28 March 2012
Seeking Solutions in Tough Times
Determining whether today’s business challenges are cyclical or structural will affect what strategy to implement (photo: iStockPhoto.com)
In a study by the Hong Kong Trade Development Council of what’s expected in the coming year, more than one-third of about 3,500 Hong Kong manufacturers and traders surveyed believe their export performances in 2012 would be “unsatisfactory” or “very unsatisfactory,” another 45 per cent expect only an “average” performance.
Nearly 90 per cent of respondents attribute the reasons for those expected performance to the weak purchasing power in target markets, particularly in western Europe and the United States, the major arterial export channels for Hong Kong consumer goods.
As a result, a hefty 87 per cent say their prices have become uncompetitive because of increased costs and exchange rate movements, which effectively point to rising production costs in the Pearl River Delta (PRD) and renminbi appreciation, since most Hong Kong exporters produce or source their products across the boundary. Eighty-three per cent also say they are facing fierce competition from their counterparts on the Chinese mainland.
Are these challenges cyclical or structural? The nature of the problem matters because either one would require a completely different strategy. If the problem was cyclical, traders need only to tighten their belts and wait patiently for the good times to come around again. Structural problems, in contrast, are linked to fundamental changes, which would require a more active approach to strive for change and improvement.
The Nature of the Challenge
Even though anaemic recovery can be expected for the US economy, employment and housing prices – the two factors that most affect consumer confidence – are still far below 2008 levels, and are unlikely to see strong rebounds in the coming years.
In most Western European countries, meanwhile, private consumption is constrained by contractionary fiscal policies expected from governments facing great pressure to reduce their budget deficits.
Keener competition is a structural challenge, a consequence of the rapid development in China’s manufacturing sector over the past decade (photo: EyePress)
Rising production costs in the Pearl River Delta and renminbi appreciation are hard to dodge. They’re the results of China’s rapid economic development, which includes urbanisation, changes in demographics due to the ongoing family planning policy, and industrial policies to upgrade coastal areas. Clearly, these are structural challenges to Hong Kong exporters.
Keener competition is also a structural challenge, as it is the consequence of the rapid development in China’s manufacturing sector over the past decade. Survey respondents do not see these challenges as short term.
Moving Up or Out
While the trend to higher production costs continues, manufacturers could choose to move to lower-cost regions. Yet, not many Hong Kong manufacturers plan to do so. Among those respondents with factories in the PRD, three out of four have no plans to relocate any part of their production base out of the region. The main reason cited is that a non-PRD production base too far from Hong Kong would be too difficult to manage (68 per cent). Some 40 per cent say the PRD remains the best manufacturing location, with its comprehensive support services.
The Art of Raising Prices
Despite the challenges, Hong Kong exporters have reacted positively
According to the survey, 62 per cent of exporters able to raise their export unit prices say that buyers are willing to absorb part or all of the increased costs. However, one-third believe that price increases have to be accompanied by new products or improvements in the quality of existing offerings.
In terms of their plans for product improvement for the next three years, half of Hong Kong exporters say they will develop new products, while 45 per cent want to improve their product quality. About 30 per cent of the survey’s respondents will develop or strengthen their designs and brands.
Some overseas buyers are aware of the higher production costs borne by their suppliers and are willing to absorb part of these. But exporters can hardly pass on all increased costs, unless they continuously launch new products or improve their existing ones.
Despite the gloom, Hong Kong exporters have reacted positively to the challenges they face. The majority (79 per cent) intend to increase marketing and promotion. Seventy-five per cent of the respondents plan to explore or step up market development, particularly on the mainland and in emerging markets, suggesting that they see the drop in developed market demand as long term.
Alive and Kicking
On their current status, 60 per cent of Hong Kong trading companies describe themselves as rapidly expanding or steadily growing. Random sampling shows that one-third were established after 2000. Despite all the challenges, that suggests a significant new generation of companies, undoubtedly the best evidence of healthy growth and development in the sector.
There’s little doubt that Hong Kong’s trading sector has undergone considerable structural changes with the rapid economic development of the mainland over the past decade. But it’s not the first time the trading community has faced difficulties. It has a reputation for re-inventing itself – and that’s the strongest card in the deck.
For more on international trade trends, please see the March issue of the HKTDC Trade Quarterly, which can be ordered at: http://bookshop.hktdc.com/.