High-end thrust will head off competition
Hong Kong companies must step up their move into higher-end production, such as original-design manufacturing (ODM) and own-brand development, if they are to stay ahead of mainland rivals, according to a Trade Development Council (TDC) study.
Mainland companies will see their competitiveness jump once the country joins the World Trade Organisation, thanks to lower tariffs on essential inputs and more secure access to the world's markets.
'Hong Kong will face more competition,' said Daniel Poon Wing-choi, an assistant chief economist at the TDC. 'We think it will be a stimulus for Hong Kong companies to move more into ODM and brand-name production.'
Faced with increasing competition from low-cost manufacturing centres around the region, the SAR's manufacturers have long been moving into higher-value-added processes.
Many began as original-equipment manufacturers (OEM), buying equipment in bulk and customising it for customers who would then sell it under their own brand name. But barriers to entry are low for OEM, so Hong Kong companies began moving further up the value chain.
In ODM, companies create original designs for their clients and then produce them based on those designs or hire OEMs to do the manufacturing. The final product would be sold under the contracting customer's brand name.
Further up the value chain is the development of a company's own brands. Branding is gaining importance with electronic commerce.
'If you don't have the brand, it will be hard to compete on the Internet,' Mr Poon said.
The TDC's report is called Competitiveness and Prospects of Hong Kong's OEM, ODM and Brand Name Business.
Responses from 2,500 Hong Kong companies found that 82 per cent were engaged in OEM production, 62 per cent in ODM work and 36 per cent in own-brand manufacturing.
As a condition of WTO membership, the mainland will open the domestic market to foreign competitors, a group that includes Hong Kong companies. Mainland companies are expected to dominate the low end of the mainland's consumer market, so Hong Kong firms will need to add value and concentrate on the high end.
SAR business leaders appear aware of the situation.
Survey respondents expect OEM production to drop to 47.6 per cent of exports in three years from 53.1 per cent at present, ODM production to rise to 29.7 per cent from 26 per cent, and own-brand production to edge up to 22.7 per cent from 21 per cent.
Insufficient protection of intellectual-property rights (IPR) was seen as a key constraint on developing ODM production. Even so, 83 per cent of the companies engaged in ODM consider the costs worth the returns.
'If China can improve its IPR protection, the environment for Hong Kong to develop ODM would increase,' Mr Poon said.
Many of the respondents identified mainland companies as their key competitors and expect this to increase in the next few years.
Only in high-technology electronics did Taiwanese companies pose a greater competitive threat.
However, mainland competitors are expected to take the lead in this area in the next three to five years.
