"Industry" refers to manufacturing industries as an economic sector; "industries" refers to types of industry. (paragraph 2.2)

Hong Kong is in an extremely advantageous position as an effective hub through which capital and technology flow. (paragraph 3.5)

If we rely on the service sector, we are passive; if we rely on industry, we can be much more proactive. (paragraph 3.14)

The types of industry for Hong Kong upon neo-industrialization should be those applying new and higher level techniques and machines to produce goods of much higher quality and design for export. They enhance "Hong Kong" as a brand name. (paragraph 5.4)

If one takes the wider perspective of Hong Kong and the Pearl River Delta, the place of industry is best described by two noted studies, namely "Made By Hong Kong" and "Made In the PRD". There is no dispute about the importance of maintaining Hong Kong's position as the key producer service centre for HK-controlled factories in the Mainland, especially the PRD. However, it does not follow that the "Made in PRD by HK" model is the be-all and end-all for Hong Kong industry - or else Hong Kong should have been enjoying the same economic growth enjoyed by the PRD, rather than experiencing recession while the rest of the PRD is growing. A re-conceptualization of Hong Kong industrial development is thus needed. This should cover all economic sectors, and industries, as the "original industrial driver", should be an important component.

The "shrinking" of the world as a result of the globalization of economy and market regionalization has rendered it even more difficult for our industry. Boundaries between sovereign states are now no longer effective demarcation lines as they are ignored by those simply seeking locations which can offer them the highest profit and as changes like China's membership of WTO are making such boundaries more and more "porous". The competitors are now so much nearer and so much stronger. The threat this implies is that of marginalization of Hong Kong, which must be examined thoroughly. Hong Kong's position is still very strong, but we should not be complacent. Throughout history examples abound of cities and states changing or losing their roles if they fail to adapt to the changing environment. The continual economic decline in the face of growth in the rest of the country must sound a warning bell for Hong Kong.

The first fundamental question to ask in the quest for neo-industrialization in Hong Kong is: what industries? The reality is that Hong Kong is a high-cost and high-wage economy, and that there has been a "flight of industries" from Hong Kong, the high vacancy rate in factory buildings and the many non-industrial uses in factory spaces being cited by some as evidence of such flight.

On the other hand, it should be recognized that some traditional industries do still remain in Hong Kong for their own good reasons (such as the jewellery industry for skill, security, licence and brand name reasons). Furthermore, a great deal of the apparently non-industrial uses in factory space are in fact industry-related, e.g. showroom for products made in the Mainland. Hong Kong is thus not totally devoid of industries.

The key question posed by the LTDPG is this: Is there a case for industry in Hong Kong? We consider that a valid case can be made, based on the following reasons and observations.

With an existing population approaching 7 million and a forecast of over 8 million by 2030, Hong Kong will definitely continue to have a very large working population. Being a metropolitan economy, the working population must be characterized by diversity - unlike agricultural or tourism-based economies where the employment pattern is limited. On employment diversity alone, Hong Kong must not be dominated by the tertiary sector.

Even in high-cost USA, manufacturing industries in 2000 generated 15.9% of its GDP (Reference 1). In the same year, Hong Kong's manufacturing industries still produced 5.9% of its GDP and supplied 10.4% of employment, even if related services activities are excluded. These figures can be increased with significance with neo-industrialized.

Hong Kong sits next to "the world's factory" and much of our economic activities are tied to that of our neighbour, the PRD. It is inconceivable that our contribution to PRD is only of the "pure services" kind. Furthermore, the PRD is not itself a static entity; it has generated much development momentum of its own. In harnessing on the growth of industry in the PRD, Hong Kong must identify a role for itself in relating our own economic activities more closely to PRD industries, and we cannot convincingly do that if Hong Kong is itself totally devoid of industries.

Given "one country, two systems", our economic integration with the Mainland is structurally different from that of other world cities with their hinterland. In many ways Hong Kong has to function as a separate, independent economic entity, more a "city state" like Singapore than a "national city". Hong Kong needs a balanced economic structure. London and New York (often cited as our model cities) can integrate their long- and short-term economic development with the rest of their respective countries through such means as "exporting" unemployment and "importing" prosperous wealth-generating economic activities. Hong Kong is in a very different situation. Hence, in seeking to integrate with the PRD, we should have our own industrial strategy, and not be passively driven by industrial development of the PRD. Given that the PRD's strategy is industrial-based, how can Hog Kong's own economic strategy ignore that of industry?

The painful experience in the economic downturn has highlighted the need to re-think our positioning as a service economy. Broadly speaking, there are two types of service industries, the internal, consumption-oriented type, and the external oriented, "producer" services. Clearly, it is the producer services that have been driving the economy. With the exception of tourism, the competitiveness of consumer services is limited as standards in the Mainland catches up, and its multiplier effect is not significant. By contrast, producer services generates wealth and growth. An industrial base in Hong Kong will facilitate the more diversified development of producer services, through the close functional relationship between the secondary and tertiary sectors.

The close inter-relationship between manufacturing and services is highlighted by the concept of supply chain, which "shrinks" the distance between production and consumption. Taking advantage of our efficient infrastructure, our rule of law, and our first-class international trading relationship and information systems, Hong Kong should be the most effective coordinator in the world supply chain in the production of commodities by industries in different parts of the world. By proactive involvement in the global supply chain, we can ensure that we will not be marginalized in the ever growing global competition, i.e. a model of "made by Hong Kong in the PRD and anywhere in the world".

No community should risk putting all its economic eggs into one fiscal basket. The tertiary sector is particularly vulnerable to the influence of external factors beyond our control, due particularly to globalization and regionalization. Recent events like the Asian financial crisis and its aftermath, as well as SARS, have proved beyond doubt the tremendous adverse impacts if most members of our workforce are employed in such a sector.

We believe there is a resounding case for Hong Kong to have an industrial strategy. The question is, what strategy, and which type of industries?

Since 1997, the cost of factory space in Hong Kong has dropped to the extent that the rent disparity between Hong Kong and the Mainland is no longer a determining factor in the choice between the two locations. This is especially true for industries for which the cost of space is only a small portion of the total production cost. Labour cost in Hong Kong has also decreased, though to a less significant extent but still sufficient to have positive impact on the decision to move back.

At the same time, the Mainland is getting more expensive, especially Hong Kong's neighbouring areas. In addition, their local governments are taking increasingly stronger actions to enforce their laws, such as the environmental protection legislation, thus adding further to the cost of production. Hong Kong factories staying north of the boundary must now seek new "havens" yet farther away in hitherto under-developed areas in the Mainland, a solution not preferred by industrialists who do not want to move farther and farther from their families and headquarters in Hong Kong. Relocating back is thus one possibility.

As the Hong Kong-Mainland boundary becomes more "porous", more methods will be derived to speed up the cross-boundary flows of people and cargoes, facilitating the production of industrial goods for consumption in the Mainland.

The banks in Hong Kong have after 2000 adjusted their attitude toward lending capital to industrialists. While they previously only welcomed mortgage for those with "brick and mortar", which very few industrial enterprises own, they are now willing to lend support to industrialists for such purposes as the purchase of production equipment, at interest rates similar to property mortgage. The Government's loan schemes to assist SMEs in procuring production equipment also helps.

China's membership of WTO will also have its effects on location decisions of these industrialists. On one hand, this will soon mean that Hong Kong industrialists will have to compete on equal ground with foreign firms while they are in the Mainland producing similar goods. On the other hand, if CEPA will finally come to fruition this year as anticipated, barriers like import tax would be resolved to the advantage of industrialists producing commodities in Hong Kong for the Mainland market.

China's membership of WTO will mean that the quota system will be abolished in 2005. It is hence no longer advantageous to remain in the Mainland. There may be room for some industries to return to Hong Kong to make use of its good attributes.

Hong Kong maintains much better international relationship and its systems are well integrated with international practices. All the Hong Kong advantages which are being promoted to the international investor - its efficiency, its law enforcement, its first-class port, airport and logistic facilities, and its effective intellectual property protection - should make Hong Kong equally attractive to Hong Kong's own industrialists in the right industries. There is the added advantage that factories in Hong Kong are more sociologically acceptable and functionally convenient vis-a-vis their headquarters and design and packaging functions.

"Hong Kong" is still a brand name in the world market. Hong Kong-brand products are regarded as high-quality and well-designed, thus commanding a premium compared to similar products made in the Mainland. Obviously, there must be industries in Hong Kong if products are to be "Made By Hong Kong".

All of the above favorable reasons do not change the fact that cost disparity between Hong Kong and the Mainland is still substantial. This and other problems will either have to be overcome in time, or there is a need for a new approach to industrialization whilst fully recognizing our constraints and limitations. The LTDPG's preference is not to try to attract factories back to Hong Kong by "overcoming the problems", but to seek a new model of industrial development under which the "problems" are conceptualized as a specific relationship with our neighbouring economy, which can be used to our advantage instead of persisting as our threats.

This new model will have to address three questions. First, what types of industry should be developed in Hong Kong? Secondly, what is the relationship between production in Hong Kong and the Mainland, especially the Pearl River Delta? Thirdly, what is the institutional support which can bring this neo-industrialization about?

Technology-enabled traditional industries, e.g. the computerized cutting process in the garment industry, printing industry using modern multimedia equipment;

The service-enhanced industries which combine advanced manufacturing and new service possibilities in design, customization, rapid delivery, quality, and product novelty and uniqueness; (They would take advantage of Hong Kong's excellent infrastructure, services, ability to serve both the Western and Asian markets, and international relationship, to produce goods of style and taste, offering total customer solutions. Some of these are described in "Made by Hong Kong", e.g. the production of Chinese herbal medicine with modern scientific techniques.)

High-value goods with high design content, notably jewellery, which adds to the reputation of Hong Kong as a manufacturing centre of high-quality goods;

High-technology industries, including electronics, bio-technology and nanometrics;(There are many problems to overcome, such as availability of experts and manpower, and insufficient resources on R&D, but these are in our view not insurmountable.)

The second question, that of the relationship between Hong Kong industry and its counterparts in the Mainland, is closely related to the first. It will be apparent that none of the industries mentioned above as offering good potential for a neo-industrialization of Hong Kong can be considered a "stand-alone" industry in Hong Kong. If the neo-industrialization we have described is successful, Hong Kong will be one part of a bigger production process which takes place in the Mainland and in other territories around the world. The challenge is to keep the high-value, productive and useful processes in Hong Kong. Another way of putting this is that Hong Kong should position itself as the centre of a seamless global industrial supply chain. Irrespective of specific industries, therefore, Hong Kong should play a role in the globalized productive and supply-chain process. This means that while not all industrial processes will take place here, Hong Kong will take up some industrial processes along the way, either directly, or through our service sector supporting the industries in question. In particular, Hong Kong's contribution is to add value to the process by forging a seamless process in global production and supply.

The third issue, that of institutional support, begins with the question of the Government developing an industrial policy. Such a policy provides the basis for the Government to guide, coordinate and enable the development of industry in the "seamless supply chain" of modern industries. It will provide guidance to investors as well as clear directive for the Government departments, universities and business support bodies to coordinate various measures relating to land, infrastructure, workers and support services to the industries. It coordinates and facilitates.

Government leadership and assistance are not the same as Government interference or intervention. An industrial policy is not the same as a rigid blue print; nor does it imply a planned economy. But it does differentiate between organized and disorganized growth. It represents the Government's policy support and shows Government's intention, sincerity and commitment. It can and should be a "proactive market enabling" measures, fully consistent with the "positive non-interventionism" concept.

An industrial policy should be frequently reviewed so as to reduce rigidity and increase relevance. Its constituents should include: clear indication of the types of industries and processes Hong Kong would welcome; the types of workers needed and where they would come from (local or imported); infrastructure support and planning; external promotion and facilitation; direct and indirect advantages and assistance.

The policy should be supported by concrete measures to facilitate industries. Some of these are as follows.

It has been suggested that an "Industrial Technology Promotion Board" should be set up. Its members should be industrialists and experts in technology.

An expertise training programme for government officials in related portfolios. Some industrialists have pointed out to the Group in no uncertain terms that they had decided to establish elsewhere due to the attitude, outlook and ignorance of the generalist officers in the Government. Attitude should be changed and relevant departments should be manned by officers fully conversant with the needs of industries and with the possible ways to meet these needs.

The relationship between ASTRI (the Applied Science and Technology Research Institute) and industry should be further strengthened. One of the reasons given for Hong Kong dropping behind others in industrial development and in our ability to compete has been the insufficiency in our investment in research and development (R&D). It has been pointed out to us that the investments in industrial R&D in Canada was 1.83% of her GDP, Japan 1.93%, Korea 3.22% and Mainland China 0.853%. The equivalent for Hong Kong was less than 0.5%. Although substantial sum has been invested, albeit indirectly, in R&D through technological centres and universities, Hong Kong is still hardly convincing as an R&D centre. In stepping up our effort we should take an integrated approach and not just limit our R&D to specific segments of "science and technology".

Manpower training is an important ingredient of our industrial policy. The vocational colleges and universities should continue to provide training but there should be a shift to modern forms of technological requirements, e.g. knowledge in the maintenance of new and expensive machines used in the modern factories. In addition, the overall "training environment" should be enhanced by relating Hong Kong industries more to their offshore counterparts, e.g. by making it easier for industrial workers to move across the boundary.

In addition to training in vocational colleges and universities which may not produce the personnel with exactly the skills required by the industries, many industrialists prefer to train their own workers, but this requires the Government to assist by paying parts of the trainees' salaries/allowances.

A revamp in the education system is needed to produce people with innovative minds. As Hong Kong can only afford to have industries producing high value-added, well-designed, original, high-quality commodities, a continuous supply of creative brains is a pre-requisite. Hong Kong may have to import these skilful workers at the beginning, but our educational institutions should begin to be reformed with "innovation" and "creativity" built in as a fundamental aim.

The Government has to supply adequate and suitably serviced industrial land, together with the required supporting external infrastructure, to meet the needs of the new industries. The many existing industrial areas may not fulfill these requirements. Whilst the Science Park and Cyberport now under construction may be suitable for special and high-tech industries of very special nature, appropriately planned and developed new industrial land might be called for to achieve the objectives of neo-industrialization. This could perhaps be done through modifying the present industrial estates approach. We may have to consider whether we would need other types of industrial land such as non-polluting industrial parks, warehouse/distribution parks, logistic parks, research parks, technology parks, incubator parks and corporate parks. A number of other implementation issues will also need to be addressed, such as the criteria for allocating land to build customized factories, the possibility of controlling the use of factory spaces through "performance standards", distribution of industrial zones vis-a-vis their relationship to surrounding land uses, the creation of a cluster effect, etc. The Government could make use of the current Territorial Development Strategy (that is Vision 2030) to address some of the more long-term issues.

The Government can help promote our industrial development and industrial production in the Mainland, by expanding the presence of the Economic and Trade Offices in the Mainland. Their staff should be properly trained to enable them to conduct face-to-face exchanges on technical industrial development matters with experts in the field.

Many new industries, particularly the high-tech industries, consume large quantities of electricity. The Government can help to reduce the cost of production by finding ways to reduce the price of electricity. With the ending of the Scheme of Control of electricity industry in 2008, a structural reform in the regulation of electricity supply is now under way. A reduction of the cost of electricity should be made an explicit aim of this reform.

As a necessary step, the HKSAR Government should undertake a thorough study, either by itself or through commissioning a consultancy, on how other governments have helped and are helping their industries. This study should form one of the bases to formulate our plan to assist our industries. (The report listed as Reference 1 has suggested a number of areas where the Government can help.)

It will certainly be asked: why should industries be assisted while other economic activities are not? The others are in fact assisted, though indirectly and inconspicuously - disguised as services and infrastructure, for instance. Industries require more help, not only because they involved much heavier investments of capital - they employ many more people, they require expensive techniques and know-how, they often need purposely designed sites and buildings as well as suitably laid out districts, many of them can readily find homes elsewhere unless we can attract them to stay or relocate here - and they have been neglected in the past. Indeed, we did help some industries - the industrial estates, and now the science park and cyperport.

It should be said that the policy described above may not be helpful to those currently unemployed. But it should at least provide a stronger and more diversified basis in the economy for suitable jobs to be generated, which will hopefully be of help to some of the displaced workers. However, we acknowledge the reality that some previous industrial workers will still remain unsuitable for employment even as more industrial jobs are created. In other words, neo-industrialization may lessen but will not completely resolve the problem of structural unemployment. A complete solution will have to be based also on a suitable population policy that can satisfy our manpower needs on the one hand, and provide relief and jobs for our displaced workers on the other.

Hong Kong must strengthen the various components of its economy and must diversify its economic development. One essential tool to achieve these objectives is to capitalize on our advantages. This point is stressed in the Chief Executive's recent policy speech. Neo-industrialization is an inevitable step in this process. The one important gap is policy support.

Hong Kong must find ways to create wealth. In promoting Hong Kong's place in the seamless global supply chain, neo-industrialization will help to revitalize Hong Kong's economy, upgrade our competitive capacity, generate employment opportunities, and rejuvenate Hong Kong. It can help Hong Kong regain its strategic position in the global economy and prevent it from being marginalized.

To succeed in neo-industrialization in the face of very strong competition from the Pearl River Delta areas, Hong Kong has to look farther a field. We must forge a stronger relationship with our PRD neighbours so that together we can stretch our arm to hitherto less tapped areas in the Mainland.

Hong Kong, like the other territories which lost their original industries to regions of lower production costs, should make full and positive use of the opportunity to modernize its industries and to expand its industrial base. Neo-industrialization is possible if we have foresight, self-confidence, cooperation of the people, and the appropriate implementation mechanism.