Friday, December 13, 2013, 07:04
Asia Weekly: HK firms require change of pace
By BEN YUE in Hong Kong

Small businesses need to cut back on borrowing and look to niche areas with less competition

Asia Weekly: HK firms require change of pace
Hong Kong’s small business owners are the most pessimistic in the region, judging by a recently released report. In another survey, however, they have indicated that they foresee brighter, if not quite booming, prospects for the near future.

According to the CPA Australia Asia Pacific Small Business Survey 2013, 64 percent of Hong Kong owners of small and medium enterprises (SMEs) believe their businesses will not grow in 2014. Compared to the five other markets in the region covered by the survey — Australia, New Zealand, Indonesia, Malaysia and Singapore — Hong Kong business growth expectations are ranked the lowest at 36 percent, while Indonesia and Malaysia are the highest at 83 percent and 65 percent.

“Global economic uncertainty is having implications across the Asian region, and the evidence is no different in Hong Kong where we’ve seen the largest drop in small business confidence in this year’s survey,” says Gavan Ord, business policy adviser of CPA Australia.

“For Hong Kong’s small businesses, those external factors are compounded by increasing costs, such as rent and staff costs, and increased competition.”

But the Standard Chartered Hong Kong SME Leading Business Index for the fourth quarter of 2013, offers a slightly more optimistic view. Based on data from over 800 small businesses, the report reveals that local SMEs expect a steady business outlook.

The CPA Australia survey of 314 SMEs — which covers companies with fewer than 20 employees —shows that 61 percent of them believe that increasing costs had an impact on their business in the past 12 months, a trend that most expect to continue. About 40 percent of respondents consider increasing costs, and about 30 percent consider rent and competition, will hold back their growth for the year ahead.

Despite all the gloomy market expectation, over a third of participants are recruiting. At the same time, 78 percent of Hong Kong SMEs are thinking of getting more funds, much more than in Singapore and Australia, a signal that Ord says may lead to serious overleveraging of those SMEs.

“It is surprising to us. Normal business practice in a negative environment would be reducing their employees and debts,” he says.

Hong Kong SMEs’ demand for external finance is the second highest among the six markets surveyed, just after Indonesia.

Ord says something really has to be changed for Hong Kong SMEs, particularly as the expectation of tapering of quantitative easing by the US central bank has pushed interest rates up.

“If SMEs keep borrowing, this issue will affect business growth in the future. It could lead to an increase of business failure.”

One of the reasons companies are increasingly seeking external finance is that access to finance has been easier in 2013 than in the previous year, according to the survey.

“The other reason we thought about is some businesses are actually taking external finance to defend their position, to defend their market share, or shifting their source into potential areas of business growth,” Ord explains.

The survey result highlights the importance of cash flow management to properly assess repayment capabilities or otherwise reducing the demand for debt, says Patrick Yeung, divisional councilor for Greater China at CPA Australia.

“A stronger alignment of business and staff performance would transfer part of fixed costs to variable costs, and could free up working capital and reduce the need for external finance,” Yeung says.

“SMEs need to review and adapt their business models and look at niche areas with less competition.”

CPA Australia believes many Hong Kong SMEs are lacking in business skills and are reluctant to get professional advice from accountants, lawyers, or government experts, who may have solutions that would improve their business efficiency.

The accounting body also suggests that the Hong Kong government could provide a single entry point to those SME-related services.

“The goal of those services is to put Hong Kong SMEs on the right track to business success,” says Ord.

Currently, Hong Kong has a wide range of official and semi-official bodies that provide SME health check services, which include the Hong Kong Trade and Industry Department, InvestHK, Vocational Training Council, Hong Kong Science and Technology Parks Corporation, and the digital and technology cluster Cyberport. A single entry point would likely make things simpler for small businesses.

Lawmakers have also addressed the importance of SMEs to the local economy. Funding schemes have been offered to support business operations, such as the SME Loan Guarantee Scheme, and the SME Export Marketing Fund.

Last month Wilson Shea Kai-chuen, former director of Hong Kong Small and Medium Enterprise Association, said that those support funds are not as in demand as before. He also warned that rental cost for SMEs on the Chinese mainland is just one sixth of the cost in Hong Kong.

However, the true condition of Hong Kong’s SMEs remains difficult to judge, as the differing view of the Standard Chartered report into SMEs shows.

According to the bank’s SME Leading Business Index for the fourth quarter of 2013, local SMEs expect business to remain steady, with the index reaching a record high since July 2012.

The confidence of local SMEs is also picking up as more of them predict rental cost has reached its peak, and many regard the huge market potential as the biggest draw for doing business on the Chinese mainland. Hong Kong SMEs can also offer skills and experiences that are unique in the region.

“Instead of competing head-to-head with SMEs on the mainland, Hong Kong SMEs should focus on developing their businesses using their comparative advantage, including their expertise in services,” says Rocky Tung, an economist from Coface, a global credit insurance firm.

“Services contribute almost 90 percent to Hong Kong’s aggregate economic output and that shows us what Hong Kong’s key advantage is,” he says. “SMEs should continue to build on such strength on the upstream segments, such as design, or downstream segments, such as sales or post-sales services.”

Tung says that the differing survey results may be as a result of different methodologies used — such as frequency, timing, sample size, business sectors — among other reasons.

“The period of rapidly rising costs is behind us,” he says, adding that the recent producer price index is declining, and the consumer price index in Hong Kong has also been stabilizing.

“Innovation will be a key to success for SMEs across different sectors and I believe SMEs could also invest in research and development to expand their competitiveness,” Tung says.

New trade agreements also play in the favor of Hong Kong’s SMEs. The adoption of the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) has opened up opportunities for small- or medium-scaled manufacturers in Hong Kong.

“With the import duty incentive of CEPA on certain products, we do see companies shifting part of their production chains back to Hong Kong. That would be beneficial to Hong Kong’s SMEs, and also the professionals that are in such areas.”

However, Tung also points out that the appreciation of the yuan and the slow recovery process of developed economies may continue to influence Hong Kong’s SMEs.

“For trade business, many companies are chain practices. Small businesses are chain practices as well. This will increase business failure, and potentially increase bankruptcy in Hong Kong,” Ord from CPA Australia says.

“We must have a small business environment where more businesses are thriving, not just surviving.”

He says small businesses should underscore their business management including cost control, cash flow management and customer retention.

“Hong Kong is in a good position. It is still competitive, but companies have to look at their business fundamentals,” he says. “You cannot borrow the way out of the problem.”



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