The Bay Area, milestone free trade pact gives HKSAR a definite edge in becoming a world digital sourcing services hub. Oswald Chan reports from Hong Kong.
Hong Kong ought to be looking at winning another accolade — making itself a world digital sourcing and supply chain services pivot — by taking full advantage of the Guangdong-Hong Kong-Macao Greater Bay Area’s development and the historic signing of the world’s biggest free trade pact, prominent industrialists and investment pundits say.
Building and strengthening supply chains and services to create more jobs is one of the key objectives of the Regional Comprehensive Economic Partnership, hailed as a milestone in bolstering market access.
It will be further aided by China’s global supply chain network, as well as the advent of digitalization, amid China-United States trade frictions and the unrelenting spread of the COVID-19 pandemic.
Hong Kong, the experts urged, should take the initiative in supporting technology and innovation, upskilling the workforce by tapping its innovation ecosystem, capitalizing on the Chinese mainland’s supply chain system and, not least, leveraging the potential benefits offered by the RCEP accord, which was signed in November last year by the 10-member Association of Southeast Asian Nations, China, Japan, South Korea, Australia and New Zealand with a combined 30 percent of the world’s gross domestic product.
The escalating trade spat and COVID-19 are a wakeup call for multinational enterprises to realize the importance of boosting supply chain resiliency and efficiency. To diversify the risks of possible production disruptions, global manufacturers need to relocate or reshore part of their production lines.
Many industries see China as no longer the cheapest or the most cost-effective place to manufacture. Hence, rising costs, especially tariffs, and the exigent value of diversifying supply networks have accelerated the push to relocate manufacturing businesses from China.
Technology and innovation
Hong Kong’s trade and logistics sector is already embracing technology and innovation to respond to the new business environment. New technologies have enabled businesses to operate more flexibly, fueled by advances in manufacturing, such as rapid prototyping, the emergence of new materials, and the proliferation of online platforms that help companies better find the products they need.
Sourcing companies based in the special administrative region have engaged startups and technology companies to beef up their capacities in applying artificial intelligence to add services, such as smart chatbots, search processes and virtual 3D fitting, to enhance customer experience.
According to a report in November last year by InvestHK — the SAR government’s department geared to promoting foreign direct investment — and global auditing and advisory services firm KPMG, the number of startups in the city had soared by nearly 200 percent, from 1,065 to 3,184 between 2014 and 2019.
Cyberport and Hong Kong Science Park are nurturing the next generation of startups that help the research and development of the logistics industry, focusing on the future AI, analytical supply chain technologies and 3D virtual sampling.
“Digitalization is not just about logistics and supply chains. It’s across multiple sectors. We see a lot emerging in e-commerce, such as digital platform businesses stepping up in merchandising as well,” said Anson Bailey, KPMG China’s partner and Asia-Pacific head of consumer and retail. “We also see it in education technology companies providing digital education to drive the business digitally.”
He reckoned that Hong Kong has to ensure that companies are adapting new technologies to lure investments. Besides digitalization, Hong Kong has to ensure it can upskill and reskill the labor force in trade and logistics to attract the world’s highest quality talents.
Stephen Phillips, director-general of investment promotion at InvestHK, said the SAR government is trying to draw global talents to focus on filling the gaps in the local workforce, such as data scientists and programmers. “This will ensure that talents can help technologies related to digitalization to expand expertise in the industry.”
The mainland’s resiliency as the preferred supply-chain network and the sealing of the RCEP accord are held as catalysts for Hong Kong to be transformed into a digital supply chain services hub in the Bay Area if the city can jump on the technology application bandwagon.
“Even if China has lost its appeal of low-cost, loosely-controlled manufacturing, it still enjoys many excellent infrastructural, economic and financial advantages that ASEAN countries could never replicate. Global manufacturers are less likely to uproot their heavily invested manufacturing infrastructure,” reckoned Daniel Yip Chung-yin, chairman of the Federation of Hong Kong Industries.
Leaders of the 15 participating countries in the Regional Comprehensive Economic Partnership agreement attend the trade pact’s signing ceremony held online on Nov 15, 2020. (ZHANG LING / XINHUA)
‘China-Plus-One’
“In this respect, the ‘China-Plus-One’ procedure is a fail-safe for corporates to vary supply-chain risks and gain access to new revenue streams and resources while tapping into domestic market opportunities,” he said, referring to the strategy of multinational corporates adding new production facilities in other developing Asian countries, besides China, to complement existing operations.
Francoise Huang, senior economist for Asia-Pacific at Euler Hermes, noted: “Global companies could still consider establishing production sites in China to provide for the country’s large and growing domestic demand as the authorities continue to loosen regulatory restrictions to attract foreign direct investment.”
According to the global trade credit insurer, highly digitized companies are significantly more likely to look for suppliers in China than those that are not as digitized. This could be put in the context of the fast digitalization drive that China has been experiencing in the past few years. Companies in the automotive sector mentioned China significantly more than companies in chemicals and information technology, as well as telecoms.
“This reinforces the fact that Hong Kong has continued to benefit from the supply chain shift and the prevalence of the ‘China-Plus-One’ strategy, in particular, in terms of the electronics industry. In the medium term, we think the trade sector’s outlook is promising, given the accelerating regionalization, COVID-19 vaccine hopes and the expected easing of US-China trade tensions under a Biden administration,” said OCBC Wing Hang economist Carie Li Ruofan.
The accelerating trend of economic, trade and investment linkages between China and ASEAN has reinforced Hong Kong’s trade and logistics role in the Bay Area with the central government vowing to develop the 11-city cluster region into a world-class city metropolis in terms of trade, investment, logistics and finance.
“Hong Kong is a relatively small market, so businesses think of expanding into the Bay Area which is 10 times bigger. There’ll be a clustering effect when Hong Kong joins Shenzhen and Guangzhou. This will be a powerful combination as the three cities enjoy a high global ranking in technology and innovation,” said Bailey. “Hong Kong’s future lies in scalability -- being linked up with the other 10 cities in the Bay Area.”
Phillips said Hong Kong’s investment promotion agency will set up a small team for the Bay Area to sell this proposition to businesses worldwide.
Regional trade blocs
The ‘China-Plus-One’ approach will gain further momentum if regional trade blocs develop. The signing of the world’s largest free trade pact has lifted Hong Kong’s prospects as a global digital supply-chain hub.
Moody’s Investors Service estimates that the RCEP pact accounts for about US$26.2 trillion of the grouping’s gross domestic product, with cross-border trade reaching US$10.4 trillion (28 percent of global trade). The deal is expected to scale up the Asia-Pacific’s market size, creating fresh opportunities for companies to produce and sell within the region.
Besides further liberalization of tariffs and quotas and expanding existing bilateral free trade pacts among the member countries, the agreement aims to cut non-tariff barriers by covering trade in services, investment, e-commerce, intellectual property and labor mobility.
RCEP will facilitate greater volumes of outbound foreign direct investment and existing supply chain reorientation throughout ASEAN, with greater market access and increased production opportunities. The establishment of a common rules-of-origin framework will also widen market access for exporters in member countries and step up the drive to strengthen regional supply-chain resilience.
“Hong Kong exports have more room to grow with the new opportunities arising from the mainland’s ‘dual circulation’ policy and the Bay Area development, coupled with the implementation of a free trade agreement between Hong Kong and the ASEAN bloc, as well as the RCEP, which promotes inter-regional trade,” said Nicholas Kwan Ka-ming, director of research at the Hong Kong Trade Development Council.
The key benefit of the RECP accord is harmonization that can reduce the complexity of trade relations in the Asia-Pacific, as well as trade barriers, by slashing import tariffs in the next few years.
Home to over 650 million people, the ASEAN bloc was China’s top trading partner in the first half of last year, surpassing the US and the European Union and reflecting the immense market potential of the ASEAN economies.
“We see the shift toward consumers in China and ASEAN much more tech-savvy and digital as they’re very young in demographics and millennia consumers. ASEAN and China are coming together. They’re manufacturing centers moving to consumption. We see the rise of China and ASEAN consumers,” Bailey added.
Financial Secretary Paul Chan Mo-po said Hong Kong will strive to be among the first batch economies to join after the RCEP agreement takes effect, saying it will benefit Hong Kong’s services trade and investment although the city exempts most imported goods tariffs and has a small proportion of the manufacturing industry.
Total bilateral trade in goods between Hong Kong and the 15 RCEP member countries stood at US$765.5 billion in 2019, accounting for 71 percent of the city’s total trade value, Chan wrote in a blog post in November last year.
Contact the writer at oswald@chinadailyhk.com
