Hong Kong must develop its edge in tech research to join China's manufacturing revolution

Stephen Wong says China's push to raise its manufacturing game gives Hong Kong the chance to play a key role

PUBLISHED : Sunday, 28 June, 2015, 12:00pm
UPDATED : Sunday, 28 June, 2015, 12:00pm

Since Germany's manufacturing sector officially unveiled its Industry 4.0 blueprint in 2013, their competitors have begun to realise that the combination of all the current technological advances - such as the internet of things, sensors, the cloud, 3D printing, robotics, advanced analytics, big data and the like - will fundamentally change entire production lines and supply chains.

Bill Gates has a famous saying: "We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10." This insight may also be applicable to Industry 4.0: the immediate hype will eventually fade, but in 10 years' time, when people look back, they will probably be amazed at how much change has occurred.

In the past, technological advances helped mass production through economies of scale; but for Industry 4.0, each production output can have its own specifications, which will drive how it is made on the production lines. Production will become more tailor-made, supply chains more fragmented and customers more flexible.

It has been estimated that the total related investment spending in Europe will exceed €140 billion (HK$1.2 trillion) every year. Some people have even called this the fourth industrial revolution, comparing its impact favourably to the advent of the steam engine in first industrial revolution in the 18th century, electricity in the second revolution in the 19th century, and computers in the third revolution in the 20th century.

These developments present both an opportunity and a challenge to China's manufacturing sector. China has come up with its own version of Industry 4.0 - "Made in China 2025", which was launched earlier this year. While China has always aimed to upgrade its production in the value chain by relying more on technology and design and less on cheap labour and artificially low exchange rates, the "Made in China 2025" plan is certainly the most ambitious articulation of such a goal.

In a way, the showdown between Germany's Industry 4.0 and "Made in China 2025" will determine whether China can successfully transform from a low-value manufacturing hub into one of hi-tech manufacturing, for example, in large-scale industrial robotics used in auto manufacturing.

Of the four largest industrial robotics companies globally, two of them are German and one is Japanese. Obviously, the challenge for China is that the gap between German and Chinese manufacturing technology is very big, but, looking at it positively, there is an opportunity for China to catch up or even excel. China might have a chance to make use of a "last mover advantage" to leapfrog into the top echelon of manufacturing elites.

In the context of these changes in the manufacturing world, Hong Kong's prospects appear brighter than in the recent past. Over the past decade, as manufacturing in mainland China began to move up the value chain amid rising labour costs, Hong Kong's industrialists have been struggling to maintain their relevance.

Many of them have turned to real estate development. They have had more success taking advantage of the government policy of revitalising industrial buildings than in actual manufacturing.

Now, Hong Kong may yet play a bigger role in the grandiose plan of "Made in China 2025". The city has a competitive advantage in its universities with their international research reputation, and that will be crucial in providing technological know-how and innovations for China to successfully implement the 2025 game plan.

A prime example is drone maker DJI. The company, founded by Frank Wang, a mainland-born graduate of Hong Kong University of Science and Technology, is valued at up to US$10 billion, with revenues expected to exceed US$1 billion this year. Wang's interest in robotics began when he was a student at HKUST, thus DJI can be said to have started as a student project at the university. This experience shows Hong Kong can play a bigger part in China's move to upgrade its manufacturing. While the commercialisation of university research is still not yet a competitive advantage for Hong Kong, DJI has proven to be a prototype of "people transfer" - as opposed to the more traditional model of "technology transfer" - to spur innovation.

Hong Kong's proximity to Shenzhen and Dongguan is also an advantage, as they have been transforming themselves into leaders in providing efficient labour and logistics support for technology products. Hong Kong need not reinvent the wheel by developing a manufacturing infrastructure of its own. Instead, it should redouble its efforts to attract internationally renowned researchers to local universities, as high-quality research is something Dongguan and Shenzhen cannot yet offer.

As a percentage of gross domestic product, Hong Kong government spending in research and development is about half that of Singapore's and America's. Imagine how much more competitive Hong Kong could be if the government's raised R&D spending to a comparable level. Investing in R&D would increase the city's productivity and competitiveness in the long run, and the money invested would have a bigger impact than just lying idle as part of the government's massive fiscal reserves.

Stephen Wong is adjunct lecturer at the Chinese University of Hong Kong for a graduate degree programme and a former managing director of an international investment bank