Hong Kong: Business Still Dances Inside the Dragon’s Jaws

Forget the hype and hysteria.

Hong Kong’s turnover hasn’t dulled its legendary business buzz.

Hong Kong is awash with conviction a month after becoming a Chinese Special Administrative Region (SAR). That may surprise readers who’ve relied on Western media, which largely seem to have been Waiting for Gotterdammerung. Little has changed since Jul. 1’s wee hours, when Prince Charles and Chris Patten, the last British governor, sailed out of Victoria Harbour in a driving rainstorm.

“What’s happened here has been an anticlimax for many watching from overseas,” says Leung Chun Ying, the No. 2 man in Hong Kong’s government and founder of real estate service provider C.Y. Leung & Co. (CYL). “That was basically the game plan,” says the soft-spoken mediagenic 43-year-old Leung, Hong Kong’s Deputy CEO and the man considered by some observers as the odds-on favorite to succeed Tung Chee Hwa as Hong Kong’s chief executive in 2002.

The decidedly calm facts have frustrated media preconceptions, says Hong Kong Industrial Estates CEO T.H. Barma.

“The media look for something to highlight; things going normally are not news,” says Barma, 63, a poised, razor-trim Oxford grad with a distinguished public-sector dossier. “The somewhat sensationalized Hong Kong coverage is what hits CEOs overseas, who don’t know day-to-day activities. From that, they largely judge expansion investment risk. In truth, it’s very much business as usual.”

“Does Chase Manhattan perceive Hong Kong as a high-risk investment?” says Richard Watton, Asia-Pacific vice president and portfolio manager. “Well, we recently committed to a 10-year [downtown] lease for seven floors.”

Richard Leider, who joined CYL in 1996 after 18 U.S. years in with CB Commercial, has watched doomsday press accounts spur clients’ human rights concerns, he says.

“The press, especially in Europe, is very hard on Hong Kong,” Leider says. “One headline read, ‘PLA Arrives in Hong Kong, No Shots Fired Yet.’ It’s ridiculous. Nothing’s changed.”

Indeed, the 5,000 People’s Liberation Army troops at Hong Kong Island’s Prince of Wales barracks are sighted about as often as the Loch Ness Monster. They’re a non-presence.
Hong Kong’s unique entrepreneurial alchemy, though, is palpably present on the teeming streets below CYL’s high-rise offices. If anything, the turnover has ratcheted up Hong Kong’s legendary optimism. Since the 1984 handover agreement, the free-wheeling capitalistic hothouse’s economy has trebled; the stock market has risen 15-fold.

Symbiosis Keys Changes

The handover, however, is altering Asian real estate management strategies — as it has for years. Now, though, change is likely to accelerate, as China partially privatizes its sickly state sector and mainland “red chips” remake Hong Kong’s business sector. Plotting savvy expansion strategies within Asia’s web of complex interrelationships, though, is no easy task.

China and Hong Kong comprise East Asia’s cornerstone symbiosis — at least for now. Hong Kong’s “gateway to China” has long swung both ways.

Hong Kong-based investments in China total US$100 billion-plus, far and away the mainland’s biggest source of outside capital; 60 percent of 1996’s $42 billion in mainland foreign investment came through Hong Kong.

Correspondingly, Chinese firms have invested $30 billion-plus in Hong Kong; 70-plus have SAR-based regional headquarters. And state-owned Chinese “red chips” on the Hong Kong stock index are becoming a major economic force.

In short, Hong Kong has become China’s free-wheeling Wall Street, its economic and political bridge to the world. That accounts for the host of multinational Hong Kong facilities, Leung says.

“Hong Kong is the world’s only one-stop shop for professional expertise on mainland China — real estate, architecture, engineering, taxes, finance, banking and stock brokering,” he says. “You can easily be in business in only days, buying a registered Hong Kong firm and taking temporary space. Nowhere else could you do that.”

But much of Hong Kong’s highly evolved expertise sprang from China’s Open Door policy. Hong Kong’s 50 foreign banks, for instance, mushroomed to 400 in the first few years after China unlocked. “The opening of China saved us,” says Victor Fung, Hong Kong Trade and Development Council chairman. “We were merely an increasingly uncompetitive, low-end manufacturing center.”

Now, interdependence will accelerate, says Hong Kong Polytechnic University’s China Business Center’s Zhu Wenhui. Hong Kong will tap more of China’s market and natural resources, as China taps more of Hong Kong’s financial muscle, Zhu says, with the two economies cycling more closely.

The RHQ Picture

Asia’s changing regional headquarter (RHQ) location patterns offer a glimpse the unfolding real estate picture.

Despite a handful of highly publicized defections, events thus far have debunked some analysts’ predictions of Hong Kong’s RHQ demise. Since 1994, Hong Kong has added 200 of its 700 total multinational RHQs. AT&T staffing has increased from 50 to 400 in the last five years.

“Understandable fears have proved unfounded,” Barma says. “The reversion has really had no effect on [RHQ] attractiveness.”

Other Asian sites, particularly Singapore, pack a potent RHQ punch, SAR leaders concede. There’s equally pricey Tokyo; and Kuala Lumpur, Taipei and the Philippines’ Subic Bay are strong, lower-cost contenders offering generous incentives.

But Hong Kong’s flat 16.5 percent corporate tax rate largely negates competitors’ enticements, corporate executives say. In addition, Manila and Bangkok’s infrastructure is comparatively weak, while bureaucracy dogs Taipei, they say.

Internationally allied with CB Commercial and DTZ Debenham Thorpe, CYL uses both Hong Kong and Singapore in what Leung calls a “bifocal strategic approach. Hong Kong is our North Asian business focus. Singapore is our Southeast Asian focus; its location and population mix allow weekend access to the Malaysian, Indonesian, Thai and Indian markets.”

Markets also generate Hong Kong’s enduring RHQ magnetism, insiders say.

“Singapore is an excellent Southeast Asian location, but it’s too far away to effectively serve the Chinese market.” Leider says. “That’s why Whirlpool recently moved [its RHQ] back to Hong Kong, where you’re within four to five hours of two-thirds of the world’s population.”

More Mainland RHQs?

But sharing that market proximity is much of the mainland, perhaps the most likely long-term RHQ beneficiary.

Volkswagen Asia Pacific, for instance, is turning its three-year-old Hong Kong RHQ into a Hong Kong/Beijing/Singapore operation. Beijing gives access to the mighty central government and technical support for VW’s Changchun and Shanghai plants. Singapore facilitates rapid region-wide shuffling of regional sales and marketing. And Hong Kong has demonstrated strengths in the management functions it retains.

The Yangzi Delta’s Shanghai, though, is a Beijing favorite, a “socialist market economy” showcase. With a sixth of China’s population and a third of economic output, the delta equals all of Indonesia.

“Many in Hong Kong now see Shanghai as their primary business rival, and some see it as China’s business center in five years,” says Helen Wessel-Krijger, a Netherlands-born O’Melveny & Myers (O&M) attorney at the O&M Shanghai operation added to its Hong Kong office.
Wessel-Krijger’s husband works for Philips, which relocated many Asian operations to serve snowballing business in Shanghai. Allied Signal, Kodak, Roche and Sharpe have also moved part of their RHQs to Pudong, Shanghai’s new town.

However, only 60 percent of residents in the one-time “Paris of the East” have flushing lavatories. And Hong Kong-based financial giants aren’t likely to fully shift toward Shanghai until the renminbi is fully convertible, likely early in the 21st century.

China’s Service Center: Where?

Despite the changes, Leung is characteristically bullish on Hong Kong.

“Hong Kong will become all of China’s service center,” he says. “So many companies come here not for headquarters proximity, but for our mainland interface. the outside world’s most important asset. They can send a few general managers, set up a Hong Kong company, then penetrate the mainland with local people, who speak, read and write Chinese and English, understand Chinese culture, and can move freely to and from the mainland.

Watton, though, sees a more protean picture. “In the big picture, I see Hong Kong now as a damn good Chinese city,” he says. “Hong Kong 10 years ago was your only RHQ choice. Now, you may also look at Beijing and Shanghai. In many ways, Hong Kong is way ahead of China; in others, perhaps not.”

But unlike manufacturing, mainland high-skill operations are very expensive. In fact, lower costs prompted Global One, a France Telecom/Sprint/Deutsch Telecom joint venture, to pick Hong Kong over Shanghai for its RHQ. Many Hong Kong managers are reluctant to accept assignments beyond nearby Guandong province.

The Manufacturing Shuffle

Area manufacturing is shifting toward China. Nokia recently joined the wave, shifting Hong Kong-based phone accessory manufacturing to the mainland.

Hong Kong manufacturing’s GDP share has shrunk to 9 percent today; in 1980, it was 24 percent. Many contend, though, that SAR manufacturing has significantly expanded its influence orbit.

“Hong Kong recently commissioned an MIT study, published as Made by Hong Kong, not made in Hong Kong,” Leung says. “It underscores a whole new industrial dimension, with Hong Kong’s capital, management and networking driving mainland labor production. That’s added industries we never had before.

All told, Hong Kong-based firms employ a mainland manufacturing work force is estimated as high as 6.5 million, 4 million in South China’s nearby Guandong Province. South China’s prosperity, though, is triggering further shifts. Some manufacturers are migrating toward North China’s lower labor costs, adding to Shanghai’s muscle.

Hong Kong’s Value-Added Edge

Skill needs, however, have bolstered Hong Kong’s high value-added manufacturing core. Mainland skill levels are rising, analysts agree, but scientific and technical talent often remains sparse.

“Part of the base has shifted, but value-added operations — control, product development, R&D, etc. — are still Hong Kong-based,” Barma says. “Motorola, for example, employs over 3,000 in the Tai Po estate, and over half are engineering graduates.”

Intellectual property rights have also dictated siting some major value-added operations outside the mainland, where counterfeiting is rampant. Chrysler, for example, dropped a planned major minivan plant two years ago after China refused to guarantee technology protection. Bootlegging has sharply limited sports shoe manufacturers’ sales. “Real” pairs go for some $65; bogus sets, about $12, Asia Market Intelligence reports.

“Strong intellectual property protection is a major reason some firms are keeping some Hong Kong activities, and a few have brought them back,” Barma says.