March 28, 2012 —
Determining whether today’s business challenges are cyclical or structural will affect what strategy to implement (photo: iStockPhoto.com).
Not many doubt that the current global economic downturn could spell potential disaster for businesses. Whether it’s a minor or a major disaster in 2012 is a moot point for Hong Kong exporters concerned about their prospects and the strategies they should adopt.
In a study by the Hong Kong Trade Development Council of what’s expected in the coming year, more than one-third of about 3,500 Hong Kong manufacturers and traders surveyed believe their export performances in 2012 would be “unsatisfactory” or “very unsatisfactory,” another 45 per cent expect only an “average” performance.
Nearly 90 per cent of respondents attribute the reasons for those expected performance to the weak purchasing power in target markets, particularly in western Europe and the United States, the major arterial export channels for Hong Kong consumer goods.
As a result, a hefty 87 per cent say their prices have become uncompetitive because of increased costs and exchange rate movements, which effectively point to rising production costs in the Pearl River Delta (PRD) and renminbi appreciation, since most Hong Kong exporters produce or source their products across the boundary. Eighty-three per cent also say they are facing fierce competition from their counterparts on the Chinese mainland.
Are these challenges cyclical or structural? The nature of the problem matters because either one would require a completely different strategy. If the problem was cyclical, traders need only to tighten their belts and wait patiently for the good times to come around again. Structural problems, in contrast, are linked to fundamental changes, which would require a more active approach to strive for change and improvement.
The Nature of the Challenge
Keener competition is a structural challenge, a consequence of the rapid development in China’s manufacturing sector over the past decade (photo: EyePress).
These are far from “normal” times. What worries Hong Kong exporters most is the weak purchasing power in Western Europe and the US. Overly pessimistic perhaps, yet it’s not hard to conclude that the problems that most of the developed economies face will last for some time, beyond the usual economic cycle.
Even though anaemic recovery can be expected for the US economy, employment and housing prices – the two factors that most affect consumer confidence – are still far below 2008 levels, and are unlikely to see strong rebounds in the coming years.
In most Western European countries, meanwhile, private consumption is constrained by contractionary fiscal policies expected from governments facing great pressure to reduce their budget deficits. . . .
Moving Up or Out
While the trend to higher production costs continues, manufacturers could choose to move to lower-cost regions. Yet, not many Hong Kong manufacturers plan to do so. Among those respondents with factories in the PRD, three out of four have no plans to relocate any part of their production base out of the region. The main reason cited is that a non-PRD production base too far from Hong Kong would be too difficult to manage (68 per cent). Some 40 per cent say the PRD remains the best manufacturing location, with its comprehensive support services.
The Art of Raising Prices
Despite the challenges, Hong Kong exporters have reacted positively to the structural changes (photo: iStockPhoto.com).
When “moving out” is not feasible, “moving up” the value chain by adopting higher value-added activity seems to be the only solution. The majority of respondents (71 per cent) say they will pass cost increases to buyers. . . .
Alive and Kicking
On their current status, 60 per cent of Hong Kong trading companies describe themselves as rapidly expanding or steadily growing. Random sampling shows that one-third were established after 2000. Despite all the challenges, that suggests a significant new generation of companies, undoubtedly the best evidence of healthy growth and development in the sector. . . .
For more on international trade trends, please see the March issue of the HKTDC Trade Quarterly, which can be ordered at: http://bookshop.hktdc.com/.