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Free-trade zone in Shenzhen lures Hong Kong entrepreneurs chasing their dream

Soaring rents, insufficient government support and a lack of investors willing to take risks explain why three young innovators have set up across the border

PUBLISHED : Wednesday, 30 November, 2016, 9:18pm
UPDATED : Wednesday, 30 November, 2016, 10:55pm

For the past four decades, Hong Kong has been hailed the “land of opportunity”, allowing young people, many of whom came from impoverished Guangdong villages, to realise their entrepreneurial dreams.

Many in the city are familiar with the awe-inspiring rags-to-riches stories of self-made billionaires like Li Ka-shing, who made a fortune manufacturing plastic flowers in the 1950s.

But Hong Kong has lost some of its lustre and its fertile soil that once nurtured business growth, especially for small enterprises with huge potential, has diminished, forcing many to go elsewhere.

Soaring rents, insufficient government support and a lack of investors willing to take risks were some of the reasons why three young Hong Kong entrepreneurs decided to cross the border and set up business in the Qianhai free-trade zone in Shenzhen.

Horan Fu, founder of an internet lending firm, set up an office in Qianhai a year ago after he was rejected by entrepreneur programmes at Cyberport and the Science Park, Hong Kong government-backed initiatives that aim to nourish home-grown start-ups.

Fu said that in Qianhai he was able to operate at about one-third of the cost of his Causeway Bay office of similar size. But the Shenzhen outlet gave him access to a much bigger internet financing market on the mainland.

Fu left a well-paid job as a fund manager three years ago and founded Dynamic FinTech, a peer-to-peer lending platform focusing on property mortgages between Hong Kong and the mainland.

Although financial technology is considered a high potential growth engine for the city given its expertise, the Hong Kong authorities have long been criticised for being too slow to adapt to the new business model due to its rigid regulatory approach.

There is no way to conduct business without taking any risk. If I fail, I will just quit and work for others again. So what’s the big deal?
Horan Fu

“Neither Hong Kong nor the mainland has formed a mature regulatory system that adapts to the new internet finance business,” Fu said. But even so, he stressed, Qianhai offered more incentives for start-ups to conduct innovative businesses rather than discouraging such initiatives in the first place.

“There is no way to conduct business without taking any risk. If I fail, I will just quit and work for others again. So what’s the big deal?”

Fu has been able to explore more cross-border internet lending businesses without worrying too much about legal risks, as Beijing has positioned the Qianhai trade zone as a forerunner in China’s financial reform. Fu is also planning to conduct offshore yuan lending in the future, which is only allowed in free-trade zones on the mainland.

A bigger pond: why Hong Kong start-ups are taking the plunge in mainland China

In stark contrast, Hong Kong has no specially designed legislation to regulate lending intermediaries, and many regulations applying to those who hold money lending licences have not been reviewed since the 1980s.

Located in China’s “Silicon Valley” and only a one-hour drive from Hong Kong, Qianhai has seen 85 Hong Kong start-ups – more than half the target number – set up offices in its Shenzhen-Hong Kong Youth and Entrepreneur Hub, or E hub, in the past two years.

Jointly founded by the Qianhai Authority, the Shenzhen Youth Federation and the Hong Kong Federation of Youth Groups in November 2014, the university-like incubator centre promises one-year free rent, preferential tax rates, and assistance to connect with well-known angel investors and venture funds to those aged 18 to 45.

Project to offer US$30,000 in seed funding to five Hong Kong start-ups

These terms are especially attractive to Hong Kong start-ups, many of whom have been struggling to locate investors amid the city’s high operational costs.

Taking Fu as an example, it costs him about HK$50,000 a month to rent a 400 sq ft office in Causeway Bay, but in the Qianhai free-trade zone the rent is only 5,000 yuan (HK$5,736) in the form of an administration fee. Staff and marketing costs are also a fraction of those in Hong Kong.

The other advantage about Qianhai is that it is easier for internet-related firms such as his to attract investment, Fu said, as both his current investors were from the mainland.

“Mainland investors think they are investing in another Jack Ma [founder of Alibaba Group] or Pony Ma [president of Tencent] when they put money in internet companies,” Fu said.

“But in Hong Kong, the iconic entrepreneurial images are Li Ka-shing and Lee Shau-kee, who became rich by investing in property. That’s why local investors would rather throw millions to buy houses rather than buying shares in start-ups.”

Besides the obvious cheap rental costs, companies registered in the free-trade zone also enjoy favourable tax rates – even lower than those in Hong Kong in some cases.

Companies operating in Qianhai could pay as little as 15 per cent corporate tax if they meet certain criteria, compared to the normal 25 per cent for companies outside the zone, and 16.5 per cent in Hong Kong. Qualifying individuals are assessed at 15 per cent against the standard 40 per cent for income tax on the mainland, while income tax in Hong Kong ranges from 2 to 17 per cent.

Another Qianhai advocate, Alex Li, said some of the biggest incentives that lured him to the zone were the strong government support and much larger mainland market.

Li sold his house at a loss to start a computer disaster recovery firm seven years ago in Hong Kong. But his efforts ended in disaster as few local firms were willing to use his award-winning iCloud back-up service – simply because they did not trust newcomers.

His luck turned after he opened a branch in Qianhai last year. Now he has investment of more than 8 million yuan from the mainland and several municipal governments are using his self-developed system to back up their computer data.

“Developing innovative technology is not like running a restaurant. It takes quite a while to be profitable and policy support is essential,” Li said.

Sometimes start-ups need a healthy dose of partiality in order to flourish
Alex Li

He pointed out that the non-intervention approach traditionally adopted by the Hong Kong government towards businesses ran in the opposite direction of the needs of start-ups.

Li said he had been in talks with the government for years but failed to secure any financial support. Even government-backed institutions turned him down, even though they all claimed to “lend full support to local start-ups”.

He had to sell his Tseung Kwan O home at a loss of HK$300,000 and take two contract jobs to support his firm’s operation.

But in Qianhai, Li has quickly become the rising star after he claimed top prize in Shenzhen’s Innovation and Entrepreneurship Competition last year.

“The Hong Kong government has been conducting its business in a fair and balanced manner, which is good. But sometimes start-ups need a healthy dose of partiality in order to flourish,” Li said.

Hong Kong start-ups lagged behind Shenzhen in attracting investments. In 2014, tech start-ups in Hong Kong received US$33.7 million in funding, compared with US$202.9 million for Shenzhen start-ups, according to a research report by the Bauhinia Foundation Research Centre.

There are various funds available in Hong Kong, but many young entrepreneurs complain that the thresholds of these programmes are too high for fresh graduates to qualify.

“Don’t even think about Cyberport or Science Park. They are not meant for start-ups,” said Gary Lam Chun-ming, a senior year student at the Hong Kong University of Science and Technology, who made local news headlines for the success of Hoome.hk, a website he founded with two classmates at age 19 which sublets apartments to mainland students.

One big problem, he said, was that these government-led funds preferred to give money to firms that had already proved profitable – a criteria many start-ups would never satisfy.

Although Lam secured millions in funds from Cyberport, he said it was only because his website made millions in profit in its first year.

He said budding businesses that had growth potential would have no reason to stay in Hong Kong as they were discouraged by its “outdated approaches of conducting business” and limited market space. The solution was to go north. He opened an office in Qianhai earlier this year to promote a new artificial intelligence service that answered questions for Chinese students who wished to study overseas via mobile messaging app WeChat.

Lam said Qianhai was a better place to tackle the vast mainland market, because talent there really understood the mindset and needs of mainland Chinese students.

“First, the manpower here is cheap. Second, people are down to earth,” Lam said, adding that most of his employees in Qinghai were university students from Shenzhen, and some part-time summer workers cost just 20 yuan an hour.

At best, he said, Hong Kong was good at making HK$100 out of 1,000 users, but mainland entrepreneurs tended to make HK$1,000 profit out of one million people, he said.

Witman Hung, principal liaison officer for the Hong Kong, Shenzhen Qianhai Authority, and an angel investor himself, said ultimately the vast business opportunities across the border was the key that attracted Hong Kong start-ups.

“What we do here is to lower the threshold for young entrepreneurs and make them want to take risks to start a business,” he said.

Hung questioned the way the Hong Kong government allocated funds, which he described as “safety always comes first”.

“Hong Kong officials are by nature risk-averse. Not a cent of taxpayers’ money could afford to be wasted, otherwise they would be held accountable. In the end, the money would end up funding projects of universities and other public-oriented institutions.”

Taking risks is part of what Qianhai was designed for, he said. “If you do not venture into the grey area, you are not being innovative.”

Three more who have taken the plunge ...

ShowMuse, mobile-based personalised learning platform

Hong Kong entrepreneur Dennis Cheung created the platform in 2014 to help people in their 20s and 30s continue learning outside the classroom. It gives users access to video tutorials on a wide range of topics from wine tasting to giving presentations. One of the most popular is a series of kissing tutorials conducted by Filipino-Chinese model and actress Jessica Cambensey, better known as Jessica C. The lessons, which include a demonstration on how to French kiss, have so far pulled in over 100,000 views.

 

Printact, 3D printing software and hardware developing and manufacturing firm

Founded by Data Ng, a PhD holder in experimental physics, Printact was among the first batch of start-ups that entered Qianhai. The three-year-old firm not only produces 3D printers for commercial use, it also provides talks and workshops for the general public on digital skills, testing sessions, 3D scanning, laser cutting and electronics DIY. Ng, an advocate for digital fabrication, said adapting to the latest technological revolution would be simple for the everyday manufacturer. He said it was easy for him to acquire all the necessary accessories in Shenzhen.

Palapple, IT solution start-up

Founded by Peter Choi, a University of Hong Kong graduate, Palapple taps into the booming virtual reality market. It created a product called VResidence, which provides a 360-degree virtual view of homes in 3D. This allows real estate agents to give virtual reality tours to clients, with second-hand property being its market focus. The Hong Kong-based start-up has set up an office in Qianhai as a stepping stone to expand its business in mainland China, and has already sealed partnerships with property developers there such as Vanke.