• Under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA), all Hong Kong-origin products, including telecommunications equipment, can be imported into the mainland with zero tariff treatment.
• Hong Kong exports a variety of telecommunications equipment, ranging from basic telephones, cordless phones, mobile phones to sophisticated system products. According to latest available statistics, Hong Kong was the second largest world exporter of telephone sets in value terms in 2005.
• Hong Kong's exports of telecommunications equipment surged by 136% in 2007, due mainly to the re-classification of trade statistics. Despite this, sales of parts and accessories to the Chinese mainland continued to expand on the back of increases in processing production, while exports to the US and the EU were aided by steady demand amid increasing telecommunications applications.
• While mobile phones with enhanced features like digital camera, radio, MP3 and movie playback functions are in demand, broadband application has become another hot area for development in the telecom sector. As for domestic telephone products, higher frequency cordless phones are well sought after. But corded telephones have continued to be in steady demand on the back of relatively low costs.

Industry Features

Hong Kong exports a variety of telecommunications equipment, ranging from basic telephones to sophisticated system products. Major export items include telephone sets like simple corded phones, featured phones, low frequency cordless phones, as well as high frequency cordless phones operating at 900MHz, 1.8GHz, 2.4GHz, etc. According to latest available statistics, Hong Kong was the second largest world exporter of telephone sets in value terms in 2005.

Another major category is parts and accessories, including items such as telephone cords, modular jacks and a variety of mobile phone accessories. Hong Kong also exports different kinds of telecommunications apparatus with radio reception, like paging apparatus and mobile phones. Other smaller export items include facsimile machines, radar and navigational apparatus, modems, telephone switching/exchange equipment and telephone answering machines.

Hong Kong's telecommunications equipment industry is characterised by heavy dependence on imported parts of key components. Given its free port status and the advanced telecommunications infrastructure, Hong Kong allows companies to source freely world-wide. For example, most diallers, micro-control units (MCUs), digital signal processors (DSPs), memories and/or other chips are imported from Taiwan, Japan and South Korea, etc. For other parts and components, such as printed circuit boards (PCBs), passive components, key-pads, cords, modular jacks and mechanical parts, Hong Kong companies may source from other local manufacturers, or indigenous enterprises in the mainland.

Most companies in the industry have relocated their production facilities to the Chinese mainland, where labour intensive processes like component insertion, plastic injection and sheet metal working are carried out. Their Hong Kong offices focus mainly on product design and development, industrial engineering, management, logistic support and marketing. In the wake of this relocation, the companies have been re-classified as non-manufacturing establishments, despite the fact that they have manufacturing activities across the boundary.

Meanwhile, there are an increasing number of Hong Kong manufacturers adopting a strategy of vertical integration to enhance value-added content to their products. Product design and development, tool-making, production and/or quality assurance are all done under one roof. Moreover, most companies are equipped with relevant acoustic testers and frequency spectrum analysers for the design of telephone interfaces and radios respectively.

Due to the growing concern of quality conscious buyers, more and more companies have strengthened their quality assurance systems. This is evidenced by the growing number of Hong Kong companies certified as complying with ISO 9000, which is an internationally recognised standard for quality management system. Some manufacturers also have their facilities approved by the British Approval Broad of Telecommunications (BABT) for the sales of telecommunications equipment to the UK market.

Performance of Hong Kong's Exports of Telecommunications Equipment ^

* Trade statistics for the year of 2007 is subject to re-classification.
^ Since offshore trade has not been captured by ordinary trade figures, these numbers do not necessarily reflect the export business managed by Hong Kong companies.

Hong Kong's exports of telecommunications equipment surged by 136% in 2007, due mainly to the re-classification of trade statistics. Major export items included parts of telecommunications equipment, apparatus for transmission or reception of voice, images or other data, telephone sets and radar/radio navigational aid apparatus.

Market-wise, exports to the Chinese mainland expanded at a fast pace in 2007. Sales of parts and accessories, the majority of the total exports to the market, continued to expand on the back of increases in processing production.

While exports to the US and the EU, accounting for about one-third of total exports, were aided by steady demand amid increasing telecommunications applications, sales to ASEAN and Japan were also facilitated by a steady demand for telecommunications parts in the region.

Sales Channels

Hong Kong companies usually sell their products on OEM and ODM basis to overseas telephone companies and specialised importers of telecommunications equipment, which are capable of obtaining approvals from relevant authorities of the products. The products will then be distributed to telecommunications equipment stores, outlets of telephone companies, department stores and/or supermarkets. After-sales services, such as installation and maintenance, are usually undertaken by the overseas buyers, while Hong Kong suppliers provide technical support and service manuals, which include installation procedures, schematic diagrams, drawings and other relevant technical information.

On the other hand, a few Hong Kong companies market their own brand products in overseas markets, such as the US and the EU. Some companies also have offices in overseas markets to monitor local distribution and/or after-sales services.

Promotion via participation in trade fair missions organised by the Hong Kong Trade Development Council (HKTDC) is an effective way for Hong Kong's telecommunications equipment companies to explore market opportunities. Important trade fairs include the CES Show held in the US, CeBit in Germany, Japan Electronics Show and Hong Kong Electronics Fair. Business missions organised by the HKTDC to the Chinese mainland and other emerging markets also provide opportunities for Hong Kong companies to establish connections with potential buyers.

Industry Trends

Along with intensified competition, exports from other Asian countries have posed increasing challenges to Hong Kong's exports of telecommunications equipment. Competition from Asian suppliers, especially the local Chinese enterprises, has long been a threat to Hong Kong. In fact, the Chinese mainland has a well-established industrial base for telecommunications items, and poses obvious threat to Hong Kong exporters in the international market. In view of the challenges, many Hong Kong companies have differentiated their products by enhancing product features, and enriched their product lines through new product development.

This results in increased emphasis on ODM manufacturing, while maintaining OEM business for scale economy. Buyers can now provide the industrial design only, such as cosmetic drawings and features, and their Hong Kong suppliers undertake other operational activities, which range from hardware design, software programming, mechanical drawing, building prototype and samples, to tool-making and production. Some industrial designs may even be done by Hong Kong companies.

As more design works are being undertaken by Hong Kong companies, there is a tendency of overseas importers to shift liabilities arising from defective products to local manufacturers and traders. It has thus become increasingly critical for Hong Kong exporters to observe laws and regulations in relation to consumer protection and product liabilities in overseas markets.

On the other hand, the fast changing consumer pattern has resulted in low inventory levels in major export markets, requiring quick response for inventory replenishment. Product life cycles have also shortened amid the advancement in technology, leading to the need for more frequent changes to product features and cosmetic designs in order to lure consumers. In this respect, Hong Kong companies are well known for their adaptability and responsiveness to the rapidly evolving consumer tastes and technological changes. They have constantly upgraded their capability in product and aesthetic designs. Some companies also re-engineer their procurement and production management systems, in a bid to shorten delivery lead time.

CEPA Provisions

Since the implementation of the third phase of the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA III) in January 2006, all products of Hong Kong origin can be imported into the mainland at zero tariffs. According to the stipulated procedures, products which have no existing CEPA rules of origin will enjoy tariff-free treatment upon applications by local manufacturers and upon the CEPA rule of origins being agreed and met.

In the main, the CEPA origin criteria for Hong Kong items include change in tariff heading, performance of specific manufacturing process in Hong Kong, as well as fulfillment of value-added requirement, under which at least 30% of the FOB value of the products, and that the final manufacturing or processing operations should be completed in Hong Kong. Product development cost incurred in Hong Kong, in addition to material costs and labour costs, can be taken into account in calculating the value-added percentage.

Detailed information, as well as the origin rules for electronics items, is available from the following hyperlink:
http://www.tid.gov.hk/english/cepa/files/mainland_2008.pdf

General Trade Measures Affecting Exports of Telecommunications Equipment

Most telecommunications equipment sold to overseas markets should have the approval granted by corresponding telecommunication authorities of individual countries, e.g. the Federal Communications Commission (FCC) in the US, BABT in the UK and BZT in Germany. Also, these exports are usually subject to safety requirements. For instance, telecommunications products sold to the US have to be in compliance with the safety requirements of UL/ETL listing or equivalent. Likewise, products exporting to the EU have to comply with relevant safety directives, including those of low voltage electrical equipment, and have to carry a CE-mark to show their compliance. With regard to electromagnetic compatibility (EMC), products sold to the US require compliance with FCC standard, while the EU's CE-mark has also required the compliance with relevant EMC directives.

Hong Kong exporters should be attentive to the growing popularity of green concept in the marketplace. Especially in Europe, consumers are generally conscious of environmental protection. Not surprisingly, the EU has adopted a number of directives for environmental protection, which may have an impact on the sales of electronics and electrical appliances. These include the restrictions on batteries and accumulators that contain mercury, as well as the Directive on Waste Electrical and Electronic Equipment (WEEE) implemented in August 2005, and the Directive on Restriction of Hazardous Substances (RoHS) that came into effect in July 2006.

Product Trends

Along with the growing importance of information technology, telecommunications products capable of accessing the Internet with multi-media applications are star performers. As for mobile communication, mobile phones with capabilities of Internet access, e-mail and/or SMS/MMS functions are getting popular. Moreover, a number of enhanced features have been added on to some mobile models, such as colour display, digital camera, radio, MP3 and movie playback functions, which have effectively lured demand especially from youngsters. In addition, major players have continued to focus on the 3G mobile technology, along with the steady development of 3G services in the market.

Nevertheless, fixed-line network will continue to play a vital role in the communication world. Spurred by the demand for high-speed data transmission and Internet access via the fixed-network, broadband application has become another hot area for development. On the other hand, some companies have made use of the digital subscriber line (DSL) technology, which utilises the existing copper telephone lines to deliver high-speed data services. Also, the demand for certain digital telecommunications network services is gathering strength. The demand for relevant apparatuses, parts and accessories is expected to gather further momentum.

Telecommunications products making use of the Bluetooth technology, an industry standard for short-range radio link among different devices like computers, mobile phones and other portable apparatuses, are also in demand. With respect to domestic telephone products, there is a constant appetite for cordless phones. Thanks to changing regulations of telecommunications authorities, a certain radio frequency spectra have been opened for cordless phones operating at higher frequency, including the DECT phones for Europe, and the 900MHz and 2.4GHz cordless phones for the US. Higher frequency products are well sought after due mainly to their better quality and enhanced features. Yet corded telephones are not expected to obsolete in the medium term.