Green Manufacturing

To survive the slowing economy in the developed world, Hong Kong exporters, apart from product quality and service reliability, must better learn how to stand in their customers’ shoes. Developments such as the acceleration of new product launches, the increasing popularity of “digital shopping”, and the growth of private labels, as well as the continued thriving markets for silver, pet and baby care products are clear trends to which Hong Kong companies need to consider. In the meantime, export diversification to large emerging markets such as the BRIC countries as well as more uncharted territory like Africa, can also be a good strategy to counter the lingering economic dark cloud hanging over the traditional markets.

Still frugality and value

High joblessness, tight credit, a worrying fiscal position and an ongoing austerity drive have all contributed to the extended frugality in such developed markets as the US and Western Europe. Conservative consumers and their cautiousness remain a deterrent to a spending revival, especially when the focus is increasingly on value, functionality and environmental friendliness.

Looking at Hong Kong’s export performance, Western Europe and North America (largely the US) are the only two regions to which Hong Kong recorded below-average growth in exports in the first ten months of 2011. The weak rebound in export growth not only confirms the theme of frugality among consumers in those developed markets, but also highlights the importance of not putting all one’s eggs into one or two baskets!

Performance of Hong Kong’s total exports, by region

Source: Census and Statistics Department, HKSAR Government

To navigate through the cold currents affecting developed markets, Hong Kong exporters, apart from product quality and service reliability, must acquire better knowledge about what consumers in these markets are looking for. In addition to value for money, habitual changes such as the increasing preference for “digital shopping”, the wider acceptance of private labels and the resilient splurges on silver, pet and baby care products are important developments indicating Hong Kong companies should look at product and business model diversification.

Acceleration of new product introductions

One eye-catching trend in the trade or distribution landscape of developed markets is the increasing preference for “digital shopping”, thanks to the advances in technology that allow online shoppers to see samples through beautiful web interfaces and try on products in virtual fitting or testing rooms. In the meantime, consumers are naturally becoming much more discerning online shoppers given the greater availability of flash sales (i.e. a time-limited offer of high discounts) and online price comparison channels.

“Digital shopping” is becoming more commonplace, where consumers are shifting from price comparison to flash sales.

With virtually no limit on space, online retailers tend to showcase more items than if they were selling in a physical store, while they are also inclined to update their web sites with new products more frequently than otherwise. This, coupled with the fact that online retailers usually are not as willing to take stock as physical retailers, exacerbates the trends for shorter product development cycle and smaller but quicker orders that have already been prominent amid a value-conscious spending sentiment.

Buoyed by a more mature online shopping habit in developed markets, the traditional product development timetable has been changing as manufacturers strive to shorten the time lag between design concepts and commercialisation in a bid to introduce new products more frequently to stay in line with consumers’ expectations. This direction covers, but is not limited to, hi-tech products such as smartphones and smart TVs and fashion items for the mass market.

To surprise their customers, many manufacturers have speeded up their product development process to outclass their rivals with new and advanced product designs, while some are incorporating (or crossing over) with brands or elements from other market segments to launch more limited supply items as gimmicks.

For instance, retailers can now push deals out easily in real time to members or followers in social networking sites such as Facebook and Twitter, giving out exclusive promotional offers, while some can crossover with other brands to create new product collections to give their customers a fresh new look. A case in point is H&M’s autumn 2011 collection featuring Italian designer Donatella Versace, following collaborations with other famous designers including Matthew Williamson, Jimmy Choo and Sonia Rykiel.

From mushrooming to customers’ favourite

With consumers in the developed markets continuing to trade down, value retailers such as Walmart, Target, Aldi, Lidl, Carrefour, Auchan and Tesco are becoming increasingly popular. Over the course of offering a momentary escape in stressful times, many of these value retailers have worked hard to cultivate their own private labels or house brands.

Source: Interbrand’s 2011 Best Retail Brands report

The recent economic slump saw private labels gaining share in most of the developed markets. It is reported that 18 countries across Europe recorded growth in private label sales last year, where retailer/store brands accounted for 40% of products sold in the UK, Spain and Portugal.

With 60% of consumers across the world buying more private label products during the recent economic downturn, private labels are no longer just a good way to save money. Retailers’ efforts and resources put into the development of their own product assortment and brands are poised to bear fruit even when the recession ebbs, with more than 90% of consumers in developed markets saying that they will continue buying private label items when the economy improves.

Although pioneers and leaders in private label development are mainly Western European countries, the growth has been steady in Central and Eastern European markets such as Poland, Hungary, the Czech Republic and Slovakia, and Latin American markets such as Brazil, Chile and Peru, thanks to the continued entry of Western retailers and retail modernisation in those markets.

Tech and green triumph the mood of trading down

Trading down is a general trend, but obviously not universal. Many people, though tightening their belts, are still willing to open their wallets to buy chic electronic devices featuring “gateways to experience” such as smart TVs, smartphones and gadgets for cross-platform “mobitainment” like tablets and various other portable multimedia players.  

While consumers in many developed economies regard themselves as bargain hunters, quality and green elements remain their last things to compromise on for a cheaper price and are largely exempt from spending cut-backs. Tech products aside, products that can help save money and have more cachet than disposable fads are becoming more sellable. The increasing willingness of consumers to pay a premium for more durable and greener products such as energy efficient appliances and green textiles are not only good examples of how they attach great importance to sustainable consumption, but indicators for manufacturers to think beyond quality and make green products more than like-for-like alternatives.

When the silver market turns golden

The world is ageing fast. If one adopts the United Nations definition to consider a country “aged” when its 65+ population reaches 14% of its total population and “super-aged” when the number climbs to 20%, then most if not all of the leading developed economies have fallen deep into the aged zone, including Hong Kong’s major traditional markets, namely Europe, the US and Japan.

Source: Population Reference Bureau, United Nations

Contrary to the general perception that the aged are the poorest group of consumers with low incomes and a lack of drive to spend, the aged of today have accumulated much more wealth than earlier generations, not to mention the various kinds of subsidies they can receive from public funds.

Assuredly, consumer sentiment, in general, is weak in most of the developed economies, but in a relative sense, elderly consumers there seem to be less affected, thanks to their less aggressive investment approach and spending patterns that are less sensitive to business cycle fluctuations.

For manufacturers who do not want to go through tedious, time-consuming and costly procedures to become qualified manufacturers for health-related products, the non-health related segment looks more accessible.

As for non-health related products for the elderly, the entry barrier is lower since, unlike medical equipment, it relies less on technology skills but more on new designs of traditional products. Thus it appears to be a cost-effective option for companies that are already experienced players in the traditional industries.

That said, the low entry barrier also draws keen competition. To be successful, the products have to be innovative and user-friendly. Meanwhile, protection of intellectual property may need extra attention, as others may copy the designs more easily given a relatively low technological content.

Splurging on pets continues

In the five years to 2010, global pet care sales recorded growth of 27%, demonstrating a compound annual growth of more than 6%. Although the sales growth was only negligible in the recession year 2009, it resumed growth of 5% in 2010, reaching US$83 billion. The recession-proof nature of pet care products has therefore drawn the interest of many struggling manufacturers who have not been paying sufficient attention to the market.

While frugality remains a buzzword among buyers in developed markets, splurges on pets continue in conjunction with falling fertility and rising pet anthropomorphism. The evolving business opportunities not only bring relief to struggling exporters, but indicate plenty of room for product diversification. Leveraging on their manufacturing experience and design capabilities, Hong Kong companies, particularly those in the fields of toys, houseware and electrical products, are strongly poised to extend gains on the rising pet trend.

Given the rising pet humanisation trend, the requirements for pet care products are becoming increasingly synchronised with those applicable to the manufacturing of products for humans. As such, product safety, user-friendliness and health considerations have become essential elements that pet owners, and therefore traders, will look for when choosing products for pets.

Fewer babies, more spoiling

There may be many reasons behind the falling fertility rate, but the average number of children born to a woman during her lifetime has been sharply decreasing in all the most developed economies over the past few decades.

Many women nowadays choose to give birth to only one child, compared with half a century ago, while no-child families are becoming more commonplace year after year, especially in Japan and major European countries such as Germany and Italy.

Source: Population Reference Bureau, United Nations

While the scenario looks alarming, given the pool of consumers of toys and baby products has been shrinking with the declining fertility rate, the overall spending on products for babies and children remains on the rise. Spoiling, as well as the subsequent call for more premium baby and toy products, has more than compensated for the smaller number of newborns.

This premium trend comes hand in hand with greater safety concerns, which makes the reliability of baby and toy products so important that premium choices become almost a must for parents in developed markets in order to make safe and healthy picks for their loved babies or children.

Stepping out of the comfort zone

Without doubt, traditional markets such as the US, Western Europe and Japan will remain important for Hong Kong manufacturers and exporters. However, the weak rebound in demand from these developed markets not only confirms their ongoing drive for frugality, but also indicates to Hong Kong traders the importance of not putting all their eggs into one or two baskets!

To play defence against the lingering economic dark cloud hanging over the traditional markets, Hong Kong companies should continue pursuing market opportunities in emerging markets by utilising their strengths and existing capacity in OEM.

While continuing efforts are warranted for large emerging markets such as the BRIC economies (Brazil, Russia, India and China), other uncharted potential territory like South Africa, Kenya, Ghana and Nigeria in Africa, for example, are also showing good potential for Hong Kong companies and thus warrant further exploration.

In parallel to the potential business opportunities from these countries’ relatively stable economic conditions, their decent risk-adjusted pay-offs (measured in terms of the value and growth of Hong Kong’s exports) also suggest plenty of possibilities for traders and investors, including Hong Kong companies, who are looking beyond sales to traditional markets.