Hong Kong has a population of 6.3 million people. Its GDP for 1995 was $174.7 billion,1 for a GDP per capita of $23,258. The economy's growth rate declined from 5.5% in 1993 to 4.6% in 1995 (Table 3.1). Hong Kong is a duty-free port. Exports from Hong Kong totaled $174.1 million in 1995; imports were $193.2 million, creating a trade deficit of $19.1 billion. According to the Hong Kong Industrial Department, in 1995, it ranked as the world's eighth-largest trading entity (one-quarter the size of U.S. trade), had the highest per capita GDP after Japan in Asia (greater than that of Canada, Australia, and the UK), had the largest throughput of any port in the world, had the 2nd busiest airport, and was one of the world's largest financial centers (fifth in external banking, sixth in foreign exchange, eighth in stock market capitalization). Major U.S. investors include Motorola, Digital Equipment Corp., Sea-land, Exxon, Citibank, Caltex, AT&T, IBM, Kodak, Bank of America, Dun and Bradstreet, American International Group, Coca-Cola, and Pepsi Co.
Hong Kong is a major center for regional headquarters. It provides much of the banking, distribution, and purchasing functions for companies in Asia, especially for those operations located in South China. The number of regional headquarters and regional operations in Hong Kong, and the major foreign owners, are as follows:
Hong Kong's domestic manufacturing industry declined with the rapid migration of manufacturing across the border into the Pearl River Delta of Guangdong Province, China, between 1982 and 1994. In that period, Hong Kong's manufacturing workforce halved, while industry's contribution to GDP fell from 20% to just over 11%. Both real and nominal growth of Hong Kong's industry declined between 8 and 10% annually between 1988 and 1991, reaching $7.3 billion. In spite of this shift in industry structure, total employment increased from 2.4 to 2.9 million, an increase of 21%, as per capita GDP increased by 80% in real terms. In contrast, Guangdong-based industry grew 22% annually in the same period, with output worth $6.3 billion in 1992.
Hong Kong's success in recent years has been based on its ability to take advantage of China's low-cost labor. In Hong Kong's economy, textiles are most important; tourism is second. In electronics, Hong Kong is not known for any specific products, but some of its strengths are in electronic packaging designs. Funded by the government, the Hong Kong Electronics Industries Association is working together with the Hong Kong Productivity Council (HKPC) and the Hong Kong University of Science and Technology (HKUST) to develop a roadmap for Hong Kong electronics companies in packaging and assembly to complement China's low-cost manufacturing. HKPC is taking an important role in technology transfer in Hong Kong. In summing up Hong Kong's status in electronics, one HKPC official told WTEC panelists:
Hong Kong was ahead of Taiwan and Singapore 15 years ago. The Chinese opportunity caused Hong Kong to chase cheap labor rather than high technology. Industry cannot continue to produce low-cost products, even in China. At some point, Mongolia will be even cheaper. China's move into technology will be fast. Probably 90% of SMT operations are now in China, only 10% in Hong Kong. The Japanese decline in electronics will give Taiwan and other Asian countries more of their market share. Now we are trying to catch up. In Hong Kong, we have a lot of good engineers that can be leveraged. We see the roadmap in technology following chip fabrication. We are followers in that. Hong Kong is not investing in wafer fabrication, which is the first level in the food chain. We are more involved in packaging and assembly activities, but there is no bumping facility in Hong Kong. They may not want to spend the money for technology, but they know they need it. It has been difficult to invest in cleanrooms, for example. We don't have much land.
Korea and Taiwan, in contrast to Hong Kong, have invested heavily in technology. Many Taiwanese engineers were trained in the United States, and Taiwanese firms have invested in wafer fabs and IC packaging of their own devices. Hong Kong hasn't done that; its investment in R&D, product development, and packaging technology is low. With primarily OEM customers from the United States, HK manufacturers continue to follow the needs of their customers. During the WTEC visits, it appeared that PCB assembly is a strength. TAB and BGA production technologies are seriously being considered. Manufacturers in Hong Kong were the second or third choice of firms attempting to cut the costs of their maturing products.
Globally, electronics companies are moving into more technology-intensive products. The shift in product manufacturing is from low-profit-margin, mass-produced, labor-intensive products to capital-intensive, equipment-intensive, high-value-added products. When one company recognizes a popular new product, its challenge is getting it into the market as quickly as possible. Japanese companies used to make some parts in Hong Kong and then ship them to Japan for final assembly. Now the Japanese are buying more completed products, including copier machines, from Hong Kong but more often from China. Xerox sends its quality managers and manufacturing people to audit one local company. Xerox has decided that its core process is the ability to meet the consumer's order requirements, not to manufacture all the products.
In 1992/1993, the Hong Kong Government's Industry Department commissioned the Techno-Economic and Market Research Study of Hong Kong's Electronics Industry (BCG 1994). The study benchmarked eight countries including Hong Kong in an effort to identify strategies for Hong Kong manufacturing. The findings show that Hong Kong firms had focused too heavily on "mature" products that provided relatively low value-added. The study also concluded that the electronics industry was also providing a lower return on capital than the textile and garment industries, food and beverages industries, or non-electronics light manufacturing industries. Revenues from consumer electronics and telecommunication products had both been declining. Computers, peripherals, parts, and components had been growing but were only moderately profitable. As Table 2.11 (Chapter 2) shows, the study concluded that Hong Kong offers few electronics capabilities other than those conferred upon it by close proximity to low-cost manufacturing in the PRC. It concluded that Hong Kong, along with China, Malaysia, and Thailand, provides only low-cost competition.
According to the study, Hong Kong's strengths come from efficient low-cost manufacturing, consumer product trend identification, and aesthetic design capabilities. Weaknesses come from the lack of scale economies of small manufacturers, scarcity of R&D and technological innovations, lack of recognized brands, focus on mature products, and dependence on easily replicated skills. The primary opportunities are Hong Kong's proximity to China's land, labor, and markets; low-cost, large-scale operations in China; and the attraction of firms with high-order capabilities. An economic threat comes from land shortages in Hong Kong, skilled worker and management shortages in China, inadequate infrastructure, and ease of entry by other firms and countries. Overall recommendations for Hong Kong included the following:
HKPC officials told the WTEC study team that the electronics industry is seen as a conduit for developing globally competitive niches in newly developing markets. Asian governments have explicit objectives and industry policies to encourage electronics industry developments. Products requiring innovations and development are the focus of government policies in Korea, Taiwan, and Singapore. The Chinese government is heavily involved in the electronics industry in order to reduce dependence on imports and to increase production capacity. Policies in Malaysia and Hong Kong have been much less focused.
Hong Kong's acting finance secretary noted that the HK government did not intend to use interest rates, subsidies, imported labor, public spending, tax concessions, or tax incentives to direct industry behaviors. Instead, it attempted to provide the best business environment in the world by accelerating infrastructure investment. While refraining from interfering with either the pace or the direction of economic development, the government increased its industrial support fund from zero in 1993/94 to $180 million in 1994/95 and to $210 million in 1995/96. In addition, it spent $250 million to build the first Hong Kong Industrial Technology Center (HKITC), allocated an additional $180 million to operate it, and allocated a further $200 million to an applied research fund. With its open market and leading money management center, Hong Kong is a major center for capital in Asia. Hong Kong has expertise in financial and commercial services and has an excellent infrastructure, with good communications, roads, and utilities.
In June 1996, HKUST was completing a $50 million cleanroom in its Microelectronics Fabrication Center. Equipment includes a state-of-the-art e-beam system. HKUST operates the HK Telecom Institute of Information Technology, which studies lightwave, network, wireless, and video technologies. At the time of the WTEC visit, the university's Sino Software Research Center was developing low-cost Internet access, Chinese language interface support, and database management technology. The Advanced Materials Research Institute and the Institute for Micro Systems were developing advanced materials, micromechanical devices, flat panel display technology, nano technologies and devices, and integration of circuits and systems.
To further upgrade Hong Kong's technological infrastructure, government funds are being provided to Hong Kong's Applied Research Council to establish the Cooperative Applied Research and Development Scheme with research institutions in China. Feasibility studies have also been completed for a second technology center, a fourth industrial estate, and Hong Kong's first science park. The government's industry policy at the time of the WTEC visit was to assist the manufacturing sector in increasing real output per employee. Direct investment in manufacturing was left to the private sector. Policies were aimed at maintaining an infrastructure that enables manufacturing businesses to function efficiently, and at providing services that contribute to industrial development via productivity growth, quality improvement, and product innovations.
Human Resources Development
In the area of human resources development, education and training programs are provided through the Hong Kong Productivity Council, Hong Kong Polytechnic Industrial Center, universities, and the Vocational Training Center, as well as other commercial entities. Of the government's programs, few are heavily promoted. Educational and training programs had a higher level of awareness than other programs, according to the Boston Consulting Group's survey (BCG 1994). The Electronic Design Technology Training Center provided courses at rates of $25 to $40 per hour. The Vocational Training Council provided matching grants of up to $15,000 for local training and $37,500 for overseas training in new technologies. Over 15,000 students from Hong Kong study in the United States. Technology
In technology, support is provided through the Hong Kong Productivity Council, Hong Kong Applied R&D Fund Co., Ltd., Design Innovation (HK), Ltd., Hong Kong Industrial Technology Center Corporation (started in 1993 with a government grant of $250 million), and the Technology Development Division of the Hong Kong Industry Department, which supports the Industry and Technology Development Council and Science Park developments. The Industry and Technology Development Council (ITDC) reviews proposals for projects that benefit Hong Kong's industries. The ITDC includes a number of committees, each of which has a representative from the Industry Department, 10 prominent industrialists, five academics, and vocational training representatives who stay on the council for two years. Of 40 proposals reviewed over the six months prior to the WTEC team's visit, money had been allocated to over 10 projects. The budget was about HK $300 million (approx. $39 million). ITDC identified BGA and TAB as technologies needed in Hong Kong. It approved a project to set up a radio frequency (RF) training center within HKPC.
Quality and Productivity
Quality and productivity are supported through the Hong Kong Productivity Council, the Hong Kong Quality Assurance Agency, and the Quality Service Division of the Hong Kong Industry Department, which provides ISO 9000 certification, standards and calibration, product standards, and laboratory accreditation.
New Business Development/Exports
New business development is supported by the Hong Kong Industry Department, the Hong Kong Industry and Technology Development Council, the Hong Kong Polytechnic Industrial Center, and the Hong Kong Industry Technology Center Corporation. The Hong Kong Development Council also supports export activities.
In June 1994, the Hong Kong government commissioned the Hong Kong Productivity Council to set up the Industrial Automation Task Force and implement a one-year pilot program to help 30 local manufacturers identify opportunities and develop industrial automation strategies. The pilot program was extended through the 1995-96 fiscal year. The task force works with firms to identify areas for automation and to map out automation strategies and implementation plans. This program resulted from a study by HKPC for the Industry Department of the Hong Kong Government to find key strategies to enable local manufacturers to become more competitive through improved quality, increased productivity, and high growth rates. HKPC was investigating new manufacturing technologies, and the HK government was developing the first science park in Hong Kong in hopes of encouraging R&D.
HKPC is centrally located in Kowloon Tong, near the HKITC incubator for technology, City University, and the new Environmental Center. These three centers provide an important infrastructure for future technology developments. HKPC was established in 1967 to promote increased productivity and the use of more efficient production methods. Officials indicated that they want HKPC to become the strategy leader for Hong Kong. HKPC is a one-stop center for technology that provides consulting, training, product development, and technology transfer services aimed at strengthening the human resources and technology foundations of enterprises. For business, it provides training, consultation, and technical and laboratory-based services. For industry, it aims to identify new opportunities and carry out development projects. For government, HKPC provides advice on the factors affecting productivity in Hong Kong and carries out techno-economic studies. As explained by one official, HKPC focuses its attention on development of products, processes, people, and partnership:
In the electronics area, we have about 45 people; about 35 are engineers. In terms of technology, we focus our efforts on the front end and back end of product development. On the front end, we will work with commercial clients on product development. The Design and Automation Branch has capabilities in the three areas of product design, process improvement, and people development. They assist in design of pagers, cordless and cellular telephones, palmtop computers and electronic organizers, hand-held data terminals for use by Hong Kong Telecom, multimedia kiosks using digital electronics, radio frequency circuit design, computer graphics, software engineering, and related manufacturing techniques. The pager was developed as a turnkey project, with a new production line, to help expand into higher-value-added products. HKPC designed a customized hand-held data terminal for use by Hong Kong Telephone Co., Ltd.'s, service team. Mr. Law has organized a club of component makers (switches, LCD, connectors, antenna, inductors, substrates, semiconductor packaging, and OEM subcontractors) that meet biweekly at HKPC. We are now leading a cooperative effort to develop the palmtop computer and a cordless phone for the home. Companies are beginning to cooperate more than in the past. No one company can do it all by itself.
At the back end, the branch helps companies improve manufacturing processes through SMT and reliability and calibration centers. We look at how to manufacture the PCB assembly. We introduced SMT production several years ago. We continue to use a small batch line for product design so we can make sure that our designs work. It is also useful for small batch prototyping. Many companies will come to use that rather than change their own lines. The need for SMT training has been rapidly declining. Almost 90% of Hong Kong companies already use SMT equipment.
We have other support facilities for product reliability and X-ray testing. We have a small group of engineers working in the IT [information technology] area to provide special services in that area. In the next several years, we will look for new technologies that can be transferred to Hong Kong. We have set up a production line for tape automated bonding (TAB) on LCD. A local LCD manufacturer just saved a trip to Japan to study TAB for LCDs by spending two hours at HKPC. We are encouraging local businesses to map out their automation strategies in support of their business goals. HKPC also provides help in ISO 9000 certifications.
Companies are now moving towards more advanced processes like BGA. We have a proposal to install BGA and micro-BGA assembly and direct chip attach. We will look at the whole process, including attachment and inspection. We are investigating alternatives that might be considered. We are looking for suitable equipment for Hong Kong companies. ASAT packages semiconductors using BGA. Panasonic showed us their underfill process. Taiwanese firms produce a lot of notebooks and use TAB to reduce the board size and make the notebook very thin. We need to be able to produce these products in Hong Kong.
Since RF engineers are scarce in Hong Kong, HKPC planned to bring in experts and provide practical, hands-on training in this center. After acquiring the knowledge about RF technology, HKPC will transfer the technology to local industry through its engineers and labs.
1 All dollar amounts ($) are U.S. dollars, unless otherwise noted.