Summary

• While there is cautious optimism that the global economy will pick up towards end-2009 and beyond, a seismic shift in the world economic landscape and hence changes in the world trade structure are underway.

• In view of subdued personal assets, slow income growth and expected higher tax burdens, many recession-led consumer trends in the mature markets will likely continue in the post-crisis era, leading to a structural change in consumer behaviour.

• As overall business in traditional markets is not expected to go back to pre-crisis levels soon, Hong Kong exporters are advised to look to emerging markets, especially the Chinese mainland, for sales expansion.

• Being a promising market aside, the mainland will likely remain the world’s factory, providing a wide range of products, in terms of quality and variety, targeting both overseas and domestic markets.

• Hong Kong will have to build up credibility, expertise and its effectiveness as a marketing platform, especially sharpening the edges in sales and marketing, product design, quality assurance and supply chain management.

The world is pulling out from its deepest recession of the past 80 years.  There exists cautious optimism that the global economy should be in better shape towards the end of 2009, gaining further ground during the course of 2010.  Meanwhile, a new economic paradigm, characterised by a correction of global imbalances, is emerging.  In particular, the US savings rate will increase, and the mainland will prop up domestic demand to absorb excess production capacity.

Spurred by household deleveraging, higher savings and a low motivation for spending, consumers in developed markets, not least the US, are generally inclined to go back to basics, with a penchant for practical, durable and value-for-money products.  Such changes in consumer behaviour may become a long-term shift, as personal assets are not going to rise in value at the same pace as they did in the past, hampered by slow income growth and expected higher tax burdens.

Consumers in traditional markets will also stick to discounters and hypermarkets.  Increasing retail concentration will not only force specialty and smaller stores to close down, but also force out the smaller and inefficient players along the distribution chain.  As the winners grow larger and larger, they may have continued high expectations of their suppliers, while also moving away from traditional sourcing channels to Internet websites and electronic trade magazines.

As overall business in traditional markets is not expected to go back to pre-crisis levels in the foreseeable future, Hong Kong exporters are advised to fix their sights on emerging markets for sales expansion.  Developing Asia, in particular, remains the most promising region.  Although buyers in emerging markets are even more concerned about costs and tend to place even smaller orders, they are more willing to accept simpler designs and less functionality, and are more receptive to new brands.
 
Indeed, the number of buyers in fledgling markets will likely increase, given the emergence of a middle-income class, retail modernisation and sustained trade liberalisation.  Not surprisingly, buyers from emerging markets, as compared with their counterparts in developed markets, are more inclined to use cheaper sourcing channels such as trade magazines, both printed and electronic.  Especially for smaller buyers, more cost-effective sourcing methods may be favoured.

Among emerging markets, the mainland holds the best potential, thanks to a slew of measures aimed at boosting incomes and consumption.  In general, coastal regions, which have been seriously rocked by the recession because of their external focus, will probably continue to be dragged by a not-too-strong appetite from traditional markets.  Inner regions, in the meantime, are expected to remain beneficiaries of the mainland’s continued rural development efforts.

On the production side, the mainland’s dominant role as the world’s factory will likely be sustained over the medium term, although its manufacturing bases will become more diverse, not only clustering around the Pearl River Delta (PRD), but increasingly extending to the Yangtze River Delta (YRD) and other regions.  Moreover, the supply chain of production will be further extended beyond geographic boundaries, with the mainland remaining the production centre in the region.

While mainland exporters, notably smaller firms with low value-added, are hard hit by the global recession, the number of SMEs is expected to grow along with the world recovery due to their high entrepreneurial spirit.  A few large enterprises will be able to develop their own brands; others will maintain their OEM and ODM business, with some becoming the subcontractors of other manufacturers.  Increasingly, these mainland enterprises are able to provide a wide range of products, in terms of both quality and variety, targeting both overseas and domestic markets.

Hong Kong suppliers have been badly hurt by the world recession too.  Although the number of suppliers will grow again after the recession, it will unlikely return to pre-crisis levels soon, due partly to succession problems facing many manufacturers.  Most probably, they will continue to move up the value chain, especially undertaking product design and brand promotion, while extending their production bases away from the PRD to other parts of the mainland and even outside China.

In all, after the current financial crisis, Hong Kong will still be faced with mounting challenges, including not only tepid overseas demand and continued retail concentration in mature markets, but also a worsening production environment, mounting competition, extension of sourcing beyond the PRD and a declining number of Hong Kong suppliers.  

However, Hong Kong’s role as a sourcing hub is expected to be sustainable, thanks to the shift of economic focus to the Asian region and the critical mass establishing Hong Kong’s trading platform.  To further enhance its competitiveness, Hong Kong will have to build up credibility, expertise and its effectiveness as a marketing platform, especially sharpening the edges in sales and marketing, product design, quality assurance and supply chain management.