As the Pearl River Delta (PRD) region heads for industrial upgrade, manufacturers' demand for quality producer services is set to embark on a high growth trajectory. Hong Kong service providers are advised to move fast by stepping up investment and promotion in the PRD in a move to capture the market.

According to a survey conducted by the Hong Kong Trade Development Council (HKTDC)¹, more and more factories in the PRD are now using services outsourcing, and the market offers good growth potential. At present, services outsourcing more commonly used by PRD manufacturers include domestic logistics (44%), legal consultancy (39%), international logistics (37%), certification/rating (37%), management/corporate consultancy (31%), and telecommunications/ information technology/webpage (30%). Other services which respondents say they may also consider outsourcing are international marketing (28%), personnel training (27%), domestic marketing (24%), and product design/technology development (18%).

Advantages and Opportunities for Hong Kong Service Providers Breaking into PRD

Manufacturers in the PRD reckon that Hong Kong service providers have a high degree of professionalism and an excellent service attitude. Based on a points system with 10 being the highest score, PRD manufacturers give Hong Kong services an average score of 7-8 on professionalism in terms of quality, experience, efficiency and innovativeness, which is significantly higher than that of their mainland counterparts. Compared to foreign service providers, PRD manufacturers find Hong Kong service providers easier to communicate with, as well as more experienced in the mainland market and more familiar with how things go about in China. Hence, Hong Kong service providers enjoy competitive advantages in tapping the PRD market.

Although Hong Kong service providers charge higher fees than their mainland competitors, the respondents say professionalism (76%) and smooth cooperation (53%) are the most important considerations when they choose services suppliers. These are precisely the strengths of Hong Kong services.

Manufacturers in the PRD generally have a rather low opinion of the outsourced services they currently use. For many services, their level of satisfaction is only medium. For certain services such as product design/technology development, international marketing, management/corporate consultancy, and recruitment, their level of satisfaction is even low. This indicates that for PRD manufacturers a significant gap exists between the expected and actual service standards. As such, Hong Kong service providers are sure to win a share of the market provided that they offer improvements in these areas. The major reasons cited for dissatisfaction with services outsourcing in the PRD include: lack of professionalism, poor service, failure to meet requirements, low efficiency, failure to deliver the required service, and failure to meet the practical needs of the client.

Weaknesses of Hong Kong Services in PRD

One of the characteristics of the service industry is that consumers would only find out about the quality of the service after it has been used. Hence, most companies tend to seek referrals from business contacts or rely on word-of-mouth in choosing service providers. Where no recommendations are available and there is no way to judge the level of professionalism and service quality of a service provider, fees will become the most important consideration.

At present, the biggest shortcoming of Hong Kong services in the PRD is the lack of referrals and insufficient publicity. In particular, most small- and medium-sized Hong Kong companies cannot afford to devote much time and human resources to developing the PRD market due to resource constraints. This explains why the majority of the surveyed manufacturers say they only have limited contact with or knowledge of Hong Kong service providers. In view of this, Hong Kong service providers need to increase their promotion and marketing efforts in the PRD.
For those surveyed manufacturers who are outsourcing services to places other than Hong Kong, high fees are cited as the most important reason (59% of respondents) why Hong Kong service providers are not used, followed by lack of referral (49%). Other reasons include: Hong Kong companies do not understand the mainland market well enough, they are difficult to contact or seldom visit the mainland, and insufficient local business networks (each representing 44% of respondents). Based on the above analysis, since mainland manufacturers have no ways to evaluate the level of professionalism and quality of Hong Kong service providers, most of them (67%) outsource their services to domestic service suppliers who are charging lower fees than their Hong Kong counterparts.

Recommendations for Hong Kong Service Providers

To expedite the development of its service industry especially modernised services that are primarily led by producer services, the Guangdong provincial government has proposed to further enhance investment facilitation measures in support of Hong Kong and Macau service providers' entry into the province under the Mainland-Hong Kong Closer Economic Partnership Arrangement (CEPA). Hong Kong companies should capitalise on this opportunity to establish a presence in the PRD and step up their market expansion efforts there. Hong Kong service providers entering the mainland market are advised to hire local people. This strategy has the dual benefits of increasing the localisation rate and lowering costs, thereby sharpening their competitive edge.

For service providers, goodwill and word-of-mouth are very important factors in winning customers. However, it takes time to build goodwill and new comers to the market often find it difficult to attract customers. Hong Kong service providers are therefore advised to move fast to break into the mainland market, build up their connections and establish their goodwill. Participating in business/trade events organised by government or authoritative organisations is one of the shortcuts to networking. Companies can also ride on the credibility of these events to boost recognition.

Service sectors that promise the greatest growth potential in the PRD and in which Hong Kong commands a competitive edge include technology development/ product design, international marketing, personnel training, and management/ corporate consultancy. Although the market size of these sectors is limited currently, demand will likely increase significantly as 74% of the surveyed manufacturers indicate they would step up internal management and cost control over the next three years, while 65% say they would strengthen international market development. Hong Kong service suppliers should increase their efforts in promoting their experiences, capabilities and advantages.

The survey also found that foreign- and Hong Kong-invested factories are more receptive to outsourcing services, and are more inclined to use Hong Kong's producer services. Besides, as Guangdong is devoting great efforts to developing new- and high-tech industries and heavy and chemical industries, demand for services related to these industries is strong. Hong Kong service suppliers wishing to develop the PRD market can target these enterprises in their promotion drive.

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.