A worker makes garden ornaments and gift items at a factory on the outskirts of Guangzhou. A study by the Federation of Hong Kong Industries said Friday that the city's manufacturing SMEs operating in the Pearl River Delta face pressing challenges. Qilai Shen / Bloomberg

Study cites high labor costs and competition

Hong Kong manufacturing SMEs (small and medium sized enterprises) operating in the Pearl River Delta should consider taking bolder action at a strategic level in order to remain viable, suggested a study released by the Federation of Hong Kong Industries Friday.

It said the city faces pressing challenges such as high labor costs and increasingly capable mainland competitors.

The study, titled "Hong Kong Manufacturing SMEs: Preparing for the Future," called for a reinvention of Hong Kong industries. Michael J. Enright, director at Enright Scott & Associates Ltd, and who headed the study, said that a "strategic gap" was prevalent among Hong Kong manufacturing SMEs. Though confronted by a myriad of challenges, most companies have responded with only minor adjustments to their strategies, such as strengthening relationships with existing clients, enhancing research capabilities, or cutting costs.

However, strategic moves are hardly ever considered, which include relocation, tapping into other business areas, moving up from OEM (original equipment manufacturer) to OBM (original brand manufacturer), etc.

One solution arising from the study is collective action. SMEs are by nature quick in adjusting to market volatility - but they are weak when it comes to tackling challenges that call for large amounts of investment.

Possible collective action that Hong Kong manufacturing SMEs can take are relocation of production chains, bulk purchasing, full-line product provision, joint branding and promotion. Through collective action, they can achieve economies of scale, leading to industry consolidation, the report said.

For example, some industries, such as electro-plating or cloth dyeing, are high polluters. So waste treatment system can work only on a relatively large scale. However, the investment needed for this usually exceeds what a single manufacturing SME is able to afford. But by collective action, such as investment in technologies or relocation to a more suitable site, SMEs can make better use of waste treatment systems. According to the report, some Hong Kong electro-plating companies are preparing to move together to an industrial park in Guangdong.

Fact sheets on GovHK, the government information portal, show that Hong Kong has a total of 282,000 SMEs, representing 98 percent of overall businesses in the city. A majority of these SMEs operate in the Pearl River Delta in Guangdong province, the production center for many Hong Kong industries.

Cliff Sun, chairman of the Federation of Hong Kong Industries, said that the body will submit recommendations to the SAR government and the Guangdong government on ways to enhance support for Hong Kong manufacturing SMEs, in areas including industrial upgrade and transformation, clean production, domestic sales and regulatory compliance.

China Daily

(HK Edition 10/30/2010 page2)