China has been in the spotlight since the 1980s by virtue of phenomenal economic growth. On the back of increased economic stature, escalated income level and continued improvement in distribution system, China's domestic market has developed by leaps and bounds in respect of breadth, depth and efficiency as well. Recently, the Chinese Government has speeded up the opening of domestic markets, on both product and services fronts, to foreign participation as part of its concerted efforts to bid for the WTO membership. The level of tariffs on imported goods has been substantially cut down, restrictions on domestic sales have been eased and the scope for foreign companies to invest in China's distribution industries gradually enlarged. All these new developments have, in one way or the other, paved the way for international investors to tap China's immense domestic market.

Members of the Chinese Manufacturers' Association of Hong Kong (CMA) are pioneers in venturing into Chinese market and they have established a substantial investment position across the border. Leveraging on "first mover" advantages, many CMA members have taken the lead in exploring domestic sale opportunities. In view of this, the Association conducted a questionnaire survey during June to August 2001, aiming to grasp the current status and characteristics of members' domestic sales, keep abreast of their future plan and developmental strategies, and solicit their viewpoints on the environment as well as prospects of Chinese market. The survey adopted the self-completion approach and received 168 valid replies.

Respondents to the Survey come form over 10 industries, including garment, metals, textile, electronics, plastics, toys, pharmacy, import & export (I/E), and trading. 75.6% of these companies have a sales volume of over HK$ 10 million per year, while the mean and median of the sample's turnover can be roughly estimated at HK$ 94 million and HK$ 25 million respectively.

Among the responded companies, more than 80% are involved in B2B (Business to Business) activities, supplying goods to corporate customers, while 13.1% specialize merely in B2C (Business to Consumer) business. Taking the 168 sample companies as a whole, B2B accounts for 75.8% by sales value, of which 63% relates to finished products and 12.8% to semi-finished products, e.g., components, parts and materials. As far as operational model is concerned, the majority (73.2%) of responded companies follow the oft-seen OEM mode (Original Equipment Manufacturing). At the same time, 53% companies claimed that they have been involved in ODM (Original Design Manufacturing), and the corresponding percentage for OBM (Original Brand Manufacturing) scores an impressive 35.1%. On average, OEM business constitutes 50.9% of the total sales value of the sample companies, with ODM (24.1%) and OBM (21.6%) together garnering the other half.

In regard to the geographical structure of sales market, the responded companies have generally achieved some degree of diversification. USA and EU (European Community) remains the prime destinations, each absorbing 27% of all respondents' products, while Hong Kong, Mainland and other Asian countries take in 19.6%, 10.3% and 11% respectively. Although 44% respondents have begun dispatching products to the Mainland, their exposure to Chinese market is still far from significant - which averages out at 23.5% as a share of these companies' turnover. Under the current regulatory regime, there are three major avenues for Hong Kong products to enter the Mainland market, i.e., imported by Chinese Foreign Trade Companies (FTC), through PIM (Processing of Imported Materials) of FIEs (Foreign Invested Enterprises), and under subcontract arrangements commissioned by Chinese companies. In a sense, these channels are no more than basic I/E (Import & Export) practice or peripheral activities derived form foreign direct investment (FDI).

Although Hong Kong products' inroad into the Mainland is still at its early stage, the room for development should not be underestimated. As evidence of this, 83.4% of the responded companies have indicated interest in making debut or increasing presence there over the coming two years. According to these companies, China's rapidly growing market size, improved transportation and logistic infrastructure, the recent moves of deregulation, as well as the established relationship with local suppliers/distributors, are the primum mobile behind their enthusiasm. It follows that this new tidal wave of marketing in the Mainland is not only a direct ramification of the institutional shifts, but also a lead-up of the "pull factors" arising form the economic arena.

However, due mainly to the so-called "cognitive lag" and "implementation lag," many companies surveyed (66.1%) have not yet come up with concrete plans to crystallize their aspiration for domestic sales. To some extent, this phenomenon is a reflection of Hong Kong companies' prudent attitude towards China's controversial market environment, which is still plagued by lack of transparency, onerous burden of opaque levies and sub-charges, rampant violations of intellectual property rights, and insufficiency in financial services.

Relatively speaking, companies with experience in domestic sales are keener on new opportunities in the Mainland market, with over one-third of them having plans for further development. These early birds have an inclination to follow a "from South to North, from coast to inland" strategy in extending their business realm across China's vast territory. In particular, East China and North China are expected to replace South China as these companies' marketing focuses, while Central and West regions are also taking on increasing importance. In contrast, companies that are new comers tend to replicate the "Flying Geese Pattern," that is, they are likely to tread in the step of their pioneer counterparts and establish footholds foremost in South China, followed by East and North China.

Changes on the institutional front often trigger off adjustments in enterprises' developmental strategy and modus operandi. To the extent that the liberalization of Chinese market has substantially increased the maneuverable room for foreign investors, most companies responding to the Survey have declared that they would adopt a wider variety of strategies to pursue market share in China. Along with establishing strategic alliance with local enterprises, many companies opt for a focus approach - either by setting up a wholly-owned subsidiary to handle domestic sales or investing directly in China's distribution industries, e.g., retailing, wholesales and I/E., Much impressively, a number of responded companies, especially those that are devoted to cultivating ODM/OBM, have attached much importance to the brand name strategy, in an attempt as to capitalize on China's emerging market to speed up the upgrading of operational mode.

With Hong Kong companies stepping up their presence in the domestic market, the division of labor between the Hong Kong and Mainland will further deepen and broaden. Under the new cooperative pattern, Mainland is bound to become Hong Kong's all-around hinterland that combines production base, market outlet as well as strategic partner. To make this win-win situation happen, it is imperative for the Mainland to press ahead with the improvement on "software" of market environment, especially in respect of institutional factors. Among other things, it is suggested that China should devote immediate efforts to establish a policy environment that have a high degree of openness, transparency and consistency, set up a taxation environment that observes the principle of fairness, clarity and simplicity, put in place a regulatory environment that is impartial, rigorous and intellectual property-based, and to develop a financial environment that has the merits of efficiency, soundness and functional competence. On the other hand, for Hong Kong chambers to enhance their pivotal role as facilitator and coordinator, they should make efforts to line up value adding services, such as providing market intelligence, interpreting and disseminating policy changes, identifying role models and promoting intra-industry experience sharing, and fostering cooperation between Hong Kong and Mainland enterprises.

(For a detailed Report, please contact Mr. Hilson Yan, Manager for Industrial Development and Research of the CMA by Telephone: 2542 8631, Fax: 2541 4541)