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Electrifying Challenges(HKTDC Enterprise, Vol 08,2007)

Electronic Notes

 

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Hong Kong Trade Development Council Electronics/Electrical Appliances Industries Advisory Committee chairman Dr Roy Chung says there is a "huge" demand for Hong Kong electrical and electronic appliances

Hong Kong Enterprise continues its 40th anniversary celebrations with a look at one of Hong Kong's most important and enduring industries

It may be coincidence, but the evolution of Hong Kong's electronics and electrical appliances industry over the past four decades dovetails almost perfectly with the career of one of the sector's elder statesman.

Dr Roy Chung joined the industry at a time when it was focused mostly on audio products and composed of Hong Kong factories owned by major international brands from overseas.

He was one of a generation of entrepreneurs who learned the business by starting at the bottom and who later set up their own firms - in Chung's case Techtronic Industries (TTI), which he co-founded with Horst Julius Pudwill in 1985.

As such, he was ideally placed to view Hong Kong's electrical and electronics industry as it developed in four distinct phases:

  • the 1960s - when many businesses were overseas-owned
  • the 1970s - when Hong Kong entrepreneurs began to manufacture on an OEM basis for foreign brands
  • the 1980s - when those companies shifted their production to the mainland
  • and the 1990s to the new century - when Hong Kong companies began manufacturing their own brands and entrepreneurs on the Chinese mainland, who had learned the business in Hong Kong-operated factories, began to emerge as competitors

During these 40 years the industry followed - and in some cases instigated - every major product trend from basic transistor radios to today's emphasis on computers, telecommunications and high-end audiovisual entertainment products.

Today, Chung, the chairman of the Hong Kong Trade Development Council's Electronics/Electrical Appliances Industries Advisory Committee, believes that the industry stands at a crossroads, with new challenges and new opportunities courtesy of China's rapidly-evolving economy.

"People started moving to China in the early 1980s after the implementation of the open-door policy," Chung recalls. "Since then we've enjoyed low labour costs, no shortage of people, and businesses growing very rapidly."

Now, just as in Hong Kong 20 or 30 years ago, mainland people are becoming entrepreneurs and building their own businesses. "Their overheads are lower so Hong Kong companies can't compete with them at the low-cost end," he admits.

Chung believes Hong Kong industrialists have to change their ways of doing business. "We have to add value by innovation, better design, better products, better distribution networks and better sales service."

His assessment is borne out by statistics, particularly with regard to Hong Kong's electrical appliances sector, which is dominated by small household items manufactured mainly on the mainland - although large units such as air-conditioning systems and space heaters are also produced.

Hong Kong's total exports of household electrical appliances declined 13% in the first seven months of 2006, although air-conditioning units emerged as a significant growth area with a surge in exports of 104%.

As a result, electrical appliances companies are striving to remain competitive while moving towards a greater emphasis on value-added elements - particularly ODM services.

The electronics sector is more robust, however, accounting for nearly 50% of Hong Kong's total exports in 2006 and making the Special Administrative Region the world's largest exporter of sound-recording equipment.

Hong Kong was also the second-largest exporter in value terms of telephone sets, radios, computer parts and accessories, and video recording and reproduction equipment in 2004.

Exports of electronics surged by 14% in 2006, with a 21% increase in exports to the mainland, thanks largely to particularly strong sales of wireless Internet products, digital still and moving picture cameras, MP3 players and DVD players and recorders.

"Telecommunications equipment, computers and audio and entertainment products are the areas on which people are focusing," Chung confirms, noting that product lives are getting shorter and shorter with newer and better products being released virtually every day.

"Hong Kong hosts a lot of exhibitions, so manufacturers know the latest product trends and what people want," he insists.

"Hong Kong's intellectual property laws are also quite strong, so a manufacturer can develop his own products and brands and build up customers - that is the strength of Hong Kong."

Hong Kong electrical and electronic appliances companies are, nevertheless, heavily burdened by increasing business costs, and Chung believes ways have to be found of passing these costs on to customers - another reason to move from low- to high-end manufacturing.

"SMEs have to invest in R&D, but that's expensive," he concedes. "A company is lucky if 10% of the products that emerge from R&D are successful."

Branding is a costly exercise, but Chung maintains it is the way for the industry to move ahead even if some firms continue to stick doggedly to their OEM status.

"Building brands is very important, but a company can remain an OEM if it is really unique and can build something its competitors cannot," he observes. "Firms have to specialise and be the best in their category as they simply can't compete on cost."

Local companies can create and build their own brand, or alternatively they can follow in the footsteps of Chung's TTI Group, which bought several internationally-known brands such as Ryobi, Vax and Hoover in different markets.

However, he believes that China is ultimately both Hong Kong's greatest opportunity and its greatest challenge.

"Hong Kong has to promote and expand its businesses in China, particularly with the Chinese currency appreciating in value while others such as the US dollar are declining," Chung explains.

He believes there is a "huge" demand for Hong Kong electrical and electronic appliances. "Hong Kong belongs to a country with a population of 1.3 billion people," Chung notes. "If one-fifth of the Chinese population has real purchasing power that's almost the equivalent of the US, while two-fifths is a market the size of Europe."

Hong Kong should also reduce its reliance on the mature markets in which it is well-established, and take a leaf from China's book by working to establish a presence in new areas - initiatives which are bolstered by trade missions organised by the Hong Kong Trade Development Council.

"Hong Kong people have to have more foresight," he declares. "We still enjoy good business in more mature markets like the US and Western Europe, but the way to be successful is to expand.

"Manufacturers have to focus on emerging markets such as Eastern Europe, South America," Chung insists.

"Mainland industrialists are more aggressive in expanding into new markets than Hong Kong and this is something we have to review."

He believes low-end manufacturing of electrical and electronic products in the neighbouring Pearl River Delta will move to northern China over the next few years - or even to India, Pakistan and Vietnam.

The future for Hong Kong manufacturers, therefore, lies in premium prices for premium products. "We simply have to continue to build the best products that represent the best value for money," Chung insists.

This task will be made easier by Hong Kong's major advantages, including the fact that it is an international financial centre with more global sales experience.

"We just have to make use of all the advantages we have here to face the challenge and maintain our position at the forefront of the international electrical and electronics appliances industry," Chung concludes.

TEXT BY ROBERT PIERCE