Hong Kong’s Next Stop – Multinational Supply Chain Management Centre
In 2023, Hong Kong recorded an export decline of 10.3% in real terms and an import drop of 8.5% as compared to 2022. Despite significant overall increases in both imports and exports in the first half of 2024, Hong Kong’s cargo throughput to prime export destinations such as Europe, the US, Japan, South Korea still registered a fall. With shrinking re-export trade, which was once a major economic activity for Hong Kong, the city’s status as an international entrepot is inevitably under threat.
No more delay in economic transformation
The waning role of re-export trade and the transformation of Hong Kong as a trading port have long been topics of discussion within the wider community. Since the turn of this century, with the continuous development of various ports in the Mainland, particularly those in Guangzhou and Shenzhen, the share of transshipments from the Mainland through Hong Kong has been gradually decreasing. As a result of the 2008 financial crisis, which dealt a serious blow to local exports, Hong Kong’s status as a trading port and its trade diversion became a hot topic in the SAR Government’s economic policy deliberations.
In the 2024–25 Budget, the SAR Government unveiled a new transformation strategy. The plan is to harness the decades-long strengths in foreign trade to position Hong Kong as a multinational supply chain management centre. As Financial Secretary Paul Chan Mo-po points out, Hong Kong boasts ample talent and comprehensive complementary professional services in addition to excellent hardware facilities. For Mainland enterprises planning to “go global” but lacking overseas experience and exposure, Hong Kong, in its traditional role as a super-connector between the Mainland and the international market, is well-positioned to offer the best solutions.
The economic transformation this time is not only a top priority under pressures from different quarters but is also a golden opportunity for Hong Kong to make the first move. On the one hand, amid rising geopolitical tensions, the global supply chain is becoming more and more fragmented. To address high tariffs and other trade barriers, China has resorted to an “indirect export” approach by exporting semi-finished goods to other developing countries for local assembly and exporting, effectively bypassing Hong Kong. This has further lowered the demand for re-export trade via Hong Kong, thus lending a new urgency to the city’s economic transformation.
On the other hand, in view of the rapid development of emerging markets, every country is vying for a piece of action in them. This has made it all the more necessary for Mainland enterprises to invest and produce in other countries and as a result, demand for related trade services has been on the rise. It is high time for Hong Kong to seize the golden opportunity during the trade restructuring by capitalizing on its own advantages and expediting its economic transformation.
Hong Kong’s strengths and underpinnings
The Government’s endeavour to build Hong Kong into a multinational supply chain management centre is taken by many as the ultimate objective. What is more, it epitomizes the SAR’s distinct competitive edge over other Asian cities in the following three areas.
- A diverse range of trade financing options: In addition to a sound and robust financial infrastructure, Hong Kong has a sizeable and vigorous market that offers companies a great variety of financing channels. Its well-established legal system and years of experience in smooth operations also ensure a stable business environment.In the realm of trade financing and cross-border payment arrangements, the Hong Kong Monetary Authority (HKMA) and the local financial sector have stepped up effort to foster innovation. For example, the HKMA has in recent years been actively exploring a number of Central Bank Digital Currency (CBDC) initiatives. Besides, through collaboration with the central banks of the United Arab Emirates, Thailand, and the Mainland, they have jointly developed the mBridge platform to facilitate cross-border CBDC payments. Making use of artificial intelligence and blockchain technology, several leading banks in Hong Kong have separately or jointly launched an array of new solutions to provide digital safeguards and to expedite trade financing, supply chain financing, cross-border financing, etc.
Thanks to its thriving and healthy financial market, Hong Kong is well-equipped to position itself as a supply chain management centre likely to remain head and shoulders above its regional counterparts in the short term. Over the past decades, ease of financing has been a crucial advantage conducive to trade. By maintaining a stable financial market, upholding transparent policies, and adhering to a sound rule of law, the SAR will continue to attract trading companies from abroad to set up businesses here.
- A wide range of complementary professional services: To make Hong Kong an ideal supply chain management centre for companies and investors alike, trade and management-related services are just as indispensable as abundant liquidity. Throughout the decades, a full array of complementary professional services in law, accounting, investment, insurance, shipping, business strategy, and translation have evolved in Hong Kong because of its status as a trading centre. These services have become the SAR’s traditional advantageous sectors, where there is no shortage of talent or experience.Abiding by international standards within the domains of law and commerce, Hong Kong has become the top metropolis in Asia for international arbitration, trade compliance, and standard certification. Regarding trade arbitration, Hong Kong has always been Asia’s international arbitration hub. According to data of the Hong Kong International Arbitration Centre, more than 70% of arbitration cases handled in 2023 were of an international nature, with parties involved in the cases coming from 45 countries and regions. In terms of testing and standard certification, Hong Kong boasts a mature industry made up of 900-plus professional agencies, providing certification and testing services in manufacturing, export, and supply chain sectors for buyers from various regions. The standards adopted by Hong Kong are recognized by over 100 economies worldwide.
Similar to financial infrastructure, the professional services industry needs time for talent cultivation and standard formulation. These processes simply cannot be completed overnight. As remarked by the Financial Secretary, Hong Kong can be developed into a one-stop supply chain management centre complete with comprehensive services required by related companies worldwide. Given that other ports are unlikely to surpass Hong Kong in the short term, the SAR can enhance its overall competitiveness so long as it effectively capitalizes on and develops these advantages.
- High-quality human capital: Regardless of the development or transformation approach, the most valuable source of capital lies in talent. The business environment and talent-development system in Hong Kong can ensure a continuous supply of skilled personnel in supply chain management. While there may be no global shortage of high-calibre professionals in finance, business, and law, it is rare to find individuals who are multilingual, culturally adaptable, and have international experiences and career exposure. These attributes not only form an integral part of the SAR’s education but are also the unique advantages of Hong Kong people.
Rising to formidable external challenges
Despite its head start on competitors, Hong Kong is faced with unignorable challenges mainly coming from intensifying geopolitical pressures. In the era of supply chain globalization, the trading industry is highly sensitive to geopolitics. Since it has relatively low resistance to risks, even minor adjustments to trade policies can cause significant disruptions to supply chain operations. Against the backdrop of China-US rivalry, re-emergence of protectionism, and fierce competition in Asian markets, Hong Kong has been subject to frequent impacts in recent years. As geopolitical tensions are likely to escalate in the foreseeable future, it behoves the authorities to prioritize balancing pressures from different directions, maintaining financial stability and legal transparency, as well as minimizing shocks to the business sector.
Secondly, Hong Kong’s standing in traditional developed markets has declined. The SAR Government has been proactive in visiting ASEAN, South American, and Middle Eastern countries in recent years, aiming to tap into potential markets. Notwithstanding the fresh opportunities available in these new markets, their increasingly complex political, cultural, and economic situations could impair the effectiveness of Hong Kong’s talent and experience. In order to provide services that enable Mainland enterprises to go global, it is imperative for the SAR to gain a deep understanding of the new environments and markets. Attaining the dual goals of competing with local or regional rivals while playing to its own strengths is as demanding as starting a brand-new industry from scratch.
Finally, the process of building, operating, and managing a supply chain management centre is a lengthy one. During the economic transformation, it is necessary to promptly determine future directions and the way forward. Under the SAR Government’s existing plan, the supply chain management centre is primarily and even solely designed to serve Mainland enterprises attempting to go global. To become an international supply chain management centre, Hong Kong must inculcate the need in customers from various countries and business sectors to make the SAR their first choice in this regard.
According to analysis using the Smile Curve concept in supply chain economics, profits from the supply chain vary across stages. Generally speaking, in both the upstream (research and development as well as design) and downstream (marketing and export) operations, revenues are higher compared with the midstream (production) stage. In order to list “multinational supply chain management centre” as another achievement in addition to “major international trade and financial centre” on its name card, Hong Kong must first identify which of its industries command a competitive edge in both upstream and downstream supply chain. The SAR Government could consider categorizing industries and service needs to facilitate service diversity and professionalization. Diversifying the target customer base is conducive to enhancing service professionalism, preventing firms in the same sector from constantly competing for the same group of customers. This strategy can also enable Hong Kong to diversify risks, thus bolstering its resistance to impacts from geopolitics and other factors.
by Professor Heiwai Tang and Ms Shuyi Long
19 June 2024