Spring From the Hong Kong Platform
Hong Kong calls itself “Asia’s World City.” As global traders representing 150 nations descend on the Hong Kong Convention and Exhibition Centre, packing five full floors overlooking Victoria Harbor to vie for new partnerships at the sister events, Hong Kong Electronics Fair and ICT Expo, you’ll know it’s not a self-serving moniker. It might even be an understatement.
Ninety-thousand international buyers and more than 3,250 exhibitors—and this is just the Spring edition. Hong Kong’s Autumn Electronics Fair is known far and wide as the biggest of its kind. More importantly, it has earned a reputation as a gathering for people actually interested in doing business.
“In Hong Kong it’s more of a world market,” says Jason S.C. Hou, founder and director of Sales and Marketing of VocoPro, a La Verne, California-based maker of karaoke personal amplifiers. (See “Singing Praises,” Page 27.) He’s a 10-year veteran of the exhibition with as many as 30 worldwide partnerships generated through it. Want some perspective? “We tried China but had no return at all.”
At “Mainland” shows, says Hou, there’s a high proportion of spies looking to copycat products and compete; Hong Kong draws an audience that’s just the opposite. “You run into actual customers who want to buy,” he says. “They’re here to look for opportunity too.”
Organized by Hong Kong Trade Development Council (HKTDC), the Spring edition, now in its 10th year, has become as important to electronics traders as its Autumn counterpart. If Hou’s success were rare, there would be little demand for a second fair each year.
Rami Ezratty, vice president of Sales and Marketing for Brooklyn, New York’s Pure Acoustics, says he’s set up about half his company’s partnerships through Hong Kong’s Electronics Fairs. Here’s a scene from one of the speaker producer’s previous shows, in which he expounds on the difficulty of partnering with an Australian:
“The distributor walked by and said, ‘I love your product.’” Six months later it was on shelves Down Under, and that market has accounted for roughly half a million dollars worth of products for the past three years. Ezratty offers a simple reason for the brief courtship. “They liked what they saw and it was just a good business proposition for them.”
A relatively new addition to the show is Improv Electronics, which manufactures proprietary LCD screens out of its factory in Kent, Ohio, then ships them to China to be used in assembling its inexpensive writing tablets. “I do the Hong Kong Electronics Fair as kind of the Asian-central hub of electronics for the Asian market,” says Billy Chapnick, director of Marketing. “So we’re really looking at this to meet with a lot of Asian distributors and retailers and educate them on our product to grow the local market.” After just a few years at the fair, Improv has developed key distributor relationships that have boosted sales by securing shelf space at airports and toy stores, outlets where consumers are likely to make impulse purchases.
Others come to Hong Kong’s electronics fairs because of the wealth of suppliers, largely from the host territory or just over the border in China. Torrance, California-based iSound, manufacturer of audio accessories, has had a presence at both the Spring and Autumn exhibitions for more than a decade. Austin Jones, the company’s product line manager, says the resources of the event are unparalleled.
“Yesterday my boss told me, ‘Hey, I think the market is going to go toward children’s headphones. I need you to go out and meet some suppliers who can make us child-safe headphones.’ In a matter of half a day, I can go out and fill up my book with business cards and information from all different people. Pricing, everything—even get samples. And in a matter of half a day, have so many contacts that we can do business with.”
The supplier network is a crucial element of producing products in the Pearl River Delta, which encompasses Hong Kong and much of the densely populated area in Southeastern China where the rivers Xi Jiang, Bei Jiang and Dong Jiang converge. It’s this network that Professor K.B. Chan, chairman of HKTDC’s Electronics/Electrical Appliances Advisory Committee, sees as the reason China has emerged as what he calls “the manufacturer of the world” over the past 30 years.
“There’s this huge cluster of electronics companies [for] the supply chain in Southern China—and it’s just across the border, one and a half hours,” he says. “It’s a huge manufacturing base with 10,000 workers, over 2,000 factories, so it’s extremely convenient.”
Convenience is an enticing proposition when you consider that a complex electronic device can routinely have 500 components from as many suppliers. “It’s a hell of a mess to organize 500 different components coming from all over the world,” says Chan. “It’s a nightmare in logistics.”
U.S. VS THE WORLD
Here’s a low number: 0.307 percent.
That’s the percentage of U.S. exhibitors at the Spring edition of Hong Kong’s Electronics Fair and ICT Expo. Out of 3,250 exhibiting companies, just 10 were from the United States.
Ready for more? Of the thousands—if not tens of thousands—of components that came together to form the hundreds of complicated electronics products manufactured and marketed by these 10 U.S. companies, just one lonely component was made in the USA: the highly secretive LCD screen manufactured by Improv Electronics in Kent, Ohio.
Does this mean you should pick up sticks and move manufacturing to China? Hardly. The question is: Why aren’t more U.S. manufacturers better utilizing what nearly every one in the area refers to as “The Hong Kong Platform?”
This was the question buzzing around the brains of the folks at HKTDC. Then, in 2010, President Obama announced his National Export Initiative (NEI), aiming to double exports within five years. HKTDC didn’t just roll out the welcome mat; they practically carried U.S. companies over by creating the Pacific Bridge Initiative (PBI). The program’s purpose, says the agency, is to encourage “U.S. companies to make use of the Hong Kong platform when exporting to Asia, particularly the Chinese mainland.”
Raymond Yip, HKTDC’s assistant executive director, says the time has come for Hong Kong to turn some attention from emerging markets and revisit its mature ones. “At the end of the day, the U.S. is still our second-biggest trading partner and second-biggest export market, after China,” he says. “A lot of what we sell to China is raw materials, but what we sell to [the U.S.] are real exports—we’re talking about $70 billion of financial trade each year.”
Of that $70 billion, the U.S. is importing more than $43 billion and exporting the difference, about $26 billion.
But Yip doesn’t stop there: “In fact,” he says, “if you look at the $26 billion we import from [the U.S.], about $14 billion is actually re-exported to other parts of the world. We only consume about $12 billion locally.”
When HKTDC launched PBI in 2010, that year’s U.S. exports to Hong Kong increased by 26 percent. The next year, they increased by another18 percent. “You know what percent [of increased exports to Hong Kong] you need in order to double your exports in five-years’ time?” Yip asks. “Only 15. If you increase your exports by 15 percent over five-years’ time, because of the compound accumulative effect, you double your exports. And in 2010 and 2011, you increased your exports by 26 and 18 percent, respectively.”
In June, HKTDC—self-described as the marketing arm for manufacturers, traders and service providers in Hong Kong—will lead a two-stop event to the United States titled “Think Asia, Think Hong Kong” to encourage an increase in inbound U.S. trade. The territory will be represented by a 100-person delegation of business professionals, service providers and government officials in New York on June 11 and Los Angeles on June 14. “It’s billed as the biggest-ever Hong Kong campaign in the U.S.,” Yip says.
If you’re looking for an indication of whether you’ll find the program useful, consider that its previous stop in London generated an 80 percent jump in inquiries for doing business in Hong Kong. Its Japan tour upped inquiries by 50 percent.
SPRING YOUR BUSINESS FROM THE HONG KONG PLATFORM
The opportunity in Hong Kong reaches far beyond exports, partly because of the environment put in place by the Hong Kong government under China’s famous, “One Country, Two Systems” approach, which offers rule of law, intellectual property protection, duty-free imports (on everything but cigarettes, cars, petrol and alcohol over 30 degrees) and a standardized corporate tax rate of just 16.5 percent on profits only. But Hong Kong has benefits that can’t be legislated.
Yip jokes: “This is something you learn in a MBA course: location, location, location!”
He’s right. Hong Kong can correctly claim to have half the world’s entire population within a five-hour plane ride and the largest market on Earth just across its border. Proximity to consumers has given rise to a thriving port and the busiest cargo airport in the world, Hong Kong International Airport. And it has the service providers to support business—international banks, lawyers, accountants, agents and logistics providers among other professionals. Ninety-three percent of Hong Kong’s GDP is generated by services.
That more of its GDP is not generated by manufacturing is a bit misleading. Three-quarters of Hong Kong is countryside, only 25 percent is urban area and 40 percent of the territory’s 1,100 square kilometers is protected for conservation and recreation— manufacturing space is clearly scarce. Businesses responded with a free-market solution: they outsourced.
“It is not correct to say that Hong Kong has no manufacturing,” Yip says. “Our manufacturing does not take place physically in Hong Kong, because of the high cost of land and labor, but it is still taking place across the border in factories owned by Hong Kong people, where we employ more than our population. We have 7 million people, but we employ 9-10 million people [in China].”
All of this brings us back to the pressing question: Why aren’t more U.S. manufacturers taking advantage of the Hong Kong platform? Perhaps too many are imagining a domestic approach to being a global company. More succinctly: capture the Asian market from Asia.
“We’re not saying to people to emigrate or move,” says Andrew Young, vice president, Marketing & Sales at Hong Kong Science & Technology Parks (HKSTP). “We’re saying you would have your core business where you are.” Under the umbrella of the Hong Kong government’s Innovation and Technology Commission (ITC), which is spearheading the territory’s push to stay on the cutting edge of the world’s electronics innovation, HKSTP provides a host of resources to drive collaboration and research and development. It’s now building Phase III of its campus to add more space for tech companies. It’s first two “phases” have 96.1 percent occupancy; 40 percent of these tenants are foreign-based—15 percent of those companies are from the U.S.
Young says that HKSTP’s strength is as a center for product commercialization, when a company takes its R&D for a product geared toward the Asian market into prototyping. Many companies have “found that here is where they could access customers, but also they could customize their product to suit the local content,” Young says.
“Many startups would retain their affiliation with an institution at their home base—that’s where innovation starts,” he continues. “But we’re saying Hong Kong is the key market development in R&D.”
One U.S. company that suited its product for the nearby Chinese market is One Earth Designs (OED), maker of solar cookers. When founder Caitlin Powers came to China as a scientist in 2007, she learned that half a million Chinese die per year from indoor air pollution generated by the black smoke of fires used for cooking or making tea. Her life-saving solution was to “deliver award-winning clean technologies to rural villagers in China and the nearly 3 billion more people around the world who lack access to clean and affordable energy,” says OED’s Erica Young.
Though its headquarters has shifted to Hong Kong, OED keeps a full-time marketing development manager in Washington, D.C., and sales staff in California and its native Boston, Massachusetts. The company initially came to Hong Kong for its proximity to manufacturing, which helps reduce development costs and speed up time to market. Then it decided to take advantage of HKSTP’s “Incu-tech” program, which provides financial support—including rent, facilities, money for continuing education, marketing and promotions—all of which helps OED be more cost efficient, according to OED’s Young.
The science park’s incubation program, funded by ITC, bespeaks the Hong Kong government’s commitment to being a leader in innovation. It knows it’s not Silicon Valley, but it sees its role as a cradle for the small and midsize tech companies. “We do things where we think we have a place in the world,” says Johann Wong, deputy commissioner at ITC. “We can’t compete with the big guys, we’re not big guys. But even the big guys need the small guys, the medium guys—so we try and say, ‘We could be the medium guys, we could be the smaller guys.’ The smaller guys supply to the medium guys; the medium guys supply to companies like Apple, Intel.” Get all that?
To forward this effort, ITC gives out roughly $1 billion per year through various programs, such as HKSTP’s small business incubators. These programs offer up to HK$645,000 (roughly USD$83,000) in no-stings-attached funding, free rent (usually $2 per square foot) and priority access to its 13 labs, green room and studio at reduced rates.
While many companies will look to manufacture in China, headquartering an Asian operation in Hong Kong guarantees the available business benefits—financing, IP protection, 8,000 lawyers (35 percent of whom practice all sorts of foreign law), low taxes, university support and a transparent and straightforward legal system—all while maintaining proximity to the massive consumer market across the border.
There is but one catch to utilizing the Hong Kong platform for its full potential, including HKSTP’s incubator programs: You must be a Hong Kong company.
Fixing that is easier than you think.
“Setting up a company here takes one hour, one dollar and requires one director,” says Andrew Davis, associate director-general of Invest Hong Kong. “And that director doesn’t even need to live here.” The agency helps foreign companies get set up by offering a range of services, though no monetary or tax incentives.
Instead, InvestHK sees its role as offering addition by subtraction. “We’re not about putting money in. We don’t give grants or any of the incentives, but we try to take costs out by giving useful information, explaining the rules and regulations,” says Davis. A small company looking to locate in Hong Kong could send InvestHK a spreadsheet, for instance, detailing all its cost models, and the agency will formulate a business plan. “That’s a lot of effort you’ve removed from a small company.”
With China being the United States’ biggest export market, there’s no questioning its demand for U.S. products. But how much money are American companies leaving on the table by serving Asian consumers from a distance? Is your global company best served by having a global presence, and does the Hong Kong platform make the most sense for you?
“We want people to use our platform,” says HKTDC’s Raymond Yip. “The ways you can use our platform: You can trade with us, you can sell your products through our Hong Kong platform, of course we welcome people to come and establish a presence here. There are 1,400 U.S. companies in Hong Kong and about 900 are using Hong Kong as a regional headquarters or regional base.”
What do these companies know that others don’t? Those are questions best directed to the speakers at the “Think Asia, Think Hong Kong” symposiums, and you’ll have your chance to ask in June.
Interested in attending? Visit thinkasiathinkhk.com/usa