Hong Kong has given up trying to compete with mainland China for most manufacturing business. Never mind the territory's reputation for efficiency, stability, low taxes and minimal regulation - it simply can't match the mainland's army of cheap labor and booming factories, churning out every conceivable consumer and industrial product. But now, China is siphoning off business in a sector that Hong Kong considers vital to its future well being: logistics and supply-chain management.
Consider New Balance Athletic Shoe Inc. For five years, the big seller of sports apparel and gear has been shipping the bulk of its China-sourced orders through mainland Chinese ports. At least 75 percent of New Balance products traveling by ocean now exit through the Port of Yantian in China's Guangdong Province, according to Jim Sciabarrasi, corporate manager of sourcing, purchasing and logistics.
The reasons? "It's a lot less congested and closer to our factories [in Guangzhou]," says Sciabarrasi. "There are fewer fees and fewer trucking elements. It's simpler, faster and cheaper. And Yantian is a very solid port."
That's an unsettling message for Hong Kong, which boasts the world's busiest container port and has long served as the logistical gateway to China. Yet it's echoed by a growing number of companies.
"From an administrative standpoint, we've chosen Hong Kong as our buying office location," says Angel Garcia, director of global trading with Ace Hardware Corp., largest hardware cooperative in the U.S. "It's the place to be on the ground. But for product sourced in China, we ship mostly out of the mainland. It's more cost-effective."
The same goes for toymaker Mattel Inc. "The majority of our products produced in China are shipped from China, not Hong Kong," says spokesperson Lisa Marie Bongiovanni. "There is not really a trend - we've been doing this for quite some time."
Few companies see it as an all-or-nothing proposition. Sciabarrasi says New Balance continues to ship through Hong Kong's port when it needs to reach countries outside the U.S. or Europe. Yantian lacks the variety of sailings to service the whole world efficiently, he says. And Ace Hardware's Garcia says Hong Kong still handles huge amounts of finished product and consolidations linked to China proper. Still, the mainland is grabbing an ever-larger share of business that once was exclusively Hong Kong's, and the trend shows no sign of slowing down.
Weathering Tough Times
While maintaining its status as East Asia's dominant hub for global trade, finance and logistics, Hong Kong has weathered more than its share of misfortune in recent years. First came anxiety surrounding the British-ruled territory's transfer to Communist Chinese control in 1997. Investors and citizens alike feared the loss of both personal freedoms and a freewheeling business climate operating under decidedly capitalist rules. That didn't happen for the most part, thanks to negotiation of a Basic Law for the new "Special Administrative Region," promising a continuation of Hong Kong's way of life for another 50 years.
But immediately after the handover, the sudden devaluation of the Thai baht triggered a currency and banking crisis throughout much of East Asia, and Hong Kong wasn't entirely immune. Determined to maintain the Hong Kong dollar's link to the U.S. dollar, officials instead witnessed a bursting of the property bubble. Virtually overnight, government revenues plunged due to a halt in property transactions. Foreign investors, thanks to the vaunted liquidity of Hong Kong's markets, pulled their money out. The result was six years of flat growth or economic contraction. Interest rates soared and unemployment peaked at 8.6 percent - remarkable for an economy that had boasted virtually full employment only a few years earlier.
Additional body blows came in the form of the high-technology bust and severe acute respiratory syndrome (SARS) epidemic, the latter of which caused travel and public life in Hong Kong to grind to a near-halt for a period of months.
Ironically, a place that had been considered the economic engine of China found itself turning to the mainland for help. Hong Kong Chief Executive Tung Chee Hwa - his very title an indicator of the territory's fixation on business - appealed to Chinese authorities to loosen restrictions on Chinese citizens visiting Hong Kong. Given the freedom to spend more and travel individually, instead of with expensive, confining tour groups, they flocked across the border. The mainland now accounts for 60 percent of Hong Kong's total tourist trade, says Michael Chan, executive director of Bank of China International Research Ltd. At the same time, China and Hong Kong entered into a Closer Economic Partnership Agreement (CEPA), which strips away all import tariffs for Hong Kong-originated goods and allows many Hong Kong businesses to operate in the mainland without a local partner.
|"The pie will get bigger. There's business to be done by everybody."|
- Dora Kay of Hong Kong Airport Authority
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