• With the opening up of the China market, internationalisation is a natural development trend for mainland enterprises. In a survey conducted recently by the Hong Kong Trade Development Council, 66.8% of the responding enterprises in Jiangsu and Shandong indicate their current business strategy is to expand into overseas markets, while 62.8% say they would focus on increasing the competitiveness of their products/services.
  
  
• Insufficient funds, lack of overseas sales network and shortage of talent are reckoned by 58.9%, 50.9% and 40.9% of the respondents respectively as the biggest hurdles for the development of mainland private enterprises. To meet their capital needs, the surveyed companies are most eager to seek bank loans, while the ones that are larger in scale also consider listing on the stock market as a means of financing. As for sales network and talent, the majority of the respondents indicate they would make use of Hong Kong's services and international platform to explore business opportunities and increase competitiveness.
  
  
• Currently, 15.2% of the surveyed enterprises have offices/agents in Hong Kong. Another 58.9% indicate they intend to do so over the next two years.
  
  
• Among the enterprises which already have or intend to open offices/appoint agents in Hong Kong, 67.9% say they expect to establish overseas market network and sales network through Hong Kong, while 62.1% say they hope to find offshore investors and business partners through Hong Kong.
  
  
• Hong Kong's extensive international business network serves as an important platform for companies to make contact, exchange information and negotiate business, bringing about excellent export and investment opportunities for mainland enterprises which have already set up in Hong Kong. For instance, Kingdee International Software has established business ties with many multinational companies in the Asia-Pacific region since it began operations in Hong Kong in 2001. Through serving these clients, the company has established internationalised service standards.
  
  
• Although mainland enterprises generally consider the operating cost in Hong Kong higher than that in the mainland, they do not think it will deter them from establishing a presence in the SAR. Of the responding enterprises in this survey that do not have plans to set up in Hong Kong, 78.7% say their business has yet to reach a stage that warrants offshore expansion, only 25.9% say it is because the cost in Hong Kong is too high.
  
  
• Tung Fong Lighter Factory of Wenzhou has been operating in Hong Kong for more than 10 years. According to the person in charge, Hong Kong offers a wide range of options. For instance, the company chose to locate in Shatin because rentals are relatively inexpensive there. While the wages in Hong Kong are higher than in the mainland, the overall quality of Hong Kong workers is more superior. The company will continue to use Hong Kong as an international business platform.
  
  
• In view of the scanty knowledge of most of the mainland enterprises about Hong Kong's business environment, Hong Kong needs to step up publicity and provide relevant information to them in order to facilitate their move into Hong Kong.
  

The Challenges of "Internationalisation"

2005 is the fourth year of China's accession to the World Trade Organisation (WTO). It also marks the end of the transition period of protection for most of the industries in China as agreed during the accession negotiations. With foreign firms flocking to the mainland and the trend of globalisation continuing unabated, internationalisation is an inevitable development direction for mainland enterprises, which have to face the challenges of internationalisation whether they like it or not.

The trend of internationalisation has become increasingly evident in the mainland market since its opening up and reform. For instance, according to studies conducted by the Shanghai Commercial Information Centre, 48% of the 500-plus best-selling brands in Shanghai in 2004 were foreign or imported brands which currently command leading positions in the upper end of the market. In fact, similar situations have been found in the consumer goods markets and even services sectors of other key mainland cities. In recent years, foreign companies have made big strides into the mainland's major services sectors such as distribution, logistics, banking and insurance. In particular, the efforts of international retail giants in expanding their market shares on the mainland have increased noticeably since China fully liberalised its market in 2004. They are now aggressively expanding into second- and third-tier mainland cities.

As competition in the domestic market becomes more internationalised, Chinese enterprises have to be more alert about the competition and vie with foreign companies for customers. Chinese enterprises should even take the initiative to explore the international market and expand sales. Given the growing trend of globalisation in production and sourcing, Chinese enterprises are well placed to develop exports as they enjoy definite advantages thanks to low-cost production. Indeed, mainland private enterprises have made outstanding progress in this respect in recent years. In 2004, the exports of private enterprises amounted to US$101.16 billion, up 68.6% from the previous year. The growth rate is higher than those of state-owned and foreign-invested enterprises.

A number of private enterprises have emerged rapidly in the course of internationalised competition. Some of them have even successfully launched their own brands and become the engine of growth of mainland enterprises. While some have established distribution networks for their own brands in the international market, others have acquired or merged with multinational companies (MNCs) to embark on a truly internationalised development strategy. Notable examples include the merger of TCL with the television division of Thomson of France, the acquisition of Ssang Yong of South Korea by Shanghai Automotive, and the acquisition of IBM's PC division by Lenovo.

How would the majority of mainland enterprises struggling to stay afloat against the challenges of internationalisation formulate their business strategy and achieve their target? The Hong Kong Trade Development Council (HKTDC) conducted a questionnaire survey of 334 private enterprises in Jiangsu and Shandong on this subject between December 2004 and February 2005. Survey results show that 66.8% of the respondents say their current business development strategy is overseas market expansion. Among these, 39.0% consider overseas market expansion their top development priority. The majority of the respondents (62.8%) are aware that enhancing the competitiveness of their products/services is an important strategy for sustainable business development.

Competitiveness of Chinese Enterprises

Speaking at a forum on the development of private enterprises in China held in Hong Kong in 2004, director of the research office of the State-owned Assets Supervision and Administration Commission Wang Zhongming said the emergence of private enterprises has benefited from China's opening up and reform. Given the current situation where the market is more liberalised, competition is intensifying, and market standardisation is strengthening, private entrepreneurs can no longer thrive on personal clout alone. To move ahead with the times, business operators nowadays must adjust their mindset and boost their capability, including the ability to manage financial resources and international operations. For instance, the closure of many private enterprises in recent years can be attributed to over-expansion, involvement in too many businesses and in speculative activities, which can easily lead to cash flow problems and heavy debts.

Speaking at the same forum, Professor Zhou Qiren of the China Centre for Economic Research at Peking University, said China's opening up and reform have been a big success. The increase in industrial investment has resulted in the shortage of production inputs such as raw materials, land, energy and workers. At present, most of the enterprises are grappling with the pressure of rising production costs. To alleviate the impact of rising production costs, enterprises have to make necessary adjustments. For example, they may offset rising costs by better product quality and advanced management. Or they may increase productivity through human resources training and improvements in logistics management. In this way, enterprises may still find room for profit growth despite rising wages and downward price pressure.

Academics and experts generally agree that mainland enterprises tend to be lacking in international mindset, management style, experience, capital and technology. Also, they do not wield a significant impact on the international market in terms of brand quality and influence. The survey conducted by HKTDC has found that the biggest hurdles for the development of mainland enterprise are insufficient funds, lack of overseas sales network, shortage of talent, and the inability to beef up internal management to cope with expansion in operation scale.

A mainland study has found that on average over 90% of the start-up capital of private enterprises comes from the business partners and their family members. As for subsequent increased investment, at least 60% is the capital of the business partners or the initial profit of the enterprise concerned. According to the HKTDC survey, in order to meet their capital needs for development, project financing and bank loans including credit for day-to-day operations and import-export are most sought after by mainland private enterprises. Furthermore, among the larger enterprises targeted by this survey, many respondents indicate they hope to raise funds through listing on the stock market.

To tackle the difficulties in sales and management, many of the surveyed enterprises indicate they would make use of Hong Kong's professional expertise and international experience accumulated over the years to help them increase competitiveness. 20.2% of the respondents say they have used the services provided by Hong Kong or by Hong Kong companies in the mainland. Such services include marketing and publicity, overseas market research and analysis, legal advice, management consultancy and personnel training. Among these respondents, 98.5% say they will continue to use Hong Kong services. Among those who have never used Hong Kong services, 83.7% indicate they plan to do so in the future.

Some of the surveyed private enterprises indicate that they will set up a direct presence in Hong Kong, leveraging on Hong Kong's advantages as an international financial and business centre to achieve their strategic target of internationalisation. Survey findings show that 5.4% of the respondents have already established an office or branch operation in Hong Kong, and 9.8% have agents or business partners in the SAR. Among those respondents which have no presence in Hong Kong, 58.9% say they intend to open an office or appoint agents in the SAR over the next one to two years.

The Role of Hong Kong

Among those respondents which have offices/agents/business partners in Hong Kong or plan to do so in the future, the majority expect their presence in Hong Kong to help them build up overseas markets and distribution networks, find offshore investment and business partners, develop the local market in Hong Kong, and collect relevant market information.

Role of Hong Kong Business Presence/Agent /Partner Expected by Private Enterprises

Seizing Business Opportunities

Hong Kong, as a mature international commercial centre with its extensive business connections around the world established throughout the years, serve as a premier platform for enterprises to expand globally. As of June 2004, a total of 3,609 MNCs had their regional headquarters or offices in Hong Kong. Of these regional operations, 1,033 were from Europe, 813 from the US, and 713 from Japan. In addition, Hong Kong plays host to more than 170 international conventions and exhibitions a year, attracting large numbers of business visitors to the SAR.

In terms of investment promotion, a number of local trade associations and foreign chambers of commerce are very active in organising seminars and breakfast and luncheon meetings in Hong Kong to facilitate networking, information exchange and business negotiations among companies. These include the American Chamber of Commerce (AmCham), British Chamber of Commerce, JETRO, Australian Chamber of Commerce, and Hong Kong General Chamber of Commerce. Besides, investment banks in Hong Kong are well placed to keep tabs on international projects news and act as intermediaries. For instance, Jinyuan International (Hong Kong) of Shanghai has appointed foreign banks in Hong Kong to act as advisors. These banks now play an important role in the company's large investment projects. For example, its power plant project in Indonesia was recommended by Barclays. It is also understood that the Hong Kong platform has played a significant part in Lenovo's recent acquisition of IBM's PC business.

In terms of trade, Hong Kong serves as a major channel for overseas importers to source Chinese mainland products. According to Hong Kong-based overseas buying agents, they rely heavily on trade-related services offered by the SAR in sourcing products from the mainland. These include financial management, accounting and audit, business negotiation/liaison, banking and finance, insurance, marketing, transport and logistics, and other professional and business services. For mainland enterprises, Hong Kong's major advantage as a platform to develop overseas markets lies in its role as sourcing hub and the full range of sophisticated trade-related services it offers.

Boosting Capability for International Operations

As China gradually moves from a planned economy to market economy, due to circumstantial constraints, many mainland enterprises find themselves lagging behind their overseas counterparts in a number of areas such as management, talent, financial strength, business strategy and operation model. Over the past decade or so, Chinese enterprises have successfully won the OEM orders of overseas buyers and become the "world factory" thanks primarily to China's low-cost advantages. However, Chinese enterprises have today reached the stage where they should move ahead and "go out" and break into the global market with their own branded products. In the course of doing so, mainland enterprises have to compete with strong international rivals. This is going to be a real test of Chinese entrepreneurs' ability in running international operations.

Access to information is very important in competing with international players. A company may miss out on a lot of opportunities for growth if it fails to keep abreast of the latest market developments. Hong Kong is a highly developed information hub. Access to information on business activities, production technologies, product trends, company news and trade leads worldwide can certainly help companies make sensible decisions on their production positioning, choice of skills and target customer. Besides, Hong Kong consulting companies with different specialties are well placed to advise mainland enterprises and conduct research and analysis in areas like brand building, production management and marketing.

Mainland enterprises are facing an acute shortage of talent well versed in international market operations. Apparel maker Younger is a case in point. After accumulating a certain amount of experience in OEM production, Younger embarked on the strategic target of "building an international brand" in 2002. According to the group, the biggest hurdle in building a truly international brand lies in the workflow involved in going global. The dearth of personnel in the mainland who are experienced in developing overseas markets for large firms is a major barrier. Younger plans to step up overseas promotions of its brand over the next five years. It aims to increase brand exposure and make extensive contacts with overseas counterparts at the same time. It believes brand exposure goes hand in hand with market development.

In view of the fact that their brand names are unknown in the international market, mainland enterprises in Hong Kong can make use of the local media and public relations campaigns to boost their corporate image and branding in the international marketplace. They can also lend the help of the foreign media present in Hong Kong to arouse the interest of the overseas buyers in their products in a bid to increase their opportunities in breaking into the international market.

Financing Hub

As an international financial centre, Hong Kong offers a wide range of financing options for mainland enterprises to raise funds. Between 1993 and 2004, mainland enterprises raised a total of HK$889 billion (about US$114 billion) through listings and subsequent fund raising activities in Hong Kong. The breakdown is as follows:

• Initial public offerings, HK$392.2 billion;
• Issue of new shares after listing, HK$209.6 billion;
• Asset swap through share reissue and others, HK$287.2 billion.

According to a report by Financial Times of the UK, Lenovo (Hong Kong) first came to Hong Kong with a start-up capital of US$40,000 from its parent company in Beijing. It subsequently raised millions of dollars in Hong Kong. Besides, the high degree of standardisation and transparency of Hong Kong's stock market helps mainland enterprises strengthen their internal management and business operation capability. Because of this, the share prices of mainland enterprises in Hong Kong are more indicative of their internal management and business operation capability than those in the mainland. For instance, the price of Tsingtao Brewery H-share in Hong Kong increased from HK$1 to over HK$10 after it successfully improved control over operating cost and reduce debt through implementing the ERP system. Its H-share price in Hong Kong is higher than its A-share price in the mainland. Its price-to-equity ratio in Hong Kong has also increased by over 40 folds. Apart from share price, Hong Kong-listed mainland enterprises have to comply with international standards in areas such as management and information disclosure. As such, it is easier for them to explore the prospect of business cooperation or M&A with overseas companies.

In addition to listing on the stock market, mainland enterprises can also make use of Hong Kong's internationalised financial market and explore different financing options to meet their business needs. For example, TCL International Holdings signed a five-year US$180 million syndicated loan agreement in Hong Kong in 2004 while its parent company TCL Corp signed a three-year syndicated loan agreement for HK$650 million. The funds provided working capital for the operations and acquisitions of the two companies. TCL reckons the interest rate for raising capital in Hong Kong is lower than that through commercial banks in the mainland given the same terms and conditions. As a matter of fact, the level of sophistication and flexibility of Hong Kong's financial tools and services helps enterprises ensure stable capital flow and control financing cost.

Is Hong Kong Really Too Expensive?

In this survey, 60.7% of the respondents consider the lack of information about setting up and doing business in Hong Kong the biggest hurdle to establishing a presence in Hong Kong, while 47.8% of the respondents find the operating cost in Hong Kong too high.

Although mainland enterprises generally find operating cost in Hong Kong too high, it does not deter them from setting up in Hong Kong. As the survey results show, 78.7% of the responding enterprises in this survey that do not plan to have an office/agent/business partner in Hong Kong say their business has yet to reach a stage that warrants offshore expansion. Only 25.9% of the respondents consider the operating cost in Hong Kong too high, and 17.6% find cities other than Hong Kong can satisfy their development needs.

Despite its higher operating cost compared to the mainland, Hong Kong, as an international financial and trading centre, offers mainland enterprises business opportunity and benefits. This is the edge of Hong Kong over mainland cities. Due to cost control consideration, companies would always welcome lower rentals and wages. However, whether Hong Kong is too expensive should be measured against the benefits and opportunity for further development it can bring to companies as a whole.

Furthermore, Hong Kong is a highly developed city. While the Central district on Hong Kong Island is the central business district (CBD) housing primarily large financial and commercial firms, yet within 15 to 20 minutes by car, districts like Shatin, Kwai Chung and Kwun Tong also offer well equipped and conveniently located office buildings. These districts are just as good as the CBD in terms of access to information and other business facilities. Companies from around the world choose to operate in these districts because they can leverage on Hong Kong's advantages as a financial and trade services centre while the cost is just a fraction of that in Central. In other words, Hong Kong offers a diverse range of services and products that fit different budgets.

This new report is available at TDC's Retail Outlets. It can also be purchased through the TDC Bookshop section in the TDC's trade portal: info.hktdc.com.