17 July 2013
Offshore Success Story
Hong Kong has evolved into a highly significant trading and logistics hub, while remaining the preferred setting for the headquarters of many of the region’s trading companies(photo: iStockPhoto.com)
The share of Hong Kong’s offshore trade rose from 18.6 per cent in 1988 to 65 per cent in 2012. The figures come from the “HKTDC Offshore Trade Survey 2012,” which defines “offshore trade” as including the increasing sale of China-origin products to China by Hong Kong companies, giving deeper insight into Hong Kong’s true trading performance in recent years.
The figures vary significantly from industry to industry, providing a telling indicator of the city’s strengths. These developments have seen Hong Kong evolve into a significant trading and logistics hub, while remaining the preferred setting for the headquarters and core business functions of many of the region’s trading companies.
Many of the city’s trading companies have factories on the Chinese mainland. These produce and supply products to the overseas markets via direct shipments, without goods necessarily passing through Hong Kong. The transactions are sales attributable to Hong Kong companies, but they are not recorded in customs statistics, as the goods do not physically pass through Hong Kong. For this reason, the monthly figures released by the customs department do not accurately reflect the true performance of Hong Kong’s export sector.
Overall, there are two factors that redefine Hong Kong’s offshore trade. First, the overall size of its offshore trade has expanded faster than its onshore counterpart. Second, some sectors have seen a far faster rate of growth in offshore trade than others, largely as a result of significant changes to Hong Kong’s export structure in recent years.
According to the Hong Kong Census and Statistics Department, the annual value of offshore trade goods has outperformed the value of re-exports since 2006. In 2011, the value of offshore trade goods was estimated at HK$4.5 trillion, equivalent to 1.4 times that of Hong Kong’s re-exports of goods for the same year. The value of those goods involved in offshore trade expanded by more than 200 per cent in the 2002-2011 period, far more than the growth of 130 per cent seen in Hong Kong’s re-exports of goods during that time. It is fair to say the export business of Hong Kong companies is, in fact, bigger and growing at a faster rate than indicated by customs data.
In terms of profitability, the gross margin, or the commission rate related to offshore trade activities, was estimated to be about six per cent in 2011. This is significantly lower than the 16.3 per cent re-export margin recorded by the Hong Kong Census and Statistics Department in the same year. These lower margins, however, may be of comparatively little concern since, from a micro perspective, companies frequently have to contend with lower margins when their sales volumes increase. It’s safe to say that both the sales and profits of Hong Kong trading companies are expanding.
Changing Export Mix
Increasingly, good manufactured on the mainland by Hong Kong companies are never actually shipped through the city (photo: iStockPhoto.com)
During this period, Hong Kong’s total exports have doubled, while electronics exports have expanded by about 180 per cent. In addition to electronics, precious-jewellery exports also saw tremendous growth during this period (about 200 per cent), boosting their overall export share from one per cent to 1.6 per cent. Processed food and beverage exports also enjoyed faster-than-average growth, with their share increasing from 0.9 per cent in 2003 to 1.2 per cent in 2012.
In contrast, exports of other traditional Hong Kong products, including clothing, textiles, household electrical appliances and houseware and lighting, declined throughout this period, with their combined share falling from 19.4 per cent to 8.5 per cent, according to official offshore trade statistics.
The HKTDC’s triennial trade survey of Hong Kong’s offshore trade activities, carried out since 1988, however, gives a clearer picture of developments within the sector. According to the survey, the share of offshore trade as part of the total business of Hong Kong companies, including sales of China-origin products to China by Hong Kong companies, has actually increased – from 18.6 per cent in 1988 to a remarkable 65 per cent in 2012.
The stationery/paper products/packaging material industries have the highest share of offshore trade, according to the “HKTDC Offshore Trade Survey 2012,” which estimates the share of domestic exports, re-exports and the offshore trade of Hong Kong companies by sector. In 2012, more than 90 per cent of the export business of Hong Kong’s stationery, paper products and packaging sector was shipped directly to its destination market from its point of manufacture, without actually ever entering Hong Kong. In fact, only 8.6 per cent of sales in this sector was re-exported via Hong Kong and, thus, recorded by Hong Kong’s customs.
While domestic exports account for a small fraction overall, the higher the share of the offshore trade, the more the export business of that sector is underestimated in terms of customs data. Indeed, in 2012 the houseware/lighting, toys, giftware/decor/imitation jewellery, clothing/textiles sectors all had offshore trade shares of between 70 and 79 per cent. This represents a significant increase from the 42 to 69 per cent share seen in 2003.
By contrast, processed food and beverages, precious jewellery and electronics are sectors with lower shares of offshore trade and higher shares of re-exports than average. This, in part, explains why the share of Hong Kong’s overall export total has varied considerably across these particular industries over recent years.
Hong Kong: a vital hub for trans-shipping (photo: iStockPhoto.com)
A decade ago, the production for most light industries was concentrated in the Pearl River Delta (PRD) area. This has gradually extended to other parts of China, largely because of rising production costs in southern China and a raft of government policies designed to upgrade the industrial structure of the PRD. The overall impact, however, has varied across different industry sectors.
The “HKTDC Offshore Trade Survey 2012” shows that more labour-intensive industries with shorter supply chains tend to have a more scattered production base. While the PRD, for instance, remains the major production base for the majority of industries, certain sectors – particularly household electrical appliances, travel goods, handbags, stationery, paper products and packaging material – now also use facilities in the Yangtze River Delta (YRD).
The time demands and the cost of re-exporting through Hong Kong are inevitably greater the more distant the production base is from Hong Kong. Unless there are good reasons, re-exporting through Hong Kong is unnecessary, and exporters opt to ship products from their production site directly to their target markets.
The second factor relates to the actual size, value and nature of the products concerned.
Products that are expensive, lightweight, compact, time-sensitive, fashionable or perishable are far more likely to be re-exported by air through Hong Kong. The higher transportation costs are justifiable given the greater efficiency and reliability of Hong Kong International Airport.
Electronics, including finished products and parts, precious jewellery, processed food and beverages and fashion garments, are also covered by these requirements, explaining why their share of offshore trade tends to be considerably lower than the average figure.
There are other reasons, however, that make re-exporting through Hong Kong necessary or attractive. According to the HKTDC survey, more respondents in the electronics, precious jewellery and processed food and beverage industries said they imported their China-made products to Hong Kong, then exported back to the mainland. In the electronics sector, 46 per cent of respondents did so in order to meet the processing trade export requirements.
More than half the respondents in the precious jewellery industry said they did so in order to take advantage of the other production processes available in Hong Kong. According to respondents in the processed food and beverages sector, the need to consolidate goods with other shippers’ cargoes in Hong Kong was their major reason for re-exporting China-made products back to the mainland via Hong Kong.
It is also worth noting that the emergence of complex electronic product supply chains for electronics products has split production processes across Asian countries and has had a considerable impact on Hong Kong’s re-exports. Taking smartphones as an example, there are more than 100 parts and components (including application processors, memory, radio frequency, power management, connectivity, interface and sensors, display/camera, batteries and other components), which are supplied by companies in different countries, including Germany, the United States and a number of Asian nations. While the final assembly of smartphones takes place in southern China, intermediate goods are often imported to Hong Kong by air, then re-exported to China for assembly. Finished products are then, for reasons of convenience, shipped to overseas markets via Hong Kong.
The increasing popularity of sophisticated electronics products has seen Hong Kong emerge as an important logistics and distribution hub for these components, thanks largely to its air connectivity and proximity to southern China. The heavy traffic engendered by this kind of intra-regional trade also explains why electronics has now come to play such a dominant role in Hong Kong’s export mix.
Hong Kong’s Role
Amid the booming offshore trade, Hong Kong has evolved into a leading regional trading and logistics hub. The trading sector, as a whole, is expanding, handling a growing volume of goods. While the city’s trading companies have increased the scale and scope of their production, sourcing and logistics arrangements on the mainland, Hong Kong remains the primary location for administering their basic business functions.
The disparity between Hong Kong and the mainland in terms of these core operational functions has remained significant over the past decade. Asked about their plans for the next three years, most surveyed companies indicated that they would increase the functions of their Hong Kong offices in all aspects, with a particular focus on sales and marketing, product design and development and quality control.
Maintaining Hong Kong’s Edge
The mainland’s rapid economic development over the past decade has reshaped Hong Kong’s trading profile. Today, Hong Kong companies face a more challenging production environment in the PRD and fiercer competition from their counterparts, especially those on the mainland.
The rising trend for offshore trade is a natural consequence of the competition that occurs when companies choose the most cost-effective production and shipping arrangements. Thanks to its free-port status, good air connectivity, high efficiency and the integrity of its customs and the logistics industry, Hong Kong has cornered the market on re-exporting or trans-shipping many products that are considered to be of a higher value. The challenge for Hong Kong is to maintain its advantages and promote the long-term development of its trading industry. To safeguard its role, Hong Kong needs to look at upgrading its infrastructure, controlling costs and investing in human capital in the trading and logistics sector.
For more on global market trends, please see the June issue of the HKTDC Trade Quarterly.