Overview

• Under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA), all Hong Kong-origin products, including electronic items, can be imported into the mainland with zero tariff treatment.
• Hong Kong exports a wide range of IT equipment. The largest export item is computer parts and accessories, which include a variety of motherboards and add-on cards of different functions, followed by computer peripherals, data storage units and data processing equipment. According to latest available statistics, Hong Kong was the second largest world exporter of computer parts and accessories in value terms in 2005.
• Hong Kong's exports of IT equipment fell by 17% in 2007. Exports to the Chinese mainland, mainly parts and accessories, fell by 12%, while exports to the US and the EU were also lacklustre, due mainly to falling computer and component prices.
• Along with the importance of information technology, IT and multi-media products continue to be star performers in the market. Wireless application, especially wireless LAN, is a popular choice for wireless access to the Internet. In addition, DVD disk drives and LCD monitors are getting popular amid falling prices.

Industry Features

Hong Kong exports a wide range of information technology (IT) products, especially computer parts and accessories, including motherboards, keyboards, computer cases, cooling fans, power supplies, display cards, memory cards, LAN cards and other add-on cards for multi-media applications, as well as screen filters, cables, harnesses, mouse pads and diskette holders. Some companies also manufacture computer peripherals, such as controller pads, mouse and audio-visual items for multi-media applications. Besides, some companies conduct trading and/or manufacturing business of complete set computers such as notebooks, desktops and personal digital assistants, while others dealing with LCD monitors, hard/floppy disk drives and CD/DVD disk drives.

According to latest available statistics, Hong Kong was the second largest world exporter of computer parts and accessories in value terms in 2005.

Some Hong Kong manufacturers still maintain certain production and quality control of high value-added items in Hong Kong. But most of the companies have relocated their production facilities to the Chinese mainland, where labour intensive processes like component insertion, plastics injection moulding 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, etc. In the wake of this relocation, most of the companies have been re-classified as non-manufacturing establishments, despite the fact that they have manufacturing activities across the boundary.

Hong Kong's IT 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, CPU chips, memory chips and other integrated circuits are mainly sourced from overseas suppliers like the US, Japan, Taiwan and South Korea. For other parts and components, such as printed circuit boards, passive components, mechanical parts and connectors, Hong Kong companies may source from other local manufacturers, or local enterprises in the mainland.

In recent years, 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. In view of the short product life cycles of IT products, Hong Kong companies place much emphasis on the collection of market intelligence. This enables them to start the development of new products at the earliest stage to catch up with the fast changing market environment. Indeed, the success of Hong Kong's IT equipment industry lies in efficient management. Against the fast changing markets, Hong Kong companies emphasise quick response to ensure effective marketing services to their customers, and to monitor the changing product trends.

Also, 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.

Performance of Hong Kong's Exports of IT Equipment ^

	2005		2006		2007
	HK$Mn.	Growth%	HK$Mn.	Growth%	HK$Mn.	Growth%
Domestic Exports	13,721	+160	19,482	+42	2,947	-85
Re-exports	274,823	+28	295,753	+8	258,813	-13
of Chinese Mainland Origin	177,660	+34	198,505	+12	182,131	-8
Total Exports	288,544	+31	315,234	+9	261,760	-17

Total Exports by Major Markets	2005		2006		2007
	Share%	Growth%	Share%	Growth%	Share%	Growth%
Chinese Mainland	54	+34	57	+16	61	-12
US	10	+36	9	-1	8	-26
EU(27)	13	+38	11	-3	9	-34
Netherlands	5	+69	4	-1	2	-53
Germany	2	+21	2	-6	2	-13
ASEAN	9	+14	8	-8	9	-9
Japan	5	+20	5	+22	4	-36

Total Exports by Categories	2005		2006		2007
	Share%	Growth%	Share%	Growth%	Share%	Growth%
Computer Parts & Accessories	74	+32	71	+5	58	-32
Computers	24	+31	28	+24	24	-28
Office Machines	2	+1	2	-21	18	+914

^ 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 IT equipment fell by 17% in 2007. Sales of computer parts and accessories, as well as complete computers, decreased in the year, despite increases in office machines exports.

The Chinese mainland was the largest export market, absorbing over 60% the total exports. But exports to the mainland, mainly parts and accessories, fell by 12% in 2007 after robust growth in preceding years. Sales to other major markets like the US and the EU were also lackluster due mainly to falling computer and component prices.

Sales Channels

Many IT equipment manufacturers produce on OEM/ODM basis for large manufacturers and brand-names in the US and EU. While some sell directly to the Hong Kong purchasing offices of prominent Japanese, European and US computer companies, some large manufacturers have subsidiaries or sales offices in the US and EU for marketing and after-sales services. Others export directly to overseas importers/distributors, who may sell the products under their private labels.

For the Asian markets, Hong Kong companies usually appoint agents, which may be exclusive distributors, to cater for distribution, technical support and after-sales services. Small manufacturers of computer parts usually sell to local dealers, who assemble the complete set computers with parts imported or sourced locally.

Promotion via participation in trade fair missions organised by the Hong Kong Trade Development Council (HKTDC) is an effective way for Hong Kong's IT 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 IT equipment companies to establish connections with potential buyers.

Industry Trends

Exports from certain Asian countries increasingly pose competition to Hong Kong's exports of IT equipment. But this mainly affects low-end OEM products with relatively high labour content. Some products from Taiwan and South Korea, such as motherboards, are also competing with Hong Kong's exports to some extent. In any event, increasing competition from Asian suppliers has long been a threat to Hong Kong. In response, many manufacturers have shifted the more labour-intensive processes across the border. They have also changed their product mix to strengthen their competitiveness, moving towards higher value-added and more sophisticated products.

Moreover, they have focused more on ODM business, rendering increased value-added services to overseas customers. Although this would normally require more investment in technical design than OEM production, developing ODM business is deemed to be an important strategy for Hong Kong's IT equipment companies to enhance their competitiveness. The most important attribute of their success in ODM business is product design and development capability, while knowledge of world product trends and consumer preferences in different markets are also their edge.

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 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-times.

In addition, amid the growing significance of information technology, e-commerce has become an important development in the business world. For Hong Kong's IT equipment manufacturers and exporters, getting on-line is a fundamental element to support their marketing activities. Apart from using their web pages for promotion and cataloguing, firms are adopting electronic means to foster their business, including Internet facilities to communicate with their customers for data exchange and logistics arrangement. Some companies also make use of the Internet to stimulate sales, allowing consumers to update or enhance, through downloading relevant software from designated web sites, the functionality of their IT products.

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 IT Products

Exports of IT equipment to most overseas markets are subject to safety requirement of the corresponding countries. For instance, computer products sold to the US market have to be in compliance with the mandatory requirements of UL/ETL listing or equivalent, in order to attain the federal safety standards. Likewise, computer items exporting to the EU have to comply with the directive 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.

China Market

As for the Chinese mainland market, the lifting of Co-ordination Committee for Multilateral Export Controls (COCOM) restrictions since early 1990s on exports of a large variety of sensitive technologies to the mainland, including certain computer equipment, has facilitated Hong Kong's exports of computer products and parts to the mainland. The successor to the COCOM, the Wassenaar Arrangement which came into force in 1996 with a milder regime, allows the enforcement of restrictions at the discretion of national governments instead of collective approval. As a result, Hong Kong re-exports of higher technology computers to the mainland will benefit from the continued liberalisation of advanced economies, notably the US, towards selling hi-tech products to the Chinese mainland.

Product Trends

Along with the importance of information technology and sustained popularity of the Internet, IT and multi-media products continue to be star performers in the market. On the back of falling prices amid keen competition, however, conventional products like personal computers have become mass products. As the market for such items, especially in the US, is hotly competed, the industry is focusing on further technological advancement and enhancement to sustain their business.

One of the focal areas is wireless application. Amid the growing popularity of broadband Internet access, demand for wireless connections is on the rise. In particular, the solution of wireless LAN, or the so-called WiFi, is now a popular choice for wireless access to the Internet. Meanwhile, some market players have developed their wireless LAN solutions for system applications, which are emerging as a niche on the back of the booming networking market. In the meantime, the Bluetooth technology is also among the choices for short-range radio link among different devices like computers, mobile phones and other portable apparatuses.

On the other hand, personal digital assistants (PDAs), or some of them called pocket PC, are well sought after by not only business executives, but also general consumers. This is thanks not only to falling prices that make the products more affordable, but also their enhanced multi-media capabilities, such as MP3 functions, sound recording and movie playback, as well as alternative options like digital cameras, global positioning system applications and wireless access to the Internet.

Development of optical disk devices for data storage is another focus of the industry. The growing popularity of digital versatile disc (DVD) system has stimulated not only the demand for DVD disk drives, but also related equipment such as complementary audio systems for enhanced sound features. Along with the increasing availability of software and price reductions, DVD disk drives have been taken as the standard items for computers. LCD monitors are getting popular amid falling prices.