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On the Cross-border Synergy and Aggregation Theory of SMEs in Hong Kong

by 

Albert PK Lau, Vice-chairman, Hong Kong Small and Medium Enterprises General Association

Prelude 

Mr. Donald Tsang, Chief Executive of Hong Kong SAR, under Regional Economic Cooperation in his Policy Address 2005-2006, proposed to re-zone the closed area bordered between Hong Kong and Shenzhen for re-development and economic benefits.  Hong Kong Small and Medium Enterprises General Association (the Association) shares his standpoint but maintains that the planning must be well formulated.  To capitalize on this opportunity, the Government of HKSAR (the Government) could achieve a win-win situation by re-invigorating the SMEs in Hong Kong and enhancing the development on the border.  The Association is in place to make some concrete proposals for implementation as a harbinger to solicit more viewpoints from the public.  

Hong Kong??s SMEs in PRD: Falling from Grace 

Since the open-door economic policy was adopted and ratified by the Central Committee of CCP in December 1978, Pearl River Delta (PRD) has until now served as a silver-bullet solution to the SMEs from Hong Kong in the labour-intensive industries, such as garment, toys, shoes and so forth.  The exploitation of cheap labour and land by the SMEs has made the manufacturing viable and profitable.  However, tables are turned on them which have been ridden roughshod over by heavy levies and red tape enforced by the local authorities.  The Association hosted a seminar, entitled Hong Kong/Panyu SME Leadership Summit Conference 2005 in Panyu from 3-4 September, 2005.  The participants included numerous businessmen and entrepreneurs from Panyu, who took this opportunity to voice their grievances as regards the seamy side of PRD.  The Association conducted a questionnaire on the same topic to 200 of its members with operations engaged in PRD in October, 2005. The responses and comments were compiled and analyzed with the following findings: 

  • Deficiency of water and power supply coupled by surcharge on treatment for effluent discharge;

  •  Serious labour shortage leading to ever-increasing wages plus employee insurance to the tune of RMB?D300 per person per month;

  • Enterprises from Hong Kong being treated as foreign-owned entities not on equal footing with local private businesses in terms of taxes and other levies;

  • Outward-processing and compensation-trade contracts being the most hard hit while those operators without land and buildings even the worse;

  • Relocation to the hinterland being a lukewarm option on the grounds of transportation, networking, removal expenses and other deterrents;

  • The garment industry being further aggravated by quotas imposed by the US and EU importers;

  • About 85% of the members in the survey, mostly in garment and toy industries, willing to return to and invest in Hong Kong, pending conditions on offer.

The Association asserts that the SMEs from Hong Kong are tied to the whipping post in PRD. The Government should take initiatives for assistance and the establishment of an industrial park on the border is a bailout for consideration.   

Synergy and Aggregation Theory 

Synergy is the euphoric state in which economic benefits accrue to an organization through economies of scale and scope so that the total output is greater than the summation of individual inputs.  In other words, it is equivalent to say that one plus one is greater than two.  Synergy is attainable by successful practice of the aggregation theory of SMEs, which are ??mixed and matched?? to leverage their comparative advantages. SMEs are found formally or informally in clusters in many industrialized countries.  The clusters exist for different reasons under four models:

1.             Market-type Aggregation

The SMEs trade evenly and openly in a market-type aggregation.  They are  specialized in one category, vertically and horizontally.  In the 70s and 80s, a complete supply chain of garment industry was formed in Shamshuipo in Hong Kong, which served as a good example for market-type aggregation. The location was rife with garment makers, suppliers of sewing machines, accessories/fabrics and garment wholesalers. The clustering of SMEs in Shamshuipo supported a thriving garment industry in Hong Kong in those decades.    

2.         Axis-type Aggregation

In axis-type aggregation, SMEs are clustered around a big corporation as the pivot and provide the latter with components and relevant services.  Their strategic partnership is cooperative and not adversary as the big corporation will render support in component costing and specification.  Toyota, the giant automaker in Japan, is an exemplary practitioner of axis-type aggregation. 

3.         Knowledge-type Aggregation

SMEs are attracted to produce under intellectual property rights, such as brands and trademarks, information technology, computer software/hardware and technology transfer as well.  Venture-capital financing and marketing- communications are spun off as support services.  The Silicon Valley in California, USA, is the paragon of knowledge-type aggregation.  The Silicon Valley, originally farmlands of 500 square miles in area, are now domiciled by over 8,000 companies among which the majority are SMEs.  Stanford University in the vicinity accounts for their viability in terms of research facilities as well as technical support. 

4.         Mixed-type Aggregation

In reality, the aggregation is of mixed models and the proportion depends on the type of industry, corporate culture, inputs and surroundings. 

The survey conducted in October 2005 confirmed that the members of the Association who are intent on boomeranging to Hong Kong could invest in manufacturing facilities if the Government is to plan and develop an industrial park on the border.  They are mostly engaged in labour-intensive industries, such as garment and toys.  However, their altitude is dependent on the inputs and offerings of the industrial park, including, among others, land prices and supply of labour.  The Association is in position to put forward the layout and implementation initiatives to set up the industrial park in return for feedback as a means to boost manufacturing industries in Hong Kong. 

Cross-border Industrial Park: Is It a Pipe Dream?   

The closed area between Hong Kong and Shenzhen has a total area of 28 square kilometres and the borderline is 35 kilometres in length.  The closed area, which is restricted to permit holders, has been left fallow and deserted for many decades.  In fact, the discussions on the development of the closed area have been carried on intermittently for two decades but in vain.  The deadlock is caused by the influx of illegal immigrants and lack of incentives.  The tide is now turned in favour of the development because the security problem of illegal immigrants is ameliorating and there is an urgent need required of the SMEs in PRD.  The Government should come to their rescue by re-zoning the closed area. 

If the Government is to re-zone the closed area for half of the area for development, the Association recommends the following initiatives:

1.      The belt from the River Bend of Lok Ma Chau to Heung Yuen Wai is to be demarcated as Hong Kong SME Development Park (the Park).

2.      The Park is divided into four districts, namely, Industrial, Commercial, R & D and Residential.

3.      The Industrial District of the Park is restricted to the SMEs in some labour-intensive industries, such as garment and toys whereas the Commercial District is only open to the transactions in parts and equipment of related industries along with relevant services, for example, repairs and banking services.  R & D District is the platform where academics, government officials and entrepreneurs work together for innovative designs to keep abreast of the market trend.  This mixed-type aggregation which is dominated by market-type aggregation and supported by knowledge-type aggregation suits SMEs to a T.

4.      Labour are to be recruited across the border from Shenzhen and its suburbs.  They work in the day time and return to their residences after work.  They can  commute by subsidized vehicles or stay in the dormitories to be built near the border.  Members of the Association claim that it is still profitable to raise the wages by 20% to attract the labour to work in the Park because SMEs are immune from heavy levies and other expenses incurred on the other side of the border.

5.      The competitive advantage of the Park is sustained by branding through a layout to accommodate environmental and human-rights considerations.  The implementation process is elaborated by Mr. Albert Lau, Vice-chairman of the Association, who delivered a speech in EviroSeries hosted by Business Environment Council in 2003, entitled: Eco-Industrial Parks and SMEs in Hong Kong: Challenges, Opportunities and Initiatives.  The highlights are as follows:

(1)        The Park is to retain the landscape and vegetation as much as possible.

(2)        Effluent discharge and solid wastes are to be treated collectively while recycling and re-use amid industries are facilitated.

(3)        Industrial premises are built to meet energy-saving, environmental and human-rights benchmarks.

(4)        Watchdogs are in place to monitor and update SMEs on the important issues in environ-mentality.

(5)        SMEs in the Park are given publicity and kudos as a tactic for branding.

(6)        Discretionary concessions on top of CEPA are to be granted to the SMEs in the Park as a token of encouragement. 

Epilogue  

In Hong Kong, there are many high-fliers who are proponents of hi-tech industries, such as biotechnology, computer chip-making, fibre optics, aerodynamics, etc.  They are highly value-added but also very risky investments in terms of returns and life cycle.  On the other hand, garment, toys and other light industries can command a price premium if the products are provided with new designs and functions.  In the case of garment industry, the fabrics treated by nanometre technology can be protected from water, bacteria, creases and mildew.  The toys with electronic gadgets gain an upper hand over less sophisticated ones.  There is still a brisk demand for FMCG to satisfy basic needs of global consumers and the Government should give the light industry a shot in the arm. 

The Association reckons that the economy of Hong Kong has relied too much on the services sector and is vulnerable to any disturbances from within and without if the economy is not well diversified.  That Hong Kong was hard hit by the outbreak of SARS-pandemic in tourism and suffered from an economic recession in 2003 testifies to the fact that the Government puts the cart before the horse in its economic policy.  According to the Gross Domestic Product (GDP) at the end of 2003 estimated by Hong Kong Census and Statistics Department, the services sector accounts for 88.5% of the total while the manufacturing sector, 4.1% only.  Labour Department also claims that 85.7% of the total workforce (excluding civil services) are employed in the services sector and only 5.2% are manufacturing workers at the end of 2004.  The latest unemployment figure (August-October, 2005) is 5.3%, which has leeway for improvement. By virtue of the survey findings and analyses, the Association conjectures that the Park will give rise to 10,000 to 20,000 job vacancies for the local workforce.  Although the Park may take three to four years for realization and gives no immediate redress to the SMEs now in PRD, the Government should let manufacturing industries to rise from the ashes like a phoenix as a long-term economic policy.   

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Hong Kong Small and Medium Enterprises General Association
Last updated on 24/12/2007