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A Passport To Europe(HKTDC Hong Kong Trade Services, Vol 01,2004)

Vol 1, 2004




Professional, Training & Others

A Passport To Europe

Guiding Hong Kong Businesses Onto The Mainland

Keeping Abreast of CEPA

Why Training Fails

A Passport To Europe

Keeping up with the pace: staying on top of CE marking requirements is crucial for SMEs, particularly those in the electrical and electronic product sectors

The CE mark has become a vital passport to the ever-increasing markets of the European

Union (EU) for a huge range of products - without it there's no entry but proudly displaying those two letters will get a product waved through customs like a VIP.

An obligatory marking indicating successful completion of a product's compliance certification to European standards, the CE mark dates back to the mid-to-late 1980s when the EU developed its so-called New Approach to technical harmonisation and Global Approach to conformity assessment.

This effort to ensure free movement of goods within the union, while maintaining high levels of public protection, led to the passing of a number of EU directives, or laws, governing many product categories from toys to medical devices.

Since 1993, any product covered by one of these directives and destined for the markets of the EU is legally obliged to carry the CE mark, which stands conformite Europeene or European conformity.

As well as making things easier for companies within the EU, the system has been a great benefit for companies exporting to it. Now, instead of having to satisfy widely divergent requirements and standards for each member country, such as the German GS mark or British BSI Kitemark, there is just one set of criteria per product to gain access to them all. CE marking has also cleverly removed the need for factory inspections for many products.

The CE marking process itself is quite straightforward, as Clement Li, quality manager of the International Electrical Certification Centre Ltd (IECC) in Hong Kong, explains.

"The system is very simple," he notes. "There are three steps: first you identify the ENs, European Norms, for your product; then you test for them, either by yourself or with an independent laboratory like ourselves; and then you put the CE marking on the product yourself."

However, Li admits that it's a little more complicated than it sounds, explaining that each product may be governed by several directives and it has to meet many ENs or harmonised standards.

To complicate matters further, these are published in English, French and German and can be subject to slightly varying interpretations. Plus, new directives are constantly being issued and prevailing standards revised.

"Standards change too fast," Li concedes. "We handle 20-30 different standards and something changes every 3-4 months, which means we need to adapt and upgrade our equipment."

Staying on top of CE marking requirements can be even harder for SMEs, who often do not have the proper facilities or equipment to undertake tests even when EU directives allow manufacturers to perform the conformity testing themselves.

"This is particularly true of the electrical and electronic product sectors, which make up a large proportion of the SMEs exporting to the EU from the southern Chinese mainland," says Li.

This is IECC's primary area of expertise and one where its accredited lab can prove invaluable - especially when the local firm is hotwired into the latest developments in the EU via respected German testing partner, pkm electronic GmbH.

IECC predominantly carries out two types of test for electrical and electronic products: safety and electromagnetic compatibility (EMC). The safety testing deals with electrical safety set out in the Low Voltage Directive, as well as physical aspects such as flame resistance, toxicity, and stability.

The more detailed EMC testing uses a barrage of tests to assess not only the emission of electromagnetic radiation, but also a product's immunity from external interference.

The testing procedure at IECC for simple products like electric shavers or portable radios takes 1-2 weeks for EMC and 2-4 for the safety aspects; less if the two are combined. Costs start at about HK$3,000 for EMC and HK$5,000 for safety assessment.

While IECC can carry out the safety tests for just about any product, the firm will send more complex items such as IT equipment, microwaves and radio-controlled devices to its German partner for EMC testing requiring extremely sophisticated equipment. Even so, testing times rarely exceed six weeks.

"Together with our German partner, we can also handle any products destined for Europe's automotive industry, which fall under a different directive with more stringent requirements than the CE marking system, and usually require ISO 9000 certification," Li notes.

After testing the manufacturer is required to draw up a declaration of conformity identifying the product, the firm which made it, the date of the declaration and all the relevant provisions it meets, together with a statement that the declaration is issued under the sole responsibility of the manufacturer.

This can create problems for importers into the EU, says Li. "The importers are responsible for the safe marketing of the product but have no control over the manufacturers," he explains. "That's why they often ask us to test the product and provide a test certificate."

The CE marking system has created a streamlined process for getting most products into the EU and allowing their free movement around member states, which in turn has brought about extensive time and cost savings for manufacturers and importers.

But beware anyone whose product doesn't live up to the standards they are claiming: a strict system of market surveillance can lead to a range of sanctions from fines to a total recall of products that wrongfully carry the coveted CE mark.

Evolving benchmarks

The European Union's CE marking regime is "okay and strong enough", according to an industry veteran who has been involved with CE marking for many years.

Peter Krassowski, managing director of IECC's fully accredited German partner pkm electronic GmbH and a former chairman of the Electromagnetic Compatibility Sub-Committee for AV products at the German Standards Authority, believes the CE system will continue to evolve.

"It is an ongoing process with new directives all the time and the reworking of existing ones," he explains. With several joint activities and strong interest from the International Electrotechnical Commission that defines international standards, there also appears to be a growing global consensus, at least where electrical, electronic and related technologies are concerned.

However, in the near term there are conflicting factors influencing the speed of change, not least of which is the fact that 10 new countries will join the EU in May this year.

"I think national standardisation committees will put one foot on the brake to make the system simpler, so that new members can catch up and we will all have the same standards sooner rather than later," predicts Krassowski.

On the other hand, the pace of development of new technology, particularly the digital revolution, is exerting pressure to quickly increase the number of new directives and standards.

There is also a concern that expanding legislation and more member countries contributing to the process will increase bureaucracy and make the system inflexible. "It already takes years and years for new ideas to appear in the standards," notes Krassowski.

But overall he is positive and believes CE marking has gone a long way to freeing the movement of goods into and around the EU, which has certainly been good news for Hong Kong and mainland exporters and traders.

WRITTEN BY ALISTAIR WADDELL


Guiding Hong Kong Businesses Onto The Mainland

Moving to the mainland: Guangdong Province is an obvious first step for local accountants keen to enter the mainland market

The signing of the Closer Economic Partnership Arrangement (CEPA) has led many Hong Kong businesses to think about setting up or expanding operations on the Chinese mainland. But once a company has decided to invest, what happens next?

Those used to the ease in getting a business up and running in Hong Kong can be taken aback by the relative complexity in achieving the same ends on the mainland.

Companies have to see what kind of category their proposed operations fall into, then sort out the paperwork for the relevant application," explains Hong Kong Society of Accountants (HKSA) vice president Paul Chan.

They need to find their way through the many incentives or tax breaks that could be available to them, as well as understanding unfamiliar regulations."

Hong Kong firm Icicle Production Co Ltd has first-hand experience of the processes involved. When the company opened a representative office in Shanghai in 2003, it needed advice in several areas including company registration, tax and general business administration.

Business development manager Bonnie Chan says the company was fortunate to have been able to ask its mainland business partner for help, otherwise she would have considered using a Hong Kong accounting firm. "Hong Kong practice would have a clearer understanding of how Hong Kong businesses run,"she maintains.

The good news for Hong Kong businesses like Icicle is that CEPA is starting to make it easier for Hong Kong accountancy practices to advise on mainland operations; with the initial round that took effect this year resulting in several specific concessions for Hong Kong accountants.

Non-local accounting firms wanting to carry out assignments on the mainland as part of their work in issuing reports elsewhere need to apply for a provisional licence before they can proceed. (These reports include the audit of a Hong Kong subsidiary, or a stocktake at the mainland factory of a Hong Kong company.)

Accountancy firms used to have to renew these licences every six months: now the licences last for a year. The mainland authorities have also waived the fee for each licence application.

A more substantial change, however, is clarification of the services that Hong Kong firms can provide. Hong Kong citizens were never sure whether they were formally allowed to open wholly foreign-owned consultancies on the mainland. CEPA now confirms that they can, and clarifies the services that can be offered.

"CEPA allows Hong Kong firms to undertake general business and management consultation," says Jimmy Chung, vice president of the Association of Chartered Certified Accountants (ACCA) Hong Kong branch.

Another benefit CEPA offers is that it standardises the amount of start-up capital needed by consultancies. "Businesses used to have to find as much as US$200,000 to start a business in Beijing and US$128,000 to set up a consultancy in Shenzhen," explains Chan. Trom now on, the minimum capital requirement for a consultancy business anywhere on the mainland is US$12,500."

Chung points out that this first round of CEPA excludes accountancy and tax-related services, but maintains this is not as problematic as it may sound. "As a result of the complexities of business administration on the mainland, accounting firms operating consultancies there offer far more than the traditional audit services," he notes.

Chan agrees: He have been doing quite a bit to help Hong Kong SMEs by advising on the structure their businesses should take," he reveals. He know about tax in both jurisdictions, and can help companies structure their tax arrangements properly."

He adds that some Hong Kong firms can also help in finding business partners. "They can also advise on the best way to structure any business deals, as they are familiar with what are considered common and reasonable terms," he says. "Some firms have also helped Hong Kong residents set up small retail outlets in Guangdong Province."

Both observers have noticed that more and more Hong Kong businesses have been asking their local accounting firms for advice on setting up operations on the mainland since CEPA was announced.

Chung says these companies have good connections with their accountants in Hong Kong and have confidence in working with people they know.

"If the accountants have their own establishment on the mainland, Hong Kong companies will use these firms."

Most SMEs will look to small or medium-sized accounting practices for advice, making them the firms that Chung says will reap CEPA's benefits.

"Medium-sized firms will see increasingly more opportunity as the entry requirements fall," he believes. "They can team up with local partners to form their own network of offices in major cities."

Chan thinks that his fellow small and medium-sized practitioners should build up their competence in advising Hong Kong's SMEs on the structure their businesses should take. "This is an area that increasing numbers of businesspeople will need help in," he says.

Meanwhile, his advice to anyone thinking of expanding operations onto the mainland is simple: remain focused. "Don't be too ambitious to start with," Chan insists. "Consider one area - either geographical or business - and stick with it. And do your homework thoroughly."

WRITTEN BY CAROLINE BIEBUYCK

CEPA round two

Hopes are high in local accountancy circles that the second round of CEPA negotiations taking place this year will open yet more doors.

One of the barriers is the issue of qualifications: in order to be able to sign an audit certificate, accountants need to be members of the Chinese Institute of Certified Public Accountants (CICPA).

Membership is obtained by candidates passing exams and showing they have gained the required amount of practical experience, but currently CICPA says this experience must be gained on the mainland.

Since most Hong Kong candidates for the CICPA exams are already members of HKSA and have clocked up this experience elsewhere, HKSA vice president Paul Chan says the association is trying to get the CICPA to accept Hong Kong experience as counting towards the practical requirement. "However, another good thing to have come out of CEPA Round One is that people who have passed the exams and practise on the mainland no longer need to fulfil the annual residency requirement," he adds.

Regulations currently specify that a mainland practice should include at least five CICPA members as partners, which presents a problem for Hong Kong accounting practices since many comprise only a handful of partners.

However, Chan says negotiations are underway through CEPA to adopt the idea of "practice in association". This would mean that a Hong Kong firm could enter a contractual arrangement with a mainland firm to allow sharing of employees and office space, allowing them both to build a client base and share fees.

Chan emphasises that this is not a joint venture or partnership between the two firms. "Each party is looking to build a long-term relationship, something that can only be of benefit to client companies."

This model has already proved acceptable, as it was adopted for the legal profession during the first round of CEPA, and hopes are high that the proposed structure will be accepted for accountants.


Keeping Abreast of CEPA

The six annexes to the main body of the Closer Economic Partnership Arrangement (CEPA) signed on September 29, 2003 make essential reading for ambitious local small and medium-sized enterprises.

Among the key changes are the Rules of Origin (RO) defined in Annex 2, that determine which of the 273 product categories (since increased to 374) qualify as 'made in Hong Kong' for the zero tariff rate for exports from Hong Kong to the Chinese mainland.

The RO, which require 'substantial transformation' to be effected in Hong Kong, demand three main tests:

  • Principal Manufacturing or Processing Operations
    Hong Kong's existing Rules of Origin will apply to numerous product categories, including textiles, apparel, jewellery, cosmetics, pharmaceutical products, and plastic and paper items. A 'substantial transformation' is required to be effected in Hong Kong through some 'principal processes' having taken place in Hong Kong.

  • Change in Tariff Heading (CTH)
    CTH will apply to various categories, including chemical and metal products, some electronic products and some electronic components.
    Where material not made in Hong Kong is used in Hong Kong to make a product that bears a different code from the said material, the CTH test is fulfilled since the change in code itself demonstrates that a substantial transformation has taken place.

  • Value-Added
    The requirement of 30% value-added in Hong Kong will apply to several categories, including various electronic and optical components and timepieces.

    Product development costs, such as design and intellectual property protection, may also be included as part of the 30% (which represents a 5% increase on Hong Kong's existing content requirement and brings the SAR into line with the mainland's preferential trading partners).

    Equally important concessions have been made to the service sectors in Annex 4, which now number 18 with the inclusion of telecommunications. Joint ventures in five stipulated telecommunications subsectors are permitted with a maximum 50% Hong Kong shareholding and without geographic restrictions, from October 1, 2003.

    Similarly, a 'Hong Kong service supplier (HKSS)' has been more clearly defined in Annex 5, replacing the reference to a 'Hong Kong company', with a global definition in line with World Trade Organization terminology.

The global definition has two branches:

  • a basic identity definition of 'natural persons' (individuals) and 'juridical persons' (business vehicles and other entities); and

  • 'specific criteria' for each of these groups
    Annex 5 refers to HKSSs and PRC service suppliers, but the latter are only covered by the threshold definitions of natural and juridical persons. While the specific criteria for HKSSs are set out in Annex 5, those relating to PRC service suppliers are yet to 'be determined by the two sides through consultation'.

Natural Persons

A Hong Kong natural person service supplier is a Hong Kong permanent resident, although some service sector concessions stipulate additional requirements in Annex 4, such as the requirement of mainland citizenship for obtaining PRC legal qualifications and practising PRC law. Clause 4 of Annex 5 specifically provides that the Hong Kong natural person service supplier definition is subject to any specific stipulations in CEPA or its Annexes. A PRC natural person is a mainland citizen.

Juridical Persons

A juridical person is a 'legal entity duly constituted or otherwise organised under the applicable laws of the mainland or the Hong Kong SAR, whether for profit or otherwise and whether privately-owned or governmentally-owned'. It can be a corporation, trust, partnership, joint venture, sole proprietorship or business association.

While there are no specific criteria yet for PRC juridical or natural persons, there are two sectoral definitions for Hong Kong juridical persons: a general definition for all service sectors, except legal services, and a definition of a Hong Kong law firm, with respect to legal services.

The main general definition requirements are:

  • incorporated or established pursuant to the Companies Ordinance or other relevant Hong Kong laws
    (a) valid business registration certificate
    (b) licence/permit to provide the services (if required by law)

  • has engaged in substantive business operations for the stipulated period of time (generally three or five years, depending on the service sector)
    (a) the nature and scope of the services in Hong Kong encompass the nature and scope of the services intended to be provided on the mainland
    (b) payment of Hong Kong profits tax during the period of substantive business
    (c) owns/rents premises in Hong Kong to engage in substantive business operations and the scale of the business premises is commensurate with the scope and scale of its business
    (d) over 50% of staff employed must be Hong Kong residents without limit of stay (i.e. permanent residence, right of abode or unconditional stay status) or mainland citizens holding a One-Way Permit.

    Registered overseas companies in Hong Kong, their offices, liaison offices, mail box companies and companies specifically established for providing certain services to their parent companies are excluded from the Hong Kong juridical person definition and are not eligible for CEPA service sector concessions.

    Other Annex 5 amendments include:

  • foreign acquisitions and mergers - if a foreign investor acquires over 50% of the total equity of a HKSS on or after June 29, 2003 or if a merger results in over 50% foreign equity interest, the HKSS will have to wait one year from the date of the acquisition or merger before it can access CEPA service sector concessions i.e. before it can qualify as an HKSS.

  • HKSS certificate procedure - Annex 5 sets out a procedure and list of required documents for HKSSs to apply for a certificate from the Hong Kong Trade and Industry Department so that mainland authorities can verify the HKSS's qualifications.

    Annex 6, meanwhile, deals with trade and investment facilitation (TIF) measures that seek to provide a more streamlined service for conducting business on the mainland and improve some areas such as customs clearance.

    The signed Annex lists seven TIF areas and includes a section on 'cooperation mechanisms' and 'content of cooperation' for each of these seven areas.

    Ultimately, however, CEPA is an ongoing process, a flexible basis for progressively increasing Hong Kong/mainland cooperation in trade and investment that leaves plenty of scope for the entrepreneurial spirit.

A version of this article previously appeared in the Hong Kong Lawyer


Why Training Fails

Keep it interesting: people will only apply training if they see that it is in their best interest to do so

A large percentage of skills training, such as sales, customer service or management training, fails to produce results because of poor planning or because managers have not secured the necessary conditions for success.

There are a number of pitfalls that managers need to avoid and points they must remember if their training sessions are to be successful each and every time.

Training in isolation usually fails

Many companies invest in training with the expectation that exposing someone to training should itself create changes in behaviour and produce results. They usually are disappointed. Why?

Behaviour is shaped largely by company expectations, accountability, and reward systems. Training may show people how to perform a skill, but people will only apply the training if they see that it is in their best interest to do so and have support vehicles to put it in place.

If there are no systems to implement the training and no accountability to see that the training is applied, then only a minority of those trained will fully integrate it.

Inappropriate structures

A very high percentage of training dollars is spent on seminars and lectures or multi-day programmes. This may be an efficient way to dispense a large quantity of information to a large number of people in a short period of time.

However, people don't integrate training that is dumped on them in large quantities. They learn in chunks that are small enough to be understood and they integrate that which can be acted on immediately. People don't make wholesale changes.

Training, which is intended to change behaviour, must be structured into bite sizes that can be immediately implemented. Typically, this would limit each training session to 7-14 hours with time between sessions for application and practice.

This structure may increase the immediate out-of-pocket cost to deliver a programme; however, your rate of return on the training investment will be substantially higher.

Failure to define objectives

Managers and business owners typically are much too vague when defining objectives for training programmes. Far too much training is bought because someone "gets sold" on a particular vendor's programme rather than investing in a process designed to achieve specific results.

Even when vendors are asked to conduct a programme in-house, management objectives are often defined in vague terms such as "be better at prospecting" or "be better supervisors". A more useful objective would be "to set 15 appointments each week with qualified prospects".

Research shows that one of the most important factors that determines training effectiveness is the expectation that participants are given by their manager before the training begins. For example, "As a result of this training, we expect you to begin ________ behaviours and achieving ________ result."

Yet far too many participants in training programmes are given no expectations except to show up. Is it any wonder that participants evaluate training based on how well they are entertained?

Failure to implement follow-up

When working with either an in-house trainer or outside vendor, it is important to have a follow-up plan in place. This follow-up plan should include such items as how to monitor progress, accountability systems, next steps in the skill building, and how to supervise and support each person as they apply the training. It is often helpful to include follow-up monitoring as part of any training contract.

Lack of commitment

Too many managers have the attitude of "fix those people down there" without a commitment to live by the guidelines they want their people to follow. This is most vividly seen in companies prodding their employees to go the extra mile for external customers while the company does very little to assure the right climate for employees inside the company.

Make training succeed:

There are several key points that should be remembered to make staff training truly effective:

  • Prioritise your areas of need
    Identify those areas where an upgrading of skills would bring a high return. Look for the high leverage positions. If your company is sales or service driven, a useful place to look is to those who have direct contact with your customers and the people who manage or support them. If your company is manufacturing driven, then look first to those who directly affect the productivity and quality of the production process.

  • Begin at the end
    Determine the results and behaviours you want before considering design, cost or vendor. Skills training should produce behaviour changes and subsequent business results. And these results should provide a high rate of return on the training investment. Define very clearly what results you want to see and what behaviours you believe will produce these. Once these are clear, determine an appropriate investment.

    Think Return on Investment (ROI) first, rather than budget. Doing something just because it happens to fit in the budget often results in squandered money and staff time. Not having the budget to make a high return investment is a lousy reason to make a low cost/low return investment.

    If you don't have the budget to make a high ROI investment, then either re-negotiate the budget or wait until next year when you can combine two years' budgets. With whatever budget you can negotiate, think results before thinking quantity. It is much better to fully integrate one skill upgrade for your team than to expose them to a lot of training that doesn't get applied.

  • Specify and prioritise your criteria
    Implementation effectiveness should be at or near the top of your criteria list. Three weeks after the training is complete, nobody will be concerned with how entertaining the trainer was or how colourful the materials were. Most will want to know, "Is it producing results?" Carefully consider the quantity and quality of implementation assistance.

  • Examine how your company can support the new behaviours
    Examine such things as achievement bonuses, recognition programmes, and coaching support. Set clear expectations for those in the training for what they are to learn, how you expect them to perform, and what results you want. Determine how you will monitor their performance and how you will provide feedback.

    Training is often a critical piece to the solution. However, it is rarely the only piece. In order to make your investment in training pay off, think about the total solution and how to integrate all the components of the solution. By doing this, your training will be more successful. It will produce results.

by Frank J. Adick, CSP, CMC (USA)
managing director of training institute and management consultancy
Dew-Point Int'l Ltd

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