The rapid growth of the Yangtze River Delta (YRD) region in recent years, particularly the formation of the YRD metropolitan region, has drawn much attention. With the development of the manufacturing industry in the region, the demand for supporting services has naturally increased. However, the service sector accounted for only 37%, 40% and 51% of the GDP of Jiangsu province, Zhejiang province and Shanghai respectively in 2002. In other words, services available in these areas may not be able to satisfy the market demand for quality services. With Hong Kong's position as a service hub in the region, it is opportune for service providers in Hong Kong to make appropriate plans to capitalise on the advantages brought about by CEPA and target the demand of the manufacturing sector of the YRD for supporting services.

In order to better understand the market situation, the Research Department of the Hong Kong Trade Development Council conducted a survey in August 2004 in the YRD region. Questionnaires were sent to 3,000 manufacturing enterprises in 10 major cities, including Shanghai and cities in Jiangsu province (Nanjing, Suzhou, Kunshan, Wuxi) and Zhejiang province (Hangzhou, Ningbo, Wenzhou, Jiaxing, Shaoxing). A total of 316 valid questionnaires were returned. In-depth interviews were then conducted with over 20 of the responding manufacturing enterprises.

The results of the survey show that only 44% of the manufacturing enterprises in the YRD use outsourced services. For those that do not use outsourced services, the main reasons include: the efficiency and quality of services provided by in-house departments are better; high fees charged and low efficiency and quality of services provided by individual service suppliers. In respect of the types of enterprises, private enterprises are more open than state-owned enterprises in their attitude towards outsourced services, and are more flexible than foreign-invested enterprises in their use and choice of service providers.

The survey also reveals that a large proportion of the YRD manufacturing enterprises use local service companies (77% in Shanghai and 68% in other YRD cities), especially for services requiring local knowledge, such as logistics and transportation (domestic) and legal services. Foreign-invested service companies are mainly used for services which require coordination with the headquarters, such as insurance and auditing (sometimes the service companies are even appointed by the headquarters), or services that require a good international network, such as logistics and transportation (international) and marketing/sales/ advertising (international).

However, the degree of satisfaction of YRD manufacturing enterprises with service companies is rather low (37% in Shanghai and 27% in other YRD cities). The proportion of small and medium-sized manufacturing enterprises (mainly private enterprises) that are not satisfied with the existing service providers more than doubles that of large manufacturing enterprises. The major reasons for dissatisfaction include low level of service/professionalism and lack of transparency in fee charges. Meanwhile, YRD manufacturing enterprises are generally of the view that the quality of service/professionalism is the most important consideration in choosing service companies. This shows that they are willing to pay more for better quality services.

On the other hand, survey findings show that 11% of the manufacturing enterprises in other YRD cities use the services of service companies with offices in Shanghai. Their decision is made mainly out of circumstantial or institutional consideration and is not necessarily related to the service quality of the supplier. However, this low percentage reflects that the coverage of Shanghai's service industry in other YRD cities is still at an early stage.

About 78% of the manufacturing enterprises in the YRD export their products to overseas markets. When choosing to cooperate with Hong Kong companies, they mostly hope that their Hong Kong partners can help them develop the overseas market.

It can be seen from the above that Hong Kong service companies are well positioned to make use of the opportunity to fill the gap in market demand for quality services.

According to the survey, YRD manufacturing enterprises have a good overall impression of Hong Kong service companies. The main reasons include: service companies in Hong Kong are highly professional, charge less than multinational companies, have a good international network, and understand how things go about in China. However, not many enterprises have used Hong Kong services and they do not have a good knowledge of Hong Kong service companies.

Hence, Hong Kong service companies should lose no time in grasping the opportunity to expand their services in the YRD. Hong Kong service suppliers can take advantage of their existing edge to step up promotion and establish offices in the YRD in order to get a better understanding of the local market and the needs of indigenous enterprises. With their flexibility and experience in providing services to small and medium-sized enterprises, Hong Kong service companies are in an advantageous position. They can consider expanding their business by targeting small and medium-sized enterprises in the YRD (mainly private enterprises) as an entry point.

Hong Kong service providers should make a head start in building up relationship with potential enterprises with a view to maintaining long-term cooperation. They may also consider partnering with local service companies to complement each other. Hong Kong service companies should not simply compete in the mainland on good services alone, they should also take into consideration factors such as pricing and local culture.

Meanwhile, 72% of the YRD manufacturing enterprises planning to go public choose to list in Hong Kong. If these enterprises can be attracted to list in Hong Kong, their demand for Hong Kong's professional services will certainly increase.

Under CEPA, the entry threshold of many service sectors for Hong Kong companies has been lowered. This is bound to attract more Hong Kong service providers to Shanghai and the YRD, bringing with them specialised expertise, professional knowledge and international experience, which will in turn help the region to further develop and integrate with the international market. Hong Kong service providers can capitalise on the benefits offered by CEPA to establish a presence in the YRD and get an early start.

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