Kong manufacturers of household electrical appliances mostly produce on an OEM and ODM basis for reputable brand names. Some of these buyers have also set up offices in Hong Kong for direct sourcing. Hong Kong companies also sell to specialized importers and traders in North America and Europe, who may distribute the merchandise through their own channels or re-sell to their clients for further distribution.

In Japan, although imports of electrical appliances are dominated by reverse imports from Japanese production facilities in Asia, some Japanese brands may have OEM arrangements with Hong Kong suppliers. In any event, overseas buyers usually undertake after-sale service, while Hong Kong suppliers provide technical support for repair and maintenance.

A few large Hong Kong manufacturers market electrical appliances under their own brand names, while smaller companies sell their branded products to smaller importers and distributors in overseas market. Sales networks cover not only the advanced countries, but also emerging economies like Latin America and Eastern Europe.

Promotion via participation in trade fairs is an effective way for Hong Kong companies of household electrical appliances to explore market opportunities. Important trade fairs include the CES Show in the US, CeBit Home Fair and Domotechnica in Germany, and the Hong Kong Electronics Fair organized by the Hong Kong Trade Development Council (TDC).

Business missions organized by the TDC to the Chinese mainland and other emerging markets also provide opportunities for Hong Kong companies to establish connections with potential buyers.

Hong Kong's exports of household electrical appliances have been subject to increasing threat from other Asian suppliers in recent years. Particularly in the case of simple appliances involving lesser technological input, Hong Kong has long been subject to fierce competition from Southeast Asian suppliers and local Chinese enterprises.

Against this background, Hong Kong companies have increased the value-added and, while maintaining their OEM production, have focused more on ODM business that renders increased value-added services to overseas customers.

Although this would normally require more investment in aesthetic and technical designs than OEM production, developing ODM business is deemed to be an important strategy for Hong Kong companies to enhance their competitiveness.

The most important attribute of their success in ODM business is product design and development capability, while knowledge of world product trends and different consumer preferences in different markets also provide an edge.

As Hong Kong companies undertake more design work, there is a tendency among overseas importers to shift liabilities arising from defective products to local manufacturers and traders. It has become increasingly critical for Hong Kong exporters to observe laws and regulations in relation to consumer protection and product liabilities in overseas markets.

Meanwhile, the fast-changing consumer pattern has resulted in low inventory levels in major export markets, requiring quick responses for inventory replenishment. Product life cycles have also shortened, leading to the need for more frequent changes to product features and cosmetic designs.

Hong Kong companies, well known for their adaptability and responsiveness to rapidly evolving consumer tastes, have constantly upgraded their capability in aesthetic design and the production of fashion products.

Technology such as three-dimensional computer aided industrial design (CAID) is applied to enhance design capability, and rapid prototyping is adopted to shorten product development time. Some companies also re-engineer their procurement and production management systems in a bid to shorten delivery lead-times.

Household electrical appliances carrying a single function are much sought after in western markets. These include heating-based products like coffee and tea makers, toasters, toaster ovens and microwave ovens, and motor-based appliances such as food choppers, blenders and juice-extractors.

There are a number of multifunctional products coming out in a bid to tap the niche market. AM/FM radio functions, for example, added to coffee makers and electric tower fans, or toast makers enhanced with timer features.

In recent years, many appliances have featured electronic controls in place of mechanical switches. Electronic devices such as micro-control units (MCU) and LCD/LED displays are incorporated, making the appliances versatile and programmable at will. To enhance user-friendliness, some wired appliances have evolved into wireless versions powered by charged batteries, including wireless coffee makers, electric irons, electric jugs and vacuum cleaners.

Hong Kong manufacturers also bring out new products with cooking methods traditionally not done electrically, such as electric grillers, bread and waffle makers, deep-fryers, stewers and steamers. Other saleable products include milk bottle warmers and sterilizers.

Regarding household lighting products, aesthetic design is a major element used by manufacturers to tap the market demand. Hence, a wide range of lighting sets for domestic uses, such as track lights, linear lights and spotlights are offered in a great variety of novelty designs in order to meet different consumer preferences. To enhance value-added, some companies add extra functions such as smoke detectors and gas alarm sensors to their lighting products.

The future focus is on Internet applications and networking technology to develop so-called smart appliances, aiming at bringing the fully automated household to life. Smart appliances for air-conditioning, security, entertainment, lighting, etcetera will possibly be remote-controlled via the Internet.

Coupled with wireless technology for Internet access, a touch of a button on a mobile phone will enable consumers to turn on air-conditioners before arriving home, or programme recording and lighting apparatus.

Although these smart appliances will not enjoy early volume sales, they are expected to elicit demand over the longer term given the realization of a cost-effective solution by manufacturers and further penetration of the Internet into the daily lives of consumers.

Thanks to a stable demand in most overseas markets, small appliances of novelty design will not become obsolete in the medium term. Design and quality, in addition to price, are the selling points for such items.

Along with the growing concern over the environmental impact of electrical products, the provision of environmentally appealing products, which comply with, for instance, European or North American, eco-labelling and energy-saving schemes, are becoming a competitive edge for Hong Kong exporters of household electrical appliances.

Manufacturers have increasingly focused on lighting models of high efficiency and longer lifetime. Some lamps become electrode-less by replacing electrodes and filaments with fluorescent powders - such as integrated electronic compact fluorescent lamps that can reduce power consumption and prolong the lifetime. Some other lighting apparatus have built-in sensors for automatic on/off switching to save energy.

The full text of this abridged report can be viewed at www.tdctrade.com/main/industries/t2_2_7.htm

Strategic Path in Licensing Trade

The licensing industry is ripe for development in much of Asia, says Hong Kong Trade Development Council services promotion director Alan Wong (left). Cartoon characters like Warner Bros. star Tweety (centre) evidently agree. Also shown is TDC deputy executive director, Frederick Lam.

A COMPREHENSIVE legal and business infrastructure underscores Hong Kong's considerable strength and massive potential as a regional licensing hub in Asia.

Industry statistics show Asian licensing turnover of US$25bn in 2000, up 100% on 1999 and accounting for 18% of the global market.

Hong Kong's undisputed rule of law, free trade economy, status as a site for international finance, strategic location and close links to the Chinese mainland all make for an ideal business setting.

Hong Kong Trade Development Council (TDC) services promotion director Alan Wong says the licensing industry is ripe for development in much of Asia.

"Although Japan is a mature market where you will see little expansion, by no means is the region nearing maturity. Hong Kong has a small domestic market, but can participate in market expansion throughout Asia, including on the Chinese mainland," Wong says.

Hong Kong is famous as a nerve centre to produce light consumer products, like clothing, giftware, stationery and plush toys - precisely the merchandise most sought by the licensing industry.

"Companies based in Hong Kong can become licensees to make and distribute licensed products throughout the region," Wong adds.

Acting as licensing agents, or go-betweens for overseas licensors, is another appropriate niche. "Some big entities, like Warner Bros., Mattel and the National Basketball Association (NBA), already have offices in Hong Kong. Their presence indicates we can offer the right environment and be of service to them, especially in finding licensees on the Chinese mainland. Certainly, we want to attract more of them," Wong says.

"As Mattel continues its expansion into a variety of licensed product categories for girls, Hong Kong will remain our primary base for Barbie licensing in Asia," says Barbie Consumer Products (Asia), director Robyn Gurd.

"Hong Kong has long served as a centre for the design, manufacture and marketing of Barbie dolls, fashion and accessories, thereby creating an established support network for the licensing team. In addition, Hong Kong's proximity to North Asian markets offers a significant growth opportunity," Gurd says.

Hong Kong traders understand mainland culture and speak Cantonese and often Putonghua, the necessary languages.

Yet another angle has Hong Kong companies developing their own properties for licensing. This is a budding industry, notably in the entertainment sector. For example, licensing opportunities in toys and apparel surround movie star Jackie Chan.

Licensors keen to guard intellectual property (IP) appreciate Hong Kong laws strengthened to address challenges posed by the Internet. In fact, Hong Kong has an enviable reputation for detecting and exposing "counterfeit" operations, an added deterrence for IP violators.

The mainland's accession to the World Trade Organization should boost licensing activity while posing new challenges.

"Distribution channels on the Chinese mainland are not fully liberalized. IP protection has far to go. Import and export tariffs must decline, and the general business environment needs improvement. To an extent, such factors apply in Southeast Asia too. We will face these challenges and overcome them. If any place can succeed in doing this, it is Hong Kong," Wong says.

Licensing players say Hong Kong is already a de facto regional centre. "There are no really serious competitors, because so much licensing activity emerges from Hong Kong. With the Chinese mainland emerging, the initial focus will be on Hong Kong. However, it is important for us to capitalize on our advantages," says Dave Sharat, from Animation Int'l Ltd, a licensing agent representing Japanese studios.

One significant step was the Hong Kong Licensing Show and Conference held on April 24-25 concurrently with the Hong Kong Gifts & Premium Fair. The show, Hong Kong's first such event, offered a one-stop venue for licensing cooperation.

Twenty exhibitors representing properties and trademarks from the US, Japan, South Korea and Hong Kong attracted more than 7,000 visitors. Garments, stationery, gifts and premiums were displayed, along with more than 100 licensed characters and trademarks, including those from The Lord of the Rings, Jackie Chan Adventure, Warner Bros. movies, The Simpsons and Doraemon. There were properties from Cambridge and Oxford universities and the University of California in Los Angeles (UCLA), plus ubiquitous brands like Pepsi and Hallmark.

Fortified by positive feedback, TDC will organize the event every year. "For years, we held a licensing conference. This time we advanced a step to organize the show. Most participants were happy, and next year's event should be even bigger," promises Wong.

As in the West, entertainment or "character" licensing should be the strongest category. In Hong Kong, characters like Winnie the Pooh, Hello Kitty, Bugs Bunny and Harry Potter are already wildly popular.

Entertainment or character-related work accounted for 44% of the global licensing business in 2000, says the US-based International Licensing Industry Merchandisers' Association (LIMA). Trade brands and fashion are the next largest categories, followed by sports, universities, art, music, publishing and non-profit groupings.

Prospects look bright. A recent survey of 134 relevant companies shows global expansion on most agendas. Almost 75% are taking a proactive approach to licensing products overseas.

Warner Bros., for example, hopes that Bugs Bunny and its many other enduring cartoon characters will captivate Asian consumers, much as they have Westerners. The company is aggressively marketing and promoting.

"In Asia, the licensing industry began 10-20 years ago, whereas it has a half-century of history in the US and Europe," says Mickie Leong, Warner Bros. vice president for Greater China and Southeast Asia.

"Yet with economic advances and opening in much of Asia, many of the West's products, brands and habits are quite desirable. We see great potential to develop our business here."

Hong Kong Eases Logistics Bottleneck

Opportunities are multiplying for providers of logistics solutions on the Chinese mainland, says this Hong Kong Trade Development Council report.

THE Chinese mainland's accession to the World Trade Organization (WTO) gives Hong Kong firms golden opportunities to render tailor-made logistics solutions for various manufacturing and services industries, says a Hong Kong Trade Development Council (TDC) report.

The report, entitled China's WTO Accession - Enhancing Supply Chain Efficiency, covers three major areas: transportation and express cargo, freight forwarding, and logistics services, and suggests strategies for Hong Kong players to develop for the mainland market.

According to the WTO, the mainland was the world's sixth-largest exporter in 2001, exporting US$266bn worth of goods. The country has been successful in turning itself into a production powerhouse.

TDC assistant chief economist Joseph Tsang, however, points out that logistics have become a bottleneck for the mainland to further sharpen competitiveness.

"Cost will not be sufficient to guarantee further success. Logistics management will become an indispensable competitive tool for mainland suppliers to compete in the world and domestic market," he says.

The report quotes estimates that logistics in the mainland's industrial production took almost 90% of the whole production cycle time and 40% of general production cost.

"Inefficient logistics support and high inventory levels affect the competitiveness of wholesalers and retailers on the mainland," says Tsang.

According to the report, there is little integration in the provision of logistics services. Most companies participate in one or a few sub-sectors, rather than a total service for the whole logistics flow.

"As no logistics company has more than a 2% share of the mainland market, there are considerable untapped opportunities. Mainland logistics opportunities for Hong Kong companies will come as much from relaxation of regulatory constraints as the global trend towards more demanding service requirements," Tsang says.

The report predicts WTO accession will bring decisive and favourable changes to the regulatory regime of foreign investment in the mainland's logistics sector.

  • Freight forwarding: majority ownership in joint ventures (JV) will be allowed one year after accession, with wholly foreign-owned subsidiaries allowed within four years. Foreign companies will no longer be obliged to undertake only international freight forwarding.

  • Logistics sub-sectors: for storage, warehousing, express delivery and ground transport, majority-owned JVs will be allowed 1-2 years after accession, while wholly-owned enterprises will be allowed in 3-6 years.

In response to easier market access, Hong Kong players should leverage their experience in supply chain management, e-logistics, international freight forwarding, logistics facilities operation and management, as well as financial capability, to form JVs with local or foreign players.

The report also suggests a more diversified regional strategy for Hong Kong companies due to economic policy favouring inner regions, improved transport to these regions and relatively low competition there.

"The risk of investing in second-tier cities will be higher than in coastal cities, but opportunities and potential rewards are also greater for those gaining early entry to the more challenging, fast-growing markets," adds Tsang.

Build Business Online With New Internet Sourcing System

AN exciting, cutting-edge Internet-based system that promises to revolutionize product sourcing has been launched by the Hong Kong Trade Development Council.

Called, Video Link, the system has been especially developed to let buyers all over the world view all the factories and products they want - without leaving the home or office. Part of the TDC's innovative Sourcing Guide, Video Link is available anytime a buyer logs on to the hkenterprise.com Web site.

This comprehensive Web site contains literally thousands of informative two-minute videos from Hong Kong-based suppliers that buyers can watch on their own computers. All a buyer has to do is select a video from a handy video directory, conveniently divided into corporate, factory tour and product videos.

The corporate video lets a buyer learn all about the company structure, manufacturing facilities and export philosophy of a prospective business partner.

A factory tour video lets buyers see the firm's products being developed, manufactured and shipped before their very eyes. The videos even show items being demonstrated by professional sales staff who know how to display the merchandise to best advantage.

The advantages are virtually limitless - for example buyers no longer have to wait days or weeks for dull, lifeless product catalogues, suffer the frustration of receiving a product sample and having no idea how it works or endure the irritation of trying to imagine how an elegant garment would look on a real live model.

The cost-effective and efficient TDC Video Link has been developed in cooperation with leading Internet portal and marketing and technology partner Yahoo!.

Destined to become an indispensable sourcing tool for hard-pressed buyers all over the world, Video Link is just part of an exciting one-window cyber marketplace that offers all the TDC's online marketing and partnering services whenever they are required.

The all-sector hkenterprise.com Sourcing Guide was extensively upgraded and relaunched in April 2002 as a one-stop, available around-the-clock marketing/sourcing platform for Hong Kong SMEs and international buyers.

As a result this cutting-edge cyber marketplace offers buyers free online sourcing for the tried and true products, services and brands offered by more than 100,000 Hong Kong companies.

However, not only does the Sourcing Guide help buyers find what they want when they want it 24 hours a day, it also provides up-to-the-minute product and service information via novel New Product Alerts.

Plus there is an indispensable Business Contacts section that offers online access to TDC's unique database listing more than 500,000 overseas and mainland companies.

The innovative Business Matching segment helps buyers find and meet appropriate or potential partners in cyberspace, while the Trade Fairs sector provides a handy instant gateway to information and special customer services regarding TDC's international shows and fairs.

Already proven winners among manufacturers and buyers alike, these invaluable business services are just part of the Hong Kong Trade Development Council's ongoing commitment to utilize the very latest technology for the benefit of Hong Kong manufacturers, their buyers and customers all over the world.

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