Introduction

Mainland China's imminent accession to the World Trade Organization has incited hot debates in the local community, on its benefits and disadvantages, opportunities and challenges for Hong Kong's economy. Hong Kong manufacturers are among the most active to take part in these debates, because, a matter of fact, they are one of the groups that are at the eye of the WTO wind.

At the eye of WTO wind

Hong Kong's manufacturing has been undergoing a process of relocation and expansion in the recent decades. Since the 1980's, Hong Kong manufacturers have grasped the opportunities arising from Mainland China's open door policy and shifted labour-intensive production process northward. The significance of the manufacturing industry in our economy, in terms of both GDP contribution and employment size, has been diminishing dramatically. The percentage of industrial output in GDP has declined from 23.7% in 1980 to less than 7% currently, while its contribution to employment dropped from 46% to 12%.

However, at the same time, there had been 184,824 Hong Kong-funded projects in the Chinese mainland by the end of 1999, with contracted and utilized capitals amounting to US$ 311 billion and US$ 154.8 billion respectively. The bulk of these investments, in fact 70%, are primarily engaged in manufacturing. A latest survey by the Chinese Manufacturers Association of Hong Kong (the CMA) shows that 86% of CMA members have extended operations across the boundary, and much impressively, more than half of them have sunk over 60% of total assets value in the Mainland. Not exaggerated to say, Hong Kong manufacturers have successfully develop a vast offshore production base on the Mainland, while simultaneously transforming their Hong Kong operations into control and managerial centers, which specialize in higher value-added activities, such as R & D, information collection, merchandizing, marketing and financing

Given Hong Kong manufacturers' overwhelming investment positions in the Mainland, China's WTO accession will exert much direct and extensive impacts on them. For the one thing, Hong Kong manufacturers have been a major locomotive for China's externally-oriented economy, and they have served as an important intermediary to bridge China and the world economy. These roles will probably be maintained, and even strengthened in the post-WTO era. For the other thing, as long-standing practitioners in the Chinese market, Hong Kong's manufactures will face a "Double-edge Sword" scenario much as China's local enterprises will do. These observations boil down to a proposition: that with China's WTO accession, Hong Kong manufacturers will probably enjoy more opportunities than companies from other countries, but on the other hand, they are much likely to bear the brunt of the adverse impacts that may ensue.

Changes in operating environment

In general, China's WTO accession will influence Hong Kong manufacturers mainly on three accounts. The first one is the market opportunities. An immediate benefit of China's entry to WTO is the entitlement to multilateral, extensive Most Favored Nation treatments, whereby China can somewhat ward off the rampant discriminations imposed by industrialized nations. Moreover, under the umbrella of the WTO, China can resort to the Organization's arbitration mechanism to settle trade disputes with other members. This will pave the way for China's products, including those churned out by Hong Kong-owned factories, to make inroad into the developed markets. On the other hand, to meet the requirements of WTO, China is accelerating the opening up of domestic markets. Recently, the Foreign Investment Enterprises Law has been revised and the stipulations on export obligations have been repelled. This change signifies a greater degree of autonomy for Hong Kong companies to expand the sales of their products in Mainland's market.

Secondly, with China's WTO accession, Hong Kong manufacturers' subsidiaries in the Mainland will enjoy more favorable operating conditions. As of the start of this year, the Central Government has reduced the general tariff level from 16.4% to 15.3%, covering 3,462 items. With further tariff cuts in the pipeline, the costs of imported production materials can be saved substantially. Moreover, capitalizing on China's new initiatives in opening up more areas to foreign investors, Hong Kong manufacturers will be allowed to set foot on more sectors subject to restrictions previously, including retailing, wholesales, international trade, telecommunication and Internet. The increasing presence of foreign services companies, especially Hong Kong-based financial institutions and trade-supporting firms, would also bode well greatly for manufacturers, enabling them to upgrade efficiency and reap the benefits of synergy.

China's regulatory system towards foreign investment has invited complaints from time to time, at its ambiguity, inconsistency, lack of transparency, red tape, and onerous sub-charges and levies. WTO has been a catalyst for China's transformation towards market economy, and no need to say, it will offer a further boost for China to come up with institutional arrangements that are rule-based, in line with the international practices, and more friendly to foreign investment. Actually, according to the CMA's survey, most Hong Kong manufacturers are expecting a sounder regulatory framework in the Mainland, and they have rated this as the most important benefit that they are expecting from WTO.

A third aspect that deserves attention is the competition environment in China after the entry to WTO. WTO advocates and facilitates free trade and free flow of investment. With China speeding up its pace in market liberalization, it is bound to become a battlefield chased by market-seeking players from all over the world, including Western companies. Recently, there has been an inundation of reports on jumbo Multinational Corporations announcing new investment projects in the Mainland. By virtue of the superior size, strength and advantages in technology, these big players will probably dwarf Hong Kong's manufacturers, who are mostly smaller in size and engaged in relatively labor-intensive, low-end production. Much likely, Hong Kong companies will see an erosion in their bargaining position in relation to Mainland Government, and they also need to brace up for much fierce competition when securing operational resources, such as product outlets, raw material and especially, high-quality manpower in the Mainland.

Also emerging on the horizon of the battlefield are local enterprises of Mainland, which have been growing very rapidly in the recent years. WTO will give them a further lift by offering not only opportunities for business but also pressure for restructuring. In view of these, such stiff competition environment could put Hong Kong manufacturers in deep water, which they must tide over, in order to grasp the abundant opportunities lying ahead.

Rising to the occasion

How should Hong Kong manufacturers rise to the occasion and turn challenges into opportunities? Answers to these critical questions can be explored along three lines of thinking:

First, how to fully exploit the existing advantages. Hong Kong manufacturers are well known for their adaptability, flexibility and business acumen. They have an edge in respects of market intelligence, financing channels, marketing expertise, and managerial skills. Moreover, because of Hong Kong's strategic status as the gateway to China, they also have geographic proximity, cultural affinity and social connections with China. In fact, Hong Kong manufacturers has been playing a role of integrator ^__ who combine Hong Kong's as well as their own merits with China's advantages in low-cost labor, abundant resources and market potential. It is such integration that has laid down the ground for Hong Kong companies' previous achievements and will continue to underpin their future success in the post-WTO ages. Besides these "traditional" edges, Hong Kong manufacturers should also leverage on another strength ^__ "first mover" advantage. They can keep head start in stepping up readiness for WTO, branching out into newly-opened investment areas and venturing into China's vast Mid-west regions.

Secondly, how to re-shape the intra-firm division of labor. Thus far, Hong Kong manufacturers have mostly followed a vertical pattern to structure the division of labor between their Hong Kong operations and Mainland factories. According to the survey by CMA, 87.8% of its members export the bulk or even up to 100% of the goods manufactured in the Mainland, mostly via Hong Kong under re-export or transshipping arrangements. In regard to the intra-firm synergy, more than 80% Mainland subsidiaries depend heavily upon Hong Kong headquarters for supports in finance, marketing, purchasing, R&D and technology. However, after China joins the WTO, it is unavoidable that Hong Kong companies will shift their focus more from international market to domestic market, they will increase the reliance on local materials and equipment made in the Mainland, and probably, have more access to Mainland's financial market for working capital. Such emerging trends are calling for a review on operating models and strategic thinking.

Last but not the least, how to scale up the technology cycle. Technology issue has attracted a lot of attention recently in Hong Kong, especially when we realize that Hong Kong has kinds of being left behind by the New Economy Era. Factually, not only in Hong Kong, but also in the Mainland, many Hong Kong entrepreneurs can feel the increasing pressure for technology upgrading. Their labor-intensive technology has been losing luster now that manpower and land costs are on the rise in the Mainland, and local enterprises are catching up. Undoubtedly, this situation will become more critical with the competition intensifying after the WTO accession. Indeed, from a long-time viewpoint, technology and the ability to enhance value adding hold the key to Hong Kong manufacturers' sustainable development in both Hong Kong and Mainland China.

Conclusions

In a nutshell, due to their large investments across the border and the status as a long-standing practitioners in the Mainland market, Hong Kong manufacturers are bound to experience sea-changes in their market profile, operating conditions and competition environment after China's accession to the World Trade Organization. To step up preparedness for WTO and also to enhance long-term success, Hong Kong manufacturers should lose no time in re-sharpening strategic thinking, re-engineering organizational structure and much importantly, upgrading technological competence.